Thinning The Soup

SUBHEAD: Trillions go to the pockets of wealthy investors while Americans thin the soup of their lives to pay.
By John Schettler on 28 March 2009 in The Writing Shop -
( Image above: A bowl of wonton soup.
[Editor's Note: This is a excerpt from the beginning of this article. Click on link above for full article.]
When times got hard during the last Great Depression the soup got thinner, but people still ate. Indeed, the whole concept of thinning the soup stands now as a metaphor for how we can come through these hard times to a new sense of ourselves—a new society. The image holds within it the necessity for frugality and simplicity, but also the importance of community. Soup is thinned so that it can feed more people, and perhaps each can contribute something to the brew, extending through the talents and abilities of all who come to sit at the table. And no matter how hard things got, people still ate. That last bit is essential to bolster our hope in times of crisis. The world isn’t ending, it’s changing.
This is what we have to do now to survive and carry on—we have to build new community with one another, gather in a harvest from each person, and thin the soup of our lives so that there will be enough for everyone, and all will be taken care of. It will not be anything like the old life we lived, where constant consumption on credit fed us a sense of false abundance. If we wanted something, we didn’t have to work or save for it. Instead we just swiped the plastic and used someone else’s money to buy it then and there. The operative energy of the Brave New World was to shorten, as much as possible, the interval between desire and fulfillment. All that is over now. We will rediscover patience, endurance.
There is a great deal of fear, anger and frustration out there now, because all the wealth investor wheeler dealers have staked out their place ahead of us in the soup line. The news is simply too bad to be ignored any longer. For many, those who have lost jobs, homes, retirement nest eggs, the “Great Recession” is very real indeed, not something they read or hear about in the news. It is ever more frustrating to hear about billions going to banks and insurance companies while you struggle to pay your bills, with no bailout in sight. But much of the news itself is often just a sideshow masking far graver circumstances that go unreported.
Take the media boil up over AIG bonus money as a good example—a red herring that masks the greater scandal that billions of taxpayer dollars have gone to pay off “counterparty” investor fat cats at big financial institutions. Counterpunch reported: “White House economist, Larry Summers, on whose watch as Treasury Secretary in the Clinton administration financial deregulation got out of control, invoked the 'sanctity of contracts' in defense of the AIG bonuses.” This while labor union contracts were amended without a second thought to help big corporations cut costs. And let’s not forget the millions of credit cars contracts amended willy nilly by the banks, who raise interest at their whim, and even sell off the account in securities schemes without the borrower’s agreement. Sanctity of contracts?
Karl Denninger was on point with this incisive comment: “I love the whining about "contract law". Where were those complaining about this when AIG wrote CDS against no capital? Contract law calls that fraud folks—intentionally inducing someone into an agreement that you have no intention or ability to perform on. Further, we can do fraudulent concealment too, which is what the law calls it when you hide the fact that you're functionally insolvent for more than six months as it becomes apparent to you that you won't be able to perform, and while you know this, you draft "retention bonuses" for the very people that put your company in this position.”
The massive media coverage of the $165 million used for AIG bonus money was the biggest media distraction of the month. Not only did it ignore the issue of where all the bailout money has really gone, by the billions, it also served to mask what was one of the most significant Fed moves of the last century.
The Real News
Mike Larson, of Money & Markets reported: “Specifically, the Fed said this week that it will ramp up its purchases of Fannie Mae and Freddie Mac Mortgage Backed Securities (MBS) from $500 billion to a whopping $1.25 TRILLION in the coming months. The Fed is also going to double its purchases of Fannie Mae, Freddie Mac, and Federal Home Loan Bank bonds to $200 billion from $100 billion. And for the icing on the cake …The Fed will buy as much as $300 billion in longer-term U.S. Treasury securities.” How does the Fed “buy” Treasury bonds? The answer is that it simply prints the money required. So the big news of the month was not that a handful of insiders made off with bonus money at AIG—it was that the Fed has begun the process of monetizing the massive US debt, and a loss of confidence in the dollar will soon follow. (In fact, the dollar took its worst plunge since 1985--see chart below.) There are only about $850 billion dollars currently in public circulation, most of that being held overseas, with about $250 billion circulating here in the US. Bernanke is about to thin the soup by about 33% when he prints $300 billion more!"
John P. Hussman, of Hussman Funds thinks the situation is even worse: “Last week, the Federal Reserve announced its intention to purchase a trillion dollars worth of Treasury debt by creating the little pieces of paper in your pocket that have 'Federal Reserve Note' inscribed at the top. In effect, the Fed intends to monetize the Treasury debt in an amount that exceeds the entire pre-2008 monetary base of the United States.”
Eric deCarbonnel, of the Market Skeptic goes one step further: “The Fed is planning moves that would more than double its balance-sheet assets by September to $4.5 trillion from $1.9 trillion. Whether expressing approval or concern over the Fed’s intentions, most commentators fail to understand the real magnitude of the projected expansion of the US monetary base.” He claims the Fed moves will amount to an increase in the dollar supply by a factor of 15. The effect will be a debasement of the currency and a fire sale on good US assets, all lost in an effort to free the banks from the consequences of their bad securities debts.
There is already rumbling in the ranks concerning the dollar. Countries have been trying to wean themselves from having to pay dollars for their oil contracts for years. Then Vladimir Putin called for an end to the dollar as the world’s reserve currency, and China has now seconded that motion. The UN is also recommending that the world ditch the dollar as a reserve currency. Something big is afoot. The April G20 meeting could be a harbinger of “change” that America may not like at all. Imagine a monopoly game where you’re the banker, and well ahead in the game, but the other players suddenly agree that there will be a new currency introduced, and a new central bank to govern transactions—a currency based on the collective wealth of their properties, and that all your cute stacks of colorful dollars are now virtually worthless. Get the picture? The folks that hold our debt are losing faith in the old greenback. The “full faith and credit” of the US government isn’t counting for much these days.
What’s odd about that chart is the huge slice of the pie held by... the Caribbean? These little island states have the collective GDP of a molehill, but they’ve been great places to stash dollars looted from the American public—wonderful little tax havens—now synonymous with the term “offshore bank.”
So look what happened to the dollar as soon as Bernanke announced his intention to buy $300-billion in Treasury Bonds, by simply printing the money required to make the purchase... an amount exceeding all dollars presently in circulation here in the US...
Yet mega news of this sort doesn’t even make it to the copy desks of our mainstream “press” these days, let alone reach the minds of the Average Joe and Soccer Mom struggling in the real economy. Real people count dollars in twenties and sometimes hundreds - not billions. The average person is too preoccupied with their own thinning soup to comprehend what is really going on, but the effects will be devastating when the currency debases in the months ahead.
Marketwatch reports: “The results of a bevy of surveys found a growing number of consumers are only a couple paychecks away from a household collapse even as many scramble to shore up savings. Rainy-day funds appear to be a distant memory as households burn cash to cover food and energy bills as well as mortgage and car payments.” These are the folks that provide all the bailout money the government is throwing into the pockets of the wealthy investor class. Then I see some petty financial adviser remarking that the supermarket chains may be 'good plays' as people will spend for food first when they are at the end of their rope. There’s something obscene about that—a class of beings out there, who consider all the rest of us to be 'sub-prime', is still gaming the system, like vultures looking to profit on the demise and hardship of others. The video headline read: “Put your money where the food is!” Well I’d like to tell you where you can stuff your friendly investment advice, and so would millions of others.
The one truth in that ad is this: things will cost a good deal more when Bernanke is through expanding the Fed balance sheet later this year. Putting your money where the food is may not be a bad idea right now. And by this I mean stockpiling food itself, not buying stock in market chains. If the dollar collapses the shelves will be empty in most markets in just a matter of days. The soup may be hard to find.
For so many in the 'real economy' the soup is already thin indeed. Over 50% of Americans have but a month in reserve if they lose a job. $40% say they still come up short each month even if they are working. 57% plan to spend less, but polls showed zero percent, no one, planned to spend more in the coming year. This statistic alone should put an end to any of this silly talk about a recovery starting this coming year. People aren’t just sitting on piles of cash and refusing to spend because they are worried about the future—they just don’t have the cash. Period. They can barely stretch one paycheck to the next—this while an executive at insurance giant AIG got paid an astounding $1-million per month as 'retention salary' so the company would not lose his 'expertise', the same expertise that saw the company lose over $60-billion in a single quarter due to the man’s failed credit default swap schemes. What a job! Where do I sign up?
James Galbraith of the Washington Monthly hit the essence of the so called “credit crisis”--not just a problem of banks refusing to lend, but a crisis at the household level that will not soon be cured: “Credit is a contract. It requires a borrower as well as a lender, a customer as well as a bank. And the borrower must meet two conditions. One is creditworthiness, meaning a secure income and, usually, a house with equity in it. Asset prices therefore matter. With a chronic oversupply of houses, prices fall, collateral disappears, and even if borrowers are willing they can't qualify for loans. The other requirement is a willingness to borrow.... In a slump, such optimism is scarce. Even if people have collateral, they want the security of cash. And it is precisely because they want cash that they will not deplete their reserves by plunking down a payment on a new car. The credit flow metaphor implies that people came flocking to the new-car showrooms last November and were turned away because there were no loans to be had. This is not true -- what happened was that people stopped coming in. And they stopped coming in because, suddenly, they felt poor.”
The sad fact is that our economy was running on free and easy credit. What we are seeing now is what the real economy always was beneath the plastic. This is what it’s like without all that home equity lending and credit card spending. This is reality—people only able to spend what they actually earn, and still coming up short each month on basic necessities. Yesterday’s economy was delusional. You can throw “discretionary spending” out the door in this environment. But like banks stuck with securities they can no longer sell, average people are stuck with recurring bills and high rents based on life styles from the boom times.
This is why all the new plans put forward by Geithner and Bernanke will not succeed. Quite simply, people are already so deep in debt that they cannot service the payments, and they certainly cannot take on more debt by borrowing to spend. This is fundamental. It was the argument I made years ago in my article “Perfect Storm,” back when everything was booming and houses were flipping like pancakes. I argued debt was unmanageable, on both a personal and national level, and it is this massive debt that we must now account for before this crisis will end. Holding it off balance sheet is just fiscal denial of reality. Transferring it to present and future generations of taxpayers with programs like the new Geithner bailout bonanza is just a very expensive way of buying time. Eventually the debt must be faced and eliminated. People without jobs, behind on payments, crushed with revolving credit card interest of 30% will simply NOT borrow to start a new spending spree in this country, nor will banks even contemplate lending to them, in spite of what Geithner, Bernanke and others may hope. The banks will take taxpayer funding to zero out their bad assets, but don’t hold your breath waiting for them to start the zero doc lending craze again. It’s over. It’s cash & carry now. People feel it, deep in their bones, and the old consumer craze is simply not coming back. And the cash may lose its value sooner than we think.
Peggy Noonan, of the Wall Street Journal wrote an excellent Op ed this month where she talked about the pervasive depression settling over the country: “People sense something slipping away, a world receding, not only an economic one but a world of old structures, old ways and assumptions.” She is simply noticing one of Dimitri Orlov’s sign posts on the road of collapse. Orlov stated that the collapse was as much psychological as anything else, as people are suddenly forced to change the way they think about the world. It was not the change they expected when they flocked to the Obama campaign by the millions, for change can be painful too.
Dimitri Orlov, who witnessed the collapse of the Soviet economy, provides us with some incisive observations on how things change: “Each stage of collapse also corresponds to a certain set of beliefs in the status quo, that is about to go by the wayside… First faith in business as usual is lost. Risk can no longer be assessed and financial assets can no longer be guaranteed. Financial institutions become insolvent and access to capital is lost. Next faith that the market shall provide is lost. Commodities are hoarded. Import and retail chains break down. Widespread shortages of survival necessities become the norm.” Then as all the programs and bailouts fail to reverse the decline, the crisis becomes political as people lose faith in government and fall back on their own thinning resources. It is only when they begin to lose faith in each other that the real danger comes, for Society cannot hold together if this becomes 'every man for himself'.
In the meantime, gun sales are up, and ammunition selling out faster than Apple iPhones. Want some 9mm ammo these days? Good luck finding it. And that is another sad fact about what the fear and uncertainty has done to people. Anyone moved to buy a gun and stock up on ammo is really scared. It’s an admission of that loss of faith in the entire structure of our community and society is becoming as thin as the soup—crossing a psychological line Orlov says we must hold at all costs.
The Economist, has a special 'Economic Intelligence Unit' that just released a special report of what they see coming. The title was 'Manning the Barricades', and if that doesn’t get your attention, have a look at the table of contents! Their worst case scenario is about a dollar crash that leads to political and social instability across the world, particularly in the formerly “emerging” and now “submerging” markets.
[Editors note: Here is the link to the Economist report with a pdf warning.]
I’ve been writing about the crisis we are now involved with for over a decade now, ever since I first published 'Big Brother in the Brave New World' in 1998. That article talked about the vast social engineering of our society, and how Huxley seemed to triumph over Orwell in the way Western society was ordered. But behind the mind-numbing advertising, the endless flow of credit that fueled ever growing sales, I also argued that Orwell’s Big Brother was still alive and well. He was just wearing a kinder face, influencing by enticement instead of compulsion.
Yet under Bush and Cheney, we saw a return to the use of fear as a means of forcing public policy. The most powerful nation on earth was supposedly beset by “enemies who wished us harm.” America was afraid of a rag-tag band of Arab terrorists, with a leader on kidney dialysis, hiding out in the Hundu Kush.
The so call 'threat' posed by this boogie man prompted us to abandon the Geneva Conventions; abolish Habeus Corpus and Possee Comitatus; set up military tribunals to circumvent the courts; ignore the FISA laws; initiate programs of 'rendition' and torture; set up massive surveillance operations aimed at our own citizens; build detention facilities all over the US; establish 'NORTHCOM' and a 'Department of Homeland Security'; assign special brigades of the Army for deployment on US soil; contemplate things like 'Real ID'; a system of digital 'papers' we would all have to carry; not to mention the aggressive wars launched all over the Middle East. And while all that was distracting the media and public, the real terrorists on Wall Street were quietly levering up to bankrupt the nation, with no motive greater than simple greed.
As Bush and Cheney prepared to depart, the all out looting of the public treasury began, by the trillions. It continues unabated. If you ever saw the popular HBO series 'Rome' think of Pompey fleeing Rome with a wagon full of gold, and how the bullion was suddenly 'lost'. What we have witnessed in the last six months is nothing less than a grand heist, and no one quite knows how the trillions of lost dollars will ever be recovered again--or who they all were paid to.
I’ve been making this argument for years, that the war on terror was nothing more than a misguided distraction, a charade, while the real threat to the nation wore three piece suits in the boardrooms of our banks and investment firms, in the trading pits and hedge funds that gambled so recklessly with our future.

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