Monday, July 30, 2012

The Central Banking Theater of the Absurd

The astounding hubris of central bankers is comical, but the consequences of their actions are playing out as needless tragedy.


Central bankers present themselves as Masters of the Universe. They are, but only in their own little Theater of the Absurd. In the real world, they are as clueless as any other mortals about the unintended consequences of their actions and the speed with which the corrupted, unsustainable financial Status Quo will decay and die.

The only attribute they possess in abundance is hubris. Their claims to godhood are comical when viewed in their little Theater of the Absurd, but they become tragic when the consequences of their actions play out in the real world.

Their job, such as it is, is to deflate a tottering system based on phantom assets slowly enough that it doesn't implode. Stripped of mumbo-jumbo, their strategy to accomplish this is to inflate other phantom assets to replace the phantom assets that are falling to zero.

All their promises, preening and posturing boil down to patting their breast pocketand speaking vaguely about a "secret plan" to end the crisis without bringing down the system that spawned the crisis as a consequence of its very nature.

There is no secret plan, of course, and no secret financial weapons; all they really have is artifice and the hubris to present artifice as reality.

To admit the usustainable is not sustainable would bring the entire rotten edifice crashing down, so the central bankers invite us into their little Theater of the Absurd and evince a phantom confidence in their phantom solutions that depend on phantom assets.

A swollen cloud of doom hangs over the central banker's little Theater of the Absurd; all their chest-pounding hubris and empty confidence is artifice, as phantom as the assets they claim will replace the phantom assets that have been destroyed by exposure to reality.

On their absurd little stage, they claim the Emperor's robes are thick and fine; and we laugh, bitterly, for these threadbare lies are all they have to "save" a parasitic, predatory, anti-democratic financial Status Quo.

Entries and email may be sporadic this week.


Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.
Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.


Thank you, Frederik A. ($50), for your splendidly generous contribution to this site-- I am greatly honored by your support and readership.


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Saturday, July 28, 2012

The Grand Cycle Top in Everything

We are on the downslope side of the Grand Cycle Top in Everything.



Our Chartist Friend From Pittsburgh has assembled an epic collection of 31 charts illustrating what I call the Grand Cycle Top in Everything: Destruction Of The Dome.

The collection demonstrates his charting system, Curvilinear Wave Analysis: A Charting Method For The 21st Century.

Here are two examples:


I highly recommend viewing all 31 charts, as they provide a context for what lies ahead in the economy and the stock market.

Entries and email may be sporadic this week due to other commitments.



Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.
Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.


Thank you, Gerald O. ($10/month), for your exceedingly generous subscription to this site-- I am greatly honored by your support and readership.


Read more...

Thursday, July 26, 2012

Bernanke and Draghi Are Dangerous

What is being sacrificed to maintain the euro and the E.U./U.S. banking cartel? Everything of value: liberty, democracy and sovereignty.


Today we present the culmination of the previous entries ( Global Crisis: the Convergence of Marx, Orwell and Kafka and Are You Loving Your Servitude Yet?): A brief commentary by longtime correspondent Harun I. on Mario Draghi's market-moving statement: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

Nice, Mr. Draghi, but at what cost? And who will ultimately bear this cost? It is already far beyond the measure of mere money; democracy, truth and sovereignty have all been destroyed to prop up the central bankers' Status Quo. We can presume Mr. Bernanke and the Federal Reserve are in on the propaganda campaign, and so we need to examine the words and promises of these two central bankers, as well as what they have not said.

Is talking about printing money as good as actually printing money? It would seem so. Is promising to "do whatever it takes" as good as actually doing whatever it takes? Once again, it seems so; global markets leaped at the "news" that the financial Status Quo was going to be "saved" yet again.

What if it is beyond saving?

What if the cost in treasure, blood, liberty, sovereignty and truth is not worth the 'saving" of a broken, unsustainable, corrupted, parasitic, predatory system? Do we get to choose, or are we just passengers on the train as the central bankers accelerate toward the chasm ahead?

Here is Harun's commentary:
Words have meaning and people should choose them carefully. Nigel Farage commented that what he saw in the faces of EU officials was "madness". We should not underestimate his assessment. 
At some point these individuals have to be viewed as dangerous. If we peer beyond terms such as QE, printing money out of thin air, stimulate, etc, and understand their effect, they begin to appear not so benign.
What if central bank officials came out and said, "We are going to raise your taxes", or "we are going to reduce your purchasing power", or, down to its essential point, "we are going to take money out of your pocket"? We know that there would be an uproar.
So, what did Draghi just say? He said he is willing to destroy the purchasing power of the Euro in order to save it. But let's go deeper than that. These people are willing to see countries rip themselves apart, property destroyed, and most importantly, people dying, to preserve some frivolous ideology called the Euro. If on the other hand this is about maintaining the power of the elite, it is much worse, because if this were the case then we are seeing an attempt at totalitarian rule by what you call the "stateless state".
But of course, the markets cheered. At least that is how it is interpreted. I interpret it as people reacting to prevent the confiscation of their purchasing power by someone they cannot un-elect.
Who elected Draghi and endowed him the authority to tell Europeans that they will suffer and die before the Euro? How much violence is ready to be endured and how many lives is the EU body willing to sacrifice upon the alter of the Euro or any monetary system? 
Not one official has declared that they will "do whatever needed" to preserve liberty, democracy and sovereignty. Does this imply the Euro has a higher priority? Does the end of the Euro or the present monetary system mean the sun will stop spinning and all of its planets will be sent hurtling through the cosmos? 
The callousness and detachment from reality in an effort to save a nonessential thing makes them dangerous. The more desperate they become the more dangerous they become.
If just one of them would publicly muse aloud that perhaps a mistake has been made, and perhaps a rethink of the structure of the EU is appropriate, I would feel better. But they are willing to confiscate your labor through monetary chicanery, deny liberty, destroy democracy, ignore sovereignty, and even witness violence and death, not just in Europe but in the US as well, to maintain a system that is horribly and irrevocably broken.
Lastly, much is being made over whether the German Constitutional Court will ratify the ESM. The German High Court is wasting its time or willfully participating in a charade. A fund that will be used to bailout the very people who must provide funds to the fund is as ridiculous as this sentence sounds. Mind you that the countries that are suppose to provide funding to the ESM must borrow to do so and then must turn around and borrow from the ESM, effectively borrowing the same non-money twice -- at interest.
(If the money is "borrowed" from the ECB, which has no "money" and then "borrowed" from the ESM, the ESM will not owe a debt to the ECB. Therefore, the sovereign will owe a debt to the ESM and the ECB.)
All that has really been accomplished over the past hundred years is the establishment of elaborate transfer mechanisms, each destroying wealth one order of a magnitude faster than the previous.
I never thought I would witness such collective madness. But the worst part is that it is anything but benign, and, it is only just beginning.
Thank you, Harun. Let's enjoy the central-bank inspired market rally while it lasts. It comes at an unbearable cost that will have to be paid some day, and perhaps not as far in the future as the worshippers of the Federal Reserve believe.



Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.
Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.


Thank you, Gregory J. ($100), for your outrageously generous contribution to this site--I am greatly honored by your support and readership.


Read more...

Are You Loving Your Servitude Yet?

Aldous Huxley imagined a world in which the Status Quo satisfies its lust for power by "suggesting people into loving their servitude."


Yesterday I discussed the Convergence of Marx, Orwell and Kafka as a means of understanding the global crisis. It's not just financial fraud on a vast scale, or debt or leverage or derivatives or a hundred other arcane mechanisms of parasitic predation; it's the partnership of a mindlessly expansive Central State with Monopoly Capital and the media machine that serves them.

I considered including Aldous Huxley in the convergence, as he too anticipated the essential nature of modern life. But perhaps his insights are more complementary than convergent, for he understood the media and State's capacity to not only present a deranged and destructive Status Quo as "normal" but to persuade the serfs to embrace it.

Aldous Huxley foresaw a Central State that persuaded its people to “love their servitude” via propaganda, drugs, entertainment and information-overload. In his view, the energy required to force compliance exceeded the "cost" of persuasion, and thus the Powers That Be would opt for the power of suggestion.

He outlined this in a letter to George Orwell:
"My own belief is that the ruling oligarchy will find less arduous and wasteful ways of governing and of satisfying its lust for power, and these ways will resemble those which I described in Brave New World. Within the next generation I believe that the world’s rulers will discover that infant conditioning and narco-hypnosis are more efficient, as instruments of government, than clubs and prisons, and that the lust for power can be just as completely satisfied by suggesting people into loving their servitude as by flogging and kicking them into obedience."
As prescient as he was, Huxley could not have foreseen the power of electronic media hypnosis/addiction as a conditioning mechanism for passivity and self-absorption. We are only beginning to understand the immense addictive/conditioning powers of 24/7 social and "news" media. What would we say about a drug that caused people to forego sex to check their Facebook page? What would we say about a drug that caused young men to stay glued to a computer for 40+ hours straight, an obsession so acute that some actually die? We would declare that drug to be far too powerful and dangerous to be widely available, yet the Web is now ubiquitous.

Servitude comes in many gradations and forms. Relying on the Federal Reserve to constantly prop up our pension and mutual funds lest reality cause them to collapse is a form of servitude; we end up worshipping the Fed's every word and act as mendicants worship their financial saviors.

That the Fed is unelected and impervious to democracy or the will of the people is forgotten; all that matters is that we love our servitude to it.

I have discussed the atomizing nature of social media and the way it conditions self-absorption in 800 Million Channels of Me (February 21, 2011), and the way that the consumerist ethos generates insecurity, alienation and social defeat. The only "cure" for social defeat is to love the servitude of consumption, convenience and the resulting debt-serfdom: The Last Refuge of Wall Street: Marketing To Increasingly Insolvent Consumers(December 12, 2011). I have covered these topics in depth in my books Resistance, Revolution, Liberation: A Model for Positive Change and Survival+: Structuring Prosperity for Yourself and the Nation.

The Central State has the power via welfare (individual and corporate) and bailouts to buy complicity. Since the human mind rebels against hypocrisy and insincerity--we can all spot a phony--we subconsciously persuade ourselves of the rightness and inevitability of servitude and self-absorption.

And that is how we come to love our servitude; we persuade ourselves to believe it's acceptable and normal rather than deranged and destructive.



Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.
Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.

Thank you, Joe G. ($5/month), for your extremely generous subscription to this site--I am greatly honored by your support and readership.



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Wednesday, July 25, 2012

Global Crisis: the Convergence of Marx, Orwell and Kafka

The global crisis is not merely economic; it is the result of profound financial, sociological and political trends best captured by Marx, Orwell and Kafka.



The global crisis is best understood as the convergence of the modern trends identified by Marx, Orwell and Kafka. Let's start with Franz Kafka, the writer (1883-1924) who most eloquently captured the systemic injustices of all powerful bureaucracies--the alienation experienced by the hapless citizen enmeshed in the bureaucratic web, petty officialdom's mindless persecutions of the innocent, and the intrinsic absurdity of the centralized State best expressed in this phrase: "We expect errors, not justice."

If this isn't the most insightful summary of the Eurozone debacle, then what is? A lawyer by training and practice, Kafka understood that the the more powerful and entrenched the bureaucracy, the greater the collateral damage rained on the innocent, and the more extreme the perversion of justice.

The entire global financial system is Kafkaesque: the bureaucracies of the Central State have two intertwined goals: protect the financial Elites from the consequences of their parasitic predation, and protect their own power and perquisites.

While Marx understood the predatory, parasitic nature of Monopoly Capitalism, he did not anticipate the State's partnering with Cartel/Crony Capitalism; in effect, the State has appropriated the appropriators, stripmining the citizenry to protect the financial sector from the consequences of their "business model" (leverage, fraud, embezzlement and the misrepresentation of risk). But the State doesn't merely enable ("regulate") the predation of financiers; it also stripmines the citizenry to fund its own expansion into every nook and cranny of civil society.

This is where Orwell enters the convergence, for the State masks its stripmining and power grab with deliciously Orwellian misdirections such as "the People's Party," "democratic socialism," and so on.

Orwell understood the State's ontological imperative is expansion, to the point where it controls every level of community, markets and society. Once the State escapes the control of the citizenry, it is free to exploit them in a parasitic predation that is the mirror-image of Monopoly capital. For what is the State but a monopoly of force, coercion, data manipulation and the regulation of private monopolies?

What is the EU bureaucracy in Brussels but the perfection of a stateless State?

As Kafka divined, centralized bureaucracy has the capacity for both Orwellian obfuscation (anyone read those 1,300-page Congressional bills other than those gaming the system for their private benefit?) and systemic avarice and injustice.

The convergence boils down to this: it would be impossible to loot this much wealth if the State didn't exist to enforce the "rules" of parasitic predation. In China, the Elite's looting proceeds along somewhat different rules from the looting of Europe and the U.S., but the end result is the same in all financialized, centrally managed economies: an expansive kleptocracy best understood as the convergence of Marx, Orwell and Kafka.


Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.
Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.


Thank you, Carrie P. ($20), for your most generous contribution to this site--I am greatly honored by your support and readership.


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Tuesday, July 24, 2012

Before You "Buy the Dip," Look at These Two Charts

The real economy has entered recession territory, while the stock market is setting up a massive downtrend from QE-juiced highs.



Our Chartist Friend from Pittsburgh recently posted two charts that should give those tempted to "buy the dip" pause.

The first is a long-term chart of the Dow Jones Industrial Average (DJIA). The recent price history has traced out a pattern that looks remarkably similar to the one that presaged the crash of 2008, with one difference: massive quantitative easing and Eurozone bailouts pushed the B leg into an overextension. If this pattern is valid, the C leg down could be a real doozy:


How can we tell the market is ready to roll over on fundamentals? Study the ISM PMI composite readings, which just dropped below 50 into recession territory:

Notice that the S&P 500 stock market index is highly correlated to the Composite.Those who expect stocks to rise despite the PMI Composite cratering will have to explain why "this time it's different."

The "buy the dip" crowd is counting on the Federal Reserve to launch a new round of QE (quantitative easing) that will goose the market higher even as the real economy follows the rest of the global economy into recession.

Perhaps, but for how long? Or even more sobering, suppose this entire "b" leg up was the market pricing in QE3 being unleashed on August 1.

The "buy the dip" crowd may well face a new choice: either sell at 12,500, or sell at 10,500.

Thank you, Chartist Friend from Pittsburgh for sharing two of your many insightful charts.


Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.
Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.


Thank you, David K. ($50), for another magnificently generouscontribution to this site--I am greatly honored by your steadfast support and readership.


Read more...

Monday, July 23, 2012

Why the U.S. Dollar Is Not Going to Zero Anytime Soon

The market considers a variety of inputs in pricing the value of a floating currency. The dollar has more going for it than is generally understood.


The conventional view looks at the domestic credit bubble, the trillions in derivatives and the phantom assets propping the whole mess up and concludes that the only way out is to print the U.S. dollar into oblivion, i.e. create enough dollars that the debts can be paid but in doing so, depreciate the dollar's purchasing power to near-zero.

This process of extravagant creation of paper money is also called hyper-inflation.

While it is compelling to see hyper-inflation as the only way out in terms of the domestic credit/leverage bubble, the dollar has an entirely different dynamic if we look at foreign exchange (FX) and foreign trade.

Many analysts fixate on monetary policy as if it and the relationship of gold to the dollar are the foundation of our problems. These analysts often pinpoint the 1971 decision by President Nixon to abandon the gold standard as the start of our troubles. That decision certainly had a number of consequences, but 80% the dollar's loss of purchasing power occurred before the abandonment of dollar convertibility to gold.

The depreciation from 1971 on looks rather modest on this chart. Clearly, dropping the convertibility of the dollar to gold did not change the overall depreciation dynamic much; the dollar had been losing purchasing power since the turn of the century.


Here is the dollar's purchasing power plotted by another source. Note how the purchasing power fluctuated significantly in the 19th century. The emergence of the (privately owned) Federal Reserve as the issuer of the dollar accelerated the dollar's depreciation--a decline interrupted only by the deflationary Great Depression.


To understand the dollar's primary role as a means of exchange for trade, let's start with the relative size of the foreign exchange market. The FX markets trade some $2 trillion a day, far larger than either the credit or stock markets.

Fiat currency is the ultimate phantom asset. It is quite miraculous when you think about it. We print some symbols and images on a piece of paper, and we can exchange that intrinsically worthless paper for real goods and materials: oil, electronics, vehicles, and so on. That magic privilege is certainly worth maintaining.

So why would anyone trade real tangible wealth (say, oil) for specially printed paper? There are basically three reasons:

1. They can use the paper to buy goods and services from other nations.
2. They can buy bonds with the paper money that will draw interest and be paid as promised.
3. When the money is withdrawn to exchange for goods and services, it has retained the vast majority of the purchasing power it held when deposited.

If we look at the charts above, we might wonder why anyone would accept U.S. dollars (USD) as payment for real goods when it so steadily loses purchasing power. The answer can be found by re-reading the three conditions above: if the USD draw interest, and that income is larger than the loss of purchasing power, then the money will still retain its purchasing power when withdrawn.

For instance, if the USD deposits draw 5% annual interest and the USD loses 3% of purchasing power every year, the owner of the dollar still earned a 2% positive return.

There is another interesting feature of interest-bearing bonds: as interest rates decline, the bond rises in value. This sets up the delicious irony of the Chinese whining about their $1 trillion in U.S. Treasury bonds earning such low yields, while in fact their holdings have greatly increased in value as interest rates have declined.

But what underpins a fiat currency's purchasing power? Ultimately, the value of any paper (free-floating) currency is based on the issuer's ability to enforce claims on reliably stable income streams and assets.

Any nation that promises to pay interest on bonds denominated in its currency must be able to enforce its claim on the national income via taxation. If the national income is too unreliable or unstable to support the claim, the international community loses faith in the currency and it depreciates to zero even if the currency isn't printed with abandon.

In other words, the value of the currency as an international means of exchange is not just a function of monetary policy or money supply; the market "prices" a free-floating currency on a number of factors, all related to the three above points.

We all understand gold is an asset. The key to understanding Nixon's decision to break the international convertibility of the dollar to gold was the transition of the U.S. from a net exporter to a net importer.

In the 1960s, France famously demanded that the trade imbalance between the U.S. and France be settled in gold: when the U.S. ran a trade deficit with France, the "amount due" France had to be paid in gold.

Once U.S. domestic oil production peaked and it became necessary to import oil, the U.S. became a net importer in a deeply structural sense. With the dollar convertible to gold, eventually the exporting nations would have ended up with all the U.S.'s gold, and that was not going to happen.

The solution was to float the dollar and trade paper money for the oil.

(There is another fundamental reason why the U.S. became a net importer not just of oil but of finished goods and raw materials, and we'll look at that later.)

But the magic of trading paper for oil could only be maintained if the paper retained the vast majority of its purchasing power over typical investment timeframes.

In this, the U.S. held the immense advantage of issuing the reserve currency, i.e. paper money accepted globally for payment of debts. But this privilege was not magic; the currency still had to reliably draw interest and retain its purchasing power.

Ultimately, the USD retains its value based on the U.S. government's claim to the nation's immense income stream, its assets and its ability to attract international capital.

We can understand the market's "pricing" of these variables by asking: if we had to hold a currency for trading purposes, i.e. to settle debts resulting from global trade, and we needed to hold some of that currency for five years, which currency would be most likely to retain its purchasing power, based on the income stream, assets and capital flows of the issuing nation?

This question illuminates the varied nature of assets. Yes, gold and oil are assets; but so is enabling the free flow of international trade, for example. We can ask the question somewhat differently: is it within the power of the currency's issuer to mandate its purchasing power five years hence? How much of the market's "pricing" is outside the control of the issuer?

Take the euro as an example. Does anyone seriously believe the European Central Bank (ECB) retains sufficient global control over the euro's valuation to mandate its value five years hence? The currency's viability is in question even now, never mind in five years.

Clearly, much of the market's pricing of the euro's value is outside the control of the euro's issuers; whether they admit it or not is irrelevant.

In a similar fashion, China dares not let the renminbi float lest the market "price in" the instabilities implicit in China's economy and trade. If we were able to tote up true capital flows out of China, it is entirely possible that capital flows have reversed, and more capital is flowing out of China into the U.S. than is flowing from the U.S. to China.

If we don't understand capital flows are assets, then we understand neither capital flows nor what constitutes an asset.

How about Japan? The yen is currently viewed as a "safe haven" due to the great stability and wealth of Japan. But two decades of massive deficit spending and debt accumulation are finally putting pressure on Japan, Inc., and those willing to bet the yen will retain its current purchasing power for five more years are taking on an extraordinary amount of risk that has yet to be priced into the yen.

Once again, the question boils down to how much of the yen's purchasing power is in the hands of its issuers. For 20 years, Japan's domestic purchases of its own debt kept the global market at bay. As domestic savings rates dry up and the ageing Baby Boomers start cashing in their bonds and drawing pensions, the system may finally be exposed to global market "pricing" of risk. That exposure could destabilize the yen's position as "safe haven."

Whatever your calculus, it is self-evident that of all the issuers of major currencies, the U.S. retains the most control over the elements the market uses to "price" the risk that the dollar's value as a means of exchange and store of value is unsettled.

There is yet another way to understand the market's valuation of the dollar, and any other floating currency. If you are holding a large amount of a nation's currency, the ultimate value of that currency can be discovered by what you can buy in the issuer's nation with its paper money. If restrictions on foreign ownership crimp what you can buy, the currency's value reflects that. If there is relatively little of value to buy, or the risks of ownership are high, then once again the market will mark down the "price" of that currency.

Despite its myriad problems and challenges, the U.S. allows a fairly broad range of foreign ownership of land, corporations, etc. If you have surplus dollars, you can buy property or an oil well in the U.S. It may not produce much oil, but the output can be sold domestically and its value is relatively easy to calculate. The U.S. economy is vast and there's a wide variety of things and assets to buy with your dollars. In other words, there is a vast market that will accept your dollars in exchange for tangible goods and assets.

I have made the case technically for over a year that the U.S. dollar has reversed its long downtrend and is now in a structural advance. If we examine the multiple dynamics of FX, foreign trade and the market's pricing of currencies, we can discern a strong fundamental case for this advance as well. There is no magic in free-floating currencies, there is only the market discovering the price of numerous inputs, only some of which are easily quantifiable.

This was drawn from Musings Report 30. The Musings are sent weekly to subscribers and major contributors ($50 or more annually). Here are some samples of the Musings.


Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.
Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.

Thank you, James B. ($10/month), for your stupendously generous subscription to this site--I am greatly honored by your support and readership.


Read more...

Saturday, July 21, 2012

Part 12: Robin Imagines Kylie, Wrongly


As European promises fade to black, let's amuse ourselves with this week's chapter of my serialized comic novel "Four Bidding For Love." (Those who find absurdist humor and adult situations offensive, please read no further.)


     Though he avoided police procedural movies—his tastes ran more to Italian neo-Realism and Chinese costume dramas—Robin knew not to park his car directly across from the ramshackle two-story Berkeley house, but down the street so he could unobtrusively observe the man he'd been tasked to best in mano-a-mano negotiations, Ross Tozaj. Opening a wine-accessories catalog as if reading it, Robin glanced cautiously over the catalog at the seedy house and thought, maybe this Ross is a spindly little man who just wants his wretched toaster.
     That morning Robin had prepared various arguments to win Alexia over to attending the craft fair with him, but she'd instantly agreed to provide backup. Just as his mind eased with this reassurance, Alexia had announced that she would disguise herself as a man in order to protect her identity from Ross.
     This revelation pushed Robin's spirits off the delicate perch of reassurance just reached. "Don't worry," Alexia had said soothingly. "After today, you'll never see him again. You're just the mouthpiece, and he knows that. But if he is unstable, he may seek revenge against me, and I'd rather he didn't know what I looked like."
     Glancing briefly at her abundant bustline, Robin declined to voice his suspicions that her womanly assets could not be masked by a man’s shirt and jacket.
     Alexia studied her neighbor's ill-ease for a moment and then added, "I was planning to be there anyway, just to see what he looked like. Don't worry, it'll be fine. Just get what you can out of him and call it a day."
     Robin had nodded, but sensing her failure to reassure with words, Alexia had patted his shoulder in a maternal fashion.
     And now, Robin told himself as the door to the Berkeley abode swung open, I find out what I've gotten into. A huge bearded specimen of humanity stepped directly from Robin's worst fears onto the house's front porch, and brandished a gleaming hand-axe.
     As Robin's pulse raced up to heart-attack rapidity, the man wiped the shining blade on his blue overalls and inspected the handle with an endearment that sent chills of fresh-brewed terror down Robin's spine. The giant balanced the hand axe lightly in his palm, and then suddenly swung it forward in a throw which lodged the axe firmly in the stout porch column. The man's glee was disturbingly enthusiastic, and Robin flipped open his cellphone with unaccustomed difficulty.
     Alexia picked up his call on the second ring. "Hi, Robin."
     "This guy Ross is the size of a bear, and almost as hairy," he blurted. "He's throwing a hatchet into a post right now, and enjoying it far too much."
     "If this is your idea of a joke," Alexia replied coldly, "it's not funny."
     "I'm not joking," Robin hissed. "I'm parked outside his house in Berkeley."
     "Not where he can see you, for goodness sakes."
     "No, of course not. Now he's got a long board." After a brief pause, Robin stammered, "Holy moly, he just split the board with a single throw."
     "Don't worry, I'll bring some pepper spray that will stop a bear in its tracks."
     Robin's voice sounded disembodied and distant. "What if the bear flings a razor-sharp axe at you?"
     "This is absurd," Alexia protested. "No one can get inside the craft fair with a hatchet."
     "This guy could strangle an ox with one hand," Robin said, and Alexia had no immediate reply. "He's just a collector," she finally said, but her tone was less than convincing.
     "Look, why don't we just call this meeting off and you handle the negotiations with email?" Robin implored.
     Alexia's sigh was heavy with annoyance. "After all this? I just left my house after spending all morning dotting a stubble on my chin. The only man's shoes I could find were my ex-husband's sneakers, and they're so big I look like a circus clown."
     Realizing Robin was not responding with the sympathy she'd expected, Alexia said, "No, I have a better idea. Call him and demand to work with an intermediary. If he refuses, then tell him the deal is off."
     The relief in Robin's sigh was practically thundering. "Fine. I'll let you know if he agrees."
     The overall-clad giant sauntered inside, and Robin took a deep breath to calm himself before making the call to Ross. But his worry was wasted, for Ross—odd how his voice did not reflect his bulk, Robin observed—calmly agreed to an intermediary. To Robin's further surprise, Ross announced that a young woman by the name of Kylie would be acting in his stead. Her dark hair would be pulled back in a ponytail, he said, and she would be wearing jeans.
     In response to the question of what young woman could possibly befriend such a hellaciously hirsute axe-lover, Robin's imagination conjured a female equivalent of the man in overalls: stout, uncouth, unnerving, with a shaggy ill-kept ponytail acting as a rough analog of the giant's unruly pirate's beard. Kylie had a suitably Amazonian ring, and Robin could easily imagine her deafening chortle and the porcine cunning in her close-set eyes. He shuddered once and then started his car, reassuring himself that regardless of her undoubtedly frightening appearance, this female intermediary would be a vast improvement over negotiating with Hatchet Man.
Next: Robin Meets Kylie: Love AFS 


To read the previous chapters, visit the "Four Bidding For Love" home page.




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Friday, July 20, 2012

What's So Bad About Deflation? Nothing, If You Own the Debt

Perhaps all the assumptions about inflation being good and deflation being bad miss the key question: cui bono (to whose benefit?)



One of the most widely accepted truisms of our time is that deflation is bad: bad for debtors, bad for the indebted government, and therefore bad for the economy.

What all this overlooks is how wonderful mild deflation is for those who owe no debt but who own the debt and the income streams that flow from debt. What the "deflation is bad" argument ignores is who controls the financial and political systems, and what set of conditions benefits them.

The entire Survival+ critique is based on one simple but revealing question: cui bono--to whose benefit?

The "deflation is bad" view naively assumes the Federal government wants inflation to lower its own debt burden. But since the machinery of governance is directed not at what's good for the government, but at what's good for the financial Elites that influence policy, then the only meaningful question is: what's best for the financial Elites?

Mild inflation won't bother the Elites much as long as their leveraged returns exceed inflation by a substantial measure, but deflation is much more lucrative: why mess around with potentially volatile inflation when deflation works better?

As knowledgeable correspondent James B. recently explained, the financial Elites' are skimming their take regardless of inflation or deflation. (for more on this, see James B.'s commentary in Do the Parasitic Elite Pay Any Taxes? June 13, 2012.)

Deflation makes cash and income streams more valuable as time marches on. At a 1% rate of deflation, our cash buys more goods and services every month. As a result, a 3% yield plus the 1% deflation = 4% real return.

The reason why deflation is considered bad is that wages tend to deflate along with everything else, and so the income debtors need to pay their debts declines, making it more difficult to service the debt.

Governments are presumed to want inflation because it erodes government debt over time and boosts the income of taxpayers and thus of the government. At 5% annual inflation, the adjusted value of $100 debt decreases to $77 in five short years. In 10 years, 5% annual inflation drops the purchasing-power value of $100 debt to $60.

As wages increase with inflation, the number of hours of work needed to service the monthly debt declines. Inflation makes debts easier on the debtor and strips value away owners of the debt.

Nice if you're the debtor, extremely annoying if you own the debt. Once again we must separate the Federal government from the financial Elites who control its policies. If government spending must eventually be curtailed to pay the rising interest on exploding Federal debt, that won't bother those who own the Federal debt (bonds).

Another widely accepted truism is that the Federal government (Central State) can "print its way out of debt" by printing enough money to devalue the dollar.Devaluing the dollar and inflation are two descriptions of the same process: expanding the money supply far faster than the real economy is expanding.

But once again this is naive, as the Federal government doesn't "print money" electronically-- that privilege is held by the Federal Reserve. Does anyone seriously believe the Federal Reserve acts on behalf of the Federal government? For propaganda purposes, the stated "cover" of the Fed is to "preserve price stability" and foster full employment.

The Fed's real function, of course, is to manage monetary policy to benefit the nation's financial sector and its wealthy Elites. What happens to Federal spending and interest payments are of little interest to those setting the Fed agenda. For propaganda purposes, the Fed makes noises about "reining in deficit spending" but this is for show. The most important goal is to maintain real returns for those who own the debt of the Federal government, i.e. the mega-wealthy financial Elites and other Status Quo players.

The critical error made by the "inflation is good" camp is their assumption that wages will rise along with everything else in inflation. Alas, wages for the bottom 90% have stagnated for decades in real terms (i.e. purchasing power), and so "mild" inflation has dramatically decreased their earnings.

In a post-industrial, post-bubble economy, labor is in massive surplus, so wages are flat to down for the vast majority of workers. Inflation is actually terrible for the bottom 90%, as their wages are flat while everything else rises in cost. For those workers with modest debt loads or very low interest loans, deflation actually boosts the purchasing power of their stagnant earnings.

Deflation is a wonderful boost for those who own debt and who receive income streams from interest and principal payments. Every dollar of interest and principal buys more than it did when the loan was originated. Every dollar of cash not only buys more goods and services, it also buys more hard assets as assets tumble in deleveraging.

Some steady writedown of debt is acceptable to those who own the debt. Let's say that 1% of all the debt is written off every year due to defaults, short sales of homes, foreclosures, etc. If the yield is 3% plus 1% deflation for a real return of 4%, then a 1% reduction in principal will still leave a real yield of 3%, which can be leveraged into 10% or even 15% (at 5-to-1 leverage).

The "frog in the pot" syndrome applies. If deflation is modest, on the order of 1%-2% annually, that won't spark insurrection. If the water in the pot is heated slowly, the frog doesn't notice much except a gradual reduction in earnings and government benefits as more government revenue is funneled to debt service.

Indeed, by many measures, Japan has been in deflation for over 20 years. The slow erosion of wages has been partially offset by a decline in the cost of goods and services. Meanwhile, those who own the debt have a low-risk increase in their wealth and income, year after year. What's not to like?

Before we assume the Federal government needs inflation, we should ask who sets the policy objectives of the government. Since the super-wealthy have captured the regulatory and legislative processes, why would we think the government's actions don't align with their interests?

Since the Federal government can't "print money," it can only borrow it, then it is incapable of creating inflation, even if it wanted to. The interests of the Federal Reserve are served by propaganda about "inflation targeting," but behind the curtain mild deflation is perfectly fine with the financial Elites.

Consider this. In mild deflation, Treasury bonds increase in value as the income streams of interest gain purchasing power every year. When other assets tank--for example, stocks and real estate--the bonds can be sold and the other assets snapped up for cheap from those who have only debt to deleverage and no cash.

"Deflation" is only bad for those with crushing debts and no ability to borrow more.Since the Federal government (like the government of Japan) can always borrow more, those buying the debt are assured of a low-risk income stream that can then be used to buy other deflating assets.

Everyone assuming the Federal government has the power to create inflation and that inflation is "good" should examine the interests of those who control the government's policies, i.e. those who own the debt.

Put another way: here's what will be scarce: reliable income streams and liquidity.



Three new videos with CHS and Gordon T. Long of Macro Analytics:

Central Planning
Statism Part 1



Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.
Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.

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