Unleashing the Future: Advancing Prosperity Through Debt Forgiveness (Part 3)

This week we present a timely and important series on debt renunciation and forgiveness by longtime contributor Zeus Yiamouyiannis. Today: Part 3: Administering debt forgiveness.

As I write, "risk trade" assets are skyrocketing around the globe as central banks unleash a tsunami of liquidity. Giving bankrupt entities the ability to borrow more money does not make them solvent, and so if we look past the manic rally in speculative assets, we see that debt will still have to be renunciated, written down, forgiven, wiped off the books--whatever terminology you prefer.

PART 3: Administering debt forgiveness to restart the global value scale, promote productivity, and ensure fairness

Ultimately, debt forgiveness starts from the need for global social self-preservation. Succeeding generations will not or cannot continue the easy credit charade, so zeroing out debt, prosecuting fraud, and pursuing bankruptcies to those who have overextended themselves, including “too big to fail banks,” is necessary to get the monkey off the back of the global economy and future generations. This will have to be done in a way to prevent future abuse, open up opportunity, and reinforce a healthy productivity.

Again, when debt is both unsustainable and largely fraud, debt forgiveness is the last and only remedy. No other responses have come close to adequately dealing with the systemic enormity of the problem. Current conventional attempts at reform are some version of “extend and pretend” (“solving” debt with more debt) or “hide and seek” (valuating assets mark-to-fantasy and stashing liabilities off the books). Those are not solutions; they are pipe dreams.

Productivity, prosperity, and well-orchestrated debt forgiveness align up on one side, and austerity and debt expansion align on the other in this challenge. We’ve already seen the trajectory of the latter choice. It accelerates concentrations of wealth and control, damaging democratic governance, creating personal misery (as seen with upticks in those in poverty and without medical care), stirring violence and unrest, and destabilizing societies. When the wrong things are being valued and rewarded, people have the right and duty to resist, and they are resisting.

Currently present and future generations are literally and metaphorically being imprisoned through the attempted enforcement of non-enforceable and fraudulent debt. Paying off a hopeless mortgage is a form of house arrest. In this climate, debt forgiveness is based on a very clear and rational decision: Restorative justice for people currently paying off fraudulent or untenable liabilities (largely run up and foisted on them by others) is far more important than the prospect of having selected opportunists “taking advantage of the system” to discharge valid debts.

The system is far more broken than the people in it, and if reformed with canny foresight and wisdom, can actually reward those willing to produce and insist upon other forms of pro-social volunteer effort as “payment” for those who do not have money. This is called picking up the pieces and working in good faith.

Arguments for and against debt forgiveness: Facts and falsehoods

When confronted with the option of debt forgiveness, many citizens argue that loans are some kind of sacred cow and that debt forgiveness would reward irresponsibility. Their simplistic truisms usually ignore context and inevitably focus on the moral or contractual obligations of low-level operators and borrowers (“You signed it; you have to pay it off no matter what.”). The context and truth is this: Massive debts have been run up in our global financial system at all levels, the most egregious by those with the most power, and by those enriching themselves by extracting ever greater pounds of flesh from tax payers and borrowers.

So let’s get dispense some truth to challenge the myths:

The biggest thieves, the most immoral, criminal, and irresponsible debt players by far have been those who have been enriched the most from our current debt system. Look no further than “too big to fail banks” who profited enormously from fraud in the lead-up to financial meltdown, blew up the system in 2008, got bailed out with tax payer money, and then promptly rewarded themselves with 144 billion dollars in bonuses a year later. Mom and pop underwater mortgage holders are not the problem.

Even if a borrower takes out a loan that he or she can comfortably afford and saves up a six-month emergency fund, that borrower can get behind through illness or job loss or other unanticipated event. For larger borrowing economies these events could be peak oil or global warming or any number of strains that are not accounted for and that significantly interrupt or alter growth trajectories.

Add to this modern finance where money-to-debt ratio is widening through fractional reserve banking and complex leveraging, and we can note that only a small fraction of total debt could physically be paid off. That means morally- and practically-objectionable debt slavery for the vast majority of loan holders, as their productive efforts go into paying off interest to faceless institutions rather than investing in families and communities.

As mentioned earlier: 1) Debt that cannot be paid is already default. By this measure many countries (Greece, Italy, Spain, U.S.) are already in default. Pretending otherwise (through austerity measures, etc.) will simply stress the body politic to the breaking point and beyond. 2) Current debt is unenforceable because people do not have the money, jobs, or assets to pay them due to unprecedented global economic contraction. 3) There is so much fraud and counterfeit value in the current system (700 – 1,000 trillion in derivatives alone), that current real assets cannot cover liabilities. 4) Government welfare promises/entitlements in most countries, due to a post-WWII population bubble, far outstrip the capacity of future generations to deliver on them.

By laboring under a “debt as natural/moral law” delusion, world economies are trying to essentially drain the sea of international debt by bailing the sea into the boats of national economies and on to the backs of productive citizens. This approach is not working; that sea of international debt is growing beyond control due to its colossal size coupled with compound interest. We know that national austerity cannot come close to solving this predicament, so why are we pretending? The truth is we, the regular citizens, are not pretending. We have to live the reality of increasing debt and diminished material opportunity. It is powerful leaders and the financially rich and influential who have covered their eyes to distance themselves from the consequences of their own collapsed designs.

This peek-a-boo approach of current world leaders will only delay the day of reckoning and thus to make the economic and political consequences worse. Their approach is a recipe for violent revolt, economic freeze-up, panic, shortages of vital goods, and ironically their own endangerment. Ordered deleveraging will not be sufficient at this point, since levered value has already illegally been converted into counterfeit “actual” value by an unregulated shadow banking system: This counterfeit “notional” value not only swamps people’s ability to pay, but might even eclipse the value of all real assets in the world (unless, of course, you mark those to fantasy as well).

Even a egomaniacal two-year-old will grudgingly admit that there are no more cookies in the jar once he as eaten them all. This is far better than adult bankers who decided to make up imaginary “cookies” to dispense from that same jar (based on leverage or fractional reserve), and then expect people to hand them back real cookies (money, labor, and assets) in exchange for these concocted cookies. When we support debt forgiveness we are left with a zeroed scale, and therefore any “cookie” added will be from our own creativity, effort, and good sense. That is a far better place to be than less-than-zero where our efforts go to resupply imaginary value.

The system is not unsustainable; it is already broken, and needs to be put on a path of real, concrete productivity and growth (labor, learning, creative application, quality of life, etc.), not malignant expansion of credit and debt. My argument is that debt forgiveness is an essential mover in this necessary transformation. Debt in its current ideological form, must be decisively repudiated in practice and replaced with a working system based on healthy, productive principles.

This process of repudiation includes extinguishing delusional economic assumptions and practices—the parasitic “skim-scam” of “internalizing gains and externalizing liabilities” in an inherently interconnected system, and the addictive habit of leeching off the future. Transformation involves “paying forward” our talents and investment in the growth of a stronger, safer, and more solvent future. This will be discussed in the next part.

(by Zeus Yiamouyiannis, Ph.D., copyright 2011)

About this series: Given accelerating conditions and trends in Europe, the U.S. and Asia, debt will be renounced, forgiven or written down, and how that process unfolds is now of paramount importance. Will private entities who dined so gloriously on their profits now eat their losses? Can the public who has seen its fortunes commandeered mount an effective response? Will there be convincing practical alternatives to a rigged world economy based in debt expansion and servitude? The answer is "yes" to all three, contends this five-part series by longtime contributor Zeus Yiamouyiannis. The series offers practical analyses and blueprints for liberating the world from debt and thus freeing its people to pursue greater, more productive purposes. CHS

Unleashing the Future: Advancing Prosperity Through Debt Forgiveness (Part 1)(November 28, 2011)

Unleashing the Future: Advancing Prosperity Through Debt Forgiveness (Part 2)(November 29, 2011)

If this recession strikes you as different from previous downturns, you might be interested in my new book An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc.Click here for links to Kindle apps and Chapter One. The solution in one word: Localism.

My Big Island Girl(song) Thrill the players to bits by buying the tune from CD Baby or amazon.com (99-cent MP3 download)


Four new electric instrumentals by Coconut Charlie, CHS's longtime friend and musical mentor--give 'em a listen:

Crash Course Secret Asian Man Third Stone Tonic Float


Readers forum: DailyJava.net.


Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

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Unleashing the Future: Advancing Prosperity Through Debt Forgiveness (Part 2)

This week we present a timely and important series on debt renunciation and forgiveness by longtime contributor Zeus Yiamouyiannis. Today: Part 2: generational, historical, and psychological drivers of debt.

PART 2: Facing forward: Examining generational, historical, and psychological drivers of debt

The demand for credit and debt is driven by generational values, historical habits, and psychological desires. These in turn are premised on evolving notions of the good life. If someone thinks material consumption equates with the good life, then chances are that person will get much farther into debt than another person that values non-material staples as supporting the good life— i.e. family, community, and friendship. Where you put your energy and money communicates something strong about the person you are and the way you will interact with the world.

American baby boomers were born into a world of cheap oil, plentiful jobs, and expansionary foreign policy and were raised by Depression-era parents that wanted to give them the amenities that they never had the chance to enjoy. This engrained an historical sense that physical growth was unlimited and that the “world was there for me”.

Today’s so-called Millennials (children of baby boomers) are growing up in a starkly different world of peak oil, global warming, shrinking jobs, and diminished material standard of living, but one with unprecedented interconnection. Material opportunities are contracting, but social opportunities are expanding. The new motto emerging is more like: “We are in the world and for each other.” A collapse of material prosperity has given way to the increasing possibility of experiential and social richness.

Consequently, there has been a huge shift in attitudes about the “good life” between generations, largely unnoticed and unreported in traditional media. Only the symptoms of this shift are being reported—social media revolutions, Arab Spring, the Occupy Wall Street movement, young popular dissident authors in China, and pop-driven musical critique of conservative fundamentalism in Pakistan.

The motivating underlying philosophy for younger generations, has not been effectively brought to light. Around the world there has been a coalescing of youth around active principles of liberation, opportunity, and creativity energized through fulfilling experience and application as the currency of the good life. This stands in contrast to older generations where possession was the ideological linchpin of the good life, driven by desires for security, entitlements, and predictability.

This has enormous implications for the world economy and each generation’s relationship with debt. Younger generations don’t want to own things as much as they want to be able to access them and use them (think “shareware”). As a result non-material goods (relationships) or quasi-material goods (access to the internet) are gaining greater importance than material goods (huge LCD TVs).

According to the prevalent thinking of many young people, useful debt leverages utility around experience and development, more than the acquisition of material goods. Credit should be used as an investment to expand experiential personal and interpersonal growth opportunities that pay different kinds of dividends, whether a job (money to do other things), education (learning), travel (diversity), a peak experience (enjoyment), or funded time as a volunteer (service). The focus is not on the “thing” but its “use.”

“Use value” vs. “thing value”

This “use value” focus of youth is in many fundamental ways incompatible with “thing value” assumptions of previous generations. Sharing resources and goods is more attractive to younger generations because it reinforces experience and relationship. Consumption for consumption’s sake is at odds with this preference. Again most consumer credit has been extended to buy unnecessary things, even as these unnecessary things have driven a global consumer economy. This along with government entitlements and military spending has been largely responsible for U.S. consumer debt and national debt.

Younger generations are simply not willing to buy into entitlement and consumption at anywhere close to the same scale as their parents. They rightfully see these pyramid schemes as rigged: as generationally unfair (i.e. federal entitlements), environmentally untenable (heavily wasteful of energy and material), and undesirable from a lifestyle standpoint (requiring more money and tangential time and energy to purchase and maintain then they are worth): Welcome to the "De" generation: De-Ownership, De-Materialization.

Even if they wanted to go the way of their parents, Millennials know they can’t. The world won’t support it. This massive decrease in consumption by the young will ensure a steep drop in the need for debt but require a radical creativity in world economic premises and organization.

The post-WWII mindset, “I need to get mine, so asset values have to go up and up,” warped credit supply and assessments of reality, especially in the housing market. Driven by historical patterns and psychological desires, it became an article of faith that house prices could only go up, leading eventually to the housing bubble (not only “up” but “very up” so everyone can get rich!). Actually, without easy credit the nominal market value of houses, what people are willing or capable of paying for, has dropped rather precipitously. Price retracing reflected not losses but readjustments in nominal value to reality.

This dynamic between “use” and “thing” value plays itself out even in ideas of social progress. Those inclined toward possession-oriented, “thing” value, feel and act on an underlying assumption that the more money and attention they can attract to themselves, their cause, or their organization the better the world will be. People of this mindset end up counterproductively vying against each other to be the lead spokesperson in “saving the world,” fracturing limited resources in order to fund limited visions in a situation that fundamentally requires cooperation to be effectively solved. To be viable, personality and mission-driven idealism will have to cede itself to collaborative problem-solving pragmatism, i.e. “use” over “thing.”

The evolving preference for “use” over “thing,” application over possession, follows a stewardship mentality that stems from the limitations and opportunities of the emerging world: We pass through this life. We don’t really “own” anything. We use it and share it and then we leave this life. “It’s mine,” only makes sense if you deny your own mortality. Rather, you have responsibility for something in your temporary care and control. In fact the burdens of ownership—insurance, maintenance, storage, time, taxes—are seen by many in the younger generation as getting in the way of the good life. Nominal ownership is preferred only insomuch as it may create opportunity for autonomy (i.e. doing what you like to your house without interference from a landlord).

There is a new mandate emerging: It’s about what you can do for others as a facilitator of life growth, not solely what you can do for yourself, the self-seeking mover and shaker, the “heroic,” approval-needy individual. Much of the past psychology of debt and the failed material American Dream, involves people “taking and expanding”—taking on any debt liability and using what ever credit means necessary to build a heroic narrative: “My big house, my great reputation, my huge salary all must grow (exponentially) to Olympian heights.”

This mentality is based in things that one “owns.” Even non-material qualities like identity, ideology, reputation, celebrity, and character have been commodified and bought and sold in this framework. Eliminate this need to seek self-affirmation through consumption and commodification, and you can immediately eliminate many trillions of dollars of potential debt.

Status-oriented worth also leads to a desire to cut corners, to engage in fraud to aggrandize one’s image. When you distort the image around a “thing,” whether that thing is one’s reputation or a “complex” exotic derivative, it is a lot easier to misrepresent value and to dupe others. When a thing has to prove its value in actual use, then it becomes a lot more difficult to misrepresent its worth. Bernie Madoff extracted his illegal profits through his reputation. People did not closely examine his actual investment products. People focused on “who he was” and not “what he did.” The first refers to “thing value”; the second has to do with “use value” and quality.

A society based in individual heroism, guarantee, and security will in all likelihood destroy itself. Why? If your own narrative, wealth, power, and image in the eyes of others is paramount, you won’t risk your status in learning, making mistakes, or trying new approaches when the old approaches fail. If you merely look at your own situation, and use your negotiating power to leverage greater benefits from larger arenas, you tend to become isolated from the needs of others. You become entitled, believing that others create their own fate and that you alone “earned your benefits.”

Entitled individualism also erodes the skills and perspectives needed to analyze challenges on a systemic scale and cooperate with others in order to meet those challenges. “Thing value” and the habits that go with it are not only obsolete but quite hazardous in the present context. They also cost too much. Politicians can promise gold-plated benefits to everyone, but they won’t be able to deliver. They are hoping you vote based on a promise, not its viability. The cure: Vote on reality, not wish.

Today’s youth care relatively little about your reputation, your estimate of yourself, or your pretty speeches. They want to know what exciting phenomenon can you produce or create? What inspiring ideas or provocative words can you contribute to this larger conversation? What actions have you taken to solve the problem? This goes for young people in deciding about the performance of politicians. They will not simply pledge their allegiance to a politician based on hype or past support. Have you exerted your power on behalf of opportunity for all? Have you stayed connected to us? Have you ensured fairness? Have you gotten the job done? For Obama the answer has come back a stout, “no,” so the younger American generation has little use for him.

The same is true for the promises of great prosperity if young people just take out stratospheric student loans to pay off their overblown university education costs. That promise is not panning out. A new way forward is required and young people know their lives depend upon it. Older generations have a choice, to extend and pretend and hope they die before the consequences show up, or change premises and learn to serve a larger purpose in tune with the younger generations. This will be discussed in the next parts.

(by Zeus Yiamouyiannis, Ph.D., copyright 2011)

About this series: Given accelerating conditions and trends in Europe, the U.S. and Asia, debt will be renounced, forgiven or written down, and how that process unfolds is now of paramount importance. Will private entities who dined so gloriously on their profits now eat their losses? Can the public who has seen its fortunes commandeered mount an effective response? Will there be convincing practical alternatives to a rigged world economy based in debt expansion and servitude? The answer is "yes" to all three, contends this five-part series by longtime contributor Zeus Yiamouyiannis. The series offers practical analyses and blueprints for liberating the world from debt and thus freeing its people to pursue greater, more productive purposes. CHS

Unleashing the Future: Advancing Prosperity Through Debt Forgiveness (Part 1) (November 28, 2011)

If this recession strikes you as different from previous downturns, you might be interested in my new book An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc.Click here for links to Kindle apps and Chapter One. The solution in one word: Localism.

My Big Island Girl(song) Thrill the players to bits by buying the tune from CD Baby or amazon.com (99-cent MP3 download)


Four new electric instrumentals by Coconut Charlie, CHS's longtime friend and musical mentor--give 'em a listen:

Crash Course Secret Asian Man Third Stone Tonic Float


Readers forum: DailyJava.net.


Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

Thank you, David C. ($10/mo), for your wondrously generous subscription to this site-- I am greatly honored by your support and readership.

Read more...

Unleashing the Future: Advancing Prosperity Through Debt Forgiveness (Part 1)

This week we present a timely and important series on debt renunciation and forgiveness by longtime contributor Zeus Yiamouyiannis. Today: Part 1.

Given accelerating conditions and trends in Europe, the U.S. and Asia, debt will be renounced, forgiven or written down, and how that process unfolds is now of paramount importance. Will private entities who dined so gloriously on their profits now eat their losses? Can the public who has seen its fortunes commandeered mount an effective response? Will there be convincing practical alternatives to a rigged world economy based in debt expansion and servitude? The answer is "yes" to all three, contends this five-part series by longtime contributor Zeus Yiamouyiannis. The series offers practical analyses and blueprints for liberating the world from debt and thus freeing its people to pursue greater, more productive purposes.

Introduction:

My last article on debt forgiveness, Endgame: When Debt is Fraud, Debt Forgiveness is the Last and Only Remedy must have struck quite a chord in discussions of the future of the economy. It was re-posted on scores of websites and received over 20,000 reads on Zero Hedge. It also resulted in a reference on the Max Keiser Report and a subsequent interview with Max Keiser. This led in turn to a popularization of a term I used, “fake assets,” to denote the true nature of “toxic assets”.

The good news is that people are talking, attempting to assess the situation in real terms, and looking for an alternative to the broken system. The bad news is that this discussion has not been turned very much toward practical directions. The main contention in my original article on debt forgiveness and subsequent interview was simply that ignoring the mathematics of debt (where debt grows exponentially and real growth is limited), especially when magnified by tens, if not hundreds, of trillions of dollars of additional fraudulent debt, is a dangerous fantasy that worsens insolvency and accelerates collapse. “Extend and pretend” cannot provide an answer but can only amplify current destructive trends and delay serious preparation of an alternative.

This series outlines some of the alternatives to the current impasse.

Principles and issues in debt forgiveness administration:

Before embarking on a mission to address the standoff between people who cannot pay their debts and international economies that have been running on massive debts for the last three decades, one must do a reality check and establish sane observations and principles.

1) Debt that cannot (vs. “will not”) be practically paid is not a debt in its classical sense. It’s a default. Whether or not people want to recognize this reality is another issue. We recognize that a law that cannot be enforced is not really a law in any practical sense, so why are we dragging our feet with debt? Greece cannot pay its debt by any rational formula. It is already in default. Extending and pretending does not materially change this fact, it only delays recognition of the stark, enduring reality.

2) Debt based in fraudulent lending is also not true debt in any meaningful sense, since the loan along with its obligations originated from something (private fiat) that had no valid authority or exchange value to begin with. Much of the current worldwide debt simply stems from lending based in fraud numbering in the hundreds of trillions of dollars by institutions who did not have adequate collateral (i.e. held insufficient capital reserves, engaged in mark-to-fantasy accounting of their assets, assigned real value to fake assets like credit default swaps, etc.). A lending body cannot give effectively nothing to someone (claiming it is something) and legitimately expect to get something real back.

3) When debt systems are flooded with fraudulent currencies and claims, it is not true that someone, either the borrower or lender, will have to pay the “false value”-backed debt. You are not legally allowed to profit from crime nor legally obligated to support crime. This precludes the payment of many of the debts currently in circulation. In committing wide-scale control fraud, major financial institutions have broken laws. The laws they have broken are enforceable; they just have yet to be enforced.

However, even with successful prosecution, bankruptcy proceedings, and nationalization/receivership of offending institutions, we are left with a practical problem: Real currency has been mixed with fake currency, real debt with fake debt. Chains of title and claims to property have been so forged, electronically registered, diced up, and distorted as to make it difficult to sort valid ownership from invalid. When real money has been high-jacked and “disappeared” as with Bernie Madoff, what can be done to address this? These will be points of discussion later in this article series.

4) The mathematics of debt, even without fraud, would require periodic forgiveness or at least abatement. There must be ways for debts to be adjusted to contingencies. Economies, like families, go through good and bad times. Debt obligations are constructed as if there are only good times. Basically, the only way to pay off a debt is to outrun it in a time of relative stability. Even in eras of surplus, debt takes a big bite out productive effort, but it quickly becomes consuming as one gets behind in payments and as more and more of the fruits of effort must go to servicing debt.

At that point, loans become chains that tie people to mediocre jobs and underwater houses and no longer engines of mobile growth. Debt forgiveness recognizes this contingency and facilitates liberty, productivity, and global quality of life as the more salient indicators of vital economies. Policies and contracts ultimately must be in the interests of people’s well-being for them to be legitimate. Conversely, when debt is ring-fenced from contingency as with student loans, it will be become inherently corrupt and unjust.

5) In any rearrangement of the debt system, productivity and stakeholdership should be rewarded and parasitism should be punished. It’s easy to forget that people used to go to a banking agent to get a loan to grow their net financial worth through productive enterprise. In such a relationship the bank gained a stake in your success, not your misfortune. If we are serious about rewarding well-applied effort, then it would make sense to peg debt and debt obligations to the productivity growth curve of an enterprise or domestic product. Lending institutions, then, would essentially buy a longer term stake in the success of enterprises it funds, exert a due diligence proportional to its interest, and both benefit from and share the burden of inevitable rises and falls in growth.

In the housing-bubble debacle the incentives were exactly opposite. Irresponsibility was rewarded precisely because banks could sell off fraudulently documented loans as quickly as they could be signed. In late capitalism, bank support for productivity has been converted into support for exploitation and victimization, using repayment shortfalls to repossess assets from borrowers even though the bank loans were drawn from “money” backed by counterfeit assets. That has to be reversed—real money for real enterprise backed by real assets.

6) Things go down and not always up. “New era” rhetoric where financial gravity is suspended is a dangerous delusion. When we realize this simple fact and combine it with rewarding productivity and stakeholdership, we realize that our revenues and values will fluctuate dependent upon demand, environmental limits, and a host of other factors, some within our control and some not. Fighting this empirical fact, on the other hand, creates damaging and unsustainable living. Why not tie notions of prosperity and economic organization to optimizing our productivity, by identifying and working within the changing conditions, not distorting those conditions by taking on debt-credit to be paid by later generations?

7) The living shall not be beholden to the dead. When an individual person dies with debts, what can be collected from their remaining assets is collected and the rest is written off. Yet the opposite occurs with generational debt. Irresponsible borrowing by past generations is foisted on succeeding generations. The sins of the forefathers are preserved with interest to gouge the quality of life of younger people who neither decided upon nor benefited from irresponsible borrowing.

Certainly, we now see scorched-earth class warfare of the 1% against everyone else, but we are ignoring an even more profound unintended warfare by an entire generation of post-WWII world citizens against the wellness and interests of its own children. How could such a destructive myopia so thoroughly pervade society and bring us this critical historical inflection point? This will be examined in the next part.

(by Zeus Yiamouyiannis, Ph.D., copyright 2011)

If this recession strikes you as different from previous downturns, you might be interested in my new book An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc.Click here for links to Kindle apps and Chapter One. The solution in one word: Localism.

My Big Island Girl(song) Thrill the players to bits by buying the tune from CD Baby or amazon.com (99-cent MP3 download)

Readers forum: DailyJava.net.


Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

Thank you, Karen H. ($10/mo), for your splendidly generous subscription to this site-- I am greatly honored by your support and readership.

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A Glimpse Into the Future of the Stock Market and Dollar

The "accident" many have been waiting for has finally happened, and it's called Europe. That doesn't bode well for the U.S. stock market.

A lot of technical analysts and financial pundits are expecting a standard-issue Santa Claus Rally once a "solution" to Europe's debt crisis magically appears.There will be no such magical solution for the simple reason the problems are intrinsic to the euro, the Eurozone's immense debts and the structure of the E.U. itself.

We can fruitfully start a speculative look into the future of the U.S. stock market and dollar with a quote from John Mauldin's book Endgame: The End of the Debt Supercycle and How It Changes Everything:

Economic theory tells us that it is precisely the fickle nature of confidence, including its dependence on the public’s expectation of future events, which makes it so difficult to predict the timing of debt crises. High debt levels lead, in many mathematical economics models, to “multiple equilibria” in which the debt level might be sustained —or might not be.

Economists do not have a terribly good idea of what kinds of events shift confidence and of how to concretely assess confidence vulnerability. What one does see, again and again, in the history of financial crises is that when an accident is waiting to happen, it eventually does. When countries become too deeply indebted, they are headed for trouble. When debt-fueled asset price explosions seem too good to be true, they probably are. But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite.

The accident has finally happened, and it's called the euro/European debt crisis. I see a lot of analysts trying to torture a Bullish interpretation out of the charts, so let's take a "nothing fancy" chart of the broad-based S&P 500 with five basic TA tools: Bollinger Bands to measure volatility, relative strength (RSI), MACD (moving average convergence-divergence), stochastics and volume.

If we use Technical Analysis 101 (basic version), a number of things quickly pop out of this chart--and none of them are remotely bullish.

1. This market is not even close to being oversold. Bulls are hoping that the selloff has created an extreme of negative sentiment, which would be a reliable indicator that the market is about to rally. But there is no evidence of such an extreme, and the VIX/VXO (not shown) is also not at an extreme.

Rather than an extreme of negative sentiment, we see complacency, and a long way down to reach extremes in RSI and stochastics.

2. The 200-week moving average (MA) has offered picture-perfect resistance and support. The entire August-September period of wild swings of volatility can be seen here as a struggle around the 200-week MA.

In a classic retracement, the SPX shot up and recovered the 50-week MA, but failed to hold that level. Now it is heading back down for another retest of the 200-week MA. Only this time the chart is significantly weaker than in September, and the low-volume "oversold/hopium" rally in October was technically underwhelming.

3. Another clue that supports the notion that the 200-week MA will fail to hold this next text is the beautiful (to technicians) complex head-and-shoulders pattern which is made up of a shallow HS triple top formed from March to August of this year, and a second outer left shoulder formed in November of 2010.

The corresponding right shoulder was traced by the October rally that just rolled over.This completes a long-term head and shoulders topping pattern.

4. The MACD is extremely negative, being well below the neutral line and rolling over into a bearish cross. Coincidentally, the stochastics also rolled over in a bearish cross.

5. Price tends to alternate between the Bollinger bands; rallies will rise to the upper band and push it higher, while declines will fall to the lower band and ride it down. Thus the lower band is a reasonable initial target for this decline. The problem for Bulls is that this target is well below the 200-week MA, meaning that hitting the lower band will mean the 200-week MA will be decisively broken.

If price does fall to the lower band, we can anticipate an oversold rally back up to the 200-week MA, followed by a renewed plunge to new lows.

An insightful technical analyst who prefers to be known only as "Chartist Friend from Pittsburgh" shared two very long-term charts of the Dow Jones Industrial Average (DJIA) and the U.S. dollar. As I have noted here many times, the current era has seen the DJIA and the dollar on a see-saw, meaning a falling dollar has corresponded to a rising stock market, and voce versa.

These charts are remarkably self-explanatory:

The implications of this chart are not exactly Bullish, as it targets a long-term bottom between 1,000 and 600.

Turning to the U.S. dollar, our Chartist Friend observed, The monster decade long head & shoulders on the DJIA is well documented, but I have yet to see anyone other than myself make a connection between the DXY mid-90's bottom and the bottom that it is forming today."

Our Chartist Friend from Pittsburgh has noted how a classic 5-point pattern may be repeating, which targets the 86-88 level in the DXY near-term. Longer term, this chart suggests a rally of much greater duration and vigor than most analysts dare extrapolate in the current dollar-Bearish climate.

Thank you, Chartist Friend from Pittsburgh, for sharing these charts.

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Just a Holiday Reminder: Black Friday Is Utterly Meaningless

You'd never know it from the media coverage, but Black Friday sales are essentially meaningless noise in the U.S. economy.

You know the economy and stock market are in deep trouble when the Mainstream Media elevates one essentially meaningless metric to "The One Meaningful Statistic" and then trumpets it slavishly. One such meaningless metric is Black Friday.

The Media has glommed onto Black Friday for a number of flawed reasons, number one being the MSM's ceaseless drive to reduce all complex problems down to something that can be expressed in a sound-bite voiceover and a video clip of a crowded mall.

The MSM loves binaries: two parties, two final contestants, and if Black Friday is "good," i.e. sales exceed last year's consumerist bacchanal, then the economy is "healthy." Any weakening of the consumer's lemming-like drive to buy, buy, buy means the economy is "weak."

This is of course absolutely backward: consumers buying shiploads of poor-quality crap made overseas means the economy is is still on the slippery slope to implosion, as debt is being used to fund consumption while capital formation (savings) remains pathetic.

Since most of the crap (and it is crap--most Americans have either forgotten what actual quality is or they have never experienced it) is made overseas, the "boost" to the economy generated by rampant charge-card consumption flows to only one slice of the the U.S. economy: corporate profits.

U.S.-based global corporations skim most of the profits made when crap is made overseas; how much profit do you think the Chinese and Taiwanese suppliers of the iPad and iPhone components make? If you guessed 1%-2% of their part of the cost, you're right. So if a $300 device costs $100 to actually manufacture in China, the Chinese suppliers make a dollar or two. Apple skims about $100 and the distribution/retail channels skim the other $100.

I have covered this dynamic in depth over the years: for example:

Trade with China: Making Out Like a Bandit (March 30, 2006)
Much of China's manufacturing is owned and managed by foreign corporations. In effect, the companies aren't Chinese at all; only the workers are Chinese.

Trade and "Trade War" with China: Who Benefits? (October 5, 2010)

The key dynamic to understanding trade with China is U.S. corporate profits.

Although nobody dares state the facts lest the cargo cult fetish lose its power to conjure up another mind trick, holiday retail sales are a trivial slice of the U.S. economy, and the fluctuations in those sales year to year are essentially noise.

As I noted in Please, Santa, Let This Be the Last Christmas in America (that's supposed to "save" the U.S. economy) (November 23, 2010):

Holiday retail sales are a mere 3.4% of the U.S. GDP.

Despite the Financial and Mainstream Media's pathological obsession with holiday retail sales numbers as proxies for the "health" of the entire U.S. economy, holiday sales don't really change much:

2007: (pre-recession) Holiday sales: $516 billion
Holiday sales as percentage of annual retail sales: 19.5%

2008: Holiday sales: $495.5 billion
Holiday sales as percentage of annual retail sales: 18.6%

2009: Holiday sales: $504.8 billion
Holiday sales as percentage of annual retail sales: 19.4%

So the start of the 2008-09 recession saw a drop of $21 billion in holiday sales: statistical noise in a $14.7 trillion economy and a modest 4% decline from pre-recession levels. 2009 saw sales rise by about $10 billon (about 2%), so a rise of 2% from 2009 would return holiday sales to pre-recession levels.

Now the propaganda machine is cranking up to announce that a 2% increase in holiday retail sales means the U.S. economy is off and running. Santa, please, please, please order your reindeer to stomp the life out of the idiotic fantasy that Americans buying a few billion dollars more needless junk from China is any sort of evidence that the U.S. economy is "growing at a healthy clip."

The entire retail sector is 7.9% of the GDP compared to a 21.4% share for the FIRE tranch (finance, insurance and real estate) of the economy.

Does anyone seriously believe that 3.4% of the economy can possibly leverage up the entire GDP with a razor-thin increase of $10 billion in holiday sales?

Santa, you have my deep gratitude if you could jam the propaganda machine so that this is the last Christmas in America where trivial retail sales are hyped as the bellwether for the $14.7 trillion U.S. economy.

The cargo-cult fetish of focusing on Black Friday sales is worse than meaningless--it is profoundly misleading. What the economy needs is not more mindless debt-based consumption (the "aggregate demand" that the cargo cult sees as a "folk cure" for everything that's wrong with the economy) but the exact opposite: paying down debt, reducing the share of the national income skimmed by a parastic banking sector, a boycott of low-quality crap (i.e. 90% of what's bought on Black Friday) and an evolution beyond a model of "growth" that's dependent on ever-rising debt and consumption of low-quality, often needless junk made overseas to benefit Corporate America's bulging bottom line.

In summary: these are the retail sales you're looking for; the economy is "healthy," move along. Nice mind trick, and all you need is ceaseless propaganda, a credulous audience and a stock market seeking some excuse for a short-covering rally as the global economy implodes.

Of related interest:

The Last Christmas in America (December 23, 2010)

If this recession strikes you as different from previous downturns, you might be interested in my new book An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc.Click here for links to Kindle apps and Chapter One. The solution in one word: Localism.

My Big Island Girl(song) Thrill the players to bits by buying the tune from CD Baby or amazon.com (99-cent MP3 download)


Four new electric instrumentals by Coconut Charlie, CHS's longtime friend and musical mentor--give 'em a listen:

Crash Course Secret Asian Man Third Stone Tonic Float


Readers forum: DailyJava.net.


Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

Thank you, John L. ($25), for your extremely generous contribution to this site-- I am greatly honored by your support and readership.

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