MF Global: When Belief in the System Fades

Faith in the Status Quo is fading fast, spurred on by the long line of critical dominoes toppled by MF Global.

Longtime correspondent Harun I. recently submitted an analysis by Karl DenningerThe Ongoing MF Global DISASTER (Market Ticker) and this commentary:

I have previously written on the seriousness of this subject but there still seems to be no widespread appreciation of its implications.In complex economic systems, futures markets are as important as is a stable and reliable medium of exchange. 

A model of normal transactions is: A forward contract is initiated between parties. The parties then proceed to hedge their risk in the futures and commodities markets. 

A forward contract is a nonstandard contract between parties. For example, a grainery may agree to deliver a specified amount of grain to a processor at a negotiated price (market today or at delivery, etc). Depending on contract specifics, both parties are now concerned that price may move against them. In the case of market price at delivery, for the selling party, the concern is falling prices. For the buying party, the concern is rising prices. 

If price is negotiated at the market upon contract initiation, then for the seller the concern is rising prices and vise versa for the buyer. Why? Because of the present value of money. 

The futures contract is a standardized contract that specifies quality, quantity and time. It is marked to market every day. Positions are not held directly between parties but between a party and the Clearinghouse. The Clearinghouse is there to insure performance of the futures contract, meaning, even if a party defaults on physical delivery, the monetary value of the contract will be delivered without fail. 

Full Commission Merchants (FCM's) collect and warehouse client funds and deposit client funds with the Clearinghouse as margin (performance bonds). Client funds are supposed to be sacrosanct. But for some reason it was thought to be a good idea to allow brokerages to use client funds to purchase investment grade instruments on a short term basis. The firms and the clients made money on the earned interest. This has gone on without notice or problem until the recent 100-year flood of MF Global. 

The process of hedging allows parties with a legitimate business interest that wish to shed risk transfer it to those willing to take risk in expectation of a return (speculators). In other words, speculators are absorbing price risk and therefore its volatility. Because of the mechanism of the futures markets day-to-day volatility is not put through to the economy on a day-to-day basis. This allows stability of prices which is really stability of the exchange medium. 

Take away this mechanism and we have to imagine an economy in which farmers, for example, would not be willing to take the risk of planting enough food to feed the population, or the price for doing so would be very dear as to make it unaffordable to all but the wealthy. Or as news and rumors of unfavorable weather, droughts and crop failures hits the wire, prices fluctuate instantly and wildly at the end user level. 

This instability is a positive feedback loop that leads to shortages, hoarding, increased poverty and overall economic and social instabilityas people are thrust into a law of the jungle world where moment-to-moment survival dominates the psyche. 

I reiterate, in a complex economy, futures markets are as important as is a reliable medium of exchange. Currently both are at risk of being destroyed.
MF Global punctuates the issues at hand. Opacity, willful deception (fraud), the absence or impotence of the rule of law, which is nothing less than a collapse in government. With that said, opacity and fraud are a human constant. It is the collapse of government that poses the greatest threat.

Thank you, Harun. I see this loss of institutional trust as part of a larger dynamic I term When Belief in the System Fades (March 12, 2008).

In a way, a belief in the value, transparency, trust and reciprocity of the System is like a religious belief. The converts, the true believers, are the ones who work like crazy for the company, or the Force or the firm. And when the veil of illusion is tugged from their eyes, then the Believer does a reversal, and becomes a devout non-believer in the System. He or she drops out, moves to a lower position, or "retires" to some lower level of employment. 

When the most dedicated servants of the system awaken to the realization that they are not benefitting from their service as they'd once believed, that their near-religious faith in the System has been bruised by the grim knowledge that the few are benefitting from the lives and sacrifices of the many, then they simply quit, or move down the chain to an undemanding position. 

Then you realize you don't have to work 60 hours a week, or live in a big house. Let somebody else step up and take all the heat and the guff and the never-catch-up endlessness of the work. 

At that point--a point I anticipate will come to pass in the next 5-10 years--then the elites' machine grinds to a crawl. People don't have to throw their bodies on the gears of the machine--they just have to stop believing, stop taking that promotion, and stop wanting to trade their entire lives for a thin slice of more more more. 

If that day comes, then the social contract will have to be rewritten, or an entirely new set of elites will have to emerge with a new social contract which people are willing to believe and trust.

I hope you each have a safe and enjoyable News Years celebration.

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.

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

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Are Commodities Topping Out?

Commodities have been on a tear for years as investors bet on permanent growth of developing economies and dwindling supplies. A global recession could change the picture, at least temporarily.

The past several years have seen a growing backlash against "paper" investments as more and more investors consider hard assets to be a safe haven against the implications of central bank money printing. But as the global economy visibly slows, this question arises in many minds: Are commodities, which have been on a tear since the March 2009 bottom, finally topping out?

The question requires both a fundamental economic response as well as a technical chart analysis.

We can start by observing the common-sense connection between demand for commodities such as copper, cement, steel,etc. and economic expansion. When demand rises faster than supply, prices rise. Since supplies of commodities face all sorts of restraints in terms of extraction rates, energy costs, and declining reserves, increased demand quickly pushes prices higher.

The Big Picture

As developing world nations such as China, India, and Brazil have expanded, their consumption of basic commodities has skyrocketed, pushing prices higher and stimulating exploration for additional sources of these materials.

Now there is evidence that these developing world economies are slowing, along with the developed economies of Europe, Asia, and North America.

If demand for commodities falls significantly while supply remains ample, then prices will soften. If demand continues to exceed available supply, then prices will rise.

In other words, there are two potential drivers of commodity prices: demand and supply. If supply of a specific commodity were to plummet due to geopolitical turmoil, its price could skyrocket, even in a recessionary environment of declining demand.

Absent a sudden drop in supply, however, a global recession would crimp demand, and thus commodity prices could be expected to fall.

So the question, are commodities topping out? boils down to the question, is the global economy expanding or contracting?

The rough outlines of the bullish and bearish cases are well known to anyone who follows the economic/financial media.

The Bulls vs. The Bears

On the bullish side, Europe’s credit crisis is seen as abating, the US economy is viewed as continuing its slow but steady expansion as unemployment declines, and China is seen as transitioning from an export-dependent mercantilist economy to one based more on domestic consumption.

The bearish position sees the European debt crisis as a long-term force for economic contraction as austerity and debt service are diverting national incomes away from productive investments and consumption, China’s real estate bubble is bursting, with no equivalent source of spending available, and the US is sliding into recession, a call supported by the Economic Cycle Research Institute’s Leading Economic Indicator and the Chicago Fed National Activity Index (CFNAI), depicted on this chart courtesy of The Technical Take.

Since much of the bullish case for rising commodity prices rests on China and India, common sense suggests that we take a look at those stock markets, as equities tend to be indicators for the underlying growth prospects of the economy. Here is India’s Sensex Index:

And here is China’s SSEC index: 

In both cases, key support levels have been broken and downtrends that began months before the US market broke down in August 2011 are still firmly in place. Without any fancy footwork, it’s difficult to view the action of these critical markets for commodities as being remotely bullish or supportive of stronger demand for commodities going forward.

The Technical Picture

To get the technical pulse of the general market for commodities, let’s look at the Reuters/Jefferies CRB Index, courtesy of M3FinancialSense.blogspot.com. 

In this chart, we see the tremendous spike in commodity prices that accompanied the top of the pre-financial meltdown global economy in 2008, its free-fall heading into 2009, and the gradual recovery since February 2009. The trend line that has been in place since that low has been broken, albeit briefly.

For additional information, let’s turn to another view of the CRB:

The bull sees a double bottom; the bear sees a potentially serious break in a rising trend line. The bullish case remains unsupported by key indicators such as RSI, CCI, and MACD, all of which remain weak.

To many, the bullish case for global commodities relies on a positive reading of US gross domestic product (GDP), currently clocked at an annual rate +1.8% by the Bureau of Labor Statistics (BLS), and on a rising US stock market, which is seen by bulls as a leading indicator of future growth prospects.

In this view, the US has “decoupled” from weaker developed/developing economies, and is now the engine for future global growth and thus demand for commodities.

If the US stock market is taken as the leading indicator for this decoupling/continued-growth/higher-commodity-prices story, then we should ask what actually drives the valuation of the S&P 500. Courtesy of macrostory.com, here is a chart of margin debt and the SPX (S&P 500). Rather than being the leading indicator for future commodity demand, this chart suggests the market is far more correlated to margin debt than it is to commodity demand. In other words, when margin debt expands and the proceeds are dumped into stocks, the market rises. When margin debt declines, the market declines.

It is noteworthy that margin debt has led the SPX since the March 2009 low. If debt is the key driver of U.S. stocks rather than global growth, then this calls into question the bullish assumption that the S&P 500 is a leading indicator for future commodity demand.

In Part II: Hard Times Ahead for Assets, we dive deeper into examining the leading indicators for commodities and what they predict regarding where prices are likely headed. In our exploration, we're able to make similar forecasts about how the equity market in general will fare in 2012.

Click here to access Part II of this report (free executive summary; enrollment required for full access).

This article was first published as "Hard Times Ahead for Assets" on chrismartenson.com.

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.

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

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Will "Tax the Rich" Solve Our Deficit/Spending Crisis?

If we look at tax revenues and income in a practical way, we find "tax the rich" will not close the widening $1.5 trillion gap between Federal revenues and spending.

Clearly, $1.5 trillion annual Federal deficits to fund the Status Quo--fully 10% of the nation's GDP--is unsustainable. Eventually, the ad hoc "solutions" currently being pushed by the Federal Reserve--zero interest rates to keep borrowing costs artificially low and money-printing operations that buy Treasury debt--will encounter political and/or market pressures which will limit the marginal effectiveness of these interventions, and the real cost of these historically unprecedented deficits will trigger a host of unintended consequences--all negative.

Everyone knows there are only two ways to bring deficits back to sustainable levels: skim more tax revenues from the national income or cut spending on the massive Status Quo programs of Defense/National Security, Medicare/Medicaid and Social Security. The rest of the Federal programs so reviled by various constituencies are a relative drop in the bucket.

Everyone with a stake in the Status Quo Federal spending--and that is certainly in excess of 100 million residents of the U.S.--is vocally in favor of "taxing the rich" as the "obvious and just solution" to the widening gap between revenues and spending.

If there is one stance that can gather non-partisan support, it's "tax the rich." More knowledgeable observers refine this to "tax the super-rich," as the majority of the wealth and income of the top 1% is actually held by the top 1/10th of 1%.

We can break this idea down into two basic parts: the ethical case and the revenue case. Ethically, at least in a democracy, the idea that everyone with substantial wealth and income should pay at least as much (as a percentage of income) as wage-earning citizens is compelling.

Various studies have found that the extremely wealthy pay about 17% of their income in Federal taxes, which is less than half of what we self-employed people pay (15.6% self-employment + 25% Federal tax on all income above about $34,000 = 40.6%).

The merely well-off--typically professionals, managers and small business owners--pay the majority of Federal taxes, with the very wealthy paying a substantial share as well. Roughly half of all those filing tax returns pay no Federal tax other than the employees' 7.65% FICA (Social Security) tax.

In the larger scheme of things, the bottom 60% of the workforce pays relatively little of the total Federal tax revenues. (Check U.S. Census records or search my site for sources that break down the sources of Federal tax revenues.)

In other words, the "rich"--or those who the average person considers "rich"--already pay most of the Federal taxes.

How much additional tax could be raised were the super-wealthy to pay the same 40% rate that we self-employed people pay? It is tempting to estimate that another $1 trillion or so could be raised from the super-wealthy, largely from non-wage (unearned) income.

I have addressed this yawning gap between spending and revenues in the past, for example:

The Promises That Cannot Be Kept (July 6, 2011)

As noted in the above entry (the TrimTabs chart), Americans' after-tax income is around $5.3 trillion and $900 billion in income from "other sources." Additional taxes would of course come from current after tax-income. It's difficult to sort out all the various measures of income; the BEA, for example, includes "government transfers" as personal income--though those transfers come from tax revenues.

Including government transfers and arcane categories such as "inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)", the BEA counts $12 trillion in earned income. But if strip out transfers and inventory adjustments etc., that number drops to around $8.4 trillion. (Two Americas: The Gap Between the Top 5% and the Bottom 95% Widens August 18, 2010)

Total Federal tax revenues are about $630 billion from Social Security taxes and $1.5 trillion from Federal income taxes, or a total of $2.1 trillion. To Fix Social Security, First Ask Why It Is Deep in the Red (January 18, 2011).

There are local and state taxes, too, of course, which leaves the $6.2 trillion in after-tax income noted earlier. Since the top 10% collect roughly half the income, we can guesstimate that the top 10% receives about $3 trillion. To balance the current budget, they would need to pay 50% of their after-tax income ($1.5 trillion)--on top of the substantial taxes they already pay. (maybe the top 1/10th of 1% pay 17%, but the merely wealthy pay much higher rates on earned income.)

Add this up and you get tax rates of around 65% on the top 10% (25% total income rate plus 50% of the remaining income).

We then have to ask whether these rates would ever be collected.

There are a number of factors that affect actual tax collections from theoretical calculations. One is that Congress is a collection of wealthy people who are seeking to increase their power while minimizing their taxes and those paid by their cronies and contributors. As long as this is the case, then the tax code will continue to be thousands of pages long with exclusions, taxbreaks and exemptions for the politically connected wealthy.

Another is that studies have found Federal tax collections have historically topped out around 21% of total income. Above that level, people make choices that reduce their tax burdens.

Just as a thought experiment, put yourself in the shoes of someone with $20 million in assets and an income of $1 million. First off, you have a tax attorney who works the complex tax code to put as much of your income as possible in lower-rate income--for example, long-term capital gains.

Wealthy individuals shelter their income and assets with corporations, which have many more options in terms of shifting income.

Secondly, you have overseas accounts, assets and options. Let's say you are ethical, and pay your legal taxes without resorting to questionable tax havens. Let's stipulate that you are just like any other taxpayer--you feel no obligation to pay more than your legal share.

International agreements mean that income need only be declared and taxes paid on it in one jurisdiction. So income declared in Switzerland is exempt from taxes in the U.S., as taxes have already been paid in Switzerland.

Though I am not that knowledgeable about tax law, anecdotally it seems total tax rates in Switzerland are around 25%. If rates in the U.S. were jacked to 50% or higher, then very wealthy individuals will shift income to places like Switzerland and pay the lower tax rates there--perfectly legally. They would also liquidate assets in states which attempted to raise taxes on real property or enterprises, and shift those assets to lower-tax states or nations.

This would not be perceived as "tax avoidance," but as rational money management. In this sense, the super-wealthy are simply doing what every household does--attempt to lower taxes by whatever legal means are available. The means available to those with income and assets that can be shifted around are simply more capacious.

In practical terms, collecting another $1.5 trillion annually is problematic on multiple levels. Practically speaking, it might be wise to align total U,S. tax burdens with those of Switzerland and similar developed-world tax havens, for those essentially set the top rate that very wealthy individuals will pay.

Such a system would flatten taxation rates and very likely increase total tax collections. But it is simply not practical to think that the Federal government can skim 45% of the nation's $8.4 trillion in income to fund the bloated, corrupt and inefficient $3.7 trillion Federal budget.

How about those soaring corporate profits? If we taxed 100% of the $1.5 trillion corporate profits, then we could close the $1.5 trillion budget deficit. But then Wall Street would have nothing to support those sky-high stock valuations.

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.

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

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Why I Am Hopeful

Why am I hopeful? the Status Quo is devolving, and a better way of living lies just beyond the corrupt, wasteful, ruinous consumerist debt/financial tyranny we now inhabit.

First, let's start with a Christmas song by longtime reader/contributor Dan T. who is a professional songwriter/musician: The Happy Christmas Song - thank you, Dan, for the joy of this music.

Readers often ask me to post something hopeful, and I understand why: doom-and-gloom gets tiresome. Human beings need hope just as they need oxygen, and the destruction of the Status Quo via over-reach and internal contradictions doesn't leave much to be happy about.

The most hopeful thing in my mind is that the Status Quo is devolving from its internal contradictions and excesses. It is a perverse, intensely destructive system with horrific incentives for predation, exploitation, fraud and complicity and few disincentives.

A more human world lies just beyond the edge of the Status Quo.

I know many smart, well-informed people expect the worst once the Status Quo (the Savior State and its corporatocracy partners) devolves, and there is abundant evidence of the ugliness of human nature under duress.

But we should temper this Id ugliness with the stronger impulses of community and compassion. If greed and rapaciousness were the dominant forces within human nature, then the species would have either died out at its own hand or been limited to small savage populations kept in check by the predation of neighboring groups, none of which could expand much because inner conflict would limit their ability to grow.

The remarkable success of humanity as a species is not simply the result of a big brain, opposable thumbs, year-round sex, innovation or even language; it is also the result of social and cultural associations that act as a "network" for storing knowledge and good will--what we call technical and social capital.

I have devoted significant portions of my books Survival+ and An Unconventional Guide to Investing in Troubled Times to an explanation of how community and self-reliance have atrophied under the relentless expansion of the dominant Savior State.

The social capital and "return on investment" earned from investing time and energy in community and other social networks has been replaced by a check from the Savior State--a transfer payment that surely beats the troublesome work of investing in community in terms of risk and return.

The net result of the Savior State dominating society and the economy is the rise of a pathological mindset of entitlement and resentment--the two are simply two sides of the same coin. You cannot separate them.

Once self-reliance has been lost, so too has self-confidence been lost, and the Savior State dependent--individual and corporation alike--soon distrusts their ability to function in an open market.

This is a truly sad, self-destructive state of affairs, and deeply, tragically ironic. The calls for "help" quickly lead to dependence on the Savior State, and that dependence quickly breeds complicity and silence in the face of repression and predation by the State and its corporate partners.

In a very real sense, citizens relinquish their citizenship along with their self-reliance and self-worth once they accept dependence on the State.

I often mention that the U.S. has much to learn from so-called Third World countries that are poorer in resources and credit. In many of these countries, the government is the police, the school and the infrastructure of roadways and energy. Many of these countries are systemically corrupt, and the State is the engine of enforcing that corruption.

Rather than something to be embraced and lobbied, involvement with the State is something to be avoided as a risk. In everyday life, people rarely encounter the government except in law enforcement or schooling.

As a result, people depend on their social capital and community for sustenance, support, work and connections.

This is not altruism, it is mutually beneficial.

Once a community dissolves into atomized individuals who each get a payment from the Central State, then they no longer need each other. Rather, other dependents on the State are viewed as competitors for the State's resources.

These atomized, isolated individuals have a perverse relationship with the State and what remains of the community around them: lacking the self-worth earned from work or engagement/investment in a community, then their only outlet for self-identity is consumption: what they wear, eat, drink, etc. as consumers.

This dependence on the State also serves the State's goal, which is a passive, compliant populace of dependents, and distracted, passive workers who pay their taxes. Thus dependence on the State and a hollow consumerism are ontologically bound: one feeds the other.

The era of debt-based consumption as the engine of "growth" and "prosperity" is coming to an end. Adding debt via credit no longer creates growth; it actually takes away from the economy by expanding debt service (interest payments).

The vast majority of developed-world people have had the basics of life since the late 1960s -- transport, food, shelter and utilities. The "growth" since then depended on cheap, abundant oil and a consumerist mentality in which one constantly re-defines and renews one's identity not from social investments in others or the shared community but from consumption.

Not coincidentally, this dominance of consumption as the only metric for "growth" (as opposed to, say, productive activity) has been paralleled by the dominance of the Central State.

The end of credit-based consumption will be a very positive development, as will the devolution of the Savior State. The Savior State is like oil--both are at their peaks and are starting their inevitable slide down the S-curve. The world they created was not as positive for human fulfillment and happiness as we have been told.

Indeed, study after study has found that people with the basics for life, a higher purpose that requires sacrifice and a tight-knit community are far and away happier than isolated, atomized, insecure consumers, regardless of their wealth and consumption.

This potential to re-humanize our economy is why I am hopeful.

These are some of the themes I develop in my new book Resistance, Revolution, Liberation: A Model for Positive Change.

Longtime reader/correspondent Brad L. offered an insightful commentary on why he remains hopeful.

I see the potential for a discontinuous plunge into chaos driven by unsustainable debt every time I read a macroeconomic analysis. But "on the ground" in my own life, I see something different. Every day, in millions of unheralded ways, I see individuals making incremental changes in the direction of sustainability. There are twice the number of farmers' markets that there were 10 years ago, largely because the number of farmers is actually rising for the first time in modern American history. My buddy who owns an electric bike shop can't keep them in stock, because people are dumping their second cars in favor of e-bikes. There's more solar on rooftops every week in my little Tempe suburb. Etc. etc. etc. 

It adds up to "damping the discontinuity," and perhaps explains why we are six years into fearing a plunge into horror that never quite seems to materialize. The better society that you envision - I often think as I read your great essays - may be quietly building itself under all of our noses. 

The obvious question, of course, is will it happen fast enough? But I am very much an evolutionary theorist. Unlike Mencken, I don't see boobus Americanus when I look around me, tempting as that dismissal may be. The deeper truth about even the most pathetic Americans is that, like all human beings, they are the end product of 250,000 years of homo sapiens selecting for survival and reproduction, which means selecting for problem-solving. 

And I dispute the notion that the "default" way to solve the survival-reproduction problem is to kill or otherwise tear communities apart. At a deep level, we understand that groups and tribes survive more readily - and allow us to mate and raise young more successfully-- than do individuals. I am confident that the emerging solutions will be rooted in that understanding. 

Should the manifesting of problems pick up speed, I guarantee that this generalized, widespread, difficult-to-track-or-quantify problem-solving will speed up accordingly. I am confident that the former won't outpace the later to any vast degree. Ultimately, I admit, that's just a guess, but there is a lot of history behind that guess. 

I know the numbers you have cited of the debt that's been taken on to support the Status Quo over the past four years ($6 trillion in new Federal debt plus the $7.7 trillion bailout of the banks) don't come close to being sustainable, and suggest serious, rapid, negative change. But a brilliant thinker once remarked that "Food is wealth, health is wealth, energy is wealth; all else is illusion." 

So if the first thing that changes is the internalization of this ethic, the remainder of the changes won't be so difficult. Big if. Possible, though, because it will become necessary. Maybe the best example of "problem solving" that I cited earlier will be the revamping of problematic values... 

Also - a huge, overlooked positive enjoyed by Americans is low population density amid vast tracts of arable land in a temperate climate. If sufficient food is the real basis for wealth, we'll need to seriously screw up - via nuclear war that spreads within our borders, for example - to experience the loss of anything we truly need. Any "suffering" rooted in the loss of cheap Chinese crap does not, I think, deserve to the labeled as such, and perhaps many people will come to realize this. 

I guess I'll stay hopeful until forced to become otherwise. Have not been forced yet.

Thank you, Dan and Brad for these contributions. I will close this Christmas Eve entry with two favorite quotes:

From the poet Rumi: Where there is ruin, there is hope for treasures.

From Leonardo Da Vinci (via Kathy K.):
Don’t underestimate this idea of mine, which calls to mind that it would not be too much of an effort to pause sometimes to look into these stains on walls, the ashes from the fire, the clouds, the mud, or other similar places. If these are well contemplated, you will find fantastic inventions that awaken the genius of the painter to new inventions, such as compositions of battles, animals, and men, as well as diverse composition of landscapes, and monstrous things, as devils and the like. These will do you well because they will awaken genius with this jumble of things.

Best wishes to you for a safe and happy holiday season!

IMPORTANT NOTES: I will be taking a few weeks off from the digital world, so entries and email responses will be sporadic at best. Please accept my apologies for this lack of response in advance.

"Why I am hopeful" was reprinted from Weekly Musings 49 (12/18/11), the weekly letter I distribute to subscribers and major contributors.

A number of you made financial contributions to the site as 2011 draws to a close--thank you for your great generosity: Rob P. ($200), Michael M. ($50), Michael K. ($50), Cudick A. ($50), David T. ($50), Bryce W.($75), John S. H. ($50), Bill S. ($50), R. Stephen D. ($50), Brian K. ($100) and Rhone M. ($120).

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(fun, free MP3 song)

Readers forum:DailyJava.net. 

Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Kindle) orSurvival+ 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, Wayne V. ($8.50), for your very generous contribution to this site -- I am greatly honored by your support and readership.

Thank you, Donald B. ($10), for your most generous contribution to this site -- I am greatly honored by your support and readership.

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Risk and the Government's Destruction of the Rule of Law

The government's refusal to investigate financial crimes committed by the banking cartel and its Elites is nothing less than the willful destruction ofthe rule of law.

The present refusal of the Status Quo to impose the rule of law on financial crimes is best captured by the Vietnam War-era quote: "We had to destroy the village to save it." To save the fragile financial sector from the consequences of its systemic fraud and embezzlement, the Federal government has purposefully destroyed the rule of law: the laws governing banks and financial transactions are not being enforced, lest that enforcement bring down the house of cards that enriches and sustains the political Elite.

Correspondent C.D. works in law enforcement, and so his perspective on this willful destruction of the rule of law is informed by knowledge of the law and experience with the enforcement of regulations:

It's very telling to me given my profession that I've not heard of any federal subpoenas or search warrants being executed on the big banks on Wall Street regarding the crisis of 2008. 

There is plenty of evidence in the public domain right now that could be used to generate probable cause to get one or the other of these investigative tools to investigate the various banks. Furthermore, the government has access to all sorts of information in the form of records and reports that are mandated to be kept/submitted by those banks that would most likely show evidence of illegal activity. 

If the federal government really wanted to investigate these crimes, they would have had agents and regulators down on Wall St. serving warrants and subpoenas in the fall and winter of 2008. The power of the federal government to investigate people and companies is enormous, if they choose to do so. 

The fact that you have not seen this happen is NOT an accident! While there is a significant amount of incompetence in government, that does not explain the current state of affairs. In my considered opinion, there is a policy in place to not enforce certain laws on certain people and in fact, there are policies in place that create as Bill Black says, "a criminogenic environment". 

One just needs to compare and contrast the government's response to the S and L crisis and the 2008 crisis and you will see a big difference. The government didn't become impotent in these intervening years; there are plenty of regulators, agents, and prosecutors that would be able to successfully investigate and prosecute the plethora of crimes committed by the banks. The reason that there aren't FBI agents crawling all over Wall St. is that the top politicos don't want it to happen or prosecutors can't make criminal cases, because of misfeasance and malfeasance on the part of government officials at the SEC, CFTC, Treasury, etc. has tainted cases or don't want to expose that same mis/malfeasance for various other reasons. End of story. 

Furthermore, what good does it do to investigate these banks and fine them (usually with paltry civil fines), when they are being bailed out through government and federal reserve handouts and special loans? In these cases, we have one arm of the government trying to bring some level of justice to these banks and we have another arm of government propping up these same banks. These banks could literally take taxpayer money to pay their fines! The bank executives that ran these banks into the ground should be investigated and prosecuted, otherwise there is no deterrent to breaking the law; this is not rocket science. 

Why are we supporting institutions that have been found to have repeatedly committed fraud, anyway? Why do our local and state governments continue to do business with these banks, when they've been found to be ripping off other local governments (e.g. JP Morgan). It's like a case of financial Stockholm syndrome.
Our Founding Fathers must be turning in their graves. They put their lives on the line to fight the rule of a tyrant and remove the influence of the predatory, monopolist East India Trading Co. and now we find ourselves subjected to similar type conditions. It's crazy. Our veterans fought for this? 

I can't help but think that all of the things that John Perkins spoke about in his book that we (our corporations, military, CIA, etc) did in other countries are finally coming home to roost. All of the evil things that our government did on behalf of corporations and banks are going to be done to us in one form or another, unless enough people wake up. 

But perhaps it's the necessary feedback mechanism for people to realize that freedom is not free and one cannot get a "free/discounted lunch" forever without paying a steep price.

Thank you, C.D. The reason given by the fixers and apparatchiks like Treasury Secretary Geithner is that any exposure of the lies, corruption, fraud and embezzlement would dismantle the last of the public's fragile faith in the nation's financial sector.

No One Is Above the law (Simon Johnson, author of 13 Bankers):

“The confidence in the system is so fragile still. The trust is gone. One poor earnings report, a disclosure of a fraud, or a loss of faith in the dealings between one large bank and another—a withdrawal of funds or refusal to clear trades—and it could result in a run, just like Lehman.” (from Ron Suskind’s book 'Confidence Men', p.202) 

Now three years later, the megabanks are even bigger, as is the risk they concentrate (see my recent testimony to the Financial Institutions subcommittee of the Senate Banking Committee for details.) Curiously, their precariousness, as much as their power, is shielding these behemoths from the enforcement of financial fraud laws.

You see the irony here, of course: the trust Geithner et al. are so worried about is being destroyed by their willful destruction of the rule of law. The banks and the financial and political Elites are above the law now, and this abandonment of "every person is equal before the law" is nothing less than the destruction of rule of law.

To "save" it banking cronies from financial losses, the Federal government's agencies of enforcement and prosecution have dismantled the rule of law. Our government has made it clear for all to see: protecting and coddling banking cronies and cartels is more important than preserving democracy and the rule of law.

Is the risk posed by the banking cartel imploding in insolvency really worth the destruction of the rule of law?

What sort of nation will we be left with if wealthy, politically powerful people are routinely above the law because their financial wealth is considered more important than either democracy or the rule of law?

For more on this topic, please read Jim Puplava's interview of William Black (Financial Sense)

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