Thursday, June 30, 2011

How Much Would It Cost To Buy Congress Back From Special Interests?

Here's a thought: let's buy our Congress back from the special interests who now own it.

We all know special interests own the U.S. Congress and the Federal machinery of governance (i.e. regulatory capture). How much would it cost the American citizenry to buy back their Congress? The goal in buying our Congress back from the banking cartel et al. would not be to compete with the special interests for congressional favors--it would be to elect a Congress which would eradicate their power and influence altogether.

A tall order, perhaps, but certainly not impossible, if we're willing to spend the money to not just match special interest contributions to campaigns but steamroll them.

A seat in the U.S. Senate is a pricey little lever of power, so we better be ready to spend $50 million per seat. Seats in smaller states will be less, but seats in the big states will cost more, but this is a pretty good average.

That's $5 billion to buy the Senate.

A seat in the House of Representatives is a lot cheaper to buy: $10 million is still considered a lot of money in this playground of power. But the special interests-- you know the usual suspects, the banks, Wall Street, Big Pharma, Big Insurance, Big Tobacco, the military-industrial complex, Big Ag, public unions, the educrat complex, trial lawyers, foreign governments, and so on--will fight tooth and nail to maintain their control of the Federal machinery, so we better double that to $20 million per seat. Let's see, $20 million times 435....

That's $8.7 billion to buy the House of Representatives.

It seems we're stuck with the corporate toadies on the Supreme Court, but the President could scotch the people's plans to regain control of their government, so we better buy the office of the President, too.

It seems Obama's purchase price was about $100 million, but the special interests will be desperate to have "their man or woman" with the veto power, so we better triple this to $300 million.

Add these up and it looks like we could buy back our government for the paltry sum of $14 billion. This is roughly .0037% of the Federal budget of $3.8 trillion, i.e. one-third of one percent. That is incredible leverage: $1 in campaign bribes controls $300 in annual spending--and a global empire.

Once we bought back our government, what would be the first items on the agenda? The first item would be to eradicate private bribes, a.k.a. private campaign contributions and lobbying.

If you allow $1 in campaign contributions, then you also allow $10 million. There is no way to finesse bribery, so it has to be cut and dried: no member of Congress can accept any gift or contribution of any nature, monetary or otherwise, and all campaigns will be publicly financed.

Is this system perfect? Of course not. There is no perfect system. But the point here is that a system which allows even a $1 private contribution to a campaign cannot be restricted; after the courts have their say, then all attempted limitations prove worthless.

So it's really all or nothing: either we put our government up for auction to the highest bribe, or we ban all gifts and private campaign financing and go with public financing of all elections in the nation.

That is the only practical and sane solution. Any proposal that seeks to finesse bribery will fail, just like all previous attempts at campaign finance reform.

Any member of Congress who accepts a gift, trinket, meal, cash in an envelope, etc. will lose their seat upon conviction of accepting the gift. Once again, you can't finesse bribery. It has to be all or nothing, and the only way to control bribery is to ban it outright.

As for lobbying, thanks to a Supreme Court dominated by corporate toadies, it will be difficult to ban lobbying outright. However, that doesn't mean Congress shouldn't try to force the toadies on the Supreme Court to make a distinction between a corporation with $100 billion in assets and billions to spend on bribes and a penniless citizen.

(Those two are not coincidental; in a nation run by and for corporations, the citizens all end up penniless unless they own or manage said corporations, or work for a Federal fiefdom which can stripmine the nation at will.)

Congress should pass a law banning paid-for lobbying. If a citizen wants to go to Congress and advocate a position, they are free to do so--but they can't accept money to do so. If they receive any compensation from any agency, enterprise, foreign government, other citizen, you name it, from any source, then they will be sentenced to 10 years of fulltime community service in Washington D.C., picking up trash, etc.

If the Supreme Court toadies strike down that law, then here's another approach:

Require all paid lobbyists to wear clown suits during their paid hours of work.

In addition, all lobbyists are required to wear three placards, each with text of at least two inches in height.

The first placard lists their total annual compensation as a lobbyist.

The second lists the special interest they work for.

The third lists the total amount of money that special interest spent the previous year on lobbying, regulatory capture, bribes to politicos and political parties, etc.

Every piece of paper issued by lobbyists must be stamped in large red letters, "This lobbying paid for by (special interest)", and every video, Powerpoint presentation, etc. must also be stamped with the same message on every frame.

The second item on the agenda is a one-page tax form. The form looks like the current 1040 form except it stops at line 22: TOTAL INCOME. A progressive flat tax is then calculated from that line. Once again, you cannot finesse bribery or exemptions, exclusions, loopholes and exceptions. Once you allow exemptions, exclusions, loopholes and exceptions, then you've opened Pandora's Box of gaming the system, and the financial Elites will soon plow holes in the tax code large enough to drive trucks through while John Q. Citizen will be paying full pop, just like now.

The entire charade of punishing and rewarding certain behaviors to pursue some policy has to end. Any deduction, such as interest on mortgages, ends up creating perverse incentives which can and will be gamed. It's really that simple: you cannot finesse bribery or exemptions, exclusions and loopholes, because these are two sides of the same coin.

The tremendous inequality in income, wealth, power and opportunity which is distorting and destroying our nation all flow from the inequalities enabled by bribery and tax avoidance. The only way to fix the nation is to eliminate bribery (campaign contributions and lobbying) entirely, and eliminate tax avoidance entirely by eliminating all deductions, exemptions, loopholes, etc. State total income from all sources everywhere on the planet, calculate tax, done.

When you think about how tiny $14 billion is compared to the $3.8 trillion Federal budget and the $14.5 trillion U.S. economy, it makes you want to weep; how cheaply we have sold our government, and how much we suffer under the whip of those who bought it for a pittance.

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Wednesday, June 29, 2011

The U.S. Is a Kleptocracy, Too

If we dare look at the plain facts of the matter, we have to conclude the U.S. is a kleptocracy not unlike Greece, only on a larger and slightly more sophisticated scale.

Yesterday, I noted that Greece Is a Kleptocracy; the U.S. is a kleptocracy, too.Before you object with a florid speech about the Bill of Rights and free enterprise, please consider the following evidence that the U.S. is now a kleptocracy worthy of comparison to Greece:

1. Neither party has any interest in limiting the banking/financial cartel. The original Glass-Steagal bill partitioning investment banking from commercial banking was a few pages long, and it was passed in a few days. Our present political oligrachy spends months passing thousands of pages of complex legislation that accomplishes essentially nothing.

As Federal Reserve Bank of Kansas City President Thomas Hoenig recently noted (in a rare admission by an insider--I wonder how long it will be before he "resigns to pursue other opportunities," i.e. is muzzled):

The problem with SIFIs ("systemically important financial institutions," a.k.a. too big to fail banks) is they are fundamentally inconsistent with capitalism. They are inherently destabilizing to global markets and detrimental to world growth. So long as the concept of a SIFI exists, and there are institutions so powerful and considered so important that they require special support and different rules, the future of capitalism is at risk and our market economy is in peril.

Do you really think Dodd-Frank and all the other "fooled by complexity" legislation has accomplished anything? Hoenig cuts that fantasy off at the knees:

As late as 1980, the U.S. banking industry was relatively unconcentrated, with 14,000 commercial banks and the assets of the five largest amounting to 29 percent of total banking organization assets and 14 percent of GDP.

Today, we have a far more concentrated and less competitive banking system. There are fewer banks operating across the country, and the five largest institutions control more than half of the industry’s assets, which is equal to almost 60 percent of GDP. The largest 20 institutions control 80 percent of the industry’s assets, which amounts to about 86 percent of GDP.

In other words, nothing has really changed from 2008 except the domination of the political process and economy by the financial cartel has been masked by a welter of purposefully obfuscating legislation. This is of course the exact same trick Wall Street used to cloak the risk of the mortgage-backed derivatives it sold as "low risk" AAA rated securities: by design, the instruments were so complex that only the originators understood how they worked.

That is the current legislative process in a nutshell. Much of the 60,000 pages of tax code are arcane because they describe loopholes and exclusions written specifically to exempt a single corporation or cartel from Federal taxes.

The U.S. is truly a kleptocracy because its political leadership actually has no interest in limiting the banking/financial cartel. When questioned why their "reforms" are so toothless, legislators wring their hands and bleat, "Honest, I wanted to limit the banks but they're too powerful." Spoken like a true kleptocrat.

2. Our stock markets are dominated by insiders. It is estimated that some 70% of all shares traded are exchanged in private "dark pools" operated by the TBTF banks and Wall Street, and the majority of the remaining 30% of publicly traded shares are traded by high-frequency trading machines that hold the shares for a few seconds, or however long is needed to skim the advantages offered by proximity to the exchange and speed.

If that's your idea of an "open market," then you're the ideal citizen for a kleptocracy.

3. The rule of law in the U.S. has been divided into two branches: one in name only for the financial Elites and corporate cartels, and one for the rest of us mere citizens. Between corporate toadies on the Supreme Court who have granted corporations rights to spend unlimited money lobbying and buying legislators as a form of "free speech"--ahem, how can something that costs billions of dollars be "free"?--and vast regulatory brueacracies that saw nothing wrong with MERS and the complete corruption of land and mortgage transfer rules, the U.S. legal system is now a perfection of kleptocracy.

As economist Hernando de Soto observed in The Destruction of Economic Facts, the ForeclosureGate mortgage mess is not just a series of petty paperwork mistakes--it is the destruction of the entire system of trustworthy transfer of property rights for non-Elites:

Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: "economic facts."

Over the past 20 years, Americans and Europeans have quietly gone about destroying these facts. The very systems that could have provided markets and governments with the means to understand the global financial crisis—and to prevent another one—are being eroded. Governments have allowed shadow markets to develop and reach a size beyond comprehension. Mortgages have been granted and recorded with such inattention that homeowners and banks often don't know and can't prove who owns their homes. In a few short decades the West undercut 150 years of legal reforms that made the global economy possible.

The results are hardly surprising. In the U.S., trust has broken down between banks and subprime mortgage holders; between foreclosing agents and courts; between banks and their investors—even between banks and other banks.

Frequent contributor Harun I. summarized the reality of this political and financial coup by kleptocrats:

As described by Georgetown University bankruptcy expert Adam Levitin, in testimony to subcommittee of the House Financial Services Committee, "If mortgages were not properly transferred in the securitization process, then mortgage-backed securities would in fact not be backed by any mortgages whatsoever, [and] could cloud title to nearly every property in the United States." It would also raise the question of the legality of the resulting millions of foreclosures on American homeowners, since the banks cannot prove "ownership" of the foreclosed property.

The statement above gets to the elemental issue that apparently is lost on many otherwise intelligent people. This is not about frivolous claims based on technicalities. This is about securities fraud (theft) on a ludicrously massive scale. These so-called securities were sold to governments, pension funds and other financial institutions globally. Trillions were made by banks selling what is becoming clearly understood to be worthless pieces of paper and when the jig was up, which ultimately led to the destruction of economies globally, they made ordinary citizens the losers by sliding their worthless pieces of paper to the balance sheet of taxpayers worldwide.

And while some are quibbling over whether someone should get a free house, those who have perpetrated the greatest swindle in the history of mankind are about to get away with it, because they are "systemically important", code for TBTF (too big to fail).

You think money laundering and tax evasion is a specialty only of Caribbean island "banking centers"? Think again; we have corporate oversight equivalent to that of Somalia. U.S.A. a haven for corporate money laundering: A little house of secrets on the Great Plains:

Among the firm's offerings is a variety of shell known as a "shelf" company, which comes with years of regulatory filings behind it, lending a greater feeling of solidity.

"A corporation is a legal person created by state statute that can be used as a fall guy, a servant, a good friend or a decoy," the company's website boasts. "A person you control... yet cannot be held accountable for its actions. Imagine the possibilities!"

"In the U.S., (business incorporation) is completely unregulated," says Jason Sharman, a professor at Griffith University in Nathan, Australia, who is preparing a study for the World Bank on corporate formation worldwide. "Somalia has slightly higher standards than Wyoming and Nevada."

The U.S. was declared "non-compliant" in four out of 40 categories monitored by the Financial Action Task Force, an international group fighting money laundering and terrorism finance, in a 2006 evaluation report, its most recent. Two of those ratings relate to scant information collected on the owners of corporations. The task force named Wyoming, Nevada and Delaware as secrecy havens. Only three states - Alaska, Arizona and Montana - require regular disclosure of corporate shareholders in some form.

4. Just as in Greece, taxes are optional for the nation's financial Elites. In Greece, you don't mention your swimming pool to avoid the "swimming pool tax." Here in the U.S., that sort of tax avoidance is against the law (smirk). Here, you hire a Panzer division of sharp tax attorneys and escape taxation legally (well, mostly legally--whatever it takes to win).

If you are unfortunate enough to be a successful small entrepreneur who nets $100,000 a year, you pay 15.3% self-employment and 25% Federal tax on the bulk of your income, a combined rate of 40.3%, and a combined rate of 43.3% on all income above $82,400.

Those who net millions pay less than half that amount, somewhere between 17% for the top 1/10th of 1% and 21% for the top 1%: Citizens for Tax Justice, which looks at all taxes paid including federal, state and local taxes, said that in 2010 the top 1 percent of earners will pay 21.5 percent of taxes.

Note that the 21.5% paid by the top 1% includes all state and local taxes. Here in California, the small businessperson earning $100,000 pays between 5% and 9% state tax, so their combined state and Federal tax burden on their highest earnings is a whopping 50%. Then there are property taxes and the 9.5% sales tax, and endless junk fees skimmed from small business. Add all that together and the total taxes paid rises to the 60% level, or roughly triple what the top 1% pay.

(Bitter note from a tax donkey: To all those tax-and-spenders who whine that California has "low taxes," please pay my "low" property tax bill, will you? It's "only" $11,000 a year.)

Super Rich See Federal Taxes Drop Dramatically:

The Internal Revenue Service tracks the tax returns with the 400 highest adjusted gross incomes each year. The average income on those returns in 2007, the latest year for IRS data, was nearly $345 million. Their average federal income tax rate was 17 percent, down from 26 percent in 1992.

Eric Schoenberg says to sign him up for paying higher taxes. Schoenberg, who inherited money and has a healthy portfolio from his days as an investment banker, has joined a group of other wealthy Americans called United for a Fair Economy. Their goal: Raise taxes on rich people like themselves.

Schoenberg, who now teaches a business class at Columbia University, said his income is usually "north of half a million a year." But 2009 was a bad year for investments, so his income dropped to a little over $200,000. His federal income tax bill was a little more than $2,000.

"I simply point out to people, 'Do you think this is reasonable, that somebody in my circumstances should only be paying 1 percent of their income in tax?'" Schoenberg said.

Do you really think you don't live in a kleptocracy? Why? Because the truth hurts?

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Tuesday, June 28, 2011

Greece Is a Kleptocracy

Strip away the bailouts and the bogus austerity plans, and the truth is revealed: Greece is a kleptocracy, and the banks and the ECB Eurocrats are both complicit.

Despite a veritable flood of financial and political analysis about Greece, nobody seems to have noticed the obvious: Greece is a kleptocracy. Just as a refresher, here is the definition of kleptocracy. Ask yourself is this doesn't fit Greece like a supple leather glove:

Kleptocracy, alternatively cleptocracy or kleptarchy, from the Ancient Greek for "thief" and "rule," is a term applied to a government subject to control fraud that takes advantage of governmental corruption to extend the personal wealth and political power of government officials and the ruling class (collectively, kleptocrats), via the embezzlement of state funds at the expense of the wider population, sometimes without even the pretense of honest service. The term means "rule by thieves".

Here is a quote from a first-person report (via Zero Hedge) titled The Ugly Truth:

What angers me and most hard working Greeks is that the common workers are bearing the brunt of the austerity measures while the rich get off scot free.

In Greece, if you want to strike it rich, become a specialist dealing with critical life and death decisions, tax collector or a high profile minister in the government. The scandalous stories that are coming out now of doctors, tax collectors, and ministers with millions of euros in their bank accounts and villas in Santorini and Mykonos are no surprise to regular hard-working Greeks.

This is a classic description of a kleptocracy: a financial and political Elite which skims and concentrates the wealth of the nation via corruption and embezzlement while being protected by the winking complicity of their fellow plunderers who hold civil and financial authority.

Here's the real dynamic in Greece: The Kleptocracy--broadly, the political and financial Elites of the nation--saw a stupendous opportunity to embezzle hundreds of billions of euros from greed-blinded European banks at super-low rates of interest.

Being kleptocrats, they sniffed out the basics of the bezzle right away, and have been playing it ever since: we're not paying any of these loans back, so go get the money from the European Central Bank (ECB) and the German taxpayers, or declare bankruptcy. Your choice.

The Greek kleptocrats knew all along that the German, Dutch, French and Finnish taxpayers were easy marks, just as they knew the European Union Power Elites would fall all over themselves to "save the euro" which was the centerpiece of their "one Europe" strategy of domination.

Only the Greek kleptocrats just beat them at their own game. The entire game plan of the "one Europe" Elites depends on nation-states actually complying with non-enforceable codes of conduct and on European banks making prudent loans.

Neither condition held: Greece's Elites reckoned they could game the system and string along the Eurocrats, if not forever, then certainly long enough to engorge their Swiss accounts with euros skimmed from the banks, and they've played that hand to perfection.

Their performance is truly a thing of beauty, a masterful display of the Big Con.Yes, we will agree to austerity, but of course that is only for "the little people." Then, we'll renege on that, and demand another bailout. The Eurocrats will of course comply, lest their own plans for domination crumble along with the euro and the Eurozone edifice.

Meanwhile, the European banks were playing a similiar bezzle. They knew Greece had a history of defaulting on a regular basis, and any employee of the bank who lived in Greece could have briefed them on the kleptocracy's hold on that nation. But the banks knew they could play the Eurocrats and the ECB, too, as the Eurozone had what amounted to a "German Put": if any bad bank loans to Greece ever threatened the Eurozone, the German-led European Central Bank would make them whole.

Once again, the Eurocrats responded as expected, quickly massing hundreds of billions of euros to backstop the impaired loans to Greece and promising that bondholders would not suffer any losses.

The banks and the Greek kleptocracy are like the wife and the mistress of a prominent conservative socialite who absolutely needs to preserve a facade of conventional propriety. The kleptocrats, like the mistress, know they can blow down the entire charade, and so when they demand some baubles (bailouts) from their "Sugar Daddy" European Central Bank, the bank whimpers and complains but forks over the cash, lest the whole shaky facade collapses in a heap, along with the ECB's dominance.

The wife, meanwhile, also gets her demand met. Now that the European banks have leveraged themselves up to pre-implosion Lehman Brothers levels of 30-to-1, they need a bailout, too, and so they tell the ECB, don't even think about saying "no" because massive bank insolvency would also shatter the Euroland's thin veneer of permanence.

The euro system is already broken, but the ECB and its Eurocrats are desperate to maintain the facade. The game is untenable, however, because the Greek kleptocrats and the European banks have all the leverage and the ECB is the bleating mark trying to satisfy the dualing demands of its wife and mistress.

"But you promised." Ah yes, Dearie, but I changed my mind.

It is almost laughable to see the Eurocrats desperately trying to get another "austerity deal" approved, even as everyone involved knows it's as phony as passing off your mistress as your "private secretary." The austerity plan will not actually be put in place, none of the line-in-the-sand fiscal targets will be met, and the Greek kleptocrats will be smirking as the frantic ECB marks scrounge up another bailout and another face-saving "austerity program."

The wild card here is the oppressed Greek citizenry, who might just spoil the fun by overthrowing their corrupt Overlords. They could also spoil the game by simply refusing to play any more, as a General Strike of any length would quash the fantasy of rising taxes and all the rest of the absurd assumptions at the heart of the "austerity program."

If the Eurocrats and the ECB really want to save the euro, then they should help the Greek citizenry evict their kleptocratic Elites. But that would take genuine courage and insight, and alas, the Eurocrats, like all bureaucrats seeking to protect their fiefdom at any cost, don't really care about the oppressed Greeks. They just want to play for time, and hope that a miracle will occur. Even as their fat, sweaty fingers hold a jumble of worthless cards--not even a pair of deuces--they persist in a laughably transparent charade of holding four aces.

The game is over for the ECB, the Greek kleptocracy and the european banks. All that needs to happen now is for the players to reveal their miserable cards and fold. The losses will be stupendous, but they will only get more horrendous the longer the game is allowed to go on.

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Monday, June 27, 2011

What If the Consensus Is Wrong?

We all know the mainstream consensus is wrong, but what about the non-mainstream consensus? Maybe it's equally misguided.

There are a variety of consensus views floating around the Mainstream Media and the blogosphere. The two sets of consensus don't align on much, as might be expected: the financial MSM is still spouting the Federal Reserve/Wall Street's "happy story" about how the recovery is weak but muddling forward with "uneven growth" (i.e. someone else got laid off, you still have a job) but corporate profits (the only metric of "growth" that counts) will still be rising forever (as usual).

The financial blogosphere consensus is more or less that the fiscal-stimulus/Fed-goosed "recovery" is obviously rolling over here, and since inflation and fear are baked in, gold will continue its steady climb towards $3,000 an ounce and beyond. Oil, meanwhile, is poised to rise as suppliers either lose production to depletion or ratchet production down to support prices.

We all know about confirmation bias, the tendency to seek evidence which supports our views after they have hardened into conviction.

Seasoned traders practice the opposite: they actively seek out arguments against their current views. If these "Devil's Advocate" arguments are more compelling than their current convictions, then they change their minds and their trading positions (or at least slap on a nice thick hedge).

Which leads me to play Devil's Advocate: what if both consensus camps are wrong?

Again, this is a thought experiment which traders go through to avoid confirmation bias.

1. What if the economy rolls over hard? The Fed and mainstream economists are expecting a "soft patch" based on "mixed data," i.e. the top 20% are still "consuming" while everyone below the top 20% whithers on the vine.

Expect a hard rollover to show up all over the place in July and August data: container shipments, gasoline consumption, retails sales, auto sales, Christmas orders, tax collections, etc.

2. If the dollar rises substantially, then corporate profits will tank. Much of the big jump in corporate profits came not from actual net but from overseas sales converted into a weakening dollar.

Zero Hedge presented an excellent technical case by John Noyce for the dollar rising as the euro falls to 1.15 or lower: The Charts That Matter Next Week.

Recall that the DXY dollar index is essentially a see-saw, with the USD on one end and the euro on the other, and the other currencies adjusting to the primary trend in the see-saw.

Does anyone seriously expect the euro to rise from here? Based on what? A rescue of Greece by Alpha Centaurians bearing quatloos?

3. Gold is looking kinda heavy here (technical pun intended). Gold is in a long-term uptrend, but it has occasionally swooned for long chunks of time without threatening the long-term trendline.

We might ask: what happened in 2008 when the whole bogus fraud-ridden scheme of leverage, debt, propaganda and risk-trades imploded? Both oil and gold also tanked as debtors with margin calls or equivalent scurried out to unload whatever assets still retained some value, with a preference for selling those which retained the most value, i.e. gold and oil.

If all the world has done is push the cleansing that started in 2008 forward three years, then December 2008 is a pretty good model of what to expect going forward as the exact same forces will eventually unleash their creative destruction again, only this time with greater force and at higher levels of non-linearity.

Depending on what you look at technically, there are some major divergences popping up in gold's chart as MACD, RSI and other indicators have been sagging even as price held on until recently.

4. Oil and gasoline are also looking toppy. The consensus is watching the shaky supply situation and seeing all sorts of reasons for supply to decline, but if the global economy rolls over hard, then demand could fall faster than supply, pushing prices off a cliff.

One feature of the "oil curse" is that the oil exporters have no other revenue stream to fund their regimes and welfare states. Saudi Arabia has enough other investments in the West to weather a downturn, but the rapid rise in the cost of extraction, population and welfare has pushed up the fiscal pain point even for the Saudis.

Iran and other exporters have a wafer-thin fiscal break-even point: if oil slumps to $50/barrel, the Iranian government budget is in serious shortfall.

As I noted in Oil: One Last Head-Fake? (May 9, 2008), despite brave talk to the contrary, exporters have no choice politically but to pump and sell every barrel they can, as oil revenue is the foundation of the government's spending and legitimacy.

As demand crashes in a global rollover, oil plummets below fiscal break-even for exporters, who must then pump even more to keep revenues from destroying their domestic legitimacy and power base.

Supply won't drop as fast as demand, and that will push prices down hard at the margin, where prices are set. And as the U.S. dollar shoots up, then oil will cost a lot more in weaker currencies. That will further suppress demand and thus price.

Those two dynamics will reinforce each other in positive feedback loops, pushing prices down lower than the consensus thinks possible.

"Impossible"? Where have we heard that before? Lehman going belly-up was impossible, as I recall, and so was the housing bubble bursting, to name but two previously "impossible" financial events.

Confirmation bias has its own positive feedback called the herd instinct. When the herd reaches a consensus, it's hard not to follow along with what is "obvious."

Sometimes what's obvious isn't "obvious" at all.

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Saturday, June 25, 2011

We’re Dropping the Ball on Renewable Energy (guest post)

Fellow blogger Kevin Mercadante summarizes the opportunities for local development of renewable energy outside the Big Oil/Big Government, oligarchy-cartel capitalist Status Quo.

As the world’s largest energy consumer and importer, the U.S. should be taking the lead in renewable energy. We consume at least 25% of the world’s oil, and are the single largest importer as well. The stakes are higher for us than for any other single nation on earth. It could be said that our doom as a great nation will be all but sealed if we don’t come up with a permanent solution to our energy needs, yet we seem to have no clear direction.

A lost opportunity from a decade ago

The Bush Administration may have made a strategic error when it chose a primarily military response to 9/11. We’ve spent a couple trillion dollars in the decade since with precious little to show for the expense and effort. Would a national effort to develop renewable energy have had a greater impact? Probably not at the time—the slow pace of technological progress could not have competed with the primal thrill of military conquest.

But the tangible benefits of a renewable energy thrust would certainly be evident by now. Lower dependence on foreign oil imports, the rise of new technologies, the creation of new businesses and new jobs and a sense of a hope for a better future might be apparent today had the leadership of the time embraced the long view. And it could have been accomplished for a fraction of what we’ve paid to date for the wars in Iraq and Afghanistan.

Even today, a truly massive investment in renewable energy could reinvigorate and reindustrialize the U.S. Our economy is well past quick fixes and tweaks—we’re in desperate need of new systems that can be built from the ground up. Such systems would generate new technology, millions of new jobs and the economic surge that would follow.

Imagine a world in which electric cars—capable of going more then 200 miles between charges—are powered by electricity generated by solar and wind systems? Is it hard to imagine that combination igniting the Second Industrial Revolution? New technology powered by unlimited, clean energy. The possibilities are endless, but if we ever go in that direction it looks like we’ll do it kicking and screaming.

The “Land of the Free” has become the home of “We can’t”

The U.S. has mostly decided to sit on the sidelines to see what other countries come up with, but this will be unworkable on several fronts. First, as the world’s largest economy and energy consumer, we need to get into the game first. It will take longer for energy alternatives to make their way through our system than it will in smaller countries, and hesitation is raising both the cost and the time horizon.

Second, by letting other countries lead we’re conceding the technology, implementation and the economic benefits that will come to the nations on the cutting edge. Coming late to the party could mean not coming at all. We’re already showing ourselves to be dependent on the foreign production of goods once manufactured here—how much worse will it be with products and technologies we’ve never made at all?

Europe is well ahead of the U.S. in the implementation of renewable energy—wind and solar. Many European nations are actively moving toward wind power for electricity; in

Denmark as an example, about 20% of electricity comes from wind mills. Brazil has taken the lead on ethanol, while Japan is the clear front runner in electric car technology and implementation. In the U.S. we hear the quasi-patriotic chant of drill-drill-drill as if more oil is the only workable solution to our oil problem—but if it isn’t do we have a Plan B?

Our only identifiable energy “policy” is a bad economy driving down consumption.Only when the economy is in decline does our energy consumption recede. As long as the economy is expanding, the U.S. consumes more energy each year. Meanwhile, unofficial government policy is to do what ever it takes to ensure the free flow of cheap oil even at the point of a gun.

This single factor explains our permanent military occupation of the Middle East and offers de facto evidence that the energy situation is far graver than anyone will publicly admit. Why else would the United States commit trillions of dollars and hundreds of thousands of military personnel to maintain the occupation of a region which so clearly doesn’t want us there?

The “high cost” of renewables is quickly becoming academic as the cost to produce fossil fuels rises. Not only are we paying an enormous military cost to suppress the price of oil in the Middle East, but the costs to bring new supplies into production outside the region are escalating. We would not even be discussing tar sands, shale oil, coal conversion, heavy oil or drilling in the Artic Ocean if light sweet crude oil were plentiful in the U.S. or anywhere else in the world outside the Middle East.

Onshore light crude production is a pretty simple affair; sink a well and oil blasts out. Cap it, pipe it to an oil refinery and you’ve got just about the cheapest energy source available. Virtually every other form of oil production involves some sort of conversion process at the site, the risk of significant environmental damage, a large labor force, the burning of a significant amount of energy, and usually takes place in a remote and often hostile environment. Every one of those obstacles adds to the cost of the oil produced. Why would we even bother to go that route if cheap light crude were plentiful?

Renewable energy may be expensive to produce right now, but as processes and technology grow, we should fully expect the cost to come down. But that can only happen if their use becomes more common. Capital, talent, technology, innovation and economies of scale will naturally gravitate to renewables as they become more common in everyday use. So, why the economy-wide aversion to plunging forward?

The return of the Robber Barons

A narrow gate has been created in the form of a dozen or so big oil companies and maybe a couple hundred power utilities, through which nearly all of the nations energy needs are supplied. We can liken this arrangement to the robber barons of old who, building their fortresses at strategic locations along important European rivers, were able to extract tolls from the ships that passed—no payment, no passage. And so it is with the current energy complex. No one will release that kind of power willingly, neither the conglomerates who control it nor the government authorities who can easily collect billions in tax revenues on the flow.

Until about 100 years ago, most energy that was consumed by the average citizen was produced locally, often by the final consumer himself. Animals, water and wind, timber, coal and even oil (in the days before pipelines and refineries) were used to provide every energy need from transportation to lighting and cooking. But this type of dispersed energy production does not lend itself to automation of revenues and profits the way grand systems do. Thus in a move from the top down, energy production was gradually and systematically institutionalized removing all control over it from the ultimate consumer.

Renewables have the potential to restore consumer control. Because it can be produced with windmills and solar panels—locally and even by individual consumers—renewable energy has the very real potential to cause massive decentralization of energy production. That would have consequences that extend well beyond energy itself. Yes, oil companies and utilities would be greatly diminished in both size and importance, and some even eliminated permanently, but there’s more.

The Status Quo’s biggest fear: that we’ll change the game

A renewable energy revolution could release a surge of human energy not seen since the waning days of the industrial revolution. And that’s the problem. As Charles has written again and again, those who control the system are vested in the status quo. They have no interest in the decentralization of energy production, or of anything else in the economy.

An individual or local community with a home grown supply of what would ultimately be cheap energy would be an empowered individual, and an empowered community. The effects of that metamorphosis would be felt throughout the organizational world. If I can produce my own energy, maybe I can grow at least some of my own food too. And maybe I can start trading with my neighbors, or with people far away—we already have the internet enabling us to do that. And if I can drive an electric car—powered by energy from the solar panels on my house, I never have to buy gasoline. And maybe we can use barter…

I’m getting a bit ahead of myself, but all of that potential is real. If you’re an organizational chieftain it could very well mean that the wave you’ve been riding on for decades is about to crash on the beach. If you’re in the upper echelons of government, you know that that type of economy would be infinitely more difficult to collect taxes in because far less money is changing hands.

Solar/wind power means no checks written to power utilities; electric cars running on home grown electricity means no credit cards are swiped at gas stations; home grown food means less money changes hands at grocery store check outs, and so on. The status quo and its supporters want no part of that.

In the current economic conglomeration, we’re system-dependent. And we’re taught to be that way--take care of the system, and the system will take care of you. This has bred a level of dependency not seen in human history.

But a new energy source, one that we ourselves could produce, and the technology and economic force it would release would empower us to take control of our lives and the future. We’d no longer look to the system, but to ourselves and to the people closest to us, where it should have been all along. Can we imagine the magnitude of such a shift, especially against the constraints of the tightly controlled system we live in now?

The Ultimate Energy Solution: We’re on our own

There’s no reason to believe that the renewable energy revolution will come from the top. There’s no serious interest in renewable energy in the ivory towers of America, and for all the reasons stated above we should expect none. Sure, we get the usual machismo speeches from political leaders at election time, or when oil prices spike suddenly or an anti-Western thug comes to power in an oil rich country, but action never follows the bold words. No, this quiet revolution will come from the ground up—from people and small businesses responding to crisis.

There’s always a way forward for someone who’s determined to chart a new course. For example, an energy system that may be too expensive for one family to implement may be quite practical for a group of households forming a cooperative. Most of the wind power generated in Denmark is from wind mills owned by individuals and cooperatives, not corporations or government. To say that it can’t be done is to defy the facts--it IS being done right now.

Gasoline prices will probably be the deciding factor. At $4 a gallon, we’re starting to see a slow but visible shift to solar power and electric cars. With real wages in decline, any movement beyond $4 a gallon should accelerate the shift quickly. At $6 or $8 pain will force individuals to take action, even if the Status Quo refuses to cooperate—which we should fully expect to be the case.

Kevin Mercadante is a regular reader of Of Two Minds, a professional blogger and the owner of, a website about careers, business ideas, money and more.

CHS: Thank you, Kevin, for an excellent "big picture" context of energy and the risk of having no Plan B. As I have often noted here, renewable energy won't "pencil out" as a straight financial investment until it's too late to build a renewable energy infrastructure. At that point we'll be the classic "day late and a dollar short."

As for Kevin's point about the cost of our wars to secure oil vs. the cost of replacing that energy with renewable sources, please read my entry from three years ago: Cost of Iraq War: $3 Trillion; Cost of Solar Plants to Power all 105 million U.S Households: $500 Billion (April 10, 2008).

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Friday, June 24, 2011

Inevitable Catastrophe: The Fruits of Moral Hazard on a Global Scale

Insulate participants from risk with policies like the Bernanke Put and you guarantee destruction of both the market and institutional legitimacy.

Identify the common characteristic of these three statements:

1. The Federal Reserve will never let the stock market decline, i.e. the "Bernanke put"

2. The Chinese government will never let property prices decline

3. The European Central Bank will never let Greece default

The answer of course is moral hazard: a person who is insulated from risk will have an insatiable appetite for risky bets because any gains will be theirs to keep but any losses will be covered by the central bank or government. The global financial authorities’ success in propping up assets (stocks in the U.S., real estate in China, banks in Europe, etc.) over the past three years has strengthened this asymmetric disregard for systemic risk into a dangerously quasi-religious faith that central banks and governments have essentially unlimited power to keep asset prices aloft via printing money, manipulation of markets and financialization of their economies.

What happens if markets crumble despite massive, sustained central bank and government intervention? The institutions that created moral hazard will be revealed as false gods, and that faith will be destroyed.

This loss of faith in the transparent functioning of markets will trigger what I call the delegitimization of both the markets and the institutions which have essentially promised a permanent upward bias in assets.

We can see the global scale of this central bank-cnetral State induced moral hazard in the tight correlation of all markets: the stock exchanges rise and fall in near-perfect unison, oil and gold rise and fall in parallel with equities, and so on.

As I have noted before, beneath the surface there is really only one trade in the entire global marketplace: all assets on one side and the U.S. dollar on the other. Correlation is not causation, of course, but it is more than peculiar that every decline in global equities is matched by a concurrent rise in the dollar.

Transparent, independent markets do not move in lockstep. The campaign to prop up all asset classes with implicit guarantees of intervention has completely insulated institutions and punters who believe that the Bernanke Put and the Chinese government's equivalent prop under real estate is not just policy but a guarantee of god-like power.

Thus the gains from gargantuan speculative bets are yours to keep, and any losses will be made good by the central bank or government. This is the ideal recipe for misallocation of capital and speculative derangement on an unprecedented scale.

Moral hazard is the ultimate perverse incentive: it rewards all that is unproductive and risky and punishes long-term investment and prudent risk assessment.

A second feature of the global central bank's moral hazard is the necessity to punish any punters who dare to bet against the banks' manipulations. Thus Fed Chairman Bernanke could opine that oil would decline and presto-magico, a "surprise" release of oil by central authorities occurs the next day.

This second feature of central bank manipulation leaves a market devoid of short sellers and thus of any buyers as markets crumble.

Once trust is lost, it cannot be won back. Once participants' faith in the markets and in the god-like power of central bank intervention is crushed, the markets will lose participation on a grand scale. The authorities' favorite game, goosing asset prices to create an illusion of recovery and rising wealth, will be revealed as a global fraud.

Announcements of future interventions will be scornfully dismissed and thus they will have lost their power to prop up the markets.

All of this flows from the very nature of moral hazard: insulate participants from risk and give them unlimited leverage and "free money" to play with, and what you eventually end up with is catastrophe. There is no other possible end state.

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Thursday, June 23, 2011

Why the Eurozone and the Euro Are Both Doomed

Papering over the structural imbalances in the Eurozone with endless bailouts will not resolve the fundamental asymmetries.

Beneath the endless announcements of Greece's "rescue" lie fundamental asymmetries that doom the euro, the joint currency that has been the centerpiece of European unity since its introduction in 1999.

The key imbalance is between export powerhouse Germany, which generates huge trade surpluses, and its trading partners, which run large trade and budget deficits, particularly Portugal, Italy, Ireland, Greece and Spain.

Those outside of Europe may be surprised to learn that Germany's exports are roughly equal to those of China ($1.2 trillion), even though Germany's population of 82 million is a mere 6% of China's 1.3 billion. Germany and China are the world's top exporters, while the U.S. trails as a distant third.

Germany's emphasis on exports places it in the so-called mercantilist camp, countries that depend heavily on exports for their growth and profits. Other (nonoil-exporting) nations that routinely generate large trade surpluses include China, Japan, Germany, Taiwan and the Netherlands.

While Germany's exports rose an astonishing 65% from 2000 to 2008, its domestic demand flatlined near zero. Without strong export growth, Germany's economy would have been at a standstill. The Netherlands is also a big exporter (trade surplus of $33 billion) even though its population is relatively tiny, at only 16 million. The "consumer" countries, on the other hand, run large current-account (trade) deficits and large government deficits. Italy, for instance, has a $55 billion trade deficit and a budget deficit of about $110 billion. Total public debt is a whopping 115.2% of GDP.

Spain, with about half the population of Germany, has a $69 billion annual trade deficit and a staggering $151 billion budget deficit. Fully 23% of the government's budget is borrowed.

This chart illustrates the dynamic between mercantilist and consumer nations:

Although the euro was supposed to create efficiencies by removing the costs of multiple currencies, it has had a subtly pernicious disregard for the underlying efficiencies of each eurozone economy.

Though German wages are generous, the German government, industry and labor unions have kept a lid on production costs even as exports leaped. As a result, the cost of labor per unit of output -- the wages required to produce a widget -- rose a mere 5.8% in Germany in the 2000-09 period, while equivalent labor costs in Ireland, Greece, Spain and Italy rose by roughly 30%.

The consequences of these asymmetries in productivity, debt and deficit spending within the eurozone are subtle. In effect, the euro gave mercantilist, efficient Germany a structural competitive advantage by locking the importing nations into a currency that makes German goods cheaper than the importers' domestically produced goods.

Put another way: By holding down production costs and becoming more efficient than its eurozone neighbors, Germany engineered a de facto "devaluation" within the eurozone by lowering the labor-per-unit costs of its goods.

The euro has another deceptively harmful consequence: The currency's overall strength enables debtor nations to rapidly expand their borrowing at low rates of interest. In effect, the euro masks the internal weaknesses of debtor nations running unsustainable deficits and those whose economies had become precariously dependent on the housing bubble (Ireland and Spain) for growth and taxes.

Prior to the euro, whenever overconsumption and overborrowing began hindering an import-dependent "consumer" economy, the imbalance was corrected by an adjustment in the value of the nation's currency. This currency devaluation would restore the supply-demand and credit-debt balances between mercantilist and consumer nations.

Absent the euro today, the Greek drachma would fall in value versus the German mark, effectively raising the cost of German goods to Greeks, who would then buy fewer German products. Greece's trade deficit would shrink, and lenders would demand higher rates for Greek government bonds, effectively pressuring the government to reduce its borrowing and deficit spending.

But now, with all 16 nations locked into a single currency, devaluing currencies to enable a new equilibrium is impossible. And it leaves Germany facing with the unenviable task of bailing out its "customer nations" -- the same ones that exploited the euro's strength to overborrow and overconsume. On the other side, residents of Greece, Italy, Spain, Portugal and Ireland now face the unenviable effects of government benefit cuts aimed at realigning budgets with the productivity of the underlying national economy.

While the media has reported the Greek austerity plan and EU promises of assistance as a "fix," it's clear that the existing deep structural imbalances cannot be resolved with such Band-Aids.

Either Germany and its export-surplus neighbors continue bailing out the eurozone's importer/debtor consumer nations, or eventually the weaker nations will default or slide into insolvency.

Germany helped enable the overborrowing of its profligate neighbors by buying their government bonds. According to BusinessWeek, German banks are on the hook for almost $250 billion in the troubled eurozone nations' bonds.

Now an inescapable double-bind has emerged for Germany: If Germany lets its weaker neighbors default on their sovereign debt, the euro will be harmed, and German exports within Europe will slide. But if Germany becomes the "lender of last resort," then its taxpayers end up footing the bill.

If public and private debt in the troubled nations keeps rising at current rates, it's possible that even mighty Germany may be unable (or unwilling) to fund an essentially endless bailout. That would create pressure within both Germany and the debtor nations to jettison the single currency as a good idea in theory, but ultimately unworkable in a 16-nation bloc as diverse as the eurozone.

Be wary of the endless "fixes" to a structurally doomed system.

When Debt-Junkies Go Broke, So Do Mercantilist Pushers (March 1, 2010)

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Wednesday, June 22, 2011

"Growing Your Way Out of Debt" Is a Fantasy

Add rising interest payments and higher taxes to declining assets and incomes and you don't get "growth," you get insolvency.

The Status Quo consensus is that "kicking the can down the road" a.k.a. "extend and pretend" will work because "Greece, Spain, Ireland et al. are going to "grow their way out of debt." That is a fantasy.

Here's why.

1. There's a funny little feature of debt called interest. The Status Quo solution for Ireland, Greece, Portugal, Spain et al. is A) increase their debt load with more loans and B) roll over their old debt into new loans, without the old lenders taking any "haircut" on the principal.

Both of these "solutions" add more interest costs. That means more of the national income stream must be diverted to pay the lenders their pound of flesh. That means there is less money in the national economy to buy goods and services, which means the economy must shrink to pay the higher interest costs.

This is why unemployment in Spain and Greece has skyrocketed and why 100,000 small businesses have closed in Greece in the past year.

2. A funny little feature of interest is that when people see you're at risk of default, they start charging you more to borrow their money. And it isn't a tiny bit more interest, it's a lot. Think subprime teaser loan at 3% shooting to 8%, or 28% if you're trying to sell new debt on the open market.

For the E.U. to "help" Greece and Ireland by rolling over their already crushing debt loads into new, higher interest loans is like "helping" a sick patient by sticking a knife into their back.

3. Governments over-promise future benefits to win elections in the here and now.This makes sense, of course, because you win the elections and power now and the problem of paying for these excessive benefits is left to future politicos and taxpayers.

But when the phony "growth" (think metasticizing cancer) fueled by rapidly rising debt is finally cut off, then the government has no choice but to raise taxes, and keep raising them, to pay for the extravagant past promises made to citizens.

That means more of the national income is diverted to taxes, only part of which flow through as cash benefits to consumers. Much of the tax revenues flow to cronies, fiefdoms and of course those higher interest payments on the ballooning debt.

4. Cheap abundant credit has a funny little consequence: asset bubbles. When everybody can borrow vast sums of nearly-free money at costs much lower than the outlandish gains being reaped by real estate speculators and punters pouring cash into stocks and commodities, then of course it is a perfectly rational decision to leverage yourself to the max, borrow as much as you can and join the speculative frenzy.

So assets bubble up to frothy levels, and McMansions sprout by the thousands on Irish and Spanish soil. The "demand" is not for shelter; it was all speculative demand for something to flip and churn.

So when the debt bubble pops, so too do all the asset bubbles.

5. Leverage has a funny little feature called collateral and that other peculiar feature, interest. The land and house are the collateral for a mortgage (debt). As the real estate bubble popped, then the value of the collateral plummeted. Now the collateral is worth less than the loan--the borrower is "underwater."

The lender foolishly reckoned this would never happen, and now taking the collateral when the borrower defaults is an unsavory option because the lender will have to absorb a huge loss ("haircut") if they take the property.

So they choose to "extend and pretend," offering the borrower new terms, lower payments, etc., anything to keep the loan value on the books at 100%.

All of this is just artifice, of course; the borrower is insolvent, and so is the lender. As long as the borrower has to pay interest and principal, then there is not enough income left to "grow" anything. As long as the lender keeps the impaired loan on the books at the bogus valuation, then the lender is treading on the thin ice of insolvency.

6. As the national income and asset valuations both decline, the government imposes "austerity" programs which further cut incomes. A funny little feature of government "austerity" is the cuts come from the citizen's side of the expense ledger, not from the crony/fiefdom side.

Here in the U.S., for example, the library hours are slashed and the parks are closed to save $22 million in a $100 billion annual budget (those are the numbers in California) while various favored fiefdoms continue to get their swag. The "pain" of austerity is anything but evenly distributed.

7. People facing financial uncertainty and duress have a funny little habit called saving. As the reality of instability becomes crystal-clear to all, then people rather naturally rally round and circle the wagons, i.e. start saving money to cushion them through the hard times. Trusting in future benefits and bubbles is obviously foolish, and the only avenue of relative safety is cash (or equivalent) in hand.

As people save more of their declining income, there is even less national income left to be spent on goods and services.

8. These forces are self-reinforcing. The worse times get, the more people save. the lower the national income, the more taxes will be raised. The more visible these trends become, the more interest lenders demand as they see the positive feedback loops leading to insolvency.

Once a household or nation is burdened with stupendous debt loads and stagnating earnings, "growing your way out of debt" is impossible. The E.U. may succeed in strong-arming Greece into swallowing even more debt, more austerity and higher interest payments, but that will only speed up the self-reinforcing dynamics of insolvency, and guarantee the losses kicked down the road for a few months will be even more devastating.

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Tuesday, June 21, 2011

The Death of Demand: The Post-Consumer Debt Economy

Keynesians claim more debt will goose "demand;" they're wrong. Boosting debt has distorted the economy for 40 years, and the end-game is finally approaching.

Keynesians are constantly demanding more debt be taken on to spark "demand" for more stuff. What if debt-fueled demand is dead, expired of natural causes? If so, then the Keynesians are pushing on a string.

The truth is the U.S. has long been a post-consumer economy. Everybody already had a TV, phone, car, etc. 40 years ago, which is coincidentally when wages began their 40-year stagnation and the nation's public and private debts began exploding higher as the forces of financialization took over.

In other words, the only way to get people to buy more crap was to give them vast quantities of debt.

Now that debts exceed 350% of the nation's GDP, we've reached the end of the financialization process: we can't afford any more debt unless the interest rate is near-zero.

Hey, isn't that the Federal Reserve's policy now, forever and ever, near-zero interest rates? No wonder. If the nation had to pay a historically average rate of interest on its debts, the economy would quickly implode like a supernova star.

Take a look at this chart, courtesy of the excellent Market Ticker. It shows how much GDP has been created by each additional unit of debt. In other words, if we add $1 of debt, how much did that goose the GDP? If you follow the zero line, you will find that $1 of debt rarely boosts the GDP more than $1.

I added the red lines to show the generational shift that occurred in the mid-1970s: debt no longer boosted GDP by much, so more debt had to be taken on to keep goosing the GDP.

This meant that more of the nation's income was diverted to servicing the rising debt, which also meant that wages stagnated and profits to the financial sector skyrocketed. As those profits grew to dominate the profits of Corporate America (roughly, the S&P 500), then the political power of the financial sector and wall Street rose proportionately.

Big picture, this reliance on debt for "growth" has led to the banks owning the government and the economy. This is the Dark Side of Keynesism. The "borrow more, we need more demand!" thumpings of "liberal" economists like Krugman and Reich are completely blind to the fact that the borrowing they demand is precisely what has sold the nation down the river and handed control to the banks and Wall Street.

These structural changes are why the naive bleatings of these same Keynesians to "control the banks" are failing: by making the economy totally dependent on ever more borrowing and debt, the Keynesians created the financialization monster. Now that it controls the economy, they're whining, please Mister Too Big to Fail Bank, please hand back control to us nice economists.

It doesn't work that way. Having sold your soul to the debt monster, the monster now controls you.

Here is a chart of the Keynesian model of financial pathology. As private debt has flattened out--people simply can't borrow any more, as their incomes are flat and they're already maxed out on debt--the Federal government a.k.a. Savior State has ramped up its borrowing to replace private debt.

Meanwhile, total debt continues to zoom ever higher. The Federal Reserve is playing a game of Pretend: Let's pretend that if interest rates are near-zero, we'll always be able to borrow more. Hey, what's a trillion dollars at zero interest? You and I could make the interest-only payments each month, because they're zero.

But shoving "free money" into banks and Wall Street doesn't filter down to John Q. Citizen: it simply incentivizes massive speculation in stocks, commodities, seaside resorts, empty cities in China, you name it. This is the basis of the current stock, bond and commodities booms in the global economy: push trillions of dollars in "free money" to financial players, and guess what, that hot money flows out seeking a fat return.

The Keynesians and other economists have no ideas for confronting the reality of a post-consumerist debt economy and society. Like frenzied rats in a cage, they only have one lever to push to release the cocaine-laced pellets, and so they've been pushing it for 40 years.

Now they're hitting the bar with frantic energy, hoping the crazed and addled rats around them can dredge up some "demand" for more pellets to "consume." But the consumer-rats are bloated and lethargic; they've consumed so much debt-drug that they're near death.

Like a star which has expanded and now cannot maintain its grand state, the debt-based consumerist economy is now poised to experience a supernova implosion.

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Monday, June 20, 2011

The Only Way Forward Is to Accept Reality: Default Is Not the End of the World

The catastrophe isn't default, it's "extend and pretend."

Unwelcome crises are part of life. What's unnatural isn't crisis, it's pretending that life should be nothing but a smooth, uninterrupted rise in consumption.

Yes, I'm talking about Greece and the EU. The situation is somewhat analogous to finding out your total cholesterol is over 300. Gee, I thought I was eating well, and was in pretty good shape... alas, that was all wishful thinking; normal is 180. At 300, you're at serious risk of long-term health problems.

So the European Central Bank injects 120 billion euros of "medicine" to cure you, and a year later your cholesterol readings are 395. Hmm. The "medicine" didn't work; instead, it actively prolonged and deepened the crisis.

Humans need time to accept new realities, and to make necessary adjustments. People lose their wealth, they adjust. They lose their successful careers, they adjust. They face health crises, they adjust. This kind of wrenching adjustment is not abnormal, it is utterly normal.

Cholesterol at 300 is a crisis. We need to drop that 120 points down to 180. Everything about our lifestyle has to change to deal with this reality. So we go through a period of adjustment to the new reality. Sometimes the adjustment period is wrenching. People have to give up much of their lifestyle. But denying reality doesn't help, and bemoaning the pain don't help, either; both of these responses actively hinder the adjustment.

I was interviewed Saturday evening by guest hosts Paul Vigna and Ina Parker on the John Batchelor WABC radio program, and the topic was (unsurprisingly) Greece. Both Paul and Ina asked good questions, and so my primary aim was not to ramble too long or incoherently. (Who knows if I succeeded or not.)

One of their questions spoke directly to the central issue: "If Greece defaults, what happens next?"

I answered that Greece goes through a re-set, a painful but brief period of adjustment, and with the bad debt gone, then the economy would be cleared for new businesses to take root.

The Eurozone debt "crisis" is nothing but another credit cycle, in which debt expands beyond the carrying capacity of consumers and economies. Debt then contracts as uncollectable debt is written down; borrowers go bankrupt and their remaining assets are auctioned off (if they put up collateral; if not, then tough luck, lenders, you blew it and will have to suck the entire loss). Insolvent lenders are also declared bankrupt and dissolved.

There is absolutely nothing unusual about this cycle. Impaired debt is renounced and the system is purged of bad debt. Once the economy has been cleared of garbage, so to speak, then everyone can stop pretending and start dealing with reality. Businesses will be able to start up in a transparent and open market.

The world does not end. Life goes on. We were threatened and bullied in 2008 that the insolvency of the U.S. financial sector would trigger the end of civilization, but it was just another lie: life goes on.

The "doom and gloom" view (of which I am proponent, I suppose) is typically categorized by the Mainstream Media as a stubbornly negative insistence that "the world will end." While there is certainly a contingent who espouse that, in my view "doom and gloom" is not predicting the end of the world--it's just predicting the end of the Status Quo.

That's a key difference.

The Status Quo in Euroland is unsustainable. Last year's "fix" fixed nothing; it only deepened the pain and stole a year from those who could have used that time to make needed adjustments to reality.

It would be better for all involved if Greece defaulted on 100% of its debt and left the euro currency. Imports would instantly become very expensive in the new currency and so Greece would have a chance to build a balanced, productive economy that wasn't dependent on debt. All the banks who made the predatory loans to Greece would go bankrupt--good riddance to them all. If the ECB also goes under, so much the better.

Regardless of the shrill cries that civilization will end if lenders go belly up, life goes on. "Extend and pretend" only prolongs and deepens a crisis. "Doom and gloom" is the recognition that new conditions apply and the old way is unsustainable. Nobody likes hearing that, but it is the only way forward.

Greece, Please Do The Right Thing: Default Now (June 1, 2011)

Ireland, Please Do the World a Favor and Default (November 29, 2010)

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