The Real Cyprus Template (the one you're not supposed to notice)

The Real Cyprus Template reveals the core-periphery Neocolonial-Financialization Model in all its predatory glory.

Much has been said about "the Cyprus Template" (the so-called bail-in, where deposits are expropriated to recapitalize the insolvent banks), but virtually nothing has been written about the Real Cyprus Template.

Longtime correspondent David P. (proprietor of Market Daily Briefing) charted some very interesting data that enables us to follow the money--specifically, Eurozone money in the "foreign deposit sources" (deposits in Cyprus banks that originated from outside Cyprus).

It appears the key preliminary step of the Real Cyprus Template is that money-center banks in Germany and other "core" Eurozone nations pull their money out of the soon-to-implode "periphery" nation's banks before the banking crisis is announced.

As David observed, "I think this explains a lot about something that has always puzzled me: why the delay in resolving Cyprus after the Greek haircut?"

Here is David's explanation and two key charts: 

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"The Cyprus situation had been simmering for at least a year when in March of 2013 it finally broke; Cyprus had a week to take care of its banking situation or else face a cutoff of access to the eurosystem by the ECB. This brought matters to a head; the Cyprus Bail-In was finally settled upon, where uninsured depositors in the two largest banks in Cyprus took major haircuts, and must wait for return of their money until the assets of the banks are run down.

The banking problems in Cyprus had their roots in the Greek Sovereign Default, and were known by the general public for about a year prior to the recent default; a New York Times article dated April 11, 2012 lays out the particulars.

Looking at Cyprus bank security assets in data provided by the ECB, the problems were visible earlier - right after the first Greek haircut in mid 2011, and a second haircut finalized in early 2012. This was a 11 billion euro hole in a system with 100 billion in assets total, centered upon two banks that held half the deposits in the system.

Greek Crisis Timeline

Date	Event
April 2010	Greek Sovereign Bonds Declared Junk
May 2010	110 Euro bailout, no haircut
July 2011	"Private Sector Involvement" decided at EU Summit
Oct 2011	130 Euro bailout, 53% face value haircut
Mar 2012	Haircuts take effect; actual haircut 85%

You can see the effects of the increasing haircuts in the chart below. The chart lists all types of bonds owned by all the banks on Cyprus. The red line is the important one. It shows "all off-island Eurozone Government Bonds."

Put more simply, that red line represents Greek Government debt owned by the two banks on Cyprus that failed. It went from a 12 billion euro value in mid 2011, down to a 1 billion euro value in early 2012. That's an 11 billion haircut - all due to the Greek Default.


So why did the eurozone wait so long to resolve the problematic Cypriot banks with their 11 billion euro hole that was clearly serious in the middle of 2011, and becoming blindingly obvious by 2012? Therein lies a story - it has to do with banking, and how banks make money. The explanation is a bit complicated, but bear with me.

Bank deposits are grouped into 3 primary categories: deposits from households, from corporations, and from other banks. Households and corporations typically have a long standing relationship with their bank; they only move their deposits slowly, and most of this sort of depositor uses time deposits to maximize their interest income. Deposits from other banks are what we might term "hot money." They arrive quickly, and depart just as fast. But why would a bank deposit money with another bank? The simple explanation is: interest rate spreads.

Let's imagine you ran a German bank, and you paid very low rates to your overnight depositors. You have a great deal of really cheap money on your hands. What are your options to make money? You can either loan money to German homeowners one by one, but there are only so many German homeowners, and they only want to borrow so much money. So after loaning all you can loan, you search the world to try and find another bank that is advertising high rates for deposit money, and you stumble on the banks in Cyprus.

Rate	Deposit Type & Location
0.55%	German Overnight Deposit
1.1%	Cyprus Overnight Deposit
2.8%	Cyprus Savings Deposit (1 year)
4.9%	Cyprus Time Deposit (1 year)

Now then, if the Bank of Cyprus doesn't go under, this is free money. How much are we talking about? Subtract the rate for the overnight deposit in Germany from the time deposit on Cyprus (4.9 - 0.55) then multiply by 60 billion euros. That ends up being 2.61 billion euros in profit. Per year! Cost? One guy at a computer hitting the "transfer" button on his keyboard in Dusseldorf!

This sure beats trying to loan money to a bunch of German homeowners one by one! But the key to this free money is, your bank must be able to get its money out of Cyprus prior to any trouble.
And the barrier to getting the bank's money back is those Time Deposits (the deposits paying the most interest) are stuck in Cyprus for a year. So in order to avoid loss, you have to see into the future one year and stop rolling your bank's time deposits one year before those Cyprus banks go under. Otherwise you will have collected that 4.9%, then suffered a 30-60% uninsured depositor haircut. And a haircut is not a good way to ensure your banker bonus for the year.

So with this hypothetical strategy in mind and being mindful of the dangers of default and the timeline of when things occurred, take a look at the following chart of "foreign deposit sources" (deposits in Cyprus banks that originated from outside Cyprus) and see for yourself how well each foreign participant did in anticipating the eventual banking system crisis.

Black: Eurozone [German & French] Banks

Red: Cyprus people and businesses

Blue: Cyprus Banks

Green: Banks outside the Eurozone

Orange: Russian "Mobsters" & Brits

Looking at the timeline, even as late as the end of 2011, when it was clear Greece would default and the banking regulator had to know the banks in Cyprus were doomed, the amount of Eurozone-bank derived deposits in Cyprus was over 20 billion euros, a good portion of which would be subject to massive losses if the Cyprus Template were to be applied at that moment.

[Note that 20 billion euros was - at that time - the same size as the "Russian Mobster" Money.]

But at that moment, as a result of the "collecting the spread" strategy, some big chunk of that money were likely in time deposits, unable to be withdrawn. That money couldn't flee, not just yet.

But as time passed, those Eurozone bank deposits were slowly reduced down to 10 billion euros, a reduction of 50%. Presumably, as the time deposits expired, the money was brought back to the fatherland.

And then suddenly the President of Cyprus was informed he had 1 week to solve the banking situation that had been pending for more than a year.

In looking at the movement of capital prior to the default, we can give a grade to each participant, as a result of their apparent ability to assess the the danger to their deposits.
The clear winner: Eurozone Banks. Those guys were geniuses. They were the only participant to seriously reduce holdings prior to the default.

Participant	Grade
Eurozone [German & French] Banks	B+/A-: almost perfect
Cyprus People & Businesses	F: completely unaware
Cyprus Banks	C-: slightly more aware
Banks Outside Eurozone	F: completely unaware
Russian Mobsters	F: completely unaware

So it is expected (and a bit sad) that households and businesses don't leave their banks readily, so its not surprising they stayed on board right up until the end.

What is fascinating to me is that the banks that were NOT in the eurozone clearly had no idea what was coming, and the banks actually ON Cyprus only had an inkling, and that only at the last minute. Given both the timing and the form of the Cyprus bank resolution was in the hands of the ECB, as well as French and German politicians, is this astounding ability of the Eurozone banks to avoid losses truly a surprise?

One question that might be asked is, if the Eurozone banks knew what was going to happen, why not withdraw all their money from the banks on Cyprus?

First, only half the banking deposits on Cyprus were involved in the bail-in. Perhaps the 10 billion euros in remaining Cyprus-EZ bank deposits are in other healthy Cyprus banks. Another explanation is that only a subset of the eurozone banks were well-connected enough to receive advance information.

One last point. Since now we understand how perfectly the well-connected eurozone banking establishment identifies issues in member nation's banks, and how adept it is at avoiding uninsured depositor haircuts, we might find it useful to watch deposit flows of these Eurozone banks going forward.

They might well provide us insight as to where the next set of banking issues might arise, and perhaps more importantly, what the timing of these issues."

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Thank you, David, for sharing your finding with us. We can now see there are two Cyprus Templates:

1. The public-relations/propaganda model
2. The real one, that enables "core" eurozone banks to pull their deposits out of periphery banks before the deposit expropriation and capital controls kick in.

Why are we not surprised the entire charade and expropriation is rigged to benefit the core banks? For more on the core/periphery structure of the Eurozone, please readThe E.U., Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012)
To fully understand the Eurozone's financial-debt crisis, we must dig through the artifice, obfuscation and propaganda to the real dynamics of Europe's "new feudalism," the Neocolonial-Financialization Model.

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Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economyComplex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)

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

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"The Carrot's in Reach:" The Myth of a Self-Sustaining Recovery

The carrot of self-sustaining recovery will remain out of reach, for the policies presented as the path to recovery preclude the "virtuous cycle" everyone desires.

The enduring myth of the post-2008 era is that central-planning money printing and deficit spending would soon spark a self-sustaining recovery. Once consumers and businesses stepped up their own borrowing and spending, the central bank and state would then pare back money printing and deficit spending, as the increase in private-sector spending would fuel further borrowing and spending, i.e. become self-sustaining.

The reality is the mythical self-sustaining recovery is the carrot dangled in front of a credulous public:though we're constantly reassured "we're almost there" (the promised land of self-sustaining recovery), the mythical recovery remains out of reach, no matter how much money is printed or borrowed and blown in fiscal stimulus.

There are several key reasons for this.

1. As noted yesterday, consumption is not investment, no matter how many times you call consumption "an investment." Investment is planting one's seed corn (capital) wisely. Consumption ($300 million fighter aircraft, $70,000 biopsies, McMansions in the middle of nowhere, endless subsidies of housing and banking, etc.) is turning the seed corn into sour mash and indulging in a drunken orgy of squandered debt that cannot and will not be paid back in dollars with today's purchasing power.

2. Borrowing money (debt) yields diminishing return. There's this funny little thing called interest that piles up in a borrowing spree that eventually siphons off much of the debtor's income stream, effectively impoverishing the borrower.

There's another funny thing called mal-investment or mis-allocation of capital: when the borrowed money is nearly free (low interest rates), then even poor quality bets (oops, I mean "investments") get funded. This is especially true if the winnings are yours to keep but any losses you incur are covered by Big Brother--the Federal Reserve or the U.S. Treasury--and the taxpayers the government has indentured to the banking sector.

3. Debt that cannot be written down because that would impair the politically powerful financial sector remains a tightening noose around the throat of the economy. Capitalism requires creative destruction, which includes the liquidation of bad bets and unpayable debt. Since that is verboten in our State-managed crony-capitalism system, the impaired debt remains on the books, supported by endless government subsidies.

Both the phantom collateral and the subsidies derange and distort the markets, leading to further bad decisions as risk has been obscured.

4. As analyst Ramsey Su recently observed, It is obvious that the central banks of the world have printed too much money, (which) all went into the wrong hands and now has nowhere to go. In the oft-propagated myth of central bank intervention, helicopters drop cash into the economy to stimulate demand for goods and services, sparking the "virtuous cycle" of a self-reinforcing recovery.

But the money isn't dropped into households or the real economy--it's dropped into banks, which use it for speculation or funding cronies' speculations and asset grabs. If the Federal Reserve had wanted to do a real helicopter drop of money, it could have sent $10,000 in cash to every taxpayer. Instead, it lavished at least $23 trillion in subsidies, backstops and guarantees on the Too Big To Fail banks and the mortgage industry.

This neofeudal distribution of $7 trillion in new Federal debt to taxpayers and the Fed's trillions in "free money" to the parasitic financial sector has carved out a vicious cycle of lower real household incomes, higher interest payments and new asset bubbles in stocks, bonds and housing. These trillions of dollars in freshly issued money have flowed to financiers who have used it to chase yield in one asset class or another.

As a result of these neofeudal policies, the economy is now perched precariously on the edge of multiple asset bubbles and demographically impossible-to-fulfill promises of entitlements and other giveaways (such as mortgage/housing subsidies and a variety of corporate welfare scams).

The carrot of self-sustaining recovery will remain out of reach, for the policies presented as the path to recovery preclude the "virtuous cycle" everyone desires.

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Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)

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

Thank you, Don B. ($50), for your supremely generous contribution to this site --I am greatly honored by your steadfast support and readership.

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The Proper Use of Credit

Great fortunes are built on the proper use of credit. Improper use of credit leads to mal-investment and wealth destruction.

We cannot understand our fundamental financial problems if we do not understand the proper use of credit. Credit has a key role in capitalism; credit-starved economies are underdeveloped economies, as economist Hernando De Soto explained in his masterwork, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.

In the chronically underdeveloped economies De Soto describes, households have assets--land, dwellings, small businesses--but since the assets do not have legally recognized status as "property" (because the system for recognizing and registering property is both cumbersome and corrupt), they cannot act as collateral for borrowed capital, i.e. loans.

As a result, the majority of the assets are "dead capital," difficult to sell, pass on to future generations or use as collateral.

Great fortunes are built on the proper use of credit. The borrower needs capital to expand his/her enterprise, and the lender needs a fast-growing enterprise with collateral and an income stream to support a low-risk, high-yield loan.

We can profitably look to Colonial America as an example of a credit-starved economy. In the wake of the Revolutionary war and the ratification of the Constitution (1789), the U.S. financial system was a mess: debts left by the war burdened the new government, which historian Thomas McCaw noted "started on a shoestring and almost immediately went bankrupt."

Differing views on the role of the central government, central bank and credit splintered the political elite, with Hamilton squaring off against Madison and Jefferson (though Madison's views were by no means identical to Jefferson's).

Meanwhile, in the real economy, ordinary farmers and entrepreneurs were desperate for long-term credit to fuel their rapidly growing enterprises. Though states were banned by the Constitution from issuing their own currency, states got around this prohibition by granting bank charters. The banks promptly issued the credit that an entrepreneurial economy needed.

The political elite, regardless of their differences, were appalled by this explosion of privately issued and essentially unregulated credit, but this access to credit--turning "dead capital" into collateral--fueled the astonishing growth of the U.S. economy in the 1790s and early 1800s.

The American economy in this phase was anything but orderly or well-regulated.Wild and risky better describe the financial and commercial chaos of the era, but this untamed capitalism led to more successes than failures, and the bankrupt enterprises and busted banks were absorbed by the fast growth of the real economy.

This chaotic explosion of credit and entrepreneurial drive was the opposite of central planning. Risk was everywhere; security in today's meaning did not exist.

The key to the proper use of credit is that it is invested in productive enterprises at a high rate of return. Risk cannot be eliminated, it can only be suppressed or transferred to others. This is the lesson of Benoit Mandelbrot's masterpiece, The Misbehavior of Markets: A Fractal View of Financial Turbulence.

All the complex machinations of the financial magicians in the 2000s to eliminate risk failed, for the profound reasons Mandelbrot explains.

A high rate of return (i.e. a high interest rate) leads lenders to transparently accept risk, and entrepreneurs to only borrow for the highest-return enterprises. A low-yield, high-risk investment is not worth funding. We call these mal-investments or unproductive uses of capital.

In our era, the Federal Reserve and Federal policies have massively incentivized mal-investment and unproductive uses of capital. Low interest rates destroy the needed discipline on both lenders and borrowers to only risk capital in the highest-return, lowest risk uses.

The Keynesian Cargo Cult's blind spot is they do not distinguish between productive and unproductive uses of capital. A bridge to nowhere is equally as worthy as a truly productive investment to Keynesians, because their cult believes that any borrowed-and-spent money is equally good at boosting their false idol, "aggregate demand."

But a truly productive investment of capital has a multiplier effect; it stimulates not just consumption but increased output and productivity. Mal-investments (duplicate MRI tests, McMansions built in the middle of nowhere, etc.) have no multiplier effect because they are simply forms of consumption--they are not even investments, though they are presented as investments by those feeding at the Federal/Federal Reserve trough of zero-interest credit and "free money" distributed by the government.

For credit to be productive, there must first be productive uses for the capital. In an economy with over-capacity in virtually every sector, a massive surplus of labor, a predatory financial sector and a grossly inefficient government in thrall to crony-capitalist cartels, truly productive investments are few and far between.

Instead we borrow trillions of dollars to squander on wasteful consumption and claim it's an "investment." Consumption is not investment, but this simple truth is taboo in our financialized, centrally planned Empire of Mis-Allocated Capital.


If you're a camper/backpacker or seeking basic emergency tools and supplies for your household, I invite you to check out campingsurvival.com. 

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Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)

Thank you, William S.. ($50), for your monstrously generous contribution to this site -- I am greatly honored by your steadfast support and readership.

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

Read more...

The Crowded Trade: Buy-to-Rent Housing

Demographically, it appears there is a generational glut of single-family suburban homes on the horizon.

A trade is officially deemed "crowded" when everyone is rushing into the market with eyes only on the upside and little concern for the downside--for example, buying homes as rentals. Here's a typical headline:

Investors Pile Into Housing, This Time as Landlords (source: WSJ.com)

Any market that gets crowded quickly experiences a corresponding rise in price and risk. Rational minds then start looking at the potential downside--for example:

Is The "Buy to Rent" Party Over? (Zero Hedge)

Why could the buy-to-rent housing party be running out of air? The basic reason is the difference between buying real estate as rental housing, which is a speculative market, and the rental property market itself, which is grounded in real-world supply and demand.

Simply put, if the supply of rental housing exceeds demand, rents (the cost of renting shelter) decline. That jeopardizes the fat returns the speculative buyer was counting on: Is There a Rental Supply Glut? (The Big Picture)

A key piece of the story is being left out of all the sell side research and financial press “housing recovery” stories. In the case of Phoenix — and most likely most other heavily distressed regions turned ‘investor havens’ throughout the nation — it looks like the missing piece of the story is the lackluster demand for the mega-supply and nowhere remotely close to the rental returns investors had hoped for unless you bought the right property in a relatively small window that slammed shut in early 2012.I have also believed for a long time that the lack of foreclosures — and the mortgage modification/workout bubble — would ultimately be a killer for those hoping to rent houses to distressed borrowers. Of course, that’s because the banks and gov’t let all these potential borrowers rent their own houses from them at 2% interest only for 5 years. And this is exactly how it’s playing out.

This is only one dynamic of many in the buy-to-rent stampede. Let's quickly review the other main dynamics.

1. Housing is clearly experiencing an echo bubble. No wonder, given the Federal agency and Federal Reserve subsidies: 3% down payments, super-low interest rates and a dearth of other investment opportunities:

The U.S. Housing Bubble Is Back

Housing Bubble II: But This Time It’s Different (Zero Hedge)

The "Yet-to-be-Named" Real Estate Bubble (Acting Man blog)

2. The Federal Housing agencies are openly transferring ownership of what are quasi-public assets (defaulted private homes owned by Fannie Mae) to the usual financier predators and parasites: private equity funds, hedge funds, investment funds organized by investment banks, etc.

Michael Olenick: How Fannie Enriches Private Equity Investors at Taxpayer and Homeowner Expense (Naked Capitalism, highly recommended)

Fannie Mae Begins Marketing Foreclosed Homes as Rentals

Structured Sales Transactions (i.e. the bundling and transfer of Fannie Mae owned properties to private capital)

In their desperate search for higher yields, these concentrations of private capital are buying thousands of houses and placing them in sprawling portfolios of rentals:

Blackstone to buy $1 billion worth of Tampa Bay homes for rentals

It’s About Time - JP Morgan To Enter The Housing Slumlord Trade

3. The demand for rentals ultimately depends on jobs, income and demographics.Demand for rental housing depends on household formation rates: people moving out of their parents' homes or the dorms creates demand for rentals. But they need jobs that pay enough to support the often-hefty rent for an apartment or house.

I have reprinted this chart from Doug Short many times because the foundation of the real-world economy is real wages, and an 8% decline in real wages does not reflect an economy with strong household formation:

As a percentage of the workforce, the number of fulltime employees is at multi-decade lows. Yes, it's possible for three or four part-time workers to rent a house together, but how much demand does this doubling-up create?

4. The basic premise of buy-to-rent--that people who lost their homes in foreclosure will need to rent a house--may be overstated. The number of homes in foreclosure--currently 1.5 million, according to RealtyTrac--may sound big, but compared to the entire U.S. housing market, it is marginal.

There are about 75 million owner-occupied homes, roughly 25 million owned free-and-clear (no mortgage); 130 million dwellings, of which around 111 million are occupied and 19 million are vacant. Of these, perhaps 4.5 million are second homes or vacation rentals. What We Know (and Don't Want to Know) About Housing (June 16, 2010)

How many households leave their foreclosed home and move into a converted garage, the family home, or an apartment? There are no reliable statistics (that I can locate), but if the Phoenix market described above is typical, the demand for rental homes may be more a figment of echo-bubble imagination than reality, at least in typical markets. (New York City and San Francisco are not typical.)

5. Demographics do not support robust household formation. Older folks are jettisoning the family home and moving into retirement communities, often in cities that offer amenities and nearby healthcare. If anything, it appears there is a generational glut of single-family suburban homes on the horizon: Housing and demographics (Acting Man blog).

6. A house is not a financial instrument: it is a real object in the real world, and it falls apart without constant maintenance and attention. The tenants are real, too, and they don't just spin off a 6% yield like a machine. They make demands for repairs, they get behind in the rent, they move out and create a vacancy, and so on. Real life has a very strong tendency to erode profit margins and net income in unexpected ways.

Crowded trades are often described as boats with everyone on one side. Boats loaded in this fashion tend to capsize once exposed to the slightest volatility (wave action). A crowded room is also a common analogy for a crowded trade: once the herd realizes the trade is no longer a guaranteed winner, the herd rushes for the exits, dumping their assets onto the market. This sudden rise in supply (inventory) causes prices to plummet.

The buy-to-rent boat is looking rather overloaded, and the bullish side's gunwales are only a few inches above the water.


A MARKET CLEARING EVENT: The Global End Game - Part II: CHS and Gordon T. Long discuss the cycle of deflation and the endgame of leverage, credit and phantom collateral:

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Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)

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

Thank you, Daniel M. ($20), for your amuch-appreciated generous contribution to this site --I am greatly honored by your support and readership.

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Debt = Serfdom

Debt-serfdom and the dominance of Financial Power are two sides of the same coin.

Let's be clear about three things:

1. Too Big to Fail financialization is the metastasizing cancer that has crippled democracy and capitalism.

2. Financialization feeds on expanding debt and cannot survive without it.

3. Debt is serfdom. I have covered this in depth for years:

The New Road to Serfdom: A Negative-Equity Mortgage (May 9, 2006)
The Company Store, Debt and Serfdom (October 24, 2008)
Debt-Serfdom Is Now the New American Norm (October 18, 2011)
The Origins of American Debt-Serfdom (October 19, 2011)
EU Fiscal Union = EU Debt Serfdom (December 7, 2011)
Debt Serfdom in One Chart (May 4, 2012)
By Incentivizing Debt, We've Guaranteed Debt-Serfdom and Stagnation (June 12, 2012)
The Road to Debt-Serfdom (January 25, 2013)

There are three key dynamics to debt-serfdom:

A. The serf is never free of debt, i.e. he/she is programmed to being indebted for life.

B. Most of the serf's income is devoted to servicing debt.

C. Most of the debt is unproductive: marginal-utility college education, needless auto loan, leveraged McMansion that loses value in the inevitable speculative bust, and so on.

There are many ways to state these fundamentals and shelfloads of books have been written to describe the many mechanisms of financialization and serfdom, but we can summarize the dynamics in a few additional points:

4. Financialization requires a corruptible, highly centralized State that enables the extreme concentration of financial assets and power. Recall that debt is the banks' primary asset; every loan a debt-serf takes adds to the banks' wealth and power:

5. This creates a feedback loop: the more concentrated the financial wealth and power, the more readily it can corrupt/influence the Central State to grant it quasi-monopolies and the privileges needed to gather even more concentrated power. This additional power makes it even easier to buy control of the State machinery. Democracy is reduced to a PR facade.

6. The Financial Powers need the Central State to encourage debt, which is the lifeblood of financialization. Without the State enabling and pushing debt (student loans, subsidized mortgages, mortgage interest deductions, Federal deficit spending funded by Treasury debt, etc.), the Financial Powers (i.e. the Dark Side) would be unable to continue concentrating wealth and power via metastasizing financialization, i.e. the dependence on ever-greater debt and leverage to generate profits, growth and taxes.

7. The Federal Reserve is the "ultimate power" in this financial universe. Hiding behind its PR "dual mandate" of "stabilizing inflation and employment," the Fed's real raison d'etre is to stabilize the economy so the Financial Powers' parasitic pillaging and plundering won't be disrupted by a financial crisis or depression.

The same can be said of the parasitic State, which lives off the taxes skimmed from the expansion of debt-based growth.

8. Not that the Fed cares about the "little people" hurt in a depression; what the Fed worries about is the result of depression, which is debt-serfs defaulting on their debts and refusing to take on more debt.

This leads to an inescapable conclusion: the only way to kill the metastasizing cancer of financialization is to "starve the Beast" of debt. This is akin to starving a tumor by cutting off its blood supply--in the case of financialization, that means reducing debt to a trickle.

With democracy crippled by an ever-rising tide of dirty money, the only way to destroy the Death Star (the Fed and the Too Big to Fail/Prosecute/Control banks) is to stop borrowing.

Pleading with the President or Congress is like asking a cancer to please stop growing. Don't waste your breath. Talking isn't going to fix anything.

Debt is the mechanism of the Financial Powers' dominance and the chains of our serfdom. Eliminate debt and you eliminate the foundation of banks' power and the financial bondage of serfdom. This mechanism of neofeudal dominance is not unique to the U.S.: 500 Million Debt-Serfs: The European Union Is a Neo-Feudal Kleptocracy (July 22, 2011)

The only way to restore democracy is to cut off the blood flow of the financializing cancer, i.e. cut off debt. We have been programmed to view debt as necessary as air--it is impossible to go to college, start a business, own a vehicle or buy a house without massive debt.

It is not ordained that any of these requires a lifetime of debt. Our acceptance of debt is a programmed but still voluntary acceptance of serfdom.

It is possible to earn a university degree without going into debt, but it requires embracing an entirely unconventional approach based on sustained, goal-oriented frugality, thrift and outside-the-box thinking. The Nearly-Free University (November 15, 2012)

How Frugal Are You? (August 7, 2010)

Debt-Free U: How I Paid for an Outstanding College Education Without Loans, Scholarships, or Mooching off My Parents by Zac Bissonnette.

If an entrepreneur absolutely needs $20,000 to start his/her enterprise, then raise the money via crowdsourcing. If you must borrow money, only do so if you have a credible plan to pay it all off in the first year. If you cannot expect to do so, then your proposed enterprise simply isn't profitable enough to invest in.

If you must borrow money to buy a used vehicle, then put down $5,000 in cash and pay off the $5,000 balance within a year. Get a loan from a local credit union rather than from a TBTF bank.

If you must buy a house, then go in with others and buy a multi-unit building or a McMansion that can be shared, and only buy if you can pay off the entire mortgage with your current income in 3-5 years.

We cannot expect to control the vast derivatives trade in credit default swaps and synthetic collateral, but we can remove the real-world collateral of debt from the leveraging machine. With few mortgages, auto loans, student loans, etc. to securitize and leverage, the Financialization cancer will slowly die of starvation. Once its ability to spread is halted and its profits plummet, its political clout will decline in equal measure.

Though it would dearly love to, the State cannot force anyone to take on debt except as taxpayers. We do not have to remain debt-serfs, nor accept our servitude as unavoidable or fated.

Debt = serfdom. There is another way to live, frugally, with only short-term debts that are paid off in a few short years. We either accept the consumerist-narcissist debt-serf programming or reject it. We are neither victims nor bystanders. The choice is ours.

Narcissism, Consumerism and the End of Growth (October 19, 2012)

Narcissistic Consumerism and Self-Destruction (October 20, 2012)


A MARKET CLEARING EVENT: The Global End Game - Part II: CHS and Gordon T. Long discuss the cycle of deflation and the endgame of leverage, credit and phantom collateral:

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Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

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

Thank you, Ray W. ($50), for your astonishingly generous contribution to this site --I am greatly honored by your steadfast support and readership.

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