Tuesday, October 23, 2007

This Week's Theme: Harsh Realities

Web of Deception and What Must Be Hidden

When someone deceives you, these questions come to mind:
What's their motivation?
Who are they trying to deceive, and why?
What are they hiding, and why?
Who benefits if the lie is accepted as truth?
What are the consequences of the truth being revealed?

You and I and everyone else is being lied to on a grand scale, so we should be asking these questions. Here is a chart of what's being hidden:

The short answer to the above questions is simple; everyone generating huge profits from the debt-based shell-game which is the global economy is desperate to hide the truth from everyone who isn't colluding on the ill-gotten gains.

Let's consider each player and their lies.

1. The Federal Government: the Fed, Treasury, agencies and elected officials. The government is a huge beneficiary of debt-fueled prosperity: tax revenues rise, giving politicians more free candy to spread around to grease the palms of their wealthy contributors and distract the voters with entitlements and other free-spending goodies.

The nightmare scenario for any politician is a shrinking budget. when some budget item has to be cut, then some donor or constituency will be screaming. Not only is this unpleasant, it might cost the politico the next election. much better to lie and keep the debt machine rolling onward and upward.

How does the government deceive us? Let's count the ways.

Employment/Unemployment: Job hunters vanish without a trace after six months, and ghost jobs are created in the hundreds of thousands by a bogus "birth/death" model.

Inflation: As even the mainstream media is now admitting, official inflation is grossly manipulated to appear half of the true rate (3% vs. 6%). This lowers payments to those costly entitlement retirees and maintains the illusion that interest rates can be kept low because inflation is so low.

GDP: The GDP number always comes in "hot" and is usually revised downward later, when nobody's looking.

Federal Deficit: The Federal deficit contains a huge deception: the Social Security surplus is spent to offset current spending, reducing the "official deficit" by hundreds of billions each and every year. In exchange for these trillions, the Government issues the Social Security fund an IOU. The IOU is now about $4 trillion.

If this fiscal legerdemain were outlawed, then the true Federal deficit would be double or triple the "official" deficit.

"A strong dollar is in the interests of the nation." Hahaha... is that why you've engineered a 33% decline in our buying power since 2002 (the dollar index dropped from 120 to 80 in that time and is currently 78.) I'd hate to see what would happen if a weak dollar were in our interests.

All these accounting tricks serve one purpose: to deceive the citizenry and the world into believing the U.S. economy is stronger than it actually is.

2. The government has opened the floodgates of money and loosened banking regulations to help all those poor investment bankers. Regulators who should have provided oversight of the lending, mortgage and derivative markets have been idling away their time, doing anything but their job. Who's benefitted? Their pals churning all the origination fees, that's who.

3. The banks sold hundreds of billions in "safe investments" to institutions, domestic and foreign alike. Only now are the true risks and illiquidity of these SIVs, MBS, CDOs, etc. being revealed in the grim light of day.

4. Our trading partners who export vast quantities of goods to the U.S. (and who run stupendous trade deficits with the U.S.) have bought trillions in U.S. debt to keep us afloat. Since Americans don't save anything, somebody has to give them a credit card to fund all that spending.

So what's hidden? How utterly dependent the U.S. is on foreign buyers of Treasuries and debt to keep U.S. interest rates low. That's another little wink-wink, of course; when the Fed slashed the Fed Funds rate a half-a percentage point, headlines blared "Fed Cuts Interest Rate." Meanwhile, back at the Long-Term Interest Rate Ranch, 30-year mortgage rates actually went higher after the Fed's cut. Huh? Yes, that's right--because the market sets the long-term interest rates, not the Fed. Not that you'll ever read much about that, though.

So the "debt junkies" in the U.S. get their "fix" of abundant, low-interest debt from the "pushers" who need the junkie to keep buying exports and oil.

5. Exporters weaken their own currencies to keep goods affordable to the U.S. debt junkies. No matter how low the U.S. dollar sinks, the Japanese Yen and the Chinese Yuan stay at about the same exchange rate. Curious, isn't it? The Euro rises, the Canadian dollar rises, the Swiss Franc rise, but the Yen drops and the Yuan nudges up a couple percent.

The Pushers are happy to keep the cost of their "product" affordable to the hapless debt junkie. Manipulating Forex (foreign exchange) rates and sopping up another trillion in U.S. debt--hey, it's all in a day's work to keep the exporting profits rolling in.

6. The biggest supplier of debt junkies--a.k.a. debt serfs--is the real estate industry. Debt serfs couldn't believe their good fortune: not only were their houses rising in value at a fast clip (a rise fueled by subprime mortgages and "no document" loans), but banks and mortgage brokers were happy to loan them stupendous sums of practically free money on their rising equity to buy more furniture, flat-screen TVs, additions, carpeting, and heck, a second or third "investment property" ( i.e. speculative leveraging to buy more real estate.)

Whoo-hee, it doesn't get any better than HELOC (home equity line of credit) Heaven. And the lenders were happy to keep it all going onward and upward--the origination fees and re-finance fees were in the billions.

As for financial trickery--the real estate industry is a master. Sales figures for new and existing house look great--and then the number of escrows that actually closed is released quietly much later--a much lower number. Listing are "refreshed" so potential buyers won't see the original asking price or how many months the house has been on the market. Buyers were told they could refinance their option-ARM loans into a fixed rate virtually any time they chose to; not true, but so what? The buyer signed and the origination fee was pocketed. Yeah for our team!

7. The key was the astounding creation of new money via lending. OK, you're a bank. You need a paltry 1% cash reserve. So bank $1 million in deposits and you can write $100 million in new loans tomorrow, created right out of thin air.

But what a bother to be limited to a mere 100-fold leverage. So sell that first $100 million to a European bank as an SIV (structured investment vehicle) which puts it off-balance sheet--then write another $100 million in new loans. Rinse and Repeat. Is there any wonder that banks are terrified of the merry-go-round being shut down?

8. All that free cash from newly enriched homeowners spread everywhere: into more real state, SUVs, vacations, and even into the stock market. And since the market never goes down, it's also "safe" to margin your account and buy 50% more stock than you could have with only cash (which was borrowed off your house).

And to maintain the illusion of growing profits, corporations cook their books a la Enron. The game is still being played; liabilities are shunted off the balance sheet, profits are goosed with phony pro-forma numbers and trickery, analysts' estimates are magically exceeded every quarter by a penny, and insiders rake off hundreds of millions in stock option profits while the gullible debt serfs plow their 401K and IRA contributions into the market at the very top, having foolishly believed the insiders' accounting.

9. Investment banks have written hundreds of trillions of stock market derivatives--for nice plump fees, of course. What's the risk? Why, the market is safer now with all these derivatives floating around out there marked to model/myth/back-of-this-envelope.

10. And through it all, the mainstream media--endlessly worried about its own profitability-- soaked up hundreds of millions in advertising revenues from every business benefitting from the debt bubble. Realtors, furniture sales, home improvement stores, you name it--even as ad income from classified employment ads disappeared, these stalwarts of the debt/housing bubble economy were happy to spend millions on print and broadcast ads.

Which explains why the media has been asleep at the wheel until things are so obvious even they can't ignore them any longer. The media discovered the housing bubble a mere 18 months after it broke, and it is now discovering that inflation--I'm shocked, just shocked-- does not reflect reality.

What happens to media revenue and profits when the recession takes down their advertisers? And that's why the media and everyone else has kept all the web of deception under wraps as long as possible--because once the wheels finally fall off, so do their immense profits.

Correspondent Zeus Y. submitted a link and a comment which reveals how the financial deception has been disseminated as propaganda; even as the numbed citizenry are brainwashed into how "prosperous" they are, reality intrudes:

"The Karl Roves think they can “create” reality by simply gulling people into believing that what is good for Wall Street is good for everyone, and then bemoan the liberal media for getting people to be “irrationally” pessimistic as they are having to make choices between bread and heat. Man, something here is screwed up and it isn’t the people who are suffering."


What used to last four days might last half that long now. Pay the gas bill, but skip breakfast. Eat less for lunch so the kids can have a healthy dinner.

Across the nation, Americans are increasingly unable to stretch their dollars to the next payday as they juggle higher rent, food and energy bills. It's starting to affect middle-income working families as well as the poor, and has reached the point of affecting day-to-day calculations of merchants like Wal-Mart Stores Inc., 7-Eleven Inc. and Family Dollar Stores Inc.

Pantries that distribute food to the needy are reporting severe shortages and reduced government funding at the very time that they are seeing a surge of new people seeking their help.

While economists debate whether the country is headed for a recession, some say the financial stress is already the worst since the last downturn at the start of this decade.

From Family Dollar to Wal-Mart, merchants have adjusted their product mix and pricing accordingly. Sales data show a marked and more prolonged drop in spending in the days before shoppers get their paychecks.

Does that sound like "prosperity," "low inflation," a "growing economy," and "a strong dollar" to you? Frequent contributor Michael Goodfellow sent in this disturbing financial fact:

An article in yesterday's Financial Times said that, "Only $9.9 billion of home equity loan securitizations have come to market since July 1---A 95% DECLINE FROM THE $200.9 BILLION IN THE FIRST HALF OF THIS YEAR AND A ROUGHLY 92% DECREASE FROM THE SAME PERIOD LAST YEAR."

Funny, isn't it, how little notice that stunning contraction received in our media.

There is something you can do to stop the financial deception juggernaut. Astute readers Charley R. and Graham M. recommended the petition analyst Karl Denninger has started, Financial Petition. Karl's blog Market Ticker has been listed in my right sidebar for many moons, and Karl is one of my heroes for starting this campaign to end financial deception.

You can also write your congressperson a personal letter; their staff supposedly give more weight to private letters than petitions. You can find congressional addresses via a web search.

Thank you, Rudy B., ($20.00) for your generous and much appreciated donation to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

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