Thursday, February 17, 2011

February 17 2011: Inflation For The Innocent, Hyperinflation For The Clueless

Detroit Publishing Co. Tumbler 1910
"Rotary coal car unloader, Cleveland, Ohio"

Stoneleigh: The deflation/hyperinflation debate with Gonzalo Lira was an interesting experience. I wanted to give readers of The Automatic Earth a flavour of what was said, what issues were raised and how they were addressed. To start with here is some audience feedback posted by the moderator, Jay Carter, at Financial Survival Radio. I have commented on some of the responses sent by Jay. For those interested in hearing the debate and seeing the slide presentations made by Gonzalo and myself, it is now available as a streaming file.

The debate lasts two and a half hours, and was done in two halves. The format was an initial opportunity for each of us to make our case for hyperinflation or deflation, followed by debate between us and then audience questions. There was then a short intermission, followed by Gonzalo and myself presenting our views as to how we would expect our scenarios to play out. Each of us did a second presentation, which was again followed by a debate and then audience questions.

The major hurdle in the debate hinged on the definition of inflation, as such debates often do. Financial analysts who expect deflation typically do so because they recognize the critical role of credit in the effective money supply and the effects of credit implosion. With a natural focus on the money supply, they typically (but not universally) define inflation and deflation as monetary phenomena - as an increase or decrease in the effective money (and credit) supply relative to available goods and services.

Analysts who anticipate inflation or hyperinflation typically focus on nominal prices, which they expect to increase, likely concurrent with a loss of confidence in the currency. As I am in the deflationist camp and Gonzalo is a hyperinflationist we naturally defined inflation/deflation differently, which lead to some awkwardness at the beginning of the debate.

My view is that movements in nominal prices are of limited interest by themselves, as nominal prices say nothing about changes in affordability. It is not how much something costs that matters, but how much it costs in relation to how much purchasing power people have, and that will depend largely on changes in the effective money supply. In order to understand what is happening to affordability, one has to adjust nominal prices for changes in the money supply and thereby express price changes in real terms.

There are many drivers of prices, but changes in the money supply constitute a major one, often the primary one in fact. Changes are an effect, not a cause, and a lagging effect at that. In order to understand the world, it is better to look at the causes than the effects, and to look at leading indicators rather than lagging ones.

Deflation involves a massive change in the money supply due to the collapse of credit, which constitutes in excess of 95% of the effective money supply. Credit expansion is a ponzi scheme, and like all ponzi schemes will reach a maximum and then implode. Unlike currency hyperinflation, which divides the underlying real wealth pie into more and more pieces, credit hyper-expansion creates multiple and mutually exclusive claims to the same pieces of pie through leverage.

The best analogy is a game of musical chairs, where there is only one chair for every hundred people (or so) playing the game. It is not too difficult to imagine what happens when the music stops, when the difference between getting a chair and not getting a chair is the difference between making a fortune and destitution. At TAE we suggest that people cash out, in other words take a chair and sit on the sidelines before the music stops. The game is not compulsory, but it is addictive, and it is difficult to walk away, but ultimately it is a matter of choice whether we play or not. Given the low odds of winning after the fact, and the possibility of avoiding the that particular risk in the first place, it seems a sensible approach to stop playing.

Gonzalo’s view is that we are looking at a commodity-driven hyperinflation, where investors becoming increasingly wary of financial assets, particularly treasuries, and the dollar, and will opt instead for something tangible. He says that the Fed has monetized the debt. His advice therefore includes taking on debt in order to purchase commodities. I believe this view is distinctly premature, and the advice therefore completely wrong. While I have discussed the likelihood of a bond market dislocation myself, and have noted that all fiat currencies expire eventually, I do not believe this is at all imminent. On the contrary, in my opinion treasuries and the dollar are likely to do very well over the next year or two, and I believe that commodities are topping or close to topping.

I would point out that the Fed has not monetized the debt, but has merely taken on a tiny percentage of the debt through quantitative easing. It might have monetized 5% of the US debt, if one does not include the unfunded liabilities of the US government, namely Medicare, Medicaid and Social Security (which together represent at least half of the total debt to GDP ratio for the US). There is no provision for a meltdown in the derivatives market or other categories of debt which are international. The notional value of the derivatives market is estimated at anywhere between $600 trillion and $1600 trillion dollars. No one has pockets deep enough to monetize that, and if they were minded to try they would find out that it is impossible to get ahead of credit collapse. It will proceed faster than any reactionary (as opposed to proactive) party can act.

Attempts to monetize in the teeth of a powerful deflationary wave are destined to fail miserably. The apparent success of the last two years owes its reputation to the supportive psychology of a rally, which makes central authorities appear wise and in control, when in fact they are not. When that rally is over, as I believe it will be soon, that support will be lost, revealing central bankers to be the little men behind the curtain that they always have been. Contractions are very unkind to those in positions of power, or apparent power.

My reasoning for a dollar resurgence is twofold. First, we are on the verge of a large deleveraging of dollar-denominated debt, of which there is more than any other kind of debt worldwide. This will create demand for dollars. I also think we are going to see substantial capital flight from Europe as a result of their looming sovereign debt default crisis. That capital flight is very likely to find its way into the US as the least worst option, on a knee-jerk flight to safety into the reserve currency. While the finances of the US are obviously dire (at least as bad as the European countries at the centre of the incipient sovereign debt contagion), it is not reality that drives markets, but perception, which is emotionally-driven rather than rational. If we assume markets will behave rationally, we will be wrong-footed every time.

It is important to look at where the markets perceive risk to lie, and where they demonstrate fear. For this, one must look at credit default swap spreads. Like any good predator, markets will pick off the small and sick first and move from the weakest to the next weakest victim. The markets are currently very concerned about the situation in Greece, and increasingly concerned about the remainder of the European periphery. They are not at all concerned about the possibility of a US default, despite the obvious evidence of risk. Human beings are either in a state of complacency or one of panic at any given time, and they are currently extremely complacent about the possibility of US debt repayment difficulties. There is a perception that the US is far, far too big to fail and will therefore not fail no matter what the circumstances.

If we see the capital flight that I expect, the US should have no trouble at all selling its treasuries at a low risk premium for quite some time to come, while many European countries could easily find themselves paying risk premiums (interest rates) in the double digits. As real interest rates (ie adjusted for changes in the money supply) are always higher than nominal rates in a period of deflation, those double digit interest rates would represent even more of a burden than they would appear to at face value. The regional disparity of risk premiums would also create division and recrimination within the European Union, heightening the uncertainty that is anathema to markets, and therefore strengthening capital flight.

My reasoning for predicting a commodity top in the not too distant future is primarily that sentiment towards commodities is at an extreme. When the received wisdom is that something is highly desirable and can therefore only go up, the vast majority will have already made the investment decisions that drive markets in the prevailing direction. When sentiment is at an extreme, it generally pays to take the other side of the bet. The time to buy is when the received wisdom is that doing so would be folly. At that point, whatever it is will be cheap.

Commodities top on fear of scarcity, and that is exactly what we are seeing now for oil, gold, silver and agricultural commodities. An unfortunate dynamic sets in under such circumstances. Speculators see momentum develop and begin to pile into the sector chasing that momentum. This rapidly drives prices higher by creating artificial demand. As with all market moves, the resulting speculative fever is grounded in ponzi dynamics, meaning that only those who get in early and out early will make any money.

The much larger majority becomes the group of designated empty bag holders when the speculators dump the sector, having wrung every last ounce of profit from it. This is what happened in 2008 (when oil went from $147 a barrel to $35 in a matter of months), and what is shaping up to happen again. How quickly investors forget when there appears to be money to be made.

The effect of (monetary) deflation is to lower prices across the board, at least initially, while simultaneously rendering almost everything less affordable, as purchasing power falls faster than price. The collapse of credit, combined with increasing income insecurity and loss of benefits, reduces the effective money supply, and therefore purchasing power, very sharply and rapidly. It amounts to having the rug pulled from beneath a society’s feet. Under such circumstances there is simply no price support at anything like the current level.

Demand, which is what one can pay for rather than what one happens to want, will fall very sharply, and so will prices, but those lower prices will be less affordable than the previous higher prices in the easy credit era we have lived through. The essentials will, however, receive relative price support as a much larger percentage of a much smaller money supply begins to chase them. As we move further into depression, and essentials likely become increasingly scarce, their prices could even rise in nominal terms. Against a backdrop of money supply collapse, that would mean real prices were going through the roof, and it could happen in a few short years.

Gonzalo was of the opinion that no sane investor would ever sell something as tangible and valuable as commodities in favour of the sovereign debt of a country ovbiously heading for bankruptcy. This comes back to the fallacy of rational markets. Investors will sell that which is falling, as markets' moves are swings of positive feedback. If speculators dump the commodity sector, anyone else involved in the market will sell en masse. If treasuries yields fall and prices therefore rise, denoting that treasuries are perceived as a safe haven (at least temporarily), then investors will buy. Market participants act in the short term and follow the herd, typically off a cliff.

If my position is correct, then Gonzalo’s advice to take on debt in order to purchase commodities would be disastrous in two ways. Firstly, it would be a bad bet if commodities in fact fall. Secondly, the debt assumed would come to respresent a tremendous burden in a deflation when real interest rates would be punishingly high, even if nominal rates are low (ie the nominal rate minus negative inflation is always a larger number).

My advice is quite the contrary. I would suggest cashing out of stocks, most bonds (except short term teasuries), commodities, real estate and collectibles etc, and sitting safely on the sidelines out of the game (while not, of course, trusting one’s newfound liquidity to an insolvent banking system). While there is no no-risk scenario, cash and cash equivalents (ie short term treasuries) represent the lowest risk in an increasingly risky world. Cash is king in a deflation. It is not a long term solution, but it is the least risky means to ride out a great deleveraging as the giant overhang of debt we have built over at least the last thirty years comes crashing down around our ears like a tidal wave finally reaching the shore. Our current phase of extend-and-pretend represents the period where the tide mysteriously withdraws and the curious public ventures out on to the newly exposed sand in search of pretty shells. The wave is coming though, and its force will sweep all before it.

How the middle class became the underclass
by Annalyn Censky - CNNMoney

Are you better off than your parents? Probably not if you're in the middle class.

Incomes for 90% of Americans have been stuck in neutral, and it's not just because of the Great Recession. Middle-class incomes have been stagnant for at least a generation, while the wealthiest tier has surged ahead at lighting speed. In 1988, the income of an average American taxpayer was $33,400, adjusted for inflation. Fast forward 20 years, and not much had changed: The average income was still just $33,000 in 2008, according to IRS data.

Meanwhile, the richest 1% of Americans -- those making $380,000 or more -- have seen their incomes grow 33% over the last 20 years, leaving average Americans in the dust. Experts point to some of the usual suspects -- like technology and globalization -- to explain the widening gap between the haves and have-nots.
But there's more to the story.

A real drag on the middle class
One major pull on the working man was the decline of unions and other labor protections, said Bill Rodgers, a former chief economist for the Labor Department, now a professor at Rutgers University. Because of deals struck through collective bargaining, union workers have traditionally earned 15% to 20% more than their non-union counterparts, Rodgers said.

But union membership has declined rapidly over the past 30 years. In 1983, union workers made up about 20% of the workforce. In 2010, they represented less than 12%. "The erosion of collective bargaining is a key factor to explain why low-wage workers and middle income workers have seen their wages not stay up with inflation," Rodgers said.
Without collective bargaining pushing up wages, especially for blue-collar work -- average incomes have stagnated.

International competition is another factor. While globalization has lifted millions out of poverty in developing nations, it hasn't exactly been a win for middle class workers in the U.S. Factory workers have seen many of their jobs shipped to other countries where labor is cheaper, putting more downward pressure on American wages. "As we became more connected to China, that poses the question of whether our wages are being set in Beijing," Rodgers said.

Finding it harder to compete with cheaper manufacturing costs abroad, the U.S. has emerged as primarily a services-producing economy. That trend has created a cultural shift in the job skills American employers are looking for. Whereas 50 years earlier, there were plenty of blue collar opportunities for workers who had only high school diploma, now employers seek "soft skills" that are typically honed in college, Rodgers said.

A boon for the rich
While average folks were losing ground in the economy, the wealthiest were capitalizing on some of those same factors, and driving an even bigger wedge between themselves and the rest of America. For example, though globalization has been a drag on labor, it's been a major win for corporations who've used new global channels to reduce costs and boost profits. In addition, new markets around the world have created even greater demand for their products.

"With a global economy, people who have extraordinary skills... whether they be in financial services, technology, entertainment or media, have a bigger place to play and be rewarded from," said Alan Johnson, a Wall Street compensation consultant. As a result, the disparity between the wages for college educated workers versus high school grads has widened significantly since the 1980s. In 1980, workers with a high school diploma earned about 71% of what college-educated workers made. In 2010, that number fell to 55%.

Another driver of the rich: The stock market. The S&P 500 has gained more than 1,300% since 1970. While that's helped the American economy grow, the benefits have been disproportionately reaped by the wealthy. And public policy of the past few decades has only encouraged the trend.

The 1980s was a period of anti-regulation, presided over by President Reagan, who loosened rules governing banks and thrifts. A major game changer came during the Clinton era, when barriers between commercial and investment banks, enacted during the post-Depression era, were removed. In 2000, the Commodity Futures Modernization Act also weakened the government's oversight of complex securities, allowing financial innovations to take off, creating unprecedented amounts of wealth both for the overall economy, and for those directly involved in the financial sector.

Tax cuts enacted during the Bush administration and extended under Obama were also a major windfall for the nation's richest. And as then-Federal Reserve chairman Alan Greenspan brought interest rates down to new lows during the decade, the housing market experienced explosive growth. "We were all drinking the Kool-aid, Greenspan was tending bar, Bernanke and the academic establishment were supplying the liquor," Deutsche Bank managing director Ajay Kapur wrote in a research report in 2009.

But the story didn't end well. Eventually, it all came crashing down, resulting in the worst economic slump since the Great Depression. With the unemployment rate still excessively high and the real estate market showing few signs of rebounding, the American middle class is still reeling from the effects of the Great Recession. Meanwhile, as corporate profits come roaring back and the stock market charges ahead, the wealthiest people continue to eclipse their middle-class counterparts. "I think it's a terrible dilemma, because what we're obviously heading toward is some kind of class warfare," Johnson said. 

How Big is the U.S. Debt?
by Antony Davies

Deficit is biggest as share of economy since 1945
by Jeannine Aversa and Christopher S. Rugaber - AP

Not since World War II has the federal budget deficit made up such a big chunk of the U.S. economy. And within two or three years, economists fear the result could be sharply higher interest rates that would slow economic growth.

The budget plan President Barack Obama sent Congress on Monday foresees a record deficit of $1.65 trillion this year. That would be just under 11 percent of the $14 trillion economy - the largest proportion since 1945, when wartime spending swelled the deficit to 21.5 percent of U.S. gross domestic product. The danger is that a persistently large gap in the budget could threaten the economy.

Investors would see lending their money to the U.S. as riskier. So they'd demand higher returns to do it. Or they'd simply put their cash elsewhere. Interest rates on mortgages and other debt would rise as a result. And if borrowing turned more expensive, people and businesses might scale back their spending. That would weaken an economy still struggling to lower unemployment, revive real estate prices and restore corporate and consumer confidence.

So far, it hasn't happened. It's still cheap for the government to borrow money and finance deficits. But economists fear the domino effect if all that changes. "The moment when markets react negatively to our budget deficit cannot be known in advance, but we are absolutely in the danger zone," says Marvin Goodfriend, an economics professor at Carnegie Mellon University's Tepper School of Business.

Higher interest rates would also raise interest payments on the federal debt. It would be costlier for the government to finance its operations. The interest payments themselves could then make the deficit increase, creating a vicious cycle. Under the projections in Obama's budget, the deficit as a share of the overall economy would narrow from 10.9 percent this year to 7 percent next year and eventually to 2.9 percent by the 2018 fiscal year.

But after that, in the remaining years of this decade, the deficit would widen slightly as a percentage of the economy. It would average about 3.1 percent because of escalating costs for programs like Social Security and Medicare as baby boomers age and receive benefits. Economists generally say cutting the deficit to about 3 percent or less of the economy would be healthy. Deficits at that level are considered "sustainable" - meaning they could be easily financed and wouldn't make investors nervous about the government's finances.

Most economists don't think the deficit should be cut deeply now. They say the economy remains so fragile - unemployment is at 9 percent - that it needs big government spending to invigorate growth. In this camp is Federal Reserve Chairman Ben Bernanke. He's argued that now isn't the time to slash government spending or raise taxes. Instead, Bernanke has urged Congress and the White House to preserve federal stimulus - including tax cuts - in the short run but draft a plan to reduce the deficit over the long run.

A presidential commission last year made recommendations that Bernanke and other economists say could help curb the deficit over the long term. Its suggestions included raising the Social Security retirement age and reducing future increases in benefits. It also proposed increasing the gasoline tax and eliminating or scaling back tax breaks, like the mortgage interest deduction claimed by many Americans.

Obama embraced none of these proposals in his budget. But his plan is designed to cut $1.1 trillion from the deficit over the next decade, two-thirds of it from spending cuts. The rest would come from tax increases, such as limiting the deductions for high-income taxpayers. In Bernanke's view, a long-term plan to reduce future deficits would mean lower long-term interest rates and increased consumer and business confidence.

For months, though, longer-term rates have been creeping up, driven by prospects of stronger growth and concerns about higher inflation. The yield on the 10-year Treasury note is now 3.61 percent. That's up sharply from 2.48 percent in early November. That increase is making other loans, including mortgages, more expensive. The average rate for a 30-year fixed mortgage just rose above 5 percent for the first time since April.

Rates are still extremely low by historical standards. In 1983, during Ronald Reagan's first presidential term, the deficit soared to $208 billion, about 6 percent of the economy at the time. The rate on the 10-year note topped 10 percent. And getting a 30-year mortgage meant paying 13 percent.

Economists say that if investors trust that Congress and the White House will curb budget deficits over the long haul, interest rates could stabilize - even if deficits exceed $1 trillion over the next year or two. But if investors lose confidence that Washington policymakers can curb the deficits, rates could rise sharply. "It's all about perception," says Lou Crandall, chief economist at Wrightson ICAP, a research firm.

So far, China, the biggest buyer of U.S. debt, and other countries have maintained their appetites for Treasurys. Foreign demand for Treasury debt has helped keep U.S. interest rates historically low. The reason is that the United States is still considered a haven for many foreign investors. That point was underscored by Europe's debt crisis last year, when money poured into dollar-denominated Treasurys.

If the United States had to finance its debt through U.S. investors alone, the government, along with American companies and consumers, would have to pay higher rates. Last year's budget deficit totaled $1.3 trillion. That was just under 9 percent of U.S. economic activity. The first time the deficit topped $1 trillion was in 2009.

The growth of U.S. budget deficits has reflected the costs of the wars in Iraq and Afghanistan, the continuation of broad tax cuts, the worst recession since the 1930s and a surge in spending on Social Security, Medicare and the military. The recession prompted higher government spending to stimulate the economy and cushion the effects of the downturn. It also reduced tax revenue.

The Organization for Economic Cooperation and Development estimates that the United States' deficit as a share of the U.S. economy will be smaller - around 8.8 percent- than the president's budget estimates. Still, that would be a higher figure than for other major industrialized countries.

The OECD projects, for example, that Britain's deficit this year will be about 8.1 percent of its economy. Germany's deficit is expected to make up 2.9 percent of its economy, Japan's 7.5 percent. "So far, investors haven't been bothered by large U.S. budget deficits," says Jim O'Sullivan, economist at MF Global, an investment firm. "The fear is that could suddenly change. It's not clear whether investors will remain patient once the U.S. recovery is on track."

Barack Obama tests bond markets with mega-deficits
by Ambrose Evans-Pritchard - Telegraph

US President Barack Obama faces a stiff battle with Republican foes in Congress after unveiling plans for $7.2 trillion (£4.5 trillion) of deficit spending over the next decade, and making little attempt to control the spiralling costs of social security and medical entitlements.

Mr Obama proposed a budget that will push the this year's deficit to a fresh record of $1.65 trillion or 11pc of GDP, partly due to payroll tax cuts agreed with Congress last Autumn. It is unprecedented to run deficits on this scale two years into recovery. While he called it a budget of "hard choices and sacrifices" needed to return the US to a sustainable debt trajectory, the deficit is significantly above the $1.5 trillion recommended by the Congressional Budget Office (CBO).

Paul Ryan, Republican chair of the House Budget Committee, accused Mr Obama of a "total abdication" of leadership. "I expected more taxes, but I also expected more spending controls or reforms, but we're not getting any of it." Mr Obama aims to cut $1.1 trillion in fiscal fat over the next decade. This relies on rosy growth forecasts and falls far short of the $4 trillion squeeze demanded by his own deficit commission. It would push the US national debt further into the danger zone.

The IMF already expects US gross public debt to double from 62pc of GDP in 2007 to 111pc by 2015, a figure that will now have be revised upwards. The White House proposes a 5-year freeze in discretionary spending. This covers just an eighth of federal spending. Mr Obama has chosen not to court political fate by slashing entitlements, chiefly the trio of social security, medicare, and medicaid that ratchet ever upwards.

House Speaker John Boehner said the long-term cuts were not nearly enough. "We're broke. Let's be honest with ourselves," he said, calling for every area of spending to be examined. The Republicans could resort to the 'nuclear option' of shutting down the US government if Mr Obama refuses to meet them half way, but such Capitol Hill poker has to be played carefully.

The US Treasury market gave a muted reaction to the spending details yesterday, but some analysts fear this may be the calm before the next storm. Ten-year yields have already jumped 120 basis points since October, partly on concerns over fiscal laxity. It remains unclear whether bond vigilantes will tolerate such extreme deficits once the Fed's quantitative easing (QE) ends in June..

"The US is pushing its luck," said Stephen Lewis from Monument Securities. "Markets sense that Obama is reluctant to cut spending before the election in 2012. The Fed may have to stop QE because the policy of asset purchases is pushing up commodity prices, and when that happens the bond markets could react in a very negative way." Mr Obama plans a big shift in energy policy, cutting subsidies for the oil and gas industry and rotating money into solar, wind, and other green energy sources. While he hoped to overhaul the US corporate tax system by closing loopholes and cutting the 35pc rate, there was no clear timetable.

Defence spending will increase this year by $22bn to $671bn to cover Afghanistan, and cyberwarfare threats, before facing a squeeze from 2013 onwards. Nobel economist Paul Krugman said the Obama plan is "much less awful" than Republican austerity, arguing that the economy is not yet strong enough to withstand fiscal tightening. This is becoming a minority view outside Keynesian academic circles.

The CBO warned last month that debt interest is "poised to skyrocket" without drastic cuts. Fresh borrowing will reach $12 trillion over the next decade on current policies, pushing public debt to nearly 140pc under IMF measures. Even if Washington faces up to the crisis by raising taxes a third, debt interest costs will still jump from 1.5pc to 3.3pc of GDP. While countries such as Japan can draw on a reservoir of domestic savings to cover big debts, the US has no such luxury. The savings rate is just 5.3pc. The US relies on Japan, China, and other foreigners to finance 40pc of its debt.

Fed dictator Bernanke needs to be toppled
by Paul B. Farrell - MarketWatch

Forget Mubarak, it’s Fed reign of terror that must end

Fed boss Ben Bernanke is the most dangerous human on earth, far more dangerous than Hosni Mubarak, Egypt’s 30-year dictator, ever was. Bernanke rules a monetary dictatorship that will trigger the coming third meltdown of the 21st century. But this reign of economic terror will end.

Just as Mubarak was blind to the economic needs of the masses and democratic reforms, Bernanke is blind to the easy-money legacy that’s set the stage for revolution, turning the rich into super rich while the middle class stagnates and peanuts trickle down to the poor.

Warning, Egypt also had a huge wealth gap before its revolution. Bernanke is the final egomaniac in America’s bubbling 30-year wealth gap, where the top 1% went from owning 9% of America’s wealth to owning 23% during this dictatorship.

Bernanke’s ruling ideology is the culmination of a 30-year economic war that has forged together Reaganomics for the super rich, former Fed chairman Alan Greenspan’s toxic allegiance to Wall Street, the extreme Ayn Rand’s capitalist dogma, culminating in the toxic bailouts of Treasury Secretaries Hank Paulson and Tim Geithner, two Wall Street Trojan Horses corrupting government from within.

Since 1981 this monetary dictatorship has caused enormous collateral damage, systematically sabotaging democracy, capitalism and the American dream while fueling the rise of our most dangerous new enemy, China.

When Obama reappointed Bernanke a couple years ago, "Black Swan’s" Nicholas Taleb was "stunned." Bernanke "doesn’t even know that he doesn’t understand how things work," that Bernanke’s economic methods are so inadequate they make "homeopath and alternative healers look empirical and scientific."

We called Bernanke, the "Captain of the Titanic," warning that he was setting up the third meltdown of the 21st century, predicted by "Irrational Exuberance’s" Robert Shiller, a coming crash worse than the 2000 dot-com crash and the subprime credit meltdown of 2008 combined.

Inside the Fed: Cassandras, Chicken Littles, governors crying wolf

Unfortunately, as with Egypt’s dictator, the 30-year dictatorship now headed by Bernanke must end soon: And this class war will not be pretty. But it is no black swan; no one can claim they didn’t see a new crash coming.

For several years before the 2008 meltdown we reported on money managers, economists and financial gurus warning of a coming meltdown. They included two Fed governors who warned Greenspan in the early Bush years. And yet, as late as summer 2008 Bernanke, Paulson and Greenspan were systematically dismissing mounting evidence of a mega crash dead ahead.

That’s why Time magazine’s cover story about Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, grabbed me. David Von Drehle’s "The Man Who Said No to Easy Money" is a warning to all America.

Like Ed Gramlich and William Poole, the two Fed Governors who warned Greenspan during the Bush years, Hoenig regularly dissented from Bernanke’s easy-money policies that have been favored by Wall Street throughout this 30-year dictatorship.

We’re paraphrasing Drehle’s interview with Hoenig as 10 warnings because it brilliantly reveals the broader historical tragedy of the Fed’s 30-year monetary dictatorship driving America to the edge of another 1930s economic revolution, one that will be triggered by a repeat of the 1929 wake-up call.

1. Commodity price inflation will soon end the Fed dictatorship

Hoenig consistently "cast his lonely ballot against the indefinite reign of easy money. Eight meetings, eight no votes … an unyielding point of view, one that has become ever more relevant now that rising commodity prices have put inflation worries back on the economic radar screen."

In short, global commodity inflation may soon do what Hoenig could not, put an end to America’s self-destructive easy money reign of economic terror, and more importantly finally end the Fed’s 30-year "monetary dictatorship."

2. Central bank dictatorship destroying America’s democracy

Hoenig was America’s lone voice against the Bernanke monetary dictatorship, says Drehle: "For all the headlines over the past quarter-century about the death of American manufacturing and the twilight of community banks and the vanishing farmer, those humble building blocks of a sound economy still figure significantly in Hoenig’s perspective. The way to strengthen them … is not by pumping money into a financial system that encourages megabanks to engage in high-risk speculation. You build them up by encouraging savings, which form capital for investment, which builds stronger businesses, which hire workers and pay dividends, which leads to more savings and more investment."

3. Near-zero rates, banks richer, masses poorer, meltdown

Honenig’s opposition to Bernanke dictatorship is also clear, says Drehle: "By keeping interest rates near zero indefinitely, the Fed is asking savers to continue to subsidize borrowers. What incentive is there to save and invest?"

Earlier in his long career, Hoenig was heartsick as an "irrationally exuberant Alan Greenspan kept piling so much money onto the economic bonfire that led to the Great Recession" in 2008. Now the "time’s come to start sobering up." Except Wall Street’s addicted to easy money, won’t sober up.

4. Easy money blowing new speculation bubble … pops soon

"This is how bubbles are formed," warns Hoenig, whose long career as president of the Kansas City Federal Reserve Bank made him leery of the power buildup by the central banks monetary dictatorship. So again, "rocketing land and energy prices are telltale signs … too much money sloshing around. When you put this much liquidity into the system, it has to go somewhere."

But with the Fed keeping interest rates near zero, easy money won’t go into savings. Instead, "money starts chasing assets with higher yields — like land, the once again booming stock market and energy" and "as more money joins the chase, asset prices rise and keep rising until … pop," a new meltdown.

5. Bernanke’s narcissistic illusion of monetary power

The Fed has too much power: Hoenig "watched uncomfortably as the central bank began playing a larger and larger role in the public’s perception of the economy. Monetary policy came to be seen as the solution to more and more economic issues. It has been used to deal with one crisis after another," stock .market crashes, recessions, the tech bubble, after the 9/11 attacks, during the Iraq war, then the 2008 meltdown.

Hoenig warns against the Fed’s power: "People came to feel that all you had to do was ease interest rates and everything would be fine. But that’s what gives us these bubbles."

6. Easy money fueling worldwide inflation, and a new meltdown

Yes, Hoenig’s an inflation hawk: "The sequence of events that led to runaway inflation in 1979 got started back in the mid-1960s. That’s … long term." Drehle captures the shift in Hoenig’s position: At first backing "the Fed’s dramatic actions in 2008 and 2009 to pour trillions into the staggering financial system."

But now it is time to stop. As easy money chases higher returns across the world, in places like Brazil and China, Hoenig warns that "inflation is rising sharply. Global food prices have risen 25% in the past year, according to the U.N., and many nations are starting to hoard commodities."

7. Fed policies favor the rich, sabotaging American Dream

In favoring Wall Street bankers, Bernanke’s monetary dictatorship is clearly feeding the conditions that, as happened in Egypt, will ignite a class war in America: "The poorest 60% of American households spend 12% of their income on energy alone, compared with the 3% spent by the richest 10% … Inflation is so unfair … it is the most regressive tax you can impose on the public … eroding the buying power of the poor and people on fixed incomes. The people who have money and are savvy come out ahead. In fact, they end up stronger than before."

8. Unfortunately, the Fed learned nothing from the 2008 crisis

A lot more than the Fed’s toxic alliance with Wall Street bothers Hoenig: America "learned little from the crisis … government policy continues to smile on Wall Street but not on Main Street. Instead of breaking up the financial giants whose gambles crashed the economy, the government has let the biggest banks grow even bigger. Now they’re gorging on free money."

9. Market economy? A joke, big-money lobbyists run America

Remember folks, 20 years ago in the S&L bank crisis 3,800 bankers were jailed. This time? Wall Street robbed us, got away with it, are still robbing us. Hoenig asks: "Where’s the penalty for failure? … We don’t have a market economy." American capitalism is now "crony capitalism … who you know, how big your political donation is."

10. America must end easy money, add new Glass-Steagall

What would Hoenig do as Fed chairman? "High savings rates, low leverage and a strong currency." Finally, Drehle says Hoenig would bring back the Depression-era Glass-Steagall rule that barred commercial banks from taking excessive risks. He would reduce government debt and promote a manufacturing revival, but it won’t be easy, there is no painless approach."

Unfortunately, none of this will happen until America gets hit over the head by brutal wake-up call, like 1929 and the Great Depression 2. Until then, the 30-year monetary dictatorship now headed by Bernanke will keep pushing its self-destructive easy-money policies, ignoring the warnings of Thomas Hoenig and all of the other Cassandras, Chicken Littles and Americans Crying Wolf, over and over again.

Debt now equals total U.S. economy, jumps $2 trillion in a single year
by Stephen Dinan - The Washington Times

President Obama projects that the gross federal debt will top $15 trillion this year, officially equalling the size of the entire U.S. economy, and will jump to nearly $21 trillion in five years' time. Amid the other staggering numbers in the budget Mr. Obama sent to Congress on Monday, the debt stands out — both because Congress will need to vote to raise the debt limit later this year, and because the numbers are so large.

Mr. Obama's budget said 2011 will see the biggest one-year jump in debt in history, or nearly $2 trillion in a single year. And the administration says it will reach $15.476 trillion by Sept. 30, the end of the fiscal year, to reach 102.6 percent of gross domestic product (GDP) — the first time since World War II that dubious figure has been reached. In one often-cited study, two economists have argued that when gross debt passes 90 percent it hinders overall economic growth.

The president's budget said debt as a percentage of GDP will top out at 106 percent in 2013, but only if the economy booms. "I still don’t see a sense of urgency from the president about the massive federal debt," said Sen. Lamar Alexander, Tennessee Republican. "His budget calls for too much government borrowing – even though the debt is already at a level that makes it harder to create private-sector jobs."   

Speaking on MSNBC on Monday, Jacob "Jack" Lew, the White House budget director, said their long-term plan to lower deficits will stabilize the debt. "When we came into office, when President Obama took office, the deficit was climbing to over 10 percent of the economy. We have a plan that would bring it down to 3 percent," he said. "That is the most rapid reduction in the deficit in history. It is what we have to do to be able to say we're paying our bills and we're not adding to the debt."

The administration said debt as a percentage of GDP will stabilize at about 105 percent in the middle of this decade, though those calculations assume economic growth levels significantly above projections of the non-partisan Congressional Budget Office. The government measures debt several ways. Debt held by the public includes the money borrowed from Social Security's trust fund. Actual debt held by the public will reach 72 percent of GDP in 2011 and will climb as the Social Security trust fund's finances continue to deteriorate.

Geithner Quietly Tells Obama Debt Expense to Increase to Record
by Daniel Kruger and Liz Capo McCormick - Bloomberg

Barack Obama may lose the advantage of low borrowing costs as the U.S. Treasury Department says what it pays to service the national debt is poised to triple amid record budget deficits.

Interest expense will rise to 3.1 percent of gross domestic product by 2016, from 1.3 percent in 2010 with the government forecast to run cumulative deficits of more than $4 trillion through the end of 2015, according to page 23 of a 24-page presentation made to a 13-member committee of bond dealers and investors that meet quarterly with Treasury officials.

While some of the lowest borrowing costs on record have helped the economy recover from its worst financial crisis since the Great Depression, bond yields are now rising as growth resumes. Net interest expense will triple to an all-time high of $554 billion in 2015 from $185 billion in 2010, according to the Obama administration’s adjusted 2011 budget.

"It’s a slow train wreck coming and we all know it’s going to happen," said Bret Barker, an interest-rate analyst at Los Angeles-based TCW Group Inc., which manages about $115 billion in assets. "It’s just a question of whether we want to deal with it. There are huge structural changes that have to go on with this economy." The amount of marketable U.S. government debt outstanding has risen to $8.96 trillion from $5.8 trillion at the end of 2008, according to the Treasury Department. Debt-service costs will climb to 82 percent of the $757 billion shortfall projected for 2016 from about 12 percent in last year’s deficit, according to the budget projections.

That compares with 69 percent for Portugal, whose bonds have plummeted on speculation it may need to be bailed out by the European Union and International Monetary Fund. Forecasts of higher interest expenses raises the pressure on Obama to plan for trimming the deficit. The President, who has called for a five-year freeze on discretionary spending other than national security, sent Congress a $3.7 trillion budget today that projects the federal deficit will exceed $1 trillion for the fourth consecutive year in 2012 before falling to more "sustainable" levels by the middle of the decade.

"If government debt and deficits were actually to grow at the pace envisioned, the economic and financial effects would be severe," Federal Reserve Chairman Ben S. Bernanke told the House Budget Committee Feb. 9. "Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on U.S. output, incomes, and standards of living."

Yield Forecasts
Treasuries lost 2.67 percent last quarter, even after reinvested interest, and are down 1.54 percent this year, Bank of America Merrill Lynch index data show. Yields rose last week to an average of 2.19 percent for all maturities from 2010’s low of 1.30 percent on Nov. 4.

The yield on benchmark 10-year Treasury note will climb to 4.25 by the end of the second quarter of 2012, from 3.63 percent last week, according to the median estimate of 51 economists and strategists surveyed by Bloomberg News. The rate was 3.61 percent at 10:48 a.m. today in New York. The economy will grow 3.2 percent in 2011, the fastest pace since 2004, according to another poll.

"People are starting to come to the conclusion that you’ve got a self-sustaining recovery going on here," said Thomas Girard who helps manage $133 billion in fixed income at New York Life Investment Management in New York. "When interest rates start to go back up because of the normal business cycle, debt service costs have the potential to just skyrocket. Every day that we don’t address this in a meaningful way it gets more and more dangerous."

‘Kind of Disruption’
While yields on the benchmark 10-year note are up, they remain below the average of 4.14 percent over the past decade as Europe’s debt crisis bolsters investor demand for safer assets, Bank of America Merrill Lynch index data show.

"The market is still giving the U.S. government the benefit of the doubt," said Eric Pellicciaro, New York-based head of global rates investments at BlackRock Inc., which manages about $3.56 trillion in assets. "What we’re concerned with is whether the budget will only be corrected after the market has tested them. Will we need some kind of disruption within the bond market before they’ll actually do anything."

Still, U.S. spending on debt service accounts for 1.7 percent of its GDP compared with 2.5 percent for Germany, 2.6 percent for the United Kingdom and a median of 1.2 percent for AAA rated sovereign issuers, according to a study by Standard & Poor’s published Dec. 24. Among AA rated nations, China’s ratio is 0.4 percent, while Japan’s is 2.9 percent, and for BBB rated countries, Mexico devotes 1.7 percent of its output to debt service and Brazil 5.2 percent, the report shows.

Demand for Treasuries remains close to record levels at government debt auctions. Investors bid $3.04 for each dollar of bonds sold in the government’s $178 billion of auctions last month, the most since September, according to data compiled by Bloomberg. Indirect bidders, a group that includes foreign central banks, bought a record 71 percent, or $17 billion of the $24 billion in 10-year notes offered on Feb. 9.

Foreign holdings of Treasuries have increased 18 percent to $4.35 trillion through November. China, the largest overseas holder, has increased its stake by 0.1 percent to $895.6 billion, and Japan, the second largest, boosted its by 14.6 percent to $877.2 billion.

‘Killing Itself’
"China cannot dump Treasuries without killing itself," said Michael Cheah, who oversees $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. "They’re holding Treasuries as a means to an end," said Cheah, who worked at the Singapore Monetary Authority from 1982 through 1999, and now teaches finance classes at New York University and at Chinese universities. "It’s part of what’s needed to promote exports."

At least some of the increase in interest expense is related to an effort by the Treasury to extend the average maturity of its debt when rates are relatively low by selling more long-term bonds, which have higher yields than short-term notes. The average life of the U.S. debt is 59 months, up from 49.4 months in March 2009. That was the lowest since 1984.

The U.S. produced four budget surpluses from 1998 through 2001, the first since 1969, as the expanding economy, declining rates and a boom in stock prices combined to swell tax receipts. Tax cuts in 2001 and 2003, the strain of the Sept. 11 terror attacks, the cost of funding wars in Afghanistan and Iraq, the collapse in home prices and the subsequent recession and financial crisis has led to the three largest deficits in dollar terms on record, totaling $3.17 trillion the past three years.

The U.S. needs to manage its spending decisions "in a way that demonstrates confidence to investors so we can bring down our long-term fiscal deficits, because if we don’t do that, it’s going to hurt future growth," Treasury Secretary Timothy F. Geithner said in Washington on Feb. 9. The Treasury Borrowing Advisory Committee, which includes representatives from firms ranging from Goldman Sachs Group Inc. to Soros Fund Management LLC, expressed concern in the Feb. 1 report that the U.S. is exposing itself to the risk that demand erodes unless it cultivates more domestic demand.

"A more diversified debt holder base would prepare the Treasury for a potential decline in foreign participation," the report said. Foreign investors held 49.7 percent of the $8.75 trillion of public Treasury debt outstanding as of November, down from as high as 55.7 percent in April 2008 after the collapse of Bear Stearns Cos., according to Treasury data.

Potential Demand
The committee projects there may be $2.4 trillion in latent demand for Treasuries from banks, insurance companies and pension funds as well as individual investors. New securities with maturities as long as 100 years, as well as callable Treasuries or bonds whose principal is linked to the growth of the economy might entice potential lenders, the report said.

"They are opening up a can of worms with the idea of all these other instruments," said Tom di Galoma, head of U.S. rates trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. "They should try to keep the Treasury issuance as simple as possible. The more issuance you have in particular issue, the more people will trade them -- whether it be domestic or foreign investors."

Deficit Forecasts
The deficit for the current fiscal year is forecast to hit a record $1.6 trillion -- 10.9 percent of gross domestic product -- up from the $1.4 trillion the administration estimated previously. It would be $1.1 trillion in 2012, 7 percent of GDP. By 2015 it would decline to $607 billion, or 3.2 percent of GDP.

Obama’s budget plan would reduce federal shortfalls by $1.1 trillion over a decade through spending cuts in areas ranging from heating subsidies for the poor to grants for airports and water-treatment plants and revenue increases, including letting taxes rise for married couples with more than $250,000 in annual income.

Still, about $4.5 trillion, or 63 percent of the $7.2 trillion in public Treasury coupon debt, needs to be refinanced by 2016. That gives the government a narrowing window as growing interest expense will curtail its ability to spend. "There is roll-over risk," said James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, one of 20 primary dealers that trade with the Fed. "It’s a vicious cycle."

Even with bank-constricted pipeline, some foreclosures auctions surge
by Kerri Panchuk - Housing Wire

Foreclosures in some markets are on the rise, according to one survey of courthouse auctions. However, the numbers do not indicate a peak in foreclosure sales has been reached. "Despite months of slow sales, we've simply returned to prior levels, which to me indicates banks remain reluctant to aggressively foreclose despite the time it takes to foreclose being at or near record levels," said Sean O'Toole, founder and CEO of ForeclosureRadar. "And large inventories of properties [are] still scheduled for foreclosure sale."

Foreclosure auction sales grew as much as 50% in some states during January as foreclosure moratoriums came to an end, sending hundreds of distressed properties back to the auction block, foreclosure data firm said Tuesday. "While the increase is significant, we've seen larger surges after moratoriums or delays have played out in the past," said O'Toole in an email. "For example in California after the delays caused by Senate Bill 1137 we saw a surge in Notice of Default filings that far eclipsed any prior period. That is not the case here."

In Arizona, notice of trustee filings jumped 10.9% between December and January, the first increase recorded in six months. Foreclosure sales in Arizona also spiked with ForeclosureRadar recording a 56.2% rise in the number of homes sold back to the bank. The southwestern state also experienced a 52.7% increase in foreclosure sales to third-parties on a month-over-month basis in January.

California — one of the state's hit the hardest by unemployment and falling real estate prices during the recession — saw its back-to-bank foreclosure sales jump 51.1% between December and January. Sales of foreclosed homes to third parties in California also rose 52.8%. The Golden state reported a 6.9% rise in notice of default filings on a month-of-month basis, reversing a four-month decline in new defaults. At the same time, notice of trustee sale filings in California dropped 13.8%, turning one negative trend positive.

Oregon and Washington also recorded back-to-bank foreclosure sale increases of 33.4% and 54%, respectively. In terms of sales to third parties, Oregon noted a 70% jump in activity, compared to a 23% jump in Washington.

Derivatives: The Real Reason Bernanke Funnels Trillions Into Wall Street Banks
by Graham Summers - Phoenix Capital Research

We’ve been over the numerous BS excuses that US Dollar destroyer extraordinaire Ben Bernanke has made for QE enough times that today I’d rather simply focus on the REAL reason he continues to funnel TRILLIONS of Dollars into the Wall Street Banks.

I’ve written this analysis before. But given the enormity of what it entails, it’s worth repeating. The following paragraphs are the REAL reason Bernanke does what he does no matter what any other media outlet, book, investment expert, or guru tell you.

Bernanke is printing money and funneling it into the Wall Street banks for one reason and one reason only. That reason is: DERIVATIVES.

According to the Office of the Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activities for the Second Quarter 2010 (most recent), the notional value of derivatives held by U.S. commercial banks is around $223.4 TRILLION.

Five banks account for 95% of this. Can you guess which five?

gpc 11-10-3 top five derivative exposure

Looks a lot like a list of the banks that Ben Bernanke has focused on bailing out/ backstopping/ funneling cash since the Financial Crisis began, doesn’t it? When you consider the insane level of risk exposure here, you can see why the TRILLIONS he’s funneled into these institutions has failed to bring them even to pre-Lehman bankruptcy levels.

gpc 2-8-1

Ben Bernanke is a stooge and a fraud, but he is at least partially honest in his explanations of why he wants to keep printing money. The reason is to try to keep interest rates low. Granted, he’s failing miserably at this, but at least he understands the goal.

Of course, Bernanke tells the public and Congress that the reason we need low interest rates is to support housing prices. He doesn’t mention that $188 TRILLION of the $223 TRILLION in notional value of derivatives sitting on the Big Banks’ balance sheets is related to interest rates.

Yes, $188 TRILLION. That’s thirteen times the US’ entire GDP, and nearly four times WORLD GDP.

Now, of course, not ALL of this money is “at risk,” since the same derivatives can be traded/spread out dozens of ways by different banks as a means of dispersing risk.

However, given the amount of money at stake, if even 4% of this money is “at risk” and 10% of that 4% goes wrong, you’ve wiped out ALL of the equity at the top five banks.

Put another way, Bank of America, JP Morgan, Goldman and Citibank would CEASE to exist.

If you think that I’m making this up or that Bernanke doesn’t know about this, consider that his predecessor, Alan Greenspan, knew as early as 1999 that the derivative market, if forced into the open and through a public clearing house, would “implode” the market. This is DOCUMENTED. And you better believe Greenspan told Bernanke this.

In this light, all of Bernanke’s monetary policies and efforts are focused on doing one thing and one thing only: trying to shore up the overleveraged, derivative-riddled balance sheets of the Too Big to Fails, or Too Bloated to Exist, as I like to call them.

The fact that the bank executives taking this money and using it to pay themselves and their employees record bonuses only confirms that these folks have NO interest in taking care of shareholders or their businesses. They’re just going to take the money and run for as long as this scheme works.

I don’t know when this will come unraveled. But it WILL. At some point the $600+ TRILLION behemoth that is the derivatives market will implode again. When it does, no amount of money printing will save the Too Bloated To Exist banks’ balance sheets.

At that point, it’s game over for Wall Street and the Fed.

New report details scope of Chicago's public pension shortfalls
by Jason Grotto - Chicago Tribune

Continuing to sound the alarm on local pension funds, Chicago's Civic Federation will release a report Thursday that shows the unfunded liabilities for 10 city and county pension funds grew sixfold from 2000 to 2009, with shortfalls now totaling nearly $23 billion.

Coupled with Chicago residents' share of state pension debt, covering the unfunded liabilities of public pensions would now cost every man, woman and child in Chicago more than $11,934, up from $2,442 just a decade ago, the report found.

The Civic Federation's findings mirror many of those detailed in Tribune stories about Chicago's pensions published in November. The newspaper received an advance copy of the public policy think tank's report, which includes a detailed analysis of every county and city pension fund.

Eight of the 10 pension funds included in the report had funding levels above 80 percent in 2000. Since then, all but two have dropped below 60 percent, which pension fund experts say is a perilous position. The funding problems have continued despite pension reforms touted by Gov. Pat Quinn and the state Legislature, which lowered benefits for new hires.

"The takeaway here is that despite pension reforms that have been passed, public pension funds remain stressed," said Laurence Msall, president of the Civic Federation. "There is a great deal more work to be done to stabilize and maintain these pension funds. And it will require sacrifices by everyone."

Only the city's laborers pension fund and the Chicago Transit Authority pension had funding levels above 60 percent in 2009. The CTA retirement plan is that high only because it received a $1 billion pension obligation bond bailout from the state in 2008 to stop it from sliding into insolvency. Many now fear that other pension funds could face a similar crisis if something isn't done to shore up their finances.

In December, the Legislature passed reforms that will require Chicago to contribute more to police and firefighter pensions, which had been historically underfunded. City officials lambasted the law because they said it will lead to the largest property tax increase in city history.

While many have pointed to the economic downturn as the primary culprit of the pension crisis, the Civic Federation blames much of it on flaws in Illinois' pension code, which allows state and local governments to avoid paying the actuarially required contributions for employees' retirements. Those fundamental flaws have been exacerbated by benefit increases and early retirement incentives, as well as the recession.

Although the funds have seen significant improvement in investment returns during the last year, the pension hole is now so big that there is no way the funds can invest their way out of it, according to a report in April 2010 by Mayor Richard Daley's Commission to Strengthen Chicago's Pension Funds.

One significant issue highlighted in the Civic Federation report is a 75 percent decrease in the ratio of active-to-retired city and county workers since 2000, meaning there are now fewer workers paying into a system that requires ever more resources.

"People nationwide are starting to ask why Illinois and Chicago have allowed this fiscal recklessness to happen," Msall said. "That's not an easy question for politicians to answer. But if we don't take action soon, we may be beyond the point of fixing these problems."

Congressional Forecast Worsening: Gridlock With Increased Chance of Shutdown
by Matthew Jaffe - ABC News

There is a three-pronged budget war between President Obama and Republicans in Washington and it has politicians uttering a word they haven't used since 1994: shutdown. On one front: the fight over what programs to cut next year. On another: whether to extend the ever-rising debt ceiling again. And then there is the confrontation that could have the most immediate impact: whether the federal government will be shut down next month.

Government funding is due to run out on March 4 when the latest continuing resolution expires. If Congress fails to act, then the government would shut down. In recent days Democrats have repeatedly called for Republicans to take the prospect of a shutdown off the table, a call that Jack Lew, the Office of Management and Budget director reiterated today.

"We all want to avoid a situation like that. It's not the right way to run the government and I think we have a broad agreement that we need to keep essential services going," Lew said. But the chairman of the House Budget Committee, Rep. Paul Ryan, R-Wis. had a different view. "It is not our desire to see the government shutdown, but equally we don't want to rubber-stamp these elevated spending levels."

Even if the shutdown is avoided, at some point later this spring the national debt is set to hit its current $14.3 trillion limit. If Congress fails to act on the administration's request to raise the debt limit, then the government would have trouble refinancing its debt, taking in money to continue operations, and even default would be a possibility.

Then there is the longer term skirmish over funding for the next fiscal year. That fight kicked off this week with the unveiling of President Obama's 2012 budget proposal. The battle lines have already been drawn: Republicans want big cuts, Democrats less so. The GOP has been bolstered by its victories in last November's elections. Now Republicans feel the need to demand ever more sweeping cuts to appease their political base. "We're broke," House Speaker John Boehner said last week. "Let's be honest with ourselves."

"We have two opportunities just ahead of us to do something important on spending and debt," the Senate's top Republican Mitch McConnell said. "We have the continuing resolution for the balance of the year. We have the president asking us to increase the debt ceiling. Both of those are opportunities to do something important on spending and debt, which we believe is directly related to the sluggish growth we've had in the private sector."

In addition to the GOP's desire to make far larger cuts than the President has proposed, Republicans are also attempting to eliminate $100 billion from this year's budget. s emphasize the need to slash federal spending, Democrats -- who still control the Senate -- are urging caution, warning that drastic cutbacks could prove damaging. They fear that it could harm the nation's economic recovery, and they see the chance to portray their GOP counterparts as extreme and reckless in their budget proposals.

"We need to think about what we're cutting, and make sure those cuts aren't counterproductive. We need to pay attention to the quality of these cuts, not just the quantity," Senate Majority Leader Harry Reid said last week. "After all, you can lose a lot of weight by cutting off your arms and legs. But no doctor would recommend it." Sen. Chuck Schumer, D-N.Y., accused Republicans of "blindly swinging the meat axe to the budget when they should be using a sharp, smart scalpel."

The ramifications for the spending debate in Congress go far beyond the partisan jockeying to get the upper hand heading into next year's elections. A government shutdown could become a distinct possibility. If no deal is reached before March 4, then what are merely whispers about a shutdown right now could quickly grow into full-blown threats.

Rep. Paul Gosar, a newly-elected Republican from Arizona, was asked Monday on ABC's "Top Line" if he would support a federal shutdown if Democrats do not agree to sufficient budget cuts for fiscal year 2011 in the debate leading up to the March 4 deadline. "We wait and see," Gosar said. "I think, you know, what we've done is, we've had that adult discussion on our side -- we'll have that discussion coming about on the [House] floor. And I hope the Senate takes heed of that. And I think there's plenty of people that are listening over there with eyes wide open."

Other Republicans have gone even further. Former Minnesota Gov. Tim Pawlenty last week bragged to the Conservative Political Action Conference gathering in Washington that he oversaw the first government shutdown in Minnesota state history. Those Democrats on the Senate side with "eyes wide open" want the GOP to take the prospect of a federal shutdown off the table. "They need to say so, one way or the other. It is time for the House Republicans to stop with the games and finally rule out a government shutdown once and for all," Schumer said.

Vanishing Act: ‘Advisers’ Distance Themselves From a Report
by Andrew Ross Sorkin - Dealbook

A new study backed by pro-business groups takes a harsh stance on rules intended to bring transparency to the $600 trillion derivatives market. The report, published on Monday, claims that proposed regulation could cost 130,000 jobs and could cut corporate spending by $6.7 billion.

The findings are clearly meant to scare politicians and drum up public support — just as financial regulators are set to testify on the issue before a Congressional committee on Tuesday. And at first blush, the study would seem to be good ammunition for the Chamber of Commerce and its other supporters.

The study was conducted by Keybridge Research, a seemingly independent economics and public policy consulting firm. The firm’s bona fides include an all-star roster of academics, including Joseph E. Stiglitz, a Nobel laureate in economic science; David Laibson, a professor of economics at Harvard, and Stephen P. Zeldes, a professor of economics and finance at Columbia’s Graduate School of Business.

But a closer look at the report raises some serious questions. For one, the findings seem oddly out of step with the views of some of the group’s luminaries, including Mr. Stiglitz, who is advertised on Keybridge’s site as an adviser.

How could that be? Well, it appears that Mr. Stiglitz and many of the firm’s advisers are not advisers at all. "This is the first I have heard about it," said Mr. Stiglitz, who just returned home on Sunday after a five-week trip abroad. He said he was surprised to be listed on the group’s Web site. After reading the study, he said, "It’s not a very good report."

Some of the firm’s other so-called advisers must have agreed with him. As I made calls about the relationship between Keybridge and the academics, names mysteriously disappeared from the group’s site on Monday. By the end of the day, Keybridge’s list of affiliated advisers had shrunk to four, from seven.

When I called Keybridge’s president, Robert F. Wescott, who during the Clinton administration was a special assistant to the president for economic policy at the National Economic Council, he seemed slightly startled. "It is true that David and Steve asked to be removed from the Web site," he said. "These professors did not work on this project and were not aware of it, but they helped us with other projects."

He asserted that none of their names were attached to the study, just to the firm. He also contends that Mr. Laibson and Mr. Zeldes were distancing themselves as a result of "what happened with the movie ‘The Inside Job,’ " not the study. "That’s how it was presented to me," Mr. Wescott said.

The movie, which focuses on the financial crisis, raises questions about economists and their consulting arrangements with big business. Shortly after the film’s release, the American Economic Association voted to establish a special committee to create a professional code of conduct.= Mr. Laibson and Mr. Zeldes both said in e-mails that they just learned about the report on Monday and were not advisers to the firm. The Chamber of Commerce did not return a call for comment. Mr. Stiglitz said he had done "some work" for Keybridge, but not for a while. "The last thing I did for them was in May 2009."

Clearly the substance of the study — and the regulations it takes aim at — matter in shaping the future of the derivatives market. The study was strategically released for high impact. Gary Gensler, the chairman of the United States Commodity Futures Trading Commission, and other financial regulators are scheduled to testify on Tuesday about proposed derivatives rules before of the House Financial Services Committee.

At issue is how the rules apply to so-called end users like airlines or food companies that often buy derivatives to hedge their commodity costs. The fear is that companies will be required to post extra capital against those complex securities, amounting to 3 percent of their value. The potential results: a hit to their bottom lines and, more broadly, the economy.

The study, whose proponents also include the Business Roundtable, was clearly in the camp that such legislation would be bad for the economy since companies would have to set cash aside for derivatives instead of spending the money on jobs or new factories. But many economists derided the report within hours of its publication.

"This is not any kind of research. This is people who want to overleverage and risk the system — because, once again, they will get the upside and taxpayers/all citizens get the downside," Simon Johnson, a professor at the Sloan School of Management of the Massachusetts Institute of Technology and a senior fellow at the Peterson Institute for International Economics, wrote on his blog.

Mr. Stiglitz was even more adamant, saying the study’s conclusions encouraged the equivalent of "free fire insurance," in that companies could protect themselves from commodity price swings without paying up. "The argument they make is particularly foolish," he said. Mr. Stiglitz also said the argument seemed ludicrous in light of corporate America’s already stingy ways: "Companies are sitting on $2 trillion of cash. It’s just an embarrassment that they’d use that argument in the current context."

When I told Mr. Wescott of Keybridge about Mr. Stiglitz’s comments, he replied that "the client had asked us" to put the report together. "It was a hypothetical study."

All You Need to Know About Why Things Fell Apart
by Michael Lewis - Bloomberg

A surprising number of my fellow citizens appear to be unaware of my service these past 18 months as a member of the Financial Crisis Inquiry Commission. Thus it may come as news that I have declined to sign the report issued by the majority, or the dissent by the three- member minority, or even the dissent from their dissent, written by the now-immortal Peter J. Wallison. I hereby dissent from the dissent from the dissent. My dissent is different from all those other dissents, which is why I am dissenting.

I do this, of course, not to call attention to myself. Still less do I seek to enhance the status of my application for employment with JPMorgan Chase. I seek merely to inform the general public of the true causes of our so-called financial crisis. The task is not a simple one. In limiting me to a mere two pages at the end of their 633-page book, the majority and the other dissenters have suppressed not only several apt metaphors, but deep truths.

Here, in a far-too-brief executive summary, they are:

Financial Crisis Cause No. 1: Wall Street’s shifting demographics.
In the commission’s report Federal Reserve Chairman Ben Bernanke describes recent events as “the worst financial crisis in global history, including the Great Depression.” The event, in other words, was unprecedented. To understand an event that has never before occurred, we must logically begin with those factors that have never before been present. On Wall Street, the most obvious such factor is women.

Of course, the women who flooded into Wall Street firms before the crisis weren’t typically permitted to take big financial risks. As a rule they remained in the background, as “helpmates.” But their presence clearly distorted the judgment of male bond traders --- though the mechanics of their influence remains unexplored by the commission (on which several women sat).

They may have compelled the male risk takers to “show off for the ladies,” for instance, or perhaps they merely asked annoying questions and undermined the risk takers’ confidence. At any rate, one sure sign of the importance of women in the financial crisis is the market’s subsequent response: to purge women from senior Wall Street roles. Wall Street’s gender problem is, for the moment, of merely academic interest. Less academic is...

Financial Crisis Cause No. 2: The moral collapse of the American working class.

AIG head Robert Benmosche has recently pointed out that the reason his firm has enjoyed such great success is precisely because it has avoided selling insurance to the large number of Americans who believe, as Benmosche put it, “that the government is responsible for what happens to me.” (As we know, the government is responsible only for what happens to AIG).

The CEO of JPMorgan, Jamie Dimon, has often called our attention to the outrageous amount of banker bashing by Americans outside the financial sector, who seek to blame their troubles on others.

Wall Street leaders now understand that they made a mistake, one born of their innocent and trusting nature. They trusted ordinary Americans to behave more responsibly than they themselves ever would, and these ordinary Americans betrayed their trust. Amazingly, these ordinary Americans don’t even appear to feel guilty for their actions. Like wild animals that have lost their fear of humans, they continue to wander down from the hills to rummage through our garbage cans for sustenance.

Frankly, the commission’s report does nothing to improve public morals. In discussing the role of the 1977 Community Reinvestment Act, for instance, the report notes that the loans made by big banks to meet the act’s requirements -- that is, loans to poor people in crap neighborhoods -- outperformed, dramatically, the general run of subprime loans.

Such nitpicking merely obscures the critical point. For at least two centuries the U.S. government has encouraged people who didn’t work on Wall Street to think of themselves as “equal.” Government policies have emboldened ordinary Americans to borrow money they never intended to repay, just like rich people do, and cowed the financial elite into lending it to them. You can’t forget to bear-proof the garbage cans, and expect the bears won’t notice.

Along these same lines I cannot help but point out...

Financial Crisis Cause No. 3: The Chinese.
The willingness of this remote and curious people to sell us goods at ridiculously low prices is disruptive. It encourages our poor to believe they can afford many items which they should not be able to, for instance. And the vast number of dollars these same Chinese people willingly lend to us at absurdly low rates of interest places an unfair burden on our financiers, who must find someplace to put them.

This is a far more difficult job than is commonly understood; it often leaves Wall Street people feeling overworked and underappreciated. If we want our financiers to perform even better than they do, we must cease to expect more from them than they can give. Which brings me to...

Financial Crisis Cause No. 4: Upon our trusting, hard- working and underappreciated financiers we thrust the impossible task of overcoming impersonal historical forces.
The most distressing aspect of the commission’s report is its attempt to blame actual human beings for the financial crisis: fraudulent CDO managers, greedy ratings companies, Wall Street bond traders and, especially, Wall Street CEOs. Think about this: If everyone on Wall Street is guilty, how can anyone be? If no one on Wall Street saw it coming, how can anyone be expected to have seen it?

Details for Dummies
Anyway, as several Wall Street CEOs tried patiently to explain to the commission, the details were never their responsibility. Martin Sullivan, the CEO of AIG in the three years leading up to its near collapse, even went so far as to prove that he had no idea how much he’d been paid ($107 million).

The commission proved incapable of grasping the point: the rare man capable of running a big Wall Street firm remains focused on the big picture. And in the big picture, from the point of view of their firms and their earnings potential, the so-called financial crisis was a blip. They’ve already forgotten about it. And they assume that, eventually, you will, too.

MERS Lacks Right to Transfer Mortgages, Judge Says
by Thom Weidlich - Bloomberg

Merscorp Inc., operator of the electronic-registration system that contains about half of all U.S. home mortgages, has no right to transfer the mortgages under its membership rules, a judge said.

U.S. Bankruptcy Judge Robert E. Grossman in Central Islip, New York, in a decision he said he knew would have a "significant impact," wrote that the membership rules of the company’s Mortgage Electronic Registration Systems, or MERS, don’t make it an agent of the banks that own the mortgages.

"MERS’s theory that it can act as a ‘common agent’ for undisclosed principals is not supported by the law," Grossman wrote in a Feb. 10 opinion. "MERS did not have authority, as ‘nominee’ or agent, to assign the mortgage absent a showing that it was given specific written directions by its principal."

Merscorp was created in 1995 to improve servicing after county offices couldn’t deal with the flood of mortgage transfers, Karmela Lejarde, a spokeswoman for MERS, said in an interview last year. The company tracks servicing rights and ownership interests in mortgage loans on its electronic registry, allowing banks to buy and sell the loans without having to record the transfer with the county. It played a major role in Wall Street’s ability to quickly bundle mortgages together in securitized trusts.

"‘Don’t come around here no more,’ is basically the message to MERS," said April Charney, a senior attorney with Jacksonville Area Legal Aid in Jacksonville, Florida. "The judge basically deconstructed MERS and said there’s no possible way in any case you can come in and show you have this appropriate proper status to transfer the note."

"MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage-recording process," Grossman wrote. "The court does not accept the argument that because MERS may be involved with 50 percent of all residential mortgages in the country, that is reason enough for this court to turn a blind eye to the fact that this process does not comply with the law."

Automatic Shield
In the case Grossman ruled on, Credit Suisse Group AG’s Select Portfolio Servicing, a mortgage servicer, sought to bypass the automatic shield against legal claims triggered by Ferrel L. Agard’s filing for personal bankruptcy in September. Select Portfolio wanted permission to foreclose on Agard’s home in Westbury, New York, on behalf of U.S. Bancorp’s U.S. Bank unit, the trustee for the mortgage-backed trust the home loan was in. The house is worth about $350,000 and the mortgage amount was $536,921, according to the decision.

Grossman ruled in favor of Select Portfolio because he couldn’t overrule a November 2008 foreclosure judgment the servicer won in state court, he said. Without that state-court ruling, Select Portfolio wouldn’t have had the right to bring its motion, Grossman said. He then addressed whether a mortgage transfer by MERS is valid, because "MERS’s role in the ownership and transfer of real-property notes and mortgages is at issue in dozens of cases before this court," including those where "there have been no prior dispositive state-court decisions," he wrote.

Select Portfolio argued in part that MERS’s February 2008 assignment of the mortgage to U.S. Bank was valid because Agard agreed that MERS would hold title to it for the original lender, Bank of America Corp.’s First Franklin, and for whichever banks it was further assigned to. First Franklin transferred the promissory note the mortgage secured to Lehman Brothers Holdings Inc.’s Aurora Bank and Aurora to U.S. Bank, according to the decision.

"An adverse ruling regarding MERS’s authority to assign mortgages or act on behalf of its member/lenders could have a significant impact on MERS and upon the lenders which do business with MERS throughout the United States," Grossman wrote. "It is up to the legislative branch, if it chooses, to amend the current statutes to confer upon MERS the requisite authority to assign mortgages under its current business practices."

MERS intervened in the case and argued that Agard’s mortgage, the terms of its membership agreement and New York state law gave it the authority to assign the mortgage. MERS says it holds title to mortgages for its members as both "nominee" and "mortgagee of record."

Grossman said Select Portfolio had to show that U.S. Bank owned both the note and the mortgage, and there was no evidence that it held the note. The judge disagreed with Select Portfolio’s argument that U.S. Bank held the note because the note "follows" the mortgage, which it said U.S. Bank owned. "By MERS’s own account, the note in this case was transferred among its members, while the mortgage remained in MERS’s name," Grossman wrote.

"MERS admits that the very foundation of its business model as described herein requires that the note and mortgage travel on divergent paths." The judge said that the membership agreement wasn’t enough to assign the mortgage and that to do so the lender would have to give power of attorney or similar authority to MERS.

MERS’s membership rules don’t create "an agency or nominee relationship" and don’t clearly grant MERS authority to take any action with respect to mortgages, including transferring them, Grossman wrote. Because the interests at issue concern "real property" -- land and buildings -- under state law, any transfer has to be in writing, which isn’t done under the MERS system, he said.

"Without more, this court finds that MERS’s ‘nominee’ status and the rights bestowed upon MERS within the mortgage itself, are insufficient to empower MERS to effectuate a valid assignment of mortgage," the judge wrote. "MERS’s position that it can be both the mortgagee and an agent of the mortgagee is absurd, at best."

Grossman said parties coming to him to seek to lift the automatic ban on legal claims in cases involving MERS will have to show they own both the mortgage and the note.

Bank Regulator Pushing For Modest Settlement With Industry Over Improper Mortgage Practices
by Shahien Nasiripour - Huffington Post

The federal bank regulator overseeing the nation's largest lenders is pushing for a quick and modest settlement to the months-long federal and state probes into abusive mortgage practices, frustrating other federal agencies and state regulators and raising questions over President Barack Obama's delay in naming a pro-consumer chief to head the agency.

The Office of the Comptroller of the Currency, which oversees lenders like JPMorgan Chase and Bank of America, plays a key role in the ongoing investigations launched last September into improper foreclosure practices. The federal review involves the OCC and other bank regulators, as well as the Departments of Justice, Housing and Urban Development and the newly formed Bureau of Consumer Financial Protection. The 50-state probe involves state attorneys general and state bank regulators.

But the OCC, known for its light-touch approach, is trying to come to a quick settlement with the banks it supervises, according to officials from multiple agencies involved in the investigations. The agency is negotiating an agreement that would cost the industry less than $5 billion in fines and mortgage modifications for troubled homeowners, including principal reductions, the officials said. Other agencies are pushing for something bigger.

On Wednesday, Rep. Patrick McHenry, a North Carolina Republican, said during a House hearing on housing issues that he had heard the potential settlement would be in the "tens of billions range." In 2008, state attorneys general reached an $8.4 billion agreement with just one company -- Countrywide Financial -- to settle predatory lending accusations. The money was used to aid distressed homeowners.

The OCC is also trying to persuade mortgage companies that collect payments from borrowers, known as servicers, into adopting new standards in how they deal with homeowners. The agency has wide influence over the way banks service mortgages: It supervises firms that control nearly two-thirds of all home mortgages in the U.S., or more than 33 million loans totaling about $5.8 trillion. But officials said the OCC's proposals give the institutions wide discretion, potentially undercutting their intent.

The OCC is said to be rushing to settle in hopes of forcing the hand of other regulators on the federal and state level, weakening their efforts to extract a more meaningful resolution. The probes have cast a pall over the industry as bank executives have been forced to answer questions about the investigations posed by investors and analysts. The industry wants to put the whole matter behind it and move on.

Officials at the Treasury Department and Federal Deposit Insurance Corporation have grown frustrated with the OCC's efforts, people familiar with the matter said. State regulators conducting their own probe said they aren't a part of the OCC's seemingly lonely action.

"Any statements or actions by the OCC at this point are on the agency's own behalf and not in conjunction with the 50-state attorneys general," Iowa Attorney General Tom Miller said in a statement. "Regardless of any federal action, we intend to fully pursue all state claims and remedies." Spokesmen for the OCC didn't respond to a request for comment e-mailed after regular business hours.

State and federal officials are trying to reach a global settlement that will deter future abuses in the way mortgage servicers modify delinquent home loans and foreclose on homeowners, as well as levy penalties as a measure of restitution and force lenders to restructure distressed mortgages. The OCC's efforts subvert the possibility of a unified settlement, officials said.

In December, Federal Reserve Governor Daniel K. Tarullo said the federal review had found "significant weaknesses in risk-management, quality control, audit, and compliance practices as underlying factors contributing to the problems associated with mortgage servicing and foreclosure documentation." "We have also found shortcomings in staff training, coordination among loan modification and foreclosure staff, and management and oversight of third-party service providers, including legal services," he said.

In the wake of the worst housing crisis in generations, consumer advocates, housing analysts and bank regulators have heavily criticized the industry's performance. In addressing the recent controversies of improper foreclosures during a speech last November, Fed governor Sarah Bloom Raskin said procedural flaws like robo-signing and other efforts that cut corners are "part of a deeper, systemic problem." She added that she was "gravely concerned."

"The complex challenges faced by the loan servicing industry right now are emblematic of the problems that emerge in any industry when incentives are fundamentally misaligned, and when the race for short-term profit overwhelms sustainable, long-term goals and practices," Raskin said. "I believe that serious and sustained reform is needed to address the larger problems in mortgage servicing."

Tarullo said the "problems are sufficiently widespread that they suggest structural problems in the mortgage servicing industry." "The servicing industry overall has not been up to the challenge of handling the large volumes of distressed mortgages," he said in December. "It is clear that the industry will need to make substantial investments to improve its functioning in these areas and supervisors must ensure that these improvements occur."

But as of last week, nothing had changed, Raskin said in another speech. "These problems existed before November and as far as I can tell they remain unaddressed," Raskin said. "How do I know this? Late last year, the federal banking agencies began a targeted review of loan servicing practices at large financial institutions that had significant market concentrations in mortgage servicing. The preliminary results from this review indicate that widespread weaknesses exist in the servicing industry."

"These deficiencies pose significant risk to mortgage servicing and foreclosure processes, impair the functioning of mortgage markets, and diminish overall accountability to homeowners," she added. "I'm sure this has been said, but I'll say it again because I have seen little to no evidence of improvement in the operational performance of servicers since the onset of the crisis in 2007." Bank regulators will address the issue on Thursday during a Senate hearing.

On Wednesday, Federal Housing Administration Commissioner David Stevens said that a settlement would come in the next month. Options include penalties against the nation's largest banks, more mortgage modifications for borrowers, and the reduction of homeowners' mortgage principal, he said. Stevens also touched on how regulators aren't on the same page. "There's two ways we can go about coming to a conclusion here," Stevens said. "We can come up with one set of solutions, assuming the general findings are the same, or we can go individually. That process is being worked through right now."

The FHA chief added that the agencies would have to work together "to make this less disruptive in the market," an acknowledgement that a massive principal write-down scheme would likely impair the nation's largest financial institutions. The OCC's actions in trying to derail a more substantial settlement raises questions over the Obama administration's delay in nominating the agency's next leader.

Its last chief, John C. Dugan, stepped down in August after his five-year term ended, and joined Covington & Burling LLP, where he leads the firm's financial institutions group. Dugan "advises clients on a range of legal matters affected by significantly increased regulatory requirements resulting from the financial crisis," according to the firm's Web site. One of his colleagues is Edward Yingling, who last year stepped down as president and chief executive officer of the American Bankers Association, the industry's largest trade group.

Consumer advocates pushed for the White House to nominate an outsider who was less connected to the OCC's prior failures. The agency came under withering criticism for its lax oversight of the industry in a report published by the bipartisan, Congressionally-appointed Financial Crisis Inquiry Commission. Treasury Secretary Timothy Geithner picked Dugan's former chief of staff at the OCC, John Walsh, as Dugan's interim replacement. Obama has not yet named his successor. The nomination requires Senate approval. But Democrats lost six seats in the Senate in last fall's election. The administration now faces an uphill battle to get a tough regulator in the role.

Could rising food prices spark Egypt-style revolt in Africa?
by Drew Hinshaw - Christian Science Monitor

Soaring food prices – such as wheat, which has hit a 2-1/2-year high – could feed political tumult in Africa, despite earlier proclamations that an Egypt-style revolt would not spread to sub-Saharan Africa.
Egypt's revolution was triggered by many sparks, one of which was bread; or rather wheat, a staple whose soaring price and insufficient supply could become the dry wood for political tumult across the African continent this year.

Prices for that staple crop now sit at a 2 1/2-year high, and Egypt – currently the world's biggest exporter of televised scenes involving young men waving flags – just happens to be wheat's biggest importer. And while academics will have semesters ad infinitum to weigh the relative importance of Twitter vs. bread in the fall of ousted President Hosni Mubarak, the more immediate question could be what comes next across Egypt's backyard: sub-Saharan Africa.

Thirty African countries are scheduled to hold elections over the next 12 months. The list includes food-scarce nations like Chad and Madagascar, alongside terminally unstable lands like Nigeria or the Democratic Republic of the Congo.

And yet, as of last month, food prices are already sitting on a record high. Last week, the United Nations announced average food prices climbed 25 percent in the past year, including a 3.4 percent jump in January alone. "It's easy to see how the food supply can translate directly into political unrest," Lester Brown, founder of the Earth Policy Institute think tank in Washington, told The Guardian. What's not easy to see, he added, is how the economy of what we eat will fundamentally improve over decades and elections to come.

To be sure, some of 2011's costly cuisine has been caused by short-term disasters, like erratic weather in Russia or bad crops in Canada. But the affordability of food is also being undermined by longer-term trends, such as the growing chunk of farmland now dedicated to cultivating biofuels, or the emergence of China as a net food importer. Underground water reserves in drylands like Saudi Arabia, Mr. Brown added, are on the wane. Plus, given the vagaries of climate change, Russia's wheat-withering changeable weather could prove to be a new norm.

"This isn't just about the Muslim Brotherhood and it isn't just about politics," the economist Jefferey Sachs told Reuters. "This is about hunger, about poverty, about food production, about a change of world economy. This is one large swathe of 10,000 miles of potential instability." Spoken like an economist, rather than a political scientist. And whether Mr. Sachs is right or not remains to be seen. We'll be watching.

South Dakota Moves To Legalize Killing Abortion Providers
by Kate Sheppard - Mother Jones

A law under consideration in South Dakota would expand the definition of "justifiable homicide" to include killings that are intended to prevent harm to a fetus—a move that could make it legal to kill doctors who perform abortions. The Republican-backed legislation, House Bill 1171, has passed out of committee on a nine-to-three party-line vote, and is expected to face a floor vote in the state's GOP-dominated House of Representatives soon.

The bill, sponsored by state Rep. Phil Jensen, a committed foe of abortion rights, alters the state's legal definition of justifiable homicide by adding language stating that a homicide is permissible if committed by a person "while resisting an attempt to harm" that person's unborn child or the unborn child of that person's spouse, partner, parent, or child. If the bill passes, it could in theory allow a woman's father, mother, son, daughter, or husband to kill anyone who tried to provide that woman an abortion—even if she wanted one.  Jensen did not return calls to his home or his office requesting comment on the bill, which is cosponsored by 22 other state representatives and four state senators. 

"The bill in South Dakota is an invitation to murder abortion providers," says Vicki Saporta, the president of the National Abortion Federation, the professional association of abortion providers. Since 1993, eight doctors have been assassinated at the hands of anti-abortion extremists, and another 17 have been the victims of murder attempts. Some of the perpetrators of those crimes have tried to use the justifiable homicide defense at their trials. "This is not an abstract bill," Saporta says. The measure could have major implications if a "misguided extremist invokes this 'self-defense' statute to justify the murder of a doctor, nurse or volunteer," the South Dakota Campaign for Healthy Families warned in a message to supporters last week.

The original version of the bill did not include the language regarding the "unborn child"; it was pitched as a simple clarification of South Dakota's justifiable homicide law. Last week, however, the bill was "hoghoused"—a term used in South Dakota for heavily amending legislation in committee—in a little-noticed hearing. A parade of right-wing groups—the Family Heritage Alliance, Concerned Women for America, the South Dakota branch of Phyllis Schlafly's Eagle Forum, and a political action committee called Family Matters in South Dakota—all testified in favor of the amended version of the law.

Jensen, the bill's sponsor, has said that he simply intends to bring "consistency" to South Dakota's criminal code, which already allows prosecutors to charge people with manslaughter or murder for crimes that result in the death of fetuses. But there's a difference between counting the murder of a pregnant woman as two crimes—which is permissible under law in many states—and making the protection of a fetus an affirmative defense against a murder charge.

"They always intended this to be a fetal personhood bill, they just tried to cloak it as a self-defense bill," says Kristin Aschenbrenner, a lobbyist for South Dakota Advocacy Network for Women. "They're still trying to cloak it, but they amended it right away, making their intent clear." The major change to the legislation also caught abortion rights advocates off guard. "None of us really felt like we were prepared," she says.

Sara Rosenbaum, a law professor at George Washington University who frequently testifies before Congress about abortion legislation, says the bill is legally dubious. "It takes my breath away," she says in an email to Mother Jones. "Constitutionally, a state cannot make it a crime to perform a constitutionally lawful act."

South Dakota already has some of the most restrictive abortion laws in the country, and one of the lowest abortion rates. Since 1994, there have been no providers in the state. Planned Parenthood flies a doctor in from out-of-state once a week to see patients at a Sioux Falls clinic. Women from the more remote parts of the large, rural state drive up to six hours to reach this lone clinic. And under state law women are then required to receive counseling and wait 24 hours before undergoing the procedure.

Before performing an abortion, a South Dakota doctor must offer the woman the opportunity to view a sonogram. And under a law passed in 2005, doctors are required to read a script meant to discourage women from proceeding with the abortion: "The abortion will terminate the life of a whole, separate, unique, living human being." Until recently, doctors also had to tell a woman seeking an abortion that she had "an existing relationship with that unborn human being" that was protected under the Constitution and state law and that abortion poses a "known medical risk" and "increased risk of suicide ideation and suicide." In August 2009, a US District Court Judge threw out those portions of the script, finding them "untruthful and misleading." The state has appealed the decision.

The South Dakota legislature has twice tried to ban abortion outright, but voters rejected the ban at the polls in 2006 and 2008, by a 12-point margin both times. Conservative lawmakers have since been looking to limit access any other way possible. "They seem to be taking an end run around that," says state Sen. Angie Buhl, a Democrat. "They recognize that people don't want a ban, so they are trying to seek a de facto ban by making it essentially impossible to access abortion services."

South Dakota's legislature is strongly tilted against abortion rights, which makes passing restrictions fairly easy. Just 19 of 70 House members and 5 of the 35 state senators are Democrats—and many of the Democrats also oppose abortion rights. The law that would legalize killing abortion providers is just one of several measures under consideration in the state that would create more obstacles for a woman seeking an abortion. Another proposed law, House Bill 1217, would force women to undergo counseling at a Crisis Pregnancy Center (CPC) before they can obtain an abortion. CPCs are not regulated and are generally run by anti-abortion Christian groups and staffed by volunteers—not doctors or nurses—with the goal of discouraging women from having abortions.

A congressional investigation into CPCs in 2006 found that the centers often provide "false or misleading information about the health risks of an abortion"—alleging ties between abortion and breast cancer, negative impacts on fertility, and mental-health concerns. "This may advance the mission of the pregnancy resource centers, which are typically pro-life organizations dedicated to preventing abortion," the report concluded, "but it is an inappropriate public health practice." In a recent interview, state Rep. Roger Hunt, one of the bill's sponsors, acknowledged that its intent is to "drastically reduce" the number of abortions in South Dakota.

House Bill 1217 would also require women to wait 72 hours after counseling before they can go forward with the abortion, and would require the doctor to develop an analysis of "risk factors associated with abortion" for each woman—a provision that critics contend is intentionally vague and could expose providers to lawsuits. A similar measure passed in Nebraska last spring, but a federal judge threw it out it last July, arguing that it would "require medical providers to give untruthful, misleading and irrelevant information to patients" and would create "substantial, likely insurmountable, obstacles" to women who want abortions. Extending the wait time and requiring a woman to consult first with the doctor, then with the CPC, and then meet with the doctor again before she can undergo the procedure would add additional burdens for women—especially for women who work or who already have children.

The South Dakota bills reflect a broader national strategy on the part of abortion-rights opponents, says Elizabeth Nash, a public policy associate with the Guttmacher Institute, a federal reproductive health advocacy and research group. "They erect a legal barrier, another, and another," says Nash. "At what point do women say, 'I can't climb that mountain'? This is where we're getting to."

EU Ministers Agree To €500 Billion Permanent Rescue Fund
by Der Spiegel

Euro-zone finance ministers have agreed to effectively double the volume of the euro rescue fund from 2013 when it becomes a permanent mechanism. The fund will have an effective lending capacity of 500 billion euros, said Luxembourg Prime Minister Jean-Claude Juncker. Euro-zone finance ministers meeting in Brussels on Monday agreed that a permanent rescue mechanism to be set up from 2013 would total €500 billion euros ($675 billion) -- significantly higher than the current rescue fund.

The new fund, the European Stability Mechanism (ESM), will be part of a package of measures European leaders are hoping to agree at two summits in March to resolve the debt crisis. "We've already agreed on the volume of the lending capacity of the ESM. We've agreed on the amount of €500 billion, and this will be subject to regular revision," the chairman of euro-zone finance ministers, Luxembourg Prime Minister Jean-Claude Juncker, told a news conference.

Apart from the euro zone, the ESM would also get cash from the International Monetary Fund and, possibly, from voluntary contributions from non-euro zone European Union countries, Juncker said. The ESM is intended to replace the temporary euro rescue fund, the European Financial Stability Facility (EFSF), which was hurriedly set up in May to avert a collapse of the single currency in the wake of the Greek debt crisis.

The EFSF currently has a volume of €440 billion but can only lend up to €250 billion to ailing euro member states because it has to keep a large cash buffer in order to maintain top credit ratings. Juncker said the ESM's €500 billion would be the "effective lending capacity" of the new rescue fund.

No Deal on Expanding Current Rescue Fund
EU officials are worried that the current fund may not be big to cope if Portugal and Spain were to follow Greece and Ireland in needing a bailout. But Monday's meeting yielded no agreement on enlarging the fund's effective lending capacity. Germany is opposing an immediate increase in the EFSF unless other euro zone member states agree to cut public spending and make their economies more competitive.

Germany's " competitiveness pact", supported by France, includes higher retirement ages, a German-style "debt brake" to limit government bond issuance, a common corporate tax base and an end to inflation-linked wages. But other euro-zone countries are resisting the proposal. EU leaders are to meet first on March 11 and then on March 24-25 to reach a deal on the comprehensive package.

To the unemployed, sick, disabled and poor:
by Mark


I'm unemployed over two years now, a 99er without any benefits for three months. I followed Unemployed Friends almost from its start, never posted until now, but am grateful for my time with you all. I did as asked with calls and e-mails, etc. I've a confession to make to you all. I'm a criminal.

I've obeyed the 10 commandments and all laws except: I'm unemployed and that's now a crime, I'm poor and that's a crime, I'm worthless surplus population and that's a crime, I'm a main street American Citizen born and raised in the USA and that's now a crime, and I'm euthanizing myself as I write this note -- so arrest my corpse. This isn't a call for help, the deed is done, it's not what I wanted.

Death is my best available option. It's not just that my bank account is $4, that I've not eaten in a week, not because hunger pangs are agonizing (I'm a wimp), not because I live in physical and mental anguish, not because the landlady is banging on the door non-stop and I face eviction, not that Congress and President have sent a strong message they no longer help the unemployed. It's because I'm a law abiding though worthless, long-term unemployed older man who is surplus population.

Had I used my college education to rip people off and steal from the elderly, poor, disabled and main street Americans I would be wearing different shoes now -- a petty king. Hard work, honesty, loving kindness, charity and mercy, and becoming unemployed and destitute unable to pay your bills are all considered foolishness and high crimes in America now. Whereas stealing and lying and cheating and being greedy to excess and destroying the fabric of America is rewarded and protected -- even making such people petty king and petty queens among us.

Since the end of 2008, when corporate America began enjoying the resumption of growth, profits have swelled from an annualized pace of $995 billion to the current $1.66 trillion as of the end of September 2010. Over the same period, the number of non-farm jobs counted by the Labor Department has slipped from 13.4 million to 13 million -- there is no recovery for the unemployed and main street.

We taxpayers have handed trillions of dollars to the same bank and insurance industry that started our economic disaster with its reckless gambling. We bailed out General Motors. We distributed tax cuts to businesses that were supposed to use this lubrication to expand and hire. For our dollars, we have been rewarded with starvation, homelessness and a plague of fear -- a testament to post-national capitalism.

Twelve years ago, I lost the last of my family. Ten years ago, I lost the love of my life, couldn't even visit him in the hospital because gays have no rights. I fought through and grieved and went on as best I could. Seven years ago, I was diagnosed with Diabetes and Stage 2 high blood pressure with various complications including kidney problems, mild heart failure, Diabetic Retinopathy. These conditions are debilitating and painful. I am on over eight prescribed medications, which is very difficult without insurance and income.

But I struggled on and my primary caregiver was very pleased with my effort overtime with my A1C at seven. Still these physical disabilities have progressively worsened, and I have had a harder and harder time functioning in basic ways. All the while, I give thanks to God because I know there are many more worse off than me -- and I tried to help by giving money to charities and smiling at people who looked down and sharing what little I had.

I am college educated and worked 35 years in management, receiving written references and praise from every boss for whom I worked. Yet, after thousands of resumes, applications, e-mails, phone calls, and drop ins, I've failed to get a job even at McDonalds. I've discovered there are three strikes against me -- most 99ers will understand.
  • Strike one -- businesses are not hiring long-term unemployed -- in fact many job ads now underline "the unemployed need not apply."

  • Strike two -- I am almost 60 years old. Employers prefer hiring younger workers who demand less and are better pack mules.

  • Strike three -- for every job opening I've applied, there are over 300 applicants according to each business who allow a follow up call.

With the U3 unemployment holding steady at 9.6percent and U6 at 17 percent for the past 18 months, the chances of me or any 99er landing a job is less than winning the Mega Million Jackpot. On top of that, even the most conservative economists admit unemployment will not start to fall before 2012 and most predict up to seven years of this crap.

I believe the Congress and President have no intention of really aiding the unemployed -- due to various political reasons and their total removal from the suffering of most Americans, their cold-hearted, self-serving natures. Had they really wanted to help us, they could have used unspent stimulus monies or cut foolish costs like the failed wars or foreign aid, and farm subsidies.

The unspent stimulus money alone could have taken care of ALL unemployed persons for five years or until the unemployment rate reached 7 percent if Congress and the President really wanted to help us -- and not string us all along with a meager safety net that fails every few months. In any case, if I were to survive homelessness (would be like winning the mega-millions) and with those three strikes against me, in seven more years, I'll be near 70 with the new retirement age at 70 -- now who will hire an old homeless guy out of work for nine years with just a few years until retirement?

So, here I am. Long term unemployed, older man, with chronic health problems, now totally broke, hungry, facing eviction. My landlady should really be an advocate for the unemployed -- she bangs on my door demanding I take action. A phone call and a "please" are not enough for her -- she is angry. She is right to be angry with me, I am unemployed -- as apparently everyone is now angry with us unemployed.

Two hundred and eleven and social services cannot help single men. Food banks and other charities are unable to help any more folks -- they are overwhelmed with the poor in this nation. So I have the "freedom" to be homeless and destitute and "pursue happiness" in garbage cans and then die -- yay for America huh? It's the end of November and cold. A diabetic homeless older person will experience amputations in the winter months.

So I will be raiding garbage cans for food, as my body literally falls apart, a foot here, a finger there. I have experienced and even worked with pain from my diseases -- hardship I can face. I just cannot muster the courage to slowly die in agony and humiliation in the gutter.

I have no family, I have no friends. For the past two years, I've had nobody to talk with as people who knew me react to the "unemployed" label as if it were leprosy and contagious. I am not a bad person, in fact people really like me. But everyone seems to be on a tight budget these days and living in incredible fear. It is hopeless since we all are hearing more and more that we unemployed are to blame for unemployment, that we are just lazy, that we are no good, that we are sinners, that we are druggies, yet we are the victims who suffer and are punished while the robber baron banksters and tycoons become senators, congress, presidents and petty kings.

So the only option left for me is merciful self euthanasia. It is with a heavy heart that I have set my death in motion, but what I am facing is not living. So off I go, I have made peace with God and placed my burden on Jesus and He forgives me. This nation has become evil to the core, with cold-hearted politicians and tycoons squeezing what little Main Street Americans have left. It is not the America into which I was born -- the land of the free and the home of the brave with kind folks who help neighbors -- it is now land of the Tycoon-haves and the rest of us have-nots who march into hopelessness and despair.

Every unemployed person I have met over these past two years have been saintly. Sharing what little they have, and being charitable -- being kind and patient and supportive. Isn't it amazing that we Americans who suffer so much, have not taken to the streets in violence, riots or gotten out the guillotines and marched on tycoons and Washington in revolt as would happen in most other nations? But rather we plead with deaf politicians to please help us. We don't demand huge sums -- just 300 bucks a week, barely enough to cover housing for most. Most of all we say, please help us get a job, please allow us dignity.

I can't help but juxtapose our plight to the tycoons and politicians. They are never satisfied with their enormous wealth, and always want more millions no matter whom it hurts. They STEAL from pension funds, banks, the people and government, and little Wall Street investors. Then rather than face punishment, they become petty kings in this world. They are disloyal to America, unpatriotic, and serve their own foreign UN-American greedy causes and demand more and more and more.

I feel that this is not the nation into which I was born. I was born in America, the land of the free and the home of the brave. America, where people give as much as they receive. America, where all people work for the common good, and try to leave a better and more prosperous nation for the next generation. America, where people help their neighbors and show charity and mercy.

This new America is alien to me -- it is an America of greed and corruption and avarice and mean spirited selfishness and hatred of the common good -- it is an America of savage beasts roaring and tearing at the weak, and bullying the humble and peacemakers and poor and those without means to defend themselves. I am not welcome here anymore. I don't belong here anymore. It's as if some evil beast controls government, the economy, and our lives now.

I must go now, my home is someplace else. Goodbye and God bless you all. God bless the unemployed and poor and elderly and disabled. God bless America and the American people except the tycoons and politicians -- may God retain the sins of tycoons and politicians and phony preachers and send them to the Devil.



p01 said...

...and real tangible assets for the banks.

The house always wins.


The Anonymous said...

"Stoneleigh said...

My view is that movements in nominal prices are of limited interest by themselves, as nominal prices say nothing about changes in affordability."

Nevertheless, I assume you do believe that nominal prices for goods and services will (eventually) be down 80-90% from their peak, correct?

Stoneleigh said...

The Anonymous,

I do believe that most prices will fall, but not all by the same percentage by any means. Much of the kind of useless crap that people often spend a lot on now will probably go to zero. Essential goods and services should fall very much less, and scarce essentials could rise despite deflation. The money supply is a powerful driver of prices (especially to the downside), but it is by no means the only one.

scandia said...

@Supergravity, RE the elimination of the rabbit holes I was thinking a civilian intervention. For example the location of those bunkers would be an excellent mission for Quakers, a tangible peace action.Or some war vets who know the horror of war.

VK said...

So China,

Deflation or Inflation?

Unknown said...

I think many commenters on the inflation/deflation debate are opposed to Stoneleigh's argument not on intellectual grounds but because they are loathe to be on the sidelines.
Personally I have found Stoneleigh's explanation regarding real and nominal prices and affordability to be persuasive.

TechGuy said...

Hi Nicole (Stoneleigh),

To start off I would just like to thank you for your time and effort to this matter. That said I have a few remarks about your comments:

"If we see the capital flight that I expect, the US should have no trouble at all selling its treasuries at a low risk premium for quite some time to come"

I am not so sure on this. I believe QE2 was put in place to absorb the bulk of new debt being issued that the market can't absorb. At current interest rates, short term treasuries loose money because the interest does not cover the broker fees in buying them (or just barely). Its more practical to just hold cash in a bank account, and the Fed has made it clear that it will not let the bank accounts "break the buck". with new debt estimated to be $1.6 Trillion the gov't needs to raise 5 Billion a day. I doubt there is enough liquidity in the market to absorb this amount. Interest raise for US treasuries would rise significantly without the Fed buying $2 to $4 Billion a day. Any significant rise in US treasuries is a disaster, since not only does the Treasury need to sell new debt (at a higher cost), it needs to roll over the existing debt (about $2 to $2.5 Trillion a year). This could quickly spiral out of control as the treasury would need to borrow ever greater amounts of money, to pay for its operations and its larger interest payments. The more the gov't borrows, the higher the rates will rise as it need to attract ever increasing amounts of cash to meet its demand.

History has shown that once gov't debt breaches 100% of GDP they collapse in just a few short years.

Oh don't forget about the spiral costs for entitlements. 2.8 Million new boomer will begin collecting entitlements this year and that number will rise for the next 25 years (although I doub't the US has anywhere near 25 years left).

"My reasoning for predicting a commodity top in the not too distant future is primarily that sentiment towards commodities is at an extreme"

Commodity prices are being driven up largely by inflation in China. As long as China does not tighten, The commodity bubble will continue. The Chinese People are buying PMS and assets to hedge bad inflation. Its their inflation is being exported to the rest of the world. Speculators are just lamprey sucking on Chinese inflation.

On top of it, there is a real scarity of food caused by abnormal weather over most of the global, Drought in Russia, Asia, and flooding in Australia.

US will eventually become a leader in inflation, not based upon consumer demand, but on excessive govt debt resulting in significant dollar devaluation. Consider a publicity traded company, that has a fixed number of shares of stock in cirulation. The company goes on a borrowing bindge to fund its oblications, rent, employee salaries and its pension plans, since its revenues do not cover its cost. Eventutally the value of its stock will decline as the public realizes that its insolvent. A similar process will happen to the US. The US gov't cannot continue to borrow at more than a trillion a year and maintain the value of the US dollar.

TechGuy said...

Part II (Cut because of 4K Limit)

"Commodities top on fear of scarcity, and that is exactly what we are seeing now for oil, gold, silver and agricultural commodities."

The prices of commodities will likely remain extremely volatile. and I don't have reached any where a near top. Everytime a major economic event occurs, PMs and other commodities have a high probablity to rise, and people choose to diversify their capital away from Fiat currencies, and none fungible assets (or assets that nobody wants).

Consider that here in the US, the common citizen is a net seller of PMs, Notice the near constant bombardment of TV, Radio "Cash For Gold" Ads. During the housing bubble it was the common citizen buying homes. My point is that not everyone is in the game buying PMs, so there is room for further new highs.

Perhaps in China, and India the common man is buying PM's, but considering that China and India both have a bad inflation problem, sales of PMs are unlikely to fall (barring major policy changes in China and India).

"First, we are on the verge of a large deleveraging of dollar-denominated debt, of which there is more than any other kind of debt worldwide. This will create demand for dollars."

I am not so sure about this. The Fed has provide about $25 Trillion in liquidity to prevent deleveraging, and I don't see any comments from the Fed that suggesst deleveraging. This is why the stock market has nearly doubled in value since the March 2009 lows. Its unlikely the Fed will take its foot off the easy money accelerator. They might let up a bit, but at the first sign of trouble they'll double down.
Should deflation take hold, the US gov't would quickly collapse unable to pay its debts resulting in a default. Imagine if Congress didn't lift the debt ceiling, how many weeks would it take for the US to collapse. A matter of weeks, or months (if we are that lucky).

I think we will be stuck in a period of stagflation, where jobs remain in short supply but prices for food and energy will remain high or rise, slowly eroding the system from the inside out.

Nassim said...

While I agree almost entirely with Stoneleigh's viewpoint regarding deflation, I still think that physical precious metals are a bit different from real-estate, consumables (copper, wheat and so on) and ETF's.

From my vantage point, it looks as though the economic hitmen, having perfected their techniques on poorer countries, are now in the process of using similar techniques on their own countrymen. Deflation must be wonderful if you have either a lot of money or unlimited credit.

In the aftermath of WW2, the British government was desperately short of cash. Some favoured people were given the opportunity to buy ex-military equipment (i.e. army surplus) for very little. My Dad was offered brand-new, late model, Spitfire aircraft (minus guns and armour) for £100 each. A motor torpedo boat (minus tubes) that could do 40 knots cost only a little more. That is how the Zionists were able to conjure up an air force in 1948. The airmen were from various air forces and had lots of experience - some were mercenaries.

My Dad bought a fleet of ex-army trucks, a miniature mining railway with waggons and engines and road-building equipment (scraper and road roller). The Israelis stole all this equipment when they invaded Sinai in 1956. They even took the cutlery. :)

I think people really don't understand how cheap (yet unaffordable) stuff can get. We have been programmed to expect inflation and we are being blind-sided.

Anonymous said...

Solid Post:) Well said Stoneleigh!

@ Stoneleigh...

Only thing I see problematic is the idea of waiting to use most (but save a little) of your money. Why not use most of it right now?

We have the highest purchasing power and product availability RIGHT NOW! To wait and hope that cash will increase in purchasing power, given the corresponding risk of products not being available and essentials decreasing in terms of real affordability seems very risky indeed. I agree that we must maintain freedom by maintaining purchasing power (keep some cash), but the paradox of values for essentials may render any cash for commodity exchange unlikely. Will cash for essential commodity exchanges have the fungibility we hope for? Can you have a deflationary collapse of the money supply in conjunction with people loosing faith in paper money as a medium of exchange simultanelously? Could Gonzo lira and Nicole Foss both be partially right?

I would love to hear what I&S and others have to say about the above. I have a feeling that this may be a question others have asked themselves too. Perhaps it was mentioned in the debate? $30 dollars is a lot of oats :)

Thanks & Cheers

Anonymous said...


Yes the price for assets like cars, snowmobiles, electronics, houses, boats, etc. will likley drop off the cliff, but who will want them anyways?

I know Ilargi hammered several people before about the "false" concept of "price inflation for essentials and price deflation for non-essentials in a state of deflationary monetary collapse," but could someone give me a robust argument why nominal prices for essentials won't increase even when the money supply is deflating?
The real affordability of essentials could be decreased in a compounding manner by both nominal price increase and decrease in real purchasing power.

Check me if I am wrong. With Justification Please :)

Thanks & Cheers

Anonymous said...

If in the game of musical chairs, 100 people loose for every 1 winner, why would the 100 losers obey the axioms of the game or let the axioms of the game continue?

So you bring your own chair (physical cash) and decide to sit out the game. Assume for augments sake that for every 100 people playing there are 2 sitting on the sidelines watching. When the music stops the winner and the observers will still be outnumbered 100:3. Whatever new game the 100 losers decide to play the odds are against the ones with cash. Can the axioms of the game be upheld against such odds?


Lynford1933 said...

AGTMFC: I don't think you are wrong to buy things now you think you might need in the future (WTSHTF). I am doing this almost weekly with available cash. Seeds, tools, solar, sustainable energy, etc. The important thing is not to go in debt to buy anything. Debt will be a killer in the future.

A serious EMP (grid down, see Carrington Event) will change everyone's mind. We should get a little one tomorrow BTW.

Anonymous said...

@ Lynford1933...

I concur. :) Keep it up


John Day said...

I was deeply touched by the words of Mark, the 99er. In my work at a city clinic for walk-ins, I see about 50% of the homeless being like him, now. This is new to me. I've been a doctor since 1986.

Nassim said...

I can see that this deflation meme is a really difficult concept for anyone under the age of 90 to accept.

Real food prices can crash quite quickly - real food is not manufactured food. People in the West can reduce their consumption/demand for food enormously without any adverse effects on their health.

The food ration of 1,550 calories/day is still in effect with no prospect of an increase ... Cats and dogs disappear regularly ...

Berlin 1948 - Berlin's Winter of Fear (PDF)

Let's not forget that the Marshall Plan only came into being when the Soviets were perceived as a threat - long after this article was printed. The Allies were quite happy to see the Germans starve.

To put matters in perspective, a single Oreo Cookie Jar Blizzard is 1,550 calories. Here is a table from a book I am reading right now which shows that prisoners at Buchenwald in 1944 had a ration of 1,759 calories and the minimum in wartime Japan (they were a lot smaller than the Germans) was 2,165 calories.

If incomes crash, which they have been doing for a long while, food prices can also crash and people will have difficulty feeding themselves like today.

Controlling food supply is how tyrants control their populations. Fear of getting sent to Siberia and so on is not the first thing on most peoples' minds. During India's famines of the 19th century, many people begged to be imprisoned for not paying off their debts or for stealing.

A Fall Guy said...

Goods news for a change.

Government abandons plans to sell UK public forests

I thought of scandia when I saw this.

Anonymous said...

I agree with most of what Stoneleigh said-
I'm not sure how she was able to tollerate a hyper-inflationist for that long though-
Has anyone ever noticed that it takes them 5 pages to explain their case?
They have you imagining riding in airplanes and running out of fuel and looking for a landing spot and by time they're done all the drivel-you can't remember what the point of it all was--

I differ with Stoneleigh about Gold in deflation-
I expect it will perform simply because i believe it's money-
It outperformed everyting in the deflation of the 30's and i see no reason it wont again-

Gold was dollar locked so other than Rosevelt's manipulation-the price remained locked-but-
if you measure it against CPI--everything deflated against it-(lower chart)
it also corrolated to the lowering of the Fed Funds Rate (upper chart)
If the FFR is held low and i believe it will be kept low-then this should happen again-imo-

Also-Mining companies should out perform as well-like they did in the 30's-
I have somewhere a record of 3 other majors during that time--Placer Dome being one and they all did great-
This is the only downloadable chart availabe from that period though-

I think the USD and Gold will both gain strength-
Gold does not have to increase in price and can in fact decrease in price and have what's always most important--Buying power-

Gold only performs well in 2 instances--hyper-inflation and deflation (default risk)
Gold sucks during normal inflation-

Hyper-inflationists basically ignore the credit market-which is too bad-because if they did pay attention-they would understand that we've already had hyper-inflation--they missed it and it's over--
Gold seen it-The long Bond seen it-
Now we will have the inevitable deflation--

Here's what's important about Gold-in fact any money-it's never about how much you have-it's always about what it can buy-

team10tim said...

Looks like someone just wrote an inflammatory letter and took themselves out of the picture. Is this the American equivalent of the self immolation that set the stage for Tunisia and Egypt?

Poor Mark, what a crappy situation. I doubt that I would act any differently if I were in his shoes and I guess that's the point. Revolutions like Egypt, Tunisia, and France seem to come about through a shared desperation and hopelessness. John Kenneth Galbraith said that every successful revolution was the kicking in of a rotten door.

It's weird that Americans can hold the government, media, corporations, etc. in such low esteem and still firmly believe that the door isn't rotten. It seems like Ashvin Pandurangi was right when he said it is literally the thought that counts

Nassim said...

Henderson was honoured by Queen Elizabeth II with the CBE 1986, George Medal 1954 (and Bar 1955), Queen Elizabeth Coronation Medal 1953, Mentioned in Despatches 1955 and Kenya Police Medal for Distinguished Services 1952. He was honoured by Government of Bahrain with Order of Bahrain 1st Class and Bahrain Meritorious Service Medal 1st Class.

Ian Henderson (police officer)

I see they are demonstrating again in Bahrain. I am sure a lot of people are unaware that a Briton who was a famous torturer ran the Bahrain police for many years. I believe he retired to the West Country a wealthy man. He certainly got all the right dongs from Her Majesty.

Britain fails to detain Bahrain's 'torturer in chief'

Coco said...

So for those of us in Europe looking for an alternative to iffy banks to place cash - should we be buying German bonds? Is there a way to buy short term US treasuries over here?

Asmita said...


Is Tunisia/Egypt etc. a byproduct of the crash in '08.

Is the global periphery beginning to implode now that it's been sucked dry by the center?

scandia said...

@Fall Guy, GREAT news about the forests in Britain!!!Thanks for that.

@Kimberley, sharp insight about the collapse of the periphery

scandia said...

@p01, re the Kluge estate sale to Bank of America,might it become one of the rabbit holes for bankster on the run?
If so silly to publicize the sale.
If so quite a luxurious last stand:)
If I acquired such a homestead I would be embarassed to invite anyone over, ashamed of such a level of consumption.
Some folks have yet to hear one of my favorite phrases,
" elegant sufficiency ".

Hombre said...

@Stoneleigh - Excellent post, thanks.
"They (the market) are not at all concerned about the possibility of a US default, despite the obvious evidence of risk."

If, or when, some of the large early dominoes start to fail, Greece? Illinois? etc., isn't there a good chance this overconfidence in the U.S. will rapidly diminish and even collapse?

Hombre said...

@Kimberly - "Is the global periphery beginning to implode now that it's been sucked dry by the center?"
Interesting choice of words! It brings to mind the old cliche
"everything is connected".
With global instantaneous communication the have-nots are no longer willing to suffer in ignorance for the benefit of the haves.
And information such as Nassim provided above brings to light "the rest of the story" as to those who are powerful and how that power is used by award winning "heroes."
Of course my fellow TV gazing neighbors are totally in the dark about these perspectives as Mr. Murdocks news honeys dare not be so revealing! (well, not of facts, only necklines)

p01 said...

I sense a BIG disturbance in the force today ;)
Some unwathched pot is about to blow its lid off.


radzimir said...


@Stoneleigh and other deflationists

Please define credit contraction.
I have two different definitions:
1) when borrowers pay debt back and doesn't take new one
2) when borrowers default - sometimes in strategic way

There is huge difference between those two.
In 1. case, money stay valuable and anyone fight to get some.
In 2. case, lenders and bond holders loose all, but borrowers stay with increased purchasing power - monthly credit payments may be now used for real stuff.

Just imagine practical scenario: someone pays 2000$ mortgage payment every month. Now, he goes away and lives with parents, saving 2000$ per month, which may be spend or saved, which is an inflationary force.

Additionally, the rich having cash positions, feels being 'cheated out', I see them complaining:In the past sheep has needed cash to pay debt back, now they go free and doesn't need my stuff. Debt backing my cash doesn't exist anymore. I feel, my cash became worthless so I must throw it away as soon as possible, for example buying any possible commodities.

Ex-borrowers has destroyed their ability to borrow, so they can not buy expensive stuff like housing (prices plunging), but they can easily pay more for anything else (retail rising).

Please notice a difference to Great Depression: in that time money was backed by gold, so rich people had no motivation to spend their cash. Now they have bytes on some remote computer which isn't backed by debt any more, so how much is this 'cash' worth? Borrowers in the past were farmers, they could not go away and preserve income, they struggled to pay debt to the end. Today, going away in most cases possible.

Please point me any error I made in my reasoning, I love to learn from my own mistakes, but first someone must point them out to me :-)

Stoneleigh said...


I believe QE2 was put in place to absorb the bulk of new debt being issued that the market can't absorb.

There is a whole constellation of effects that shift direction (roughly) with the ebb and flow of confidence, and therefore liquidity. During a rally we see rising stocks and commodities, rising bond yields and a falling dollar. The QE2 package addresses an effect that will reverse anyway as the rally comes to an end. I fully expect bond yields to fall. People may say it was because of QE2 having been effective, but then people will find a rationalization for everything. I do not believe there is any causal effect.

At current interest rates, short term treasuries loose money because the interest does not cover the broker fees in buying them (or just barely). Its more practical to just hold cash in a bank account, and the Fed has made it clear that it will not let the bank accounts "break the buck".

In the current environment, it is not the return ON capital the matters, but the return OF capital. Short term treasuries are an effective capital preservation strategy. Besides, as deflation strengthens, the real rate of interest on those treasuries will be high even if the nominal rate is low, as the purchasing power they represent will be increasing sharply.

History has shown that once gov't debt breaches 100% of GDP they collapse in just a few short years.

Indeed, the US and many other countries are living on borrowed time. That doesn't mean they have to default at the same time though. Capital flight from early casualties can help sustain stronger parties for longer. By the way, total debt as a percentage of GDP is a better measure of impending trouble, whether that debt is government, household, business or financial.

Oh don't forget about the spiral costs for entitlements. 2.8 Million new boomer will begin collecting entitlements this year and that number will rise for the next 25 years (although I doub't the US has anywhere near 25 years left).

Entitlements will be reneged on, and in the not too distant future. They cannot be paid. They come under the heading of 'promises that cannot be kept'.

Commodity prices are being driven up largely by inflation in China. As long as China does not tighten, The commodity bubble will continue.

The Chinese bubble will burst. They have invested huge sums in production capacity for cheap plastic tat that will have no market. There is an enormous quantity of bad debt in their system. They are heading for depression too.

Speculators are just lamprey sucking on Chinese inflation.

Speculation is more than just an effect, it is a cause. Speculation increases demand artificially. Speculators drive up prices for personal gain and then dump the sector.

On top of it, there is a real scarity of food caused by abnormal weather over most of the global, Drought in Russia, Asia, and flooding in Australia.

True, but much of the problem with unaffordable food relates to speculative momentum chasing driving up prices, as in 2008. Speculation in essentials makes them much less affordable for those with limited means (a category that is set to expand rapidly). Eventually those people reach a breaking point.

US will eventually become a leader in inflation, not based upon consumer demand, but on excessive govt debt resulting in significant dollar devaluation.

Eventually, but not yet, and not just because excessive government debt, but excessive total debt. The dollar is not a long term safe haven to be sure, but it should be a lower risk than most other options for at least a year or two.

Stoneleigh said...


The prices of commodities will likely remain extremely volatile, and I don't have reached any where a near top.

I can imagine a top forming over the next few months for some commodities, while I think others may top sooner. The psychology of a top is clearly in evidence though.

Everytime a major economic event occurs, PMs and other commodities have a high probablity to rise, and people choose to diversify their capital away from Fiat currencies, and none fungible assets (or assets that nobody wants).

I think people will be wanting cash soon enough, once they lose their access to credit and have no other purchasing power.

The Fed has provide about $25 Trillion in liquidity to prevent deleveraging, and I don't see any comments from the Fed that suggests deleveraging. This is why the stock market has nearly doubled in value since the March 2009 lows. Its unlikely the Fed will take its foot off the easy money accelerator. They might let up a bit, but at the first sign of trouble they'll double down.

I doubt it. I think we'll see austerity instead, as we're beginning to see the in individual states. The centre will squeeze the periphery, as it always does, and ordinary people will find themselves at the bottom of the heap. This is why we'll see war in the labour market, as we said would happen in the primer on the subject.

Should deflation take hold, the US gov't would quickly collapse unable to pay its debts resulting in a default.

In a deflation (nominal) bond rates would be very low for a while, with people looking to short term treasuries as a safe haven, and therefore not asking much of a risk premium.

I think we will be stuck in a period of stagflation, where jobs remain in short supply but prices for food and energy will remain high or rise, slowly eroding the system from the inside out.

Food and energy will receive relative price support. Whether or not their prices fall in nominal terms, they will be much less affordable for most in real terms. It is not nominal prices that matter.

Stoneleigh said...


Deflation must be wonderful if you have either a lot of money or unlimited credit.

Well, essentially no one would have unlimited credit in a deflation. Some will have a lot of money though, if they cashed out and managed to preserve the resulting liquidity from systemic banking crisis. They will indeed be in a fortunate position, as they will be able to buy up everyone else's assets for pennies on the dollar. Wealth concentration gets worse in the early years of a depression, before the pitchforks come out that is. The seeds of the great fortunes are sown in times like this.

Anonymous said...


A note of interest for you.

Years ago, during the construction of the Metro subway in Washington DC (early 70's), I was talking to a guy who worked on the design of it.

He said that many of the contractors for the subway had also been involved with making the ICBM missile silos, you know, the ones with 10' thick doors.

Deep underground bunkers were made years ago to protect the top levels of the U.S. government during a nuclear attack but they are located in Virginia and have a fixed number of people they can hold.

He said the deepest tunnel sections of the DC metro system were designed to supplement the shelter/bunkers in Virginia. The main ones in Virginia were for the V.I.P.s, if you didn't 'make the cut' for those, the subway tunnels were for 'the little people'. One of the deepest sections of the Metro runs under Rock Creek Park where the DC zoo is. It has the same kind of blast gate doors as missile silos hidden in recesses at the north and south entrances to the tunnel sections.

If these less than public shelters exisited in the earlier 70's, there are probably a lot more distributed around the country and many more were probably constructed since under different cover guises.

Also, you have crime families like the Bushs setting up fiefdoms in places like Paraguay which undoubtedly are Über Doomsteads because these parasites of the political class know what they did and know what's coming.

Look at a map of where fallout would be distributed worldwide and the south hemisphere and east of the Andes in particular get very little fallout. Most nuclear targets are in the Northern Hemisphere.

Coincidence or superior breeding? Hmm.

el gallinazo said...

From he last thread re IAN:

IMO, Peter Sellers as Dr Strangelove trying to prevent his black leather gloved hand from strangling himself is the greatest moment in cinematic history. Well maybe also Brando telling his brother Rod Steiger that he cuda been a contenda.

Stoneleigh said...


Only thing I see problematic is the idea of waiting to use most (but save a little) of your money. Why not use most of it right now?

It depends what you want to buy. For some things now is indeed the best time to buy - things that are important, not too expensive and currently require only the internet and a credit card to access. For other larger items (like land), now would not be the itme, unless one is extremely wealthy, in which case the learning curve time is worth a lot too. The point is not to go into debt. If you would require debt to purchase something, don't do it, because you risk losing it anyway down the line.

We have the highest purchasing power and product availability RIGHT NOW! To wait and hope that cash will increase in purchasing power, given the corresponding risk of products not being available and essentials decreasing in terms of real affordability seems very risky indeed.

Everything will be risky where we're going. Liquidity is hard to hold on to and many things may cease to be available. Everyone needs to make their own decisions as to what they can or need to buy now and what can wait for prices to fall. Cash is not a long term bet. People need to consider moving from cash to hard goods at the point where they personally can afford it.

Will cash for essential commodity exchanges have the fungibility we hope for? Can you have a deflationary collapse of the money supply in conjunction with people loosing faith in paper money as a medium of exchange simultaneously?

I don't think there will be a problem with the fungibility of cash for quite a long time. I don't think a loss of faith in currency is on the cards any time soon, although it's inevitable eventually.

Perhaps it was mentioned in the debate? $30 dollars is a lot of oats :)

I know. Since you read here regularly, you already know my position on just about everything. I would never deprive anyone of important information on the basis of ability to pay.

el gallinazo said...

Re previous thread regarding the feminine of geezer.

I prefer geezette.

Stoneleigh said...


Could someone give me a robust argument why nominal prices for essentials won't increase even when the money supply is deflating?

Prices are very likely to decrease initially as deflation is a very powerful driver of prices (more powerful than inflation as a driver to the upside because of the force and timeframe involved). Prices may well rebound though. I would expect the essentials to bottom early in this depression, then we could see them rise in nominal terms even as purchasing power collapses. That would mean they were going through the roof in real terms. The impact on ordinary people is going to be huge. If there's any way to get hold of some essentials and store them (without going into debt to do so of course, or using up all your available liquidity), then I suggest people consider it. If they can't afford it, I would suggest considering pooling resources with others so as to be able to cover more bases together than you could alone.

The real affordability of essentials could be decreased in a compounding manner by both nominal price increase and decrease in real purchasing power.


el gallinazo said...

allgreatthingsemergefromchaos said...
@ Board... (& IAN)

What do you think the Norwegian seed bank is for? "

To recreate 10000 years of human agricultural progress after the pissants and serfs burn down Monsanto and its Frankenseeds?

steve said...

is was wondering if someone could explain the money supply in terms of the standard supply demand curve for money. with interest rate on the vertical axis and quantity of money on the horizontal axis.

i think demand curve has shifted to the left and supply curve has shifted to the right.

what are peoples thoughts?

el gallinazo said...

I read somewhere recently that the main way that JFK prevented a nuclear exchange during the CMC was to forbid the Joint Chiefs to leave town.

Stoneleigh said...


If in the game of musical chairs, 100 people loose for every 1 winner, why would the 100 losers obey the axioms of the game or let the axioms of the game continue?

There's always a risk that the rules will change in the middle of the game. I remember reading about a military training exercise where the rules were regularly changed in the middle, the object being to train people to be able to think on their feet and be able to roll with the punches. The world is not fair, and it is going to get much less fair as time goes by. Still, being prepared (chairwise) is better than not being prepared and trusting to chance. We can increase our odds, but we can never buy ourselves a guarantee.

I fully expect all kinds of rules to be changed retroactively, like rules against unilateral rewriting of contract terms so as to facilitate the calling in of debt for instance. When the top of the financial pyramid wants to reach down to the lower layers and grab what real wealth they can, they will rewrite the rules so as to make it legal. Law is a tool of hierarchy. It codifies and legitimizes what is in the interests of the elite. As those interests change, so will the law, and on top of that, the elites are increasingly refusing to be bound by their own strictures, which will lead to everyone else coming to regard the law with contempt. This is a very dangerous situation. (I studied law because I was interested in such matters.)

Stoneleigh said...


If incomes crash, which they have been doing for a long while, food prices can also crash and people will have difficulty feeding themselves like today. Controlling food supply is how tyrants control their populations.

Indeed. Think of the Irish potato famine or the holodmor in the Ukraine. In both cases the region continued to export food even as the population starved. Their survival was not in the interests of the elite.

Phlogiston Água de Beber said...

RE: Paul Kenobi

The Force is strong in this one.

Euro downgrades and looting

Anonymous said...

@ Stoneleigh....

Thank you for the thoughtful and committed response. :)

When you talk... I listen. Very difficult to punch holes in your theories and assumptions.

If in the game of musical chairs, 100 people loose for every 1 winner, why would the 100 losers obey the axioms of the game or let the axioms of the game continue?

So you bring your own chair (physical cash) and decide to sit out the game. Assume for augments sake that for every 100 people playing, there are 2 sitting on the sidelines watching. When the music stops the winner and the observers will still be outnumbered 100:3. Whatever new game the 100 losers decide to play the odds are against the ones with cash. Can the axioms of the game be upheld against such odds? These odds are my only concern for the loss of faith in fiat money.

Can cash have fungibility if only 3% of the population has it?

This unprecedented disparity of wealth distribution caused by the unprecedented expansionary phase places a unique boundary condition on the system.

I am on side with your position, but worried about critical thresholds of disparity between the haves and have-nots.

Money is based on the perception of faith of it as an exchange medium, but mass fear & anger could turn faith to disbelief in an instant.

Thank you again.

Everything in this karmic universe has a cause and consequence. Small actions now can lead to unprecedented results. You have a left a lasting legacy in the lives and lineages of your audience.

scandia said...

@p01...yesterday I rec'd an e-mail from a friend expressing your intuitive sentiment. I am going to let him know you also have a " feeling " of the force

@el G, " geezette "! Perfect.

@Walk In the woods...I am connecting the dots between the Kluge Estate and those bunker constructs in Virginia. Coincidence?
Worth noting where the fallout patterns are if one is looking to move to a more " secure " location.

Anonymous said...

Pardon the repeat Stoneleigh
I jumped the gun there.


Anonymous said...

@ el g...

Retribution and retaliation by the masses are cooked into the cake.

I hope the non-crop plants are so lucky.


Anonymous said...

@ Stoneleigh...

Thanks you for the comments. Concise and well communicated.

An excellent point that that will help me (and likely others) understand the changes as they are implemented. I am no laywer so your expertise is appreciated especially in the context of the big picture.


Anonymous said...

Stoneleigh said:

"Law is a tool of hierarchy. It codifies and legitimizes what is in the interests of the elite."

So true! Thank you for saying it so well, Stoneleigh.

scandia said...

Just reading about Bahrain and the brutal assaults on protesters, etc...I am planning to meet up with my son in Oman in early March and am now wondering if the trip will be possible or prudent?
He is in Saudi. Will he even be able to leave?

Anonymous said...

Nassim said:

"From my vantage point, it looks as though the economic hitmen, having perfected their techniques on poorer countries, are now in the process of using similar techniques on their own countrymen."

Exactly. The crimes committed abroad will come home! I witnessed firsthand the suffering inflicted on Cubans by the US Empire.

Unknown said...

Hi Stoneleigh,

Always appreciate your incredible work and have been a follower for some time. I have tended to agree with your theory that the dollar would rise as other currencies collapse but I have to admit I'm beginning to wonder why the US would be considered a safe haven for anything at this point. Why wouldn't people seek (relative) safety in tangible assets such as land or gold and silver, regardless of the inherent risks? It seems to me that the dollar can fall just as hard as precious metals.

I follow others firmly on the side of deflation too, one of whom strongly advises emigrating from the US if at all possible. It's something I could do very easily and, although the decision is a very personal one, I wonder if you have an opinion on this as an idea in general?

Best of luck with your tour. Hope you'll be coming back to Manhattan soon.

jal said...

Some things can never be repeated enough times and in enough different ways.

Stoneleigh said...
“... currency hyperinflation, which divides the underlying real wealth pie into more and more pieces,
credit hyper-expansion creates multiple and mutually exclusive claims to the same pieces of pie through leverage.”

money functions as a medium of exchange, a unit of account, a standard of deferred payment, and a store of value.

Producing or using counterfeit money is a form of fraud.

defined as: "deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage".[1] In the broadest sense, a fraud is an intentional deception made for personal gain or to damage another individual. Fraud is a crime, and also a civil law violation. Defrauding people or entities of money or valuables is a common purpose of fraud.
QE is counterfeit money and

Inflation is fraud.


TechGuy said...

Stoneleigh Wrote:
"I doubt it. I think we'll see austerity instead, as we're beginning to see the in individual states. The centre will squeeze the periphery, as it always does, and ordinary people will find themselves at the bottom of the heap. This is why we'll see war in the labour market, as we said would happen in the primer on the subject."

States will get a bailout, just as the banks did. While Bernanke said he would not bailout the states, he said the same thing about bank bailouts weeks before Lehman collapses. US State crisis will cause another liquidity crisis, as pensions, banks, etc are loaded to the hilt with Muni-Debt. Muni-Debt will become the Subprime crisis of 2011-2012, forcing the Fed to print trillions more to backstop it.

Fool me one, shame on you, Fool me twice, shame on me.

Stoneleigh Wrote:
"I can imagine a top forming over the next few months for some commodities, while I think others may top sooner. The psychology of a top is clearly in evidence though."

Not as long the Chinese inflation problem persists. The Chinese are buying commodities because of rapid decline of purchasing power of the Chinese Yuan. Inflation in China is out of control, and I doubt the Chinese Central bank will reign it in anytime soon since it would collapse the Chinese economy. If Central bank of China does reign in inflation that I would agree that commodities will take a tumble.

Stoneleigh Wrote:
"Indeed, the US and many other countries are living on borrowed time. That doesn't mean they have to default at the same time though."

It tends to spread like a contagious disease. Consider that shortly after the Greek crisis, Contagion spread to the other PIGS (Portugal, Spain, and Ireland) in a matter of weeks to months. Currently the EU CB has provided bridge loans to avoid an fast collapse of the PIGS. When Europe does keel over, the US will at best be a few months behind. Once a collapse happens, the focus quickly changes to the next Domino.

Anonymous said...


So what's your take on Iceland. They told the banksters to go pound sand and they did not cease to function.

They are in far better shape than Ireland can ever hope to be at the same point on the crisis timeline.

The Irish acquiesced their sovereignty to bailout private banks at taxpayer expense, the Icelanders did not.

Let's see, 1922 to 2011, not much of a run as a Free State before the Big Boot of Banking is on their throats as their New Master.

Anonymous said...

@ Board...

It would be great to hear how many months of food you are storing?

My grandma who went through the 1930's always had at least 12-16 months worth of food stored IN ADDITION to a mini orchard and large garden. She also had an old full size refrigerator converted to a fruit dryer and canned her own goods. She would have had way more food in storage, but she would feed armies of relatives and neighbors on a regular basis. I say we should use that as a conservative bench mark given our current outlook is worse than 1930's...Way Worse. If you store too much food (unlikely) nothing says building community like helping out those in your community.

Producing and preserving your own food is excellent and will become necessary, but there may be some periods of social upheaval we may want to sit out with rice, beans, and some multivitamins. Having sufficient food available till harvest at the minimum. This assumes hungry people don't pillage your harvest.

My take is once credit drops off we will likely see a massive permanent decline if food supply. Each locality may find itself in significant overshoot of its local biocapacity over a relatively short period of time. My city is located in the Okanogan (the fruit capital of Canada) yet most of its food is imported on a day to day basis via letters of credit. The game of musical chairs will likely apply to food too. (100:1)

Not to mention vulnerabilities in global shipping and industrial agriculture to credit collapse.

Think about when you go to a grocery store how many of the essential food items come from your city?


NB: Apparently Mormons have 2 years worth of food stored? Given this "common knowledge" the masses will likely converge on Idaho and Utah.

Anonymous said...
This comment has been removed by the author.
A Fall Guy said...

@ agtefc

I don't think Iceland was "allowed" to remain sovereign. I think that the powers weren't prepared for the local uprising that led to the solid referendum victory. Please don't credit TPTB with too much competence (their greedy self-serving ways mean they are dangerous, but also half-blind).

By the time Greece and Ireland came to the fore, they were much more prepared, and much faster, and so were able to get compliant governments to sell their people into debt servitude before the people realized what was happening, or could organize the stop it.

By the way, Ireland has closer to 4.5M people (not 6M) and the global Seedbank is in Norway, not Iceland.

Anonymous said...

The Irish politicians that did sell their Republic to the Bank Maggots are dead men walking either way once the chips finally fall for all to see.

They will have to leave the country for some gated compound to hold up in forever.

This situation is never going to 'get better' as in the past. It's a permanent state of long emergency. Things will revert back to clans and Ireland has a very long history of clan conflict.

Phlogiston Água de Beber said...

What else could explain their blatant disregard of public wellbeing.

Capacity and willingness to blatantly disregard public wellbeing is a prerequisite for admission into the upper ranks of the political class. It's in the DNA of damn near every one of them. That doesn't mean they go around exhibiting it all the time. Just when they have to and it's the ruling class that tells them when they have to.

Iceland's politicians were reportedly ready to stick it to their public too. But scale does matter. In a nation of 300k, there will usually be much less distance between the ruling class and the public. So, they gave in to a referendum where the public said no.

When the publicans are in the millions, it's much easier to have your way with them. When they are in the hundreds of millions, they can be almost totally ignored. Hosni would probably still be in power if his ruling class hadn't been so goddamn greedy that they couldn't bring themselves to compromise with labor. I think that Fat Bastard Al Khalifa is likely to learn that his Kingdom and his ruling class are too small.

I have a feeling the Bernank meant it when he said there's no bail money for states. First of all, what do the states have to offer as collateral except more irredeemable bonds? If Muni's and state obligation bonds are threatening the solvency of the insolvent banks, won't he just swap them some of his vast hoard of Treasuries for their state and muni paper, declaring that he'll hold them to maturity.

The ruling class needs the banking system as the foundation for their continued existence as the ruling class. Viable state and local government is just an impediment to their imposition of neo-feudalism and petit monarchies. Once those are well established they won't need the broken banks either. They will be free to setup their own systems of indenturetude.

Anonymous said...

haha oh dear...Silly Silly Mistakes ;) Embarrassing mistakes, but forgettable.

This said, Iceland is irrelevant quantitatively. We can praise Iceland but only in the proper context....A very small context.

Economic Hitmen are well established professionalizes with decades of success. All it takes is a photo of a leaders children to grab any man by the balls. The peoples greatest revolutionary can turn into a puppet, with paper...Kodak paper.

Time and time again the paper trail shows that people underestimate the power of the money masters to their downfall.

The stakes have never been higher. Their methods have never been more ruthless.


A Fall Guy said...

@ agtefc

I didn't intend to embarrass you.

When the Iceland crisis started, I initially thought it would be very useful to follow as a "canary in the coal mine". I don't think it's small size makes it irrelevant (and the size of the banks leveraging was not so tiny). TPTB don't like precedents to be set - gives others ideas of alternatives they would rather remain hidden (look at the Middle East....).

Instead, it seems like TPTB aimed to do anything to avoid the public refusing to take the hit as they did in Iceland. Hence, lots of behind the scenes, slower motion finagling. In Iceland, everyone knew quickly the scale of the banks' losses. In Ireland, it was slowly exposed, as the government incrementally accepted responsibility on behalf the people. They realized that they needed to maintain an illusion that they could re-stabilize the banks even though the stark reality must have been clear to all from the start.

I agree that once the dust settles a bit more, those who made the actual decisions won't be welcome to retire in their own country. Maybe there will be some sort of "puppet politician exchange program".

p01 said...

Exactly one week of celebrations...


Nassim said...

Well, essentially no one would have unlimited credit in a deflation.


I meant that figuratively and I was thinking of the JPM/GS crowd not the rest of us. :)

Anonymous said...

@ Fall Guy...

Communication malfunction. I am the cause of my own embarrassment. :)

While small quantitatively, Iceland sets a qualitative precedent. On that I concur. No wonder the Iceland Example is largely omitted from the popular propaganda. The rate and scale of exposure is critical.

Whether or not the masses get physical retribution on the political puppets, and the evil hands that control them, spiritual retribution will be decisive, and just.


jal said...

The Federal Deposit Insurance Corporation (FDIC), the bank regulator and receiver, inherits the right to sue bank directors and officers for losses, as well as their outside professional service providers, such as auditors, attorneys, and appraisers.

FDIC Professional Liability Group Set to Pursue Audit Firms
Dianne S. Wainwright and Jonathan S. Ziss
The Legal Intelligencer

As of Dec. 14, 2010, the FDIC has authorized suits against 109 individuals for D&O liability with damage claims of approximately $2.5 billion. This includes two filed D&O lawsuits naming 15 individuals. The FDIC also has authorized four fidelity bond and attorney malpractice lawsuits. The FDIC has not, as of mid-December, authorized suit against any audit firms based on violations of the standard of care. But that is neither to suggest nor to predict that such cases are not coming.

Look for claims in districts most rife with failed banks, such as Florida (42 failed banks since 2008) and Georgia (51), as opposed to, say, Pennsylvania (three).

As receiver, the FDIC has three years for tort claims and six years for breach-of-contract claims to file suit from the time a bank is closed. If state law permits a longer time, the state statute of limitations is followed. Given this limitations period, this story is long from over.

jal said...

10 Wall Street Expenses That Make The SEC’s Budget Look Pathetic

If President Obama has his way the Securities and Exchange Commission will get a 28% budget increase for fiscal year 2012.
That would bring the SEC’s budget to $1.4 billion- a number SEC chair Mary Schapiro is happy with.
Republicans are probably not. In fact, Republicans in the House of Representatives proposed cuts on Friday that would slash the SEC’s current $1.1 billion budget by $25 million.

Here are Schapiro’s own words in a 2009 testimony before the subcommittee on Financial Services and General Government Committee on Appropriations:
The SEC oversees more than 30,000 registrants including 12,000 public companies, 4,600 mutual funds, 11,300 investment advisers, 600 transfer agencies, and 5,500 broker dealers. We do this with a total staff of 3,600 people.

Nassim said...

Ron Paul has made a huge impact on America. After winning two consecutive CPAC straw polls, the corporate media and powers that be are pulling out all the stops in a bid to destroy Ron Paul and his support for ending the Federal Reserve.

Neocon David Horowitz Labels Ron Paul and His Supporters Vicious Anti-Semites

When all else fails, they call you an "Anti-Semite". Game set and match. :)

Nassim said...

The Billion Prices Project @ MIT

el gallinazo,

The MIT inflation measure for Argentina suggests that it is around 20% and rising. I hope you did manage to get hold of some silver or whatever.

Brunswickian said...

"Well, essentially no one would have unlimited credit in a deflation. Some will have a lot of money though, if they cashed out and managed to preserve the resulting liquidity from systemic banking crisis"

I presume this means having withdrawn the cash from the banks?

I imagine a systemic banking crisis could transpire within days if not hours from just about anytime now?

Gerald Celente reckons there will be a precipitating "terror" event to close the game down. And again, this could happen anytime from now on.

Nassim said...

Libya's Quryna newspaper reported that the regional security chief had been removed from his post over the deaths of protesters in Bayda. Libyan opposition groups in exile claimed that Bayda citizens had joined with local police forces to take over Bayda and fight against government-backed militias, whose ranks are allegedly filled by recruits from other African nations.

Scores of protesters killed by security forces during rallies calling for ousting of Muammar Gaddafi as unrest spreads.

Libya is really 2 different places - East and West. Inland may be considered a 3rd place but very few live there. Gaddafi made quite a reputation in the 1970's by trying to unite with Egypt. He got blamed for the Lockerbie Pan-Am bombing but I suspect it was the Iranians who did it to avenge flight IR655 . In any event, he paid a big bribe and became a "friend of America".

FWIW, our best cook, Zenham, left us to go to work for King Idris who was later deposed by Gaddhafi - my Mum was very sad as he was irreplaceable. :)

Hombre said...

@ Nassim & board - David Horowitz that you referenced should be named David the Horrible. The guy is sick! Case in point...
A few years ago I worked with a local professor from Ball State University (initials GW) on some local social service projects. A very good man, active in peace issues and interdenominational cooperative projects, etc.. (A great, award winning sax player by the way as well)
In 2006 this Horowitz nutcase wrote a book titled the 101 most dangerous professors in the U.S. To my astonishment, my friend GW's name was on the list! I kid you not he is likely the least dangerous man I ever met!
The root of the problem is that professor GW has a circle of friends that include Easterners a few of whom are muslim. He also teaches openness and diversity of all perspectives and especially religions.
In my mind Horowitz is actually one of the most dangerous of men, a divisive, mudslinging liar!

Biologique Earl said...

campbeln If you have over 250K in one bank, open an account in a credit union for the surplus. Or in several CUs if you are loaded. I think each would be insured to the 250K limit.



Dan said...


Got this is the 'mail' yesterday:

Dear Dan,

As you have undoubtedly heard, workers in Wisconsin are under siege. Under the banner of addressing his state’s budget crisis, the Badger State’s tea party governor is pushing through one of the worst union-busting bills in modern history.

But Wisconsin’s workers aren’t alone!

All over this nation, teachers, fire fighters, cops, and other public employees are under the threat of having their voices silenced. Vermont might too have been one of these states, if it weren’t for the fact that we stood up against the Republican attack machine and elected a Democratic Governor and strong Democratic majorities in our State House and Senate who value our middle class.

To that end, we are asking our activists to stand together with Democrats in Wisconsin and fight for workers’ rights.

The Wisconsin Democratic Party is currently conducting virtual phone banks to let people know what’s happening in their state. If you’re interested and can help, please e-mail for log-in information.

Republican Governor Scott Walker's budget represents one of the boldest assaults on working families and the middle class in quite some time. And this from a state known for its progressive leaders from both sides of the aisle, like Republican Congressman “Fighting Bob” La Follette, Sr. and former Democratic Senator Russ Feingold, who has recently started his own PAC, Progressives United.

Right now, the bill is temporarily stalled in the Senate after 14 Democrats walked off the floor of that chamber in protest, denying Republicans the chance to pass this legislation. Those Democrats are currently in Illinois, working to get their message out about what this bill will mean to the working families they represent.

Yesterday, over 25,000 protesters stormed the statehouse in Madison in opposition to the bill, with many more expected to show today. But even this might not be enough to prevent Republicans from getting their way.

We need to stand shoulder to shoulder against these threats and show our solidarity with Wisconsin’s working families. Again, I’d like to ask you to consider taking an hour or two to make phone calls into Wisconsin to let people know what’s at stake. You can do your part by e-mailing the Wisconsin Democratic Party at

I’m also calling on Vermont Democrats to make your voice heard next Tuesday, February 22nd as we stand with organized labor for a noontime rally at our own statehouse in support. Contact the Vermont AFL-CIO for more details at (802) xxx-xxxx.

Thanks for your consideration of this urgent request.


OK, so now read this:


Dan said...

Dan here again...

You know the old expression, "if you're not careful out, you just might get what you wish for..."...or something to that effect.

Mish, it turns out, is not a very smart man. Sure, he may be bright. But he is a rear-brain "thinker". AND, the person who sent me the letter from the VDP...also, a rear-brain "thinker".

The struggle in America is NOT about labor and attacks on is about a system that enriches a few and impoverishes the masses. But smart, front-brain thinkers are able to manipulate the discourse, and manipulate men like Mike Shedlock and Karl Denninger, into doing the work of creating a multiplicity of red-herrings for them.

The new labor wars in America will pit the middle class against itself, and the working class against itself. Men like Mish will stoke the reactive, fear-based, rear-brain fires of hatred and anger. Meanwhile, in their mansions in the Hamptons, the men of Wall Street will sip 100 year old brandy and laugh themselves to sleep at night.

A job well done.

Greg L said...

Correct me if I'm wrong, but what's the real difference between inflation and deflation in it's practical effects on the average person? A credit/money contraction leaves me not being able to purchase stuff due to lack of money/credit while hyperinflation leaves me with worthless money, even if I have it, and I still can't purchase essentials. Basically, the practical effect on the average Joe is the same.

It just seems to me that this only makes a difference for those who have money to begin with. If I can preserve cash in a deflationary setup, I'll pick up assets cheaply and if I invest correctly in an inflationary scenario, my spending power won't erode.

For the average person, with little or no savings, either scenario will be devastating as they'll lack the wherewithal to position themselves for either event. Their only salvation is to get as far off grid as possible.

Hombre said...

@cambeln - Having that much $$ to decide how to protect is not a problem I have ever had to be concerned about. :-)
(I think your response was for another poster)
Might I suggest investing in real-world projects toward localization and simplification, etc. In people!
Good luck.

Dan said...

Last point:

I said, "...The struggle in America is NOT about labor and attacks on is about a system that enriches a few and impoverishes the masses..."

The entire SYSTEM is a fraud. The debate about unions and labor is a false debate. If the system weren't so fantastically exploitative, and so fantastically skewed to favor the rich, organized labor wouldn't be a necessity. The wealthy create the distraction---in this case, the 'debate over collective bargaining'---and attention is shifted away from their crimes and foisted onto the workers.

Mike Shedlock should recognize this...but he is a rear-brain 'thinker', and as such he cannot see past his own dogma.

Hombre said...

@Dan - Good post!
Even though I engaged in a lot of internal self-criticism of the union I belonged to for 30 years, and still do, it is clear to me that MISH's views are extreme and clearly narrow minded.
Unions evolved out of necessity in the first half of the last century to combat horrible and dangerous workplace conditions, child labor, cruel coercions, and a variety of slavelike perpetrations practiced by manufacturers on workers.
In the last few decades, in many cases, I believe (and know from experience) that the UAW and other major unions often erred on the side of greed, rather than fast forwarding their efforts toward helping other low income people.
But in no way are unions to blame for most of the over simplified accusations MISH states!
The list of social improvements and equities initiated by unions is long and impressive, many of which have been in common practice so long now, even in non union situations of course, that younger folks do not even know how it all came about. Too long to list here.

Nic T.R.G. Salad said...

Personally, I find this whole discussion rather disconcerting. For the past 10 years I've been "coming to my senses" and now fully realize the financial predicament plant earth finds itself in. I don't see any pain free way out of it but I'm still not certain how it will play out (as I hope any honest person will admit the same).

History tells us that the US dollar is heading down the same path every other fiat currency has walked. No one is sure of the timing but the result is certain. With that said, I don't see how any deflationist can recommend holding dollars or any dollar based investment- if your timing is off one day you are in big trouble. Gold and silver also have risks but in times of economic uncertainty IMO, they are some of the few safe stores of value (along with the obvious store of food, fuel and protection).

All that matters right now is that the world is seeing inflation unless you believe in the CPI (and Santa). And to avoid the inevitable crash of an entire world economy based on funny money, everyone seems hell bent on "solving" the problem with yet more funny money. I just don't see how gold and silver don't continue to be safe havens in times like these.

What is challenging to me is that I hear very intelligent people on both sides of the argument that sound convincing and stake their reputations on being right- both cannot be and if you are on the wrong side of the trade, the results WILL be horrible.

And again, I would be cautious of anyone (including me) who says they are certain of the future. Many are saying this- at least half of them will be wrong.

p01 said...

Dan said:
Mish, it turns out, is not a very smart man.

Sorry to contradict you, but Mish IS a very smart man. He may not be wise and may not have had enough life experience outside his programming/engineering/economic stuff, but the guy is brilliant.
I'm just arguing about semantics here...

In such a (hypothetical?) case you have too much. Period.

Do as Hombre said, or watch it evaporate or worse (I hope I don't have to spell out what "worse" could mean)


Dan said...

@ Nic...Salad

Read Steve Keen's work contrasting FIAT systems to CREDIT systems. Good stuff.

@ p01

I think I addressed your semantic concern: yes 'bright', just not smart. The most brilliant men in the world are still victimized by their own genetic predisposition toward primitive thinking. Mish is "dumb" because he lets his passions commandeer his rational mind. It does not take a rocket scientist to recognize that that (a) the ownership class seeks to maximize its profits, that (b) it will exploit the workers whenever such exploitation compliments its quest for profits and power, (c) that the workers will fight against this dynamic, and that (d) when the workers "prevail" (in the form of gaining the right to collective bargaining, for example), that eventually the leadership of labor will act IN EXACTLY THE SAME MANNER as does the ownership class---based upon rear-brain, greed-centric, fear-borne thinking.

Mish is "dumb" because he cannot see this truth. The issue is not labor v. ownership (as it were), the issue is human beings v. their propensity to think irrationally and primitively.

Hegel was right, dude.

Supergravity said...

Sorry to bring this kind of thing up again, a brief ruling.

The author of above material, specifically considering the stated title of mentioned article, may be charged with seditious libel against [active member[s] of] congress, by apparently directly inciting hatred towards/active political persecution of, said parties, whereas if said author was an agent of government, said statement may instead directly consititute low treason [against [member[s] of] congress], and may further be rendered conspiracy to commit treason [against [member[s] of] congress].

Dan said...

One more point...

What MISH (and Denninger) really seem to object to are the MAOIST tactics of unions (like the SEIU). The coercion and use of threats and know-nothing allies.

This, however, is AGAIN not about labor. It is about a rear-brain response to a methodology, not an ideology.


Supergravity said...

The link to that piece of seditious libel was already up there, didn't see.

Generally, though, it cannot be lawfully suggested [in public] that an active member of congress is somehow a political extremist in the legal sense, so effecting precriminalisation of said member's protected political speech, with the apparent intent of inducing active state-sanctioned political persercution of said member of congress based solely on said protected political speech.

As per the above example, under specific conditions which apparently do apply here, a public statement or publication by any citizen to that precise effect is itself not protected speech, and may be construed as seditious libel, being just one degree away from low treason.

p01 said...

There are no painless fixes for the predicament we're in.
However, doing this instead of nothing might be a decent start.
I know there are UK readers here, make this go viral for your own good.


p01 said...

Glad to see you got that burden off your chest ;)

I'm willing to forgive Mish this black and white view of the grey reality for the absolutely stunning public service he has provided. I know for sure he has personal problems on top of his libertarian views being pretty shaken up at the foundation by reality.


Dan said...

@ p01

Agreed. :)

Anonymous said...

@ Dan...

Great post.:) Like Stoneleigh has commented on numerous times, and as you confirm with the post and link, movements out of fear and anger are very persuasive and impassioned to the average person.

Mish's points are justifiable relative to that of the teachers unions. The FDR quote was BRILLIANT!! Bang On.

The sad reality is that the masses will likely resort to fear and anger rather than confronting the underlying class struggle and pillaging by the money masters/elite.

Avoiding temptations of fear and anger will be critical!!!

While Mish's points are justified they only serve to amplify fear/anger. That is the difference between TAE and Mish. When you get the bigger picture (TAE) one can see that movements of fear and anger are NOT in ones or ones communities self interest.


Anonymous said...

@ Nic TRG Salad...

Your skeptical mindset is wise. I read and research as many positions as possible and try to punch holes (falsify) in the theories and assumptions put forth.

The inherent unpredictability of complex systems is problematic. This said, getting the biggest picture possible is the best way to manage uncertainty. Emergent properties of complex systems, integration of cross discipline variables and positive feedback cycles can only be fully grasped in the big picture. Only when you get he biggest picture will you be best situated to make critical decisions in the face of that uncertainty.

TAE has the biggest picture available by a large margin in my humble opinion. Most other analysts are way too reductionist.

For a pragmatic mind, it is best to prepare...prepare...prepare! There is no downside to having the means of your own subsistence. Do this first especially if you have a family. Have cash to maintain short term purchasing power and PM's for a longer term hedge.

You cannot eat gold/silver, but at least you can wipe your ass with cash. ;)

Just my opinion though.


Anonymous said...

@ Dan and Paul...

Interesting exchange. Intelligence is necessary but insufficient for wisdom.


scandia said...

RE the union debate, how I see it is that America don't need no workers no mo.
The jobs aren't coming back, peak oil cripples every existing institution including schools,hospitals,firehalls/trucks etc.
I heard a brief clip of Gov. Walker saying, " There is no money. We are broke." What is it exactly that the unions will win as the coffers are empty?
Battling ideology is inappropriate now.The energy spent on these rallies would be better expended on securing the family nest, the neighbourhood, your town if you can.
This social crisis is to be expected when the pentagon and security industries consume the resources of the nation.
I choked on reading that Pelosi is standing in solidarity with the unions. I'll bet she is as it takes the heat off her for a spell.

@Dan, I suspect those white shoe boys in the Hamptons are drinking more than usual, may even need a few drinks to sleep at all.
Who knows maybe they are too wasted and jaded to hear " the bell that tolls for thee".

Ric said...

Dan announces: The entire SYSTEM is a fraud.

Marging Chaos responds: Intelligence is necessary but insufficient for wisdom.

We wonder what wisdom there might be in a collapsing civilization? Protest? Revolution? Survival?

A few days ago, Alex pointed out Stuart Staniford's response to Stonleigh's arguments here--and reading Stuart I again realized how hard it is to communicate what we know but can't express. What struck me was his sentence:

I know you've always felt that excessive debt was going to trigger TEOTWAWKI, but I continue to think, although debt is important, it's much less important than real constraints - at the end of the day, debt is just an accounting device not a physical thing, and so given some time it can be readjusted.

This illustrates why discussion about our predicament is so difficult. Stuart's usage of "real" and "physical thing" shows an unquestioned certainty that he knows what the "real" and "physical thing" actually IS. I would suggest our experiences in which we have so much confidence, such as "mind" and "matter" are not what we think they are at all. Such ruminations can seem impractical, but are actually essential, as shown in Stuart's response. He dismisses what seems to him not a true reality. I'm not denying the reality of what we call "physical"--I'm suggesting that wisdom is accepting we do not know what it IS.

Population die-off of a species undergoing exponential growth is part of what IS. Through such practices as irrigation, engineering, and social organization industrial civilization eliminates limits to exponential population growth. In what IS, exponential growth is like a nuclear explosion--a chain reaction that suddenly appears in a transformative process and then seems to dissappear as the transformation continues. From this viewpoint living and dying with what IS seems more rewarding and practical than concerns about avoiding death. We make of suffering what we will--with dignity and intelligence or instincts. It's a question of scale. To use Stuart's phraseology, at the end of the day, neither life nor death are what we think they are.

Archie said...

I heard a brief clip of Gov. Walker saying, " There is no money. We are broke." What is it exactly that the unions will win as the coffers are empty?.

Please be aware that we are living in a time of not only Peak Oil and Peak Credit, but also Peak Bullshit. Walker is both a politician and a tea party conservative to boot. He has oodles of financial support from the disgusting Koch brothers. The default position should be to disbelieve whatever they say and reason from there.

Nic T.R.G. Salad said...


Thanks for your comments.

"Have cash to maintain short term purchasing power and PM's for a longer term hedge."

I'd say your above comment wins the $10,000 prize but $10,000 doesn't buy what it used to.

This is my strategy also. I realize the need for cash but I'm not about to put my savings or families future in little pieces of paper backed by a bunch of print happy lunatics in Washington.

Gold and silver will always be worth something. In deflation or inflation, while bread may cost either $0.10 or $100 a loaf and gold may be worth $100/oz or $10,000/oz, paper will eventually be worth $0. I'm sticking with PM's.

Good luck to you and us all.

Anonymous said...

@ Nick TRG Salad...

I wish the best for you and your family. Any tools and durable supplies are a sure bet right now. A lot of products are imported and their availability or affordability is not guaranteed in the future.

Covering all your bases is wise. Sustenance should not be played with IMHO. (food, shelter, clothing, hygiene, heating) Being you are a family man, I am sure you already are all over that though.

Good Luck & Good Speed.


scandia said...

@Frank A, are you proposing that the Gov. Walker appropriate the Koch fortune to pay for public services and pensions?

scrofulous said...

Hi Nicole,

Thanks for pointing out the comments from the floor for that Gonzalo/Stoneleigh battle. The commentary Intrigued me enough to think that I will put up the 30 bucks to watch the bout.

A question: Gold in relation to the amount US treasuries is very small, one might almost call it a niche market . As such it could very well hold or grow in value by use as a safe haven for those who do not trust the US dollar or are looking beyond that momentary (IMO) flight to US dollar safety, this even in a deflationary collapse. As well the Chinese both private and public are avid gold buyers and would I think tend to put a floor on gold prices ... they would eat up any weakness. Would you mind commenting.

Anonymous said...

@ Hombre & Dan

Well said re unions and Mike Shedlock.

ogardener said...

I'm soooooo happy everyone is concurring around here.

ogardener said...

Blogger Nic T.R.G. Salad said...

"Gold and silver will always be worth something."

Perhaps but they have little practical value.

Nassim said...

... This misrepresents the way computers change social relations and individual human beings. They do so not by replicating human judgment and reasoning but by offering tempting alternatives to it. In many areas, reliance on computers erodes human inventiveness, curiosity and perseverance to the point where human judgment becomes less reliable. Industrial technology has enabled us to unlearn all sorts of primal things our ancestors knew – how to recognise rain by looking at the sky, how to make a fire without matches.

Jeopardy is just the start for Watson

Anonymous said...

@ ogardener & Nic TRG Salad...

Concerning the little practical value of gold and silver.

Things may get so nasty that Precious metals could loose their fungibility because of the paradox of value. The marginal utility of precious metals will approach zero as the marginal utility of food and "real utility" of durable goods will approach infinity. Under these conditions an exchange would not increase the net utility of a person who has limited durable goods or food and therefore there would not be an exchange (no fungibility). When using money or precious metals as as exhange medium the price (amount of money or PM's) of a good can only be assesed as the value realized in exchange. Food and many durable goods may become priceless because no one will be willing to part with them for money or PM's. Barter will likely reign for a period of time.

I anticipate that during the peak of social upheaval such a situation will occur because of massive supply shortages of sustenance and durable goods. This said gold/silver will be nice to have as things roll over and some exchange begins again beyond pure bartering.

It is important to differentiate between "utility" which is the minimizing of pain and maximizing of pleasure and "real utility" which is the usefulness of a good in terms of energy and productive and embodied work. Often people fumble the semantic differences of the two but it is critical to understand the difference to grasp the paradox of valuation.

There is one thing for certain. Our current theory of value is going to be flushed down the toilet along with the economy.

Once again, this is just my opinion. Take from it what you will.


Anonymous said...

Is is also possible that the purchasing power of PM's could explode, but to be pragmatic given the uncertainty over the paradox of value being realized, I am purchasing my means of subsistence and durable goods now.


Ilargi said...

New post up.

The Dictated Psychology of Network Society


Gravity said...

I've seen mention of past labor conflicts where 'criminal syndicalism' was used as charge to criminalise and prosecute acts of militant unionism, some of the recent unionist interventions may be seen as a form of 'criminal syndicalism' by some. Its a troubling argument.

Concerning Horowitz' statement, it may not be appropriate to use old sedition laws to prosecute that particularly evident act of seditious libel, yet lesser charges of criminal libel or assorted defamations may not suffice to cover the gravity of such an affront, whereas said statement does admittedly purport to directly assault the form and structure of government currently employed, active political immunities notwithstanding, by attempting the fatal incapacitation of the functioning of congressional office [and by extension the foundational system of elective polyarchy], through curtailment or persecution of vital protected political speech inherent in the functioning of said office, so amounting to a serious threat to the constitutional integrity and vitality of the republic.

Furthermore, as the phrase 'vicious anti-feddite' can be semiotically reduced to 'violent anti-something', by transposing 'vicious' to a generic term of violence, per associative neurolinguistics, said statement may constitute an implicit accusation of violence, which is itself explicitly meant to incite [political] violence against, or incite political persecution of, an active member of congress. This may further constitute an act of seditious conspiracy, depending on intent, which is possibly rather malicious.

While its true that sedition laws have in the past been used to illegitimately and inappropriately curtail freedom of political expression, this case clearly leaves no room for protecting such speech under the first amendment. The statement is specifically libelous in the highest degree, neccesitating the closest available approximation of seditious libel currently in use as principal charge for indictment, while leaving the vital constitutional protections of lawful criticisms against [agents of] government [and policies] intact.

Nic T.R.G. Salad said...

"Gold and silver will always be worth something."

---Perhaps but they have little practical value.----

You could take your comment one step further and say that most things we surround ourselves with in life have little practical value. But if we are assuming we are not in a complete state of Armageddon and people are looking for some means of storing value and trading, silver and gold and other precious metals are as good as it gets. We could simply barter everything, but that is far less practical than having something that everyone recognizes as sound/honest money.

Maybe the whole system will turn into some Mad Max prequel but until then, I'm saving what I don't use to buy practical items in PM's.

(Now I think about it silver actually has a list of practical uses 6 miles long. I take back what I said above- silver does have practical value in addition to being a good store of value. Gold on the other hand is just plain old money ;-) )