The Final Act

SUBHEAD: In 2019 the US budget deficit was more than a trillion dollars - 16% more than 2018.

By Dmitry Orlov on 19 December 2019 for Club Orlov -
(https://cluborlov.blogspot.com/2019/12/the-final-act.html)

Image above A tidal wave of debt failure heading for home. From original article.

[IB Publisher's note: Hunker down for Merry Christmas... and as much as a Happy New Year as possible. Things may seem to be coming apart at the seams... but then again they always are - just as new things always come along and thrive. We are having our annual eggnog party tonight and we hope you find a glowing light in this darkest time of the year. In a couple of days the sky will be brighter, and isn't that is what Christmas time is all about. We know winter is coming, but there are signs it too will wane into spring.]

In processing the flow of information about the goings on in the US, it is impossible to get rid of a most unsettling sense of unreality—of a population trapped in a dark cave filled with little glowing screens, all displaying different images yet all broadcasting essentially the same message.

That message is that everything is fine, same as ever, and can go on and on. But whatever it is that’s going on can’t go on forever, and therefore it won’t. More specifically, a certain coal mine canary has recently died, and I want to tell you about it.

It’s easy to see why that particular message is stuck on replay even as the situation changes irrevocably. As of 2019, 90% of the media in the United States is controlled by four media conglomerates:\

• Disney ABC
• Viacom CBS
• Comcast NBC-Universal
•  AT&T Time-Warner

Together they have formed a corporate media monoculture designed to most effectively maximize shareholder value.

As I wrote in Reinventing Collapse in 2008, “...In a consumer society, anything that puts people off their shopping is dangerously disruptive, and all consumers sense this. Any expression of the truth about our lack of prospects for continued existence as a highly developed, prosperous industrial society is disruptive to the consumerist collective unconscious.

There is a herd instinct to reject it, and therefore it fails, not through any overt action, but by failing to turn a profit because it is unpopular.”

Two years earlier, in a slideshow optimistically titled “Closing the Collapse Gap” (between the USSR and the USA), I wrote: “...It seems that there is a fair chance that the US economy will collapse sometime within the foreseeable future. It also would seem that we won’t be particularly well-prepared for it.

As things stand, the US economy is poised to perform something like a disappearing act.” And now, 12 years later, I believe I am finally watching what amounts to preparations for that act’s final rehearsal; the ballet troupe is doing stretching exercises and the fat lady is singing arpegios to warm up…

Clearly, this final act is yet to be performed. The media replay loop continues to play, keeping the populace convinced that the future will resemble the past (except, perhaps, it will have more wind generators, solar panels and electric cars).

The populace continues to be persuaded to go out and shop for (or, more frequently now, order online) things it doesn’t need, to be paid for by money it doesn’t have.

Of course, there have been changes. The populace in the US has been doing progressively worse. Drug addiction and suicide rates have skyrocketed while rates of childbirth have plummeted. The purchase of a home is now out of reach for the vast majority of young couples.

Artificially rosy unemployment statistics hide the 100 million or so people who are considered “not in labor force” (because they lost their jobs some time ago and haven’t been able to find another one).

Uniquely among developed nations, life expectancy among white males—historically the most economically active and prosperous part of the population—has been dropping.

These are all negatives, but neither any one of them nor any combination of them adds up to anything that could cause the US economy to undergo a spontaneous existence failure.

Nevertheless, it is possible to build a convincing case that Rome is, to put it figuratively, burning. To continue with the metaphor, evidence that there is some fiddling going on is particularly compelling.

Overall, there is a steady backing away from addressing the substance of any problem and a concerted effort to maintain appearances at all cost.

Take the trade war with China, which has been going on since early 2018. Trump has recently declared a major victory in it, but upon examination signs victory are impossible to discern.

In 2017 the US ran a $750 billion trade deficit with China on $3.3 trillion of trade (22.7%). In 2018 it has jumped to $930 billion on $3.8 trillion of trade (24.4%).

China has found ways to parry each of Trump’s thrusts by imposing countertariffs. After two years of this sort of World War I-style trench warfare, in which the US has been slowly losing ground, it became clear that the US doesn’t have any means to put pressure on China.

And so Trump suddenly declares victory; not a full victory (that will have to wait until after Trump is reelected for his second term) but a victory nonetheless, because the Chinese have supposedly agreed to buy an extra $200 billion worth of US exports, $50 billion of them of agricultural exports from states that voted for Trump in 2016. But Trump is lying to his supporters.

Over the past two years the Chinese have imported roughly $24 billion of agricultural commodities from the US, and sources close to the trade talks have said that the Chinese have agreed to increase these imports by just $16 billion, putting the total $10 billion short of the $50 billion mark.

Even then, the US agricultural sector would have to rapidly scale up production by a factor of 1.6—and this is not at all likely.

The farmers will discover this only after they vote to reelect Trump, but that’s not Trump’s problem. Nor was it Trump’s problem when in 2017 the Chinese promised to buy $120 billion of US liquified natural gas exports and then the US wasn’t able to provide anywhere near that volume.

And now that Russia’s Power of Siberia pipeline is operational and ramping up volumes, while US fracking companies are going bankrupt left and right, the question has become largely moot.

The AG promise is just a replay of the LNG promise at a smaller scale. Appearances are all that matter, and appearances are what Trump delivers every time.

And if his voters want to believe—who’s to stop them? Even though it is clearly heading toward a defeat for the US as a whole, the trade war with China is definitely a huge positive for Trump: all he has to do to win personally is periodically deliver promises that others won’t keep—but that’s not his problem.

Another net benefit for Trump is the never-ending impeachment saga. It has kept him in the media limelight and has allowed him to pretend that he is prevailing heroically against great odds while making his opposition look ridiculous in the eyes of his supporters.

After the “Russian meddling” fable unraveled, an even more preposterous rationale for impeachment has taken its place.

An attempt to impeach Trump for refusing to cooperate with a congressional investigation is in the process of failing, since anyone with more intelligence than a bucket of California penis fish should know that it is up to the courts, not up to the legislature, to resolve disputes between the legislature and the executive.

All that remains now is an alleged abuse of power by Trump. Apparently, it is a no-no for a US president to ask a foreign leader to investigate a US presidential candidate for a variety of crimes such as corruption, bribery and money-laundering.

This may all seem quite ridiculous, but it serves a purpose: it allows Trump to clean up on free publicity and to continue fiddling (tweeting, in his case) as Rome burns.

But what has set fire under Rome is not the decrepitating state of US society, or the permanent and permanently worsening trade imbalance with China, or the never-ending impeachment farce. It is the incipient failure of the US dollar.

 For those who have been paying careful attention, the surreal nature of the proceedings, and the fact that results no longer matter—only appearances do—have become perfectly obvious, but they are a tiny minority.

What has allowed the politicians and the media to exploit the general public’s innate normalcy bias and to keep the media replay loop going without too many people catching on to what’s really happening was (note the past tense!)... the ability of the US government (with the assistance of the Federal Reserve, which is a government-linked but essentially private entity) to paper over the gaping chasm in the nation’s finances by issuing debt, in the form of US Treasury paper.

The US Treasury has been able to exploit its “exorbitant privilege” to issue internationally recognized and traded debt instruments denominated in its own currency—the US dollar—which has been the world’s main reserve currency for many decades.

The reserve currency status has conveyed a certain aura of security and reliability (paper money is, after all, pretty much just a confidence game) and has supported the world’s largest and most liquid financial market.

Anybody anywhere could put up US Treasury paper as collateral for a loan and get a low interest rate because that paper was considered as good as “real money” (whatever that means). And then that scheme suddenly broke.

It is difficult to say what caused the confidence game to fail. It could be just the inexorable and ever-accelerating increase in US government debt. It could be the blatant decoupling between the growth rate of the US economy and the rate of increase of its indebtedness.

It could also be the fact that much of the world is making a concerted effort to walk away from the US dollar as a reserve currency and as a means of exchange in international trade (Russia has sold off almost all of its US debt; China’s hoard is much larger but it is also gradually selling it off).

It is unclear what was the ultimate cause, but what is clear is that in August of 2019 something finally snapped, and USTs went from “good as real money” to “stuff nobody wants to hold.”

I first wrote about this in September when it became clear that real trouble was brewing in the market for US debt. Now, three months later, the situation has gone from bad to worse, and it would appear that the market for USTs definitevely broke.

I will try to sketch out what that means for the US economy and society later on (spoiler alert: nothing good) but for now I just want to lay out some of what has happened.

In the meantime please take your normalcy bias and put it some place safe (in case you need it later, although I have no idea what for).

Previously, when it was clear that an overburden of bad debt could trigger financial collapse at any moment, the Federal Reserve (which is in charge of printing money) engaged in something it euphemistically called “quantitative easing” (“QE”).

It printed lots of US dollars in exchange for various bits of USTs, along with other financial garbage, with the goal of later selling the USTs while hiding the garbage, thereby preserving the appearance that USTs are sovereign debt supported by the full faith and credit of the US government rather than just some waste paper clogging up its vaults.

But when it declared “quantitative easing” to be over and tried selling the USTs, all hell immediately broke loose and it was forced to go right back to buying them up, in a scheme that has been sarcastically referred to as “not QE.”

 Euphemisms aside, what is happening is properly called “debt monetization”: it’s when a government “borrows” money not by selling its debt in exchange for money that already exists but simply printing the money using paper and ink, or magic digits inside a very secure computer.

Let’s go over some of the relevant details.

“Not QE” actually started well before it was announced and proceeded in stealth mode. Over six weeks starting in September 2019, the Fed monetized an average of $20.5 billion per week.

This rate is compatible with the extent of its previous efforts at “quantitative easing” at their height. It was forced to do so because the REPO rate on USTs spiked to ten times the rate set by the Fed.

Note: REPO stands for “repurchase agreement”; it is where one party borrows short-term from another party, using USTs (and other supposedly very safe debt instruments) as collateral, much as a pawn shop will give you money for a watch and then allow you to buy it back.

The huge spike in interest rates signaled that USTs were no longer seen as particularly safe collateral and the Fed had to step in and start throwing freshly minted dollars at the problem. And it never stopped.

In fact, the problem grew larger; so large, that now, at the year’s end, the Fed has committed $500 billion of printing press output to making sure that nobody runs out of cash.

It is commonly thought that the Fed’s action has to do with short-term debt, and is therefore a short-term problem, but that’s simply not the case. Since early August (the start of stealth-mode “not QE”) the Fed has vacuumed up $179 billion with of USTs, of which USTs with terms longer than a year made up $108 billion, or 60%.

Compare these numbers to the total borrowing by the US government over the same period, which amounted to $659 billion, of which $368 billion was short-term debt and $291 billion long-term.

Thus, over this period the Fed has monetized 29.4% of new long-term debt and 24.4% of short-term debt. This should help put your mind at ease if you suspected that this isn’t a short-term problem but weren’t sure. It’s a long-term, structural problem.

Next, let’s consider whether the problem is being solved or is getting worse. Rest assured, it is getting worse. Looking at the numbers for October and November, the Fed monetized over half (50.7%) of new US government debt.

A straight-line projection is that if it took the Fed to go from 0% to 50% in four months, then it will go from 50% to 100% in another four—by April Fool’s 2020. But who’s to say that the increase will be linear rather than exponential?

Whichever it is, the trend is unmistakable: the market in US government debt—once the deepest and most liquid market in the world—is dead. The only thing propping up the value of USTs is the Fed’s printing press. And the only thing propping up the value of the output of the Fed’s printing press is… what is it, exactly?

Exactly!

Let’s add one more salient detail. Over the course of 2020, $4.665 trillion of USTs will mature and will need to be rolled over into new USTs. This is an all-time record, and this is on top of new debt that will have to be issued in order for the US government to be able to stay open.

Over the past year the US budget deficit has amounted to $1.022 trillion, which is a 15.8% increase over the previous year. If this trend continues, the new deficit will be around $1.183 trillion. In order to keep the wheels of finance from grinding to a halt, over 2020 the Fed will have to monetize, or print, close to $6 trillion.

It appears likely that at some point over the coming months Fed chairman Jerome Powell will have to announce “not not QE,” and then “not not not QE,” and then “Milk-milk-lemonade, ’round the corner fudge is made!” and run for the unigender restroom sobbing inconsolably.

And then Donald Trump will be forced to channel Boris Yeltsin, who, on August 14, 1998, summoned all the presidential gravitas he could muster and spoke the following sage words:

«Девальвации рубля не будет. Это твердо и четко. Мое утверждение — не просто моя фантазия, и не потому, что я не хотел бы девальвации. Мое утверждение базируется на том, что все просчитано. Работа по отслеживанию положения проводится каждые сутки. Положение полностью контролируется».

“There will be no ruble devaluation. This is my firm and clear position. My assertion is not just a product of my fantasy, and not because I don’t want devaluation to happen. My assertion is based on the fact that everything is taken into account. The work on reassessing the situation is being conducted daily. The situation is entirely under control.” (My translation.)

And then three days later the Russian government declared sovereign default. The ruble dropped by 2/3 against the US dollar and the Russian economy, which was at that time extremely import-dependent, crashed hard. In a similar scenario, the US economy will crash much harder.

Like Russia in 1998, the US is extremely import-dependent. But here the US government is not the only large borrower: most of US corporations are zombified corpses bloated with debt.

For many years they have been borrowing at artificially low interest rates in order to buy up their own shares and prop up their value in a ridiculous effort to maximize shareholder value in the face of stalling economic growth.

If they become unable to roll over their debt at artificially low interest rates (which will go away once the Fed definitively loses control of the situation) then they will automatically be forced to declare bankruptcy and liquidate.

If you want to maintain an optimistic outlook in spite of all of this, here is a book you might want to read.

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The Debt Whirlpool

SUBHEAD: Visualizing the status of the whirlpooling increase of world government debt to GDP.

By Jeff Desjardins on 21 January 2019 for Visual Capitalist -
(https://www.visualcapitalist.com/visualizing-the-snowball-of-government-debt/)


Image above: Click to enlarge. Swirling around the drain-hole of history are the national economies in red with between 50% and over100% of government debt to Gross Domestic Product (GDP). From (https://www.visualcapitalist.com/visualizing-the-snowball-of-government-debt/).

Over the last five years, markets have pushed concerns about debt under the rug.

While economic growth and record-low interest rates have made it easy to service existing government debt, it’s also created a situation where government debt has grown in to over $63 trillion in absolute terms.

The global economic tide can change fast, and in the event of a recession or rapidly rising interest rates, debt levels could come back into the spotlight very quickly.

The Debt Snowball
Today’s visualization comes to us from HowMuch.net and it rolls the world’s countries into a “snowball” of government debt, colored and arranged by debt-to-GDP ratios. The data itself comes from the IMF’s most recent October 2018 update.

The structure of the visualization is apt, because debt can accumulate in an unsustainable way if governments are not proactive. This situation can create a vicious cycle, where mounting debt can start hampering growth, making the debt ultimately harder to pay off.

Here are the countries with the most debt on the books:

Rank	Country	Debt-to-GDP Ratio (2017)
#1	Japan	237.6%
#2	Greece	181.8%
#3	Lebanon	146.8%
#4	Italy	131.8%
#5	Portugal	125.7%
#6	Sudan	121.6%
#7	Singapore	111.1%
#8	United States	105.2%
#9	Belgium	103.4%
#10	Egypt	103.0%

Note: Small economies (GDP under $10 billion) are excluded in this table, such as Cabo Verde and Barbados
 
Japan and Greece are the most indebted countries in the world, with debt-to-GDP ratios of 237.6% and 181.8% respectively. Meanwhile, the United States sits in the #8 spot with a 105.2% ratio, and recent Treasury estimates putting the national debt at $22 trillion.

 Light Snow
On the opposite spectrum, here are the 10 jurisdictions that have incurred less debt relative to the size of their economies:

Rank	Country	Debt-to-GDP Ratio (2017)
#1	Macao (SAR)	0.0%
#2	Hong Kong (SAR)	0.1%
#3	Brunei	2.8%
#4	Afghanistan	7.0%
#5	Estonia	9.0%
#6	Botswana	14.0%
#7	Russia	15.5%
#8	Saudi Arabia	17.2%
#9	DRC	18.1%
#10	Paraguay	19.5%

Note: Small economies (GDP under $10 billion) are excluded in this table, such as Timor-Leste and Solomon Islands

Macao and Hong Kong – both special administrative regions (SARs) in China – have virtually zero debt on the books, while the official country with the lowest debt is Brunei (2.8%).

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The Scenarios of the Collapse

SUBHEAD: It would be wise to start making contingency plans. Something ‘biblical’ is approaching.

By Tuomas Malinen on 11 January 2019 for GNS Economics  -
(https://gnseconomics.com/en_US/2019/01/11/the-scenarios-of-the-collapse/)


Image above: Painting of  "Noah's Ark" (1846) by American painter Edward Hicks. From (https://en.wikipedia.org/wiki/Noah%27s_Ark).

2019 has started more calmly after a very volatile year-end in the markets. Focus has been on the trade deal between China and the US and the words of the central bankers, most notably those of Jay Powell. However, this is all just a distraction, a side-show.

The market volatility was only the first sign of an approaching global economic crisis, as we warned in December 2017.

As the recent PMI figures across the globe show, a global downturn has started and the world is utterly unprepared for it. The global imbalances that have been growing for years cannot lead to anything else than a global crisis . However, there are different paths the crisis could take.

Here, we present three scenarios that the global economy is likely to follow, when the global downturn morphs into something much more sinister. We’ll start with the most likely scenario: Global Depression.

Scenario I: Global Depression

In a depression, everything that has been driven the economic expansion goes into reverse. Asset markets experience severe contraction (in excess of 50 percent), credit becomes restricted, corporations and households de-lever fiercely, and global trade flows stall (for more details see Q-review 2/2018). Gross Domestic Production (GDP) falls dramatically, between 10 to 25 percent.

Unemployment skyrockets. The standard means of stimulus by central banks (CBs) and governments are exhausted without any notable improvement in the economic environment.

The implosion of the current asset bubble will start a relentless unwinding of leverage and risk in the global financial system. Because major CBs are still “all-in” with rates pinned at or near historic lows, and balance sheets bloated to extreme levels, their ability to respond will be highly restricted.

Governments are also highly-indebted, and when interest rates rise, some sovereigns are likely to default, aggravating the global banking crisis, which will probably be in motion already. Combined with the zombified global business sector and a hard landing in China, these factors will lead the world economy into a depression.

However, a possibility of something even more ominous is lurking in the background.

Scenario II: Systemic Meltdown

Systemic crisis would mean that the global financial melts down due to an existential deficit of trust between counterparties within the system. Before 2008, a systemic meltdown was mostly a theoretical construct.

However, in mid-October in 2008, global leaders were faced with the possibility that banks would not open on Monday. The inter-bank markets had frozen, because no one knew the amount of the losses banks carried on their books.

The global financial system was grinding to a halt. Politicians and central bankers saved the day by guaranteeing bank deposits and by providing capital and extraordinary guarantees to keep the important financial institutions standing and credit flowing.

Now the problem is that many of these measures are already in play and when the next crisis hits, the solvency of governments and CBs will also be in question.

This creates a perilous situation because, for example, the shares of the Global Systemically Important Banks have been falling since the beginning of last year, which was also the time when the balance sheet normalization (QT) program of the Fed kicked into full gear.

This is no coincidence and it implies that troubles are, once again, brewing in the banking sector.

Because a crash in the asset values would affect the collateral of banks and because global depression would lead to a massive increase in loan losses, the already-impaired banking sector could, again, face collapse.

However, this time around, there is very little authorities can do to stem the panic. These factors make the systemic meltdown an ominously-likely scenario.

Systemic meltdown would mean that all banking actions, distribution of money, loans, swaps, banking services, etc., through the banking sector would stop. Credit cards would cease to function, ATMs would not give out money and loans could not be originated or rolled-over.

Following the likely collapse of global trade, the world economy would also collapse. This would imply that the global GDP would experience a harrowing fall of 20 to 40 percent. Modern societies would cease to exist in their current form.

Scenario III: The Fairy Tale

Could this all be averted somehow? We’ve been pondering this for two years now, and our resounding answer is no. The leverage in the system usually results in a crash at some point, and asset bubbles very rarely deflate in a controlled manner.

However, CBs can probably still postpone the inevitable, if they could re-start Quantitative Easing (QE) programs or find some other way to push artificial central bank liquidity into the financial markets.

To soften the eventual blow, and as an extremely desperate measure, central banks could, at least in theory, engage in a “QE-squared”. In it, major central banks would buy a hefty chunk of global risk assets, estimated to total $400 trillion.

This would mean that the balance sheet of major Central Banks would need to expand at least five-fold from the current level of approximately $20 trillion.

To cover the crippling losses to their collective balance sheets that these purchases would be likely to inflict, they would need to use their money-printing ability to paper them over.

CBs earn seigniorage-revenue from all the money they create. This is the difference between the nominal value and the production costs of the money.

Because production costs of digital entries are very close to zero, the seigniorage revenue CBs receive from each entry is close to 1-to-1. Still, this would mean that they would need to create new money in the range of tens of trillions of US dollars.

By comparison, in 2017, the global nominal GDP of the world was approximately $75 trillion.

To distribute such incomprehensible sums of new money, CBs would need to give it directly to consumers and governments.

Even in normal circumstances, the production side of the economy would be unlikely to be able to respond to such a massive increase in (artificially created) demand, and this time there would have been wide-spread corporate bankruptcies driven by global depression.

A hyper-inflation would be likely to follow.

There’s also the alternative that CBs would make a complete U-turn and continue to backstop market losses.

This would be the “way of Japan”, where the BoJ already owns over 40% of the sovereign bond universe. It would eventually mean the effective nationalization of capital markets which would continue to function in name only.

We have no historical experience with what the expropriation of modern capital markets would cause.

However, it would be unlikely to be anything good as capital markets have been around for several centuries, and they are extremely important in allocating financial capital efficiently. If CBs take a permanent active role in the capital markets, it would lead to financial market socialism.

 It would be likely to bring similar horrors as regular socialism in the form of lost incentives (breaking down of the risk-reward relationship) and inflated asset values.

It is unlikely that global central bankers would be willing, or that they would be allowed, to do so.

The Endgame Nears

The global balance sheet of CBs turned in August 2018. This marks the start of global QT and thus the end of the most reckless monetary policy experiment in history.

When this is combined with the slow-down in China, the engine of the world economy since 2008,  we have finally entered the endgame of at the current business cycle.

The desperate measures of central bankers and China enacted after the financial crisis have pushed the global debt and financial alchemy to never-seen heights.

The global financial system has become rigged with leverage, moral hazard and regulatory failures to a point where a “purge” has become all-but-impossible to avoid. This is the end.

Still, every company, household and government should start to make contingency plans. Something ‘biblical’ is approaching.

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Abracadabra!

SUBHEAD: And so - Shazzam! I give you the one-percenters! And a bankrupt United States of America.

By James Kunstler on 11 December 2017 for Kunstler.com -
(http://kunstler.com/clusterfuck-nation/abracadabra/)


Image above: Face of a slot machine dubbed "Money Magic!" From (http://www.slotsup.com/free-slots-online/money-magic-rival).

And so, as they say in the horror movies, it begins…! The unwinding of the Federal Reserve’s balance sheet.

Such an esoteric concept! Is there one in ten thousand of the millions of people who sit at desks all day long from sea to shining sea who have a clue how this works? Or what its relationship is to the real world?

I confess, my understanding of it is incomplete and schematic at best — in the way that my understanding of a Las Vegas magic act might be. All the flash and dazzle conceals the magician’s misdirection.

The magician is either a scary supernatural being or a magnificent fraud.

Anyway, the audience ‘out there’ for the Federal Reserve’s magic act — x-million people preoccupied by their futures slipping away, their cars falling apart, their kid’s $53,000 college loan burden, or the $6,000 bill they just received for going to the emergency room with a cut finger — wouldn’t give a good goddamn even if they knew the Fed’s magic show was going on.

So, the Fed has this thing called a balance sheet, which is actually a computer file, filled with entries that denote securities that it holds.

These securities, mostly US government bonds of various categories and bundles of mortgages wrangled together by the mysterious government-sponsored entity called Freddie Mac, represent about $4.5 trillion in debt.

They’re IOUs that supposedly pay interest for a set number of years. When that term of years expires, the Fed gets back the money it loaned, which is called the principal. Ahhhh, here’s the cute part!

You see, the money that the Fed loaned to the US government (in exchange for a bond) was never there in the first place. The Fed prestidigitated it out of an alternate universe. They gave this money to a “primary dealer” bank in exchange for the bond, which the bank abracadabraed up for the US Treasury. Well, not really.

In fact, the Fed just made a notation on the bank’s “reserve” account that the money from the alternate universe appeared there.

Somehow that money was sent via a virtual pneumatic tube to the US Treasury, where it was used to pay for drones to blow up Yemeni wedding parties, and for the Secret Service to visit pole dancing bars when the president traveled to foreign lands.

Here’s the fun part. The Fed announces that it is going to shed this nasty debt, at about $10 billion worth a month starting this past October. Their stated goal is to reach an ultimate wind-down velocity of $50 billion a month (cue laugh track).

If they ever get there (cue laugh track) it would take 20 years to complete the wind-down.

The chance of that happening is about the same as the chance that Janet Yellen will come down your chimney on December 24 with a sack-full of chocolate Bitcoins. But never mind the long view for the moment.

One way they plan to accomplish this feat is to “roll off” the bonds. That is, when the bonds mature — i.e. come to the end of their term — they will cease to exist. Poof!

Wait a minute! When a bond matures, the issuer has to send the principal back to the lender.

After all, the Fed lent the US Treasury X-billion dollars, the US Treasury paid interest on the loan for X-years, and now it has to fork over the full value of the loan (hopefully in dollars that have magically inflated over the years and are now worth less than when they were borrowed — another magic trick!). But that doesn’t happen.

Instead, when the theoretical principal is returned to the Fed, the Fed disappears the money, like the girl in a bikini onstage who enters the magician’s sacred box and vanishes.

Now you see her, now you don’t. The explanation, of course, might be that the money was never really there in the first place, so it makes sense to fire it back to the alternative universe it came from.

Well, uh, I guess….

The catch is: for a while it was here on earth and folks were doing stuff with it, such as the aforementioned drone strikes and pole dancers.

Not only that, but the “primary dealer” banks were allowed to loan out ten times the reserve minimum denoted on their Fed accounts for participating in the scheme. Who did they lend all that money to?

Apparently, a lot of it went to corporations who borrowed it at ultra-low interest rates in order to buy back their own stock, which paid dividends way higher than the interest rate they borrowed at to buy the stuff, and which also pumped up the share value of the stocks, which also happened to make the executives of the corporations way richer in terms of their stock options and bonuses (awarded for boosting the share value of the stock!).

And so, shazzam: I give you the one-percent! And a bankrupt United States of America.

And don’t even ask about all those bundles of janky Freddie Mac mortgages fobbed off on the Fed.

The reason they did that in the first place was because those mortgages weren’t being paid off, and the banks and insurance companies that held them were choking to death on them.

So they parked them in a crawl space under the Fed’s Eccles Building in Washington, hoping they would just turn to compost And guess what: they’re no more valuable now then they were then. File that one under Necrophilia.

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Amazon is the New Tech Crash

SUBHEAD: There is only a handful of big tech winners - Amazon, Apple, Microsoft, Google Facebook & Netflix.

By David Stockman on 1 August 2017 for the Daily Reckoning -
(https://dailyreckoning.com/amazon-new-tech-crash/)


Image above: Sign on an unidentified Amazon building. From original article.

It won’t be long now. During the last 31 months the stock market mania has rapidly narrowed to just a handful of shooting stars.

At the forefront has been Amazon.com, Inc., which saw its stock price double from $285 per share in January 2015 to $575 by October of that year. It then doubled again to about $1,000 in the 21 months since.

By contrast, much of the stock market has remained in flat-earth land.

For instance, those sections of the stock market that are tethered to the floundering real world economy have posted flat-lining earnings, or even sharp declines, as in the case of oil and gas.

Needless to say, the drastic market narrowing of the last 30 months has been accompanied by soaring price/earnings (PE) multiples among the handful of big winners. In the case of the so-called FAANGs + M (Facebook, Apple, Amazon, Netflix, Google and Microsoft), the group’s weighted average PE multiple has increased by some 50%.

The degree to which the casino’s speculative mania has been concentrated in the FAANGs + M can also be seen by contrasting them with the other 494 stocks in the S&P 500.

The market cap of the index as a whole rose from $17.7 trillion in January 2015 to some $21.2 trillion at present, meaning that the FAANGs + M account for about 40% of the entire gain.

Stated differently, the market cap of the other 494 stocks rose from $16.0 trillion to $18.1 trillion during that 30-month period.

That is, 13% versus the 82% gain of the six super-momentum stocks.

Moreover, if this concentrated $1.4 trillion gain in a handful of stocks sounds familiar that’s because this rodeo has been held before.

The Four Horseman of Tech (Microsoft, Dell, Cisco and Intel) at the turn of the century saw their market cap soar from $850 billion to $1.65 trillion or by 94% during the manic months before the dotcom peak.

At the March 2000 peak, Microsoft’s PE multiple was 60X, Intel’s was 50X and Cisco’s hit 200X.

Those nosebleed valuations were really not much different than Facebook today at 40X, Amazon at 190X and Netflix at 217X.

The truth is, even great companies do not escape drastic over-valuation during the blow-off stage of bubble peaks.

Accordingly, two years later the Four Horseman as a group had shed $1.25 trillion or 75% of their valuation.

More importantly, this spectacular collapse was not due to a meltdown of their sales and profits. Like the FAANGs +M today, the Four Horseman were quasi-mature, big cap companies that never really stopped growing.

Now I’m targeting the very highest-flyer of the present bubble cycle, Amazon.

Just as the NASDAQ 100 doubled between October 1998 and October 1999, and then doubled again by March 2000, AMZN is in the midst of a similar speculative blow-off.

Not to be forgotten, however, is that one year after the March 2000 peak the NASDAQ 100 was down by 70%, and it ultimately bottomed 82% lower in September 2002. I expect no less of a spectacular collapse in the case of this cycle’s equivalent shooting star.

In fact, even as its stock price has tripled during the last 30 months, AMZN has experienced two sharp drawdowns of 28% and 12%, respectively. Both times it plunged to its 200-day moving average in a matter of a few weeks.

A similar drawdown to its 200-day moving average today would result in a double-digit sell-off.

But when — not if — the broad market plunges into a long overdue correction the ultimate drop will exceed that by many orders of magnitude.

Amazon’s stock has now erupted to $1,000per share, meaning that its market cap is lodged in the financial thermosphere (highest earth atmosphere layer). Its implied PE multiple of 190X can only be described as blatantly absurd.

After all, Amazon is 24 years-old, not a start-up. It hasn’t invented anything explosively new like the iPhone or personal computer.

Instead, 91% of its sales involve sourcing, moving, storing and delivering goods. That’s a sector of the economy that has grown by just 2.2% annually in nominal dollars for the last decade, and for which there is no macroeconomic basis for an acceleration.

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Yes, AMZN is taking share by leaps and bounds. But that’s inherently a one-time gain that can’t be capitalized in perpetuity at 190X.

And it’s a source of “growth” that is generating its own pushback as the stronger elements of the brick and mortar world belatedly pile on the e-commerce bandwagon.

Wal-Mart’s e-commerce sales, for example, have exploded after its purchase of Jet.com last year — with sales rising by 63% in the most recent quarter.

Moreover, Wal-Mart has finally figured out the free shipments game and has upped its e-commerce offering from 10 million to 50 million items just in the past year. Wal-Mart is also tapping for e-commerce fulfillment duty in its vast logistics system — including its 147 distribution centers, a fleet of 6,200 trucks and a global sourcing system which is second to none.

In this context, even AMZN’s year-over-year sales growth of 22.6% in Q1 2017 doesn’t remotely validate the company’s bubblicious valuation — especially not when AMZN’s already razor thin profit margins are weakening, not expanding.

Based on these basic realities, Jeff Bezos will never make up with volume what he is losing in margin on each and every shipment.

The Amazon business model is fatally flawed. It’s only a matter of the precise catalyst that will trigger the realization in the casino that this is another case of the proverbial naked emperor.

Needless to say, I do not think AMZN is a freakish outlier. It’s actually the lens through which the entire stock market should be viewed because the whole enchilada is now in the grips of a pure mania. Stated differently, the stock market is no longer a discounting mechanism nor even a weighing machine. It’s become a pure gambling hall.

So Bezos’ e-commerce business strategy is that of a madman — one made mad by the fantastically false price signals emanating from a casino that has become utterly unhinged owing to 30 years of Bubble Finance policies at the Fed and its fellow central banks around the planet. Indeed, the chart below leaves nothing to the imagination.

Since 2012, Amazon stock price has bounded upward in nearly exact lock-step with the massive balance sheet expansion of the world’s three major central banks.


Image above: Comparison of stock values of G3 Central Banks and Amazon Corp. From original article.

At the end of the day, the egregiously overvalued Amazon is the prime bubble stock of the current cycle. What the Fed has actually unleashed is not the healthy process of creative destruction that Amazon’s fanboys imagine.

Instead, it embodies a rogue business model and reckless sales growth machine that is just one more example of destructive financial engineering, and still another proof that monetary central planning fuels economic decay, not prosperity. Amazon’s stock is also the ultimate case of an utterly unsustainable bubble.

When the selling starts and the vast horde of momentum traders who have inflated it relentlessly in recent months make a bee line for the exits, the March 2000 dotcom crash will seem like a walk in the park. .

Central banks ARE the Crisis

SUBHEAD: We shouldn't let them conjure up trillions out of nothing, and use that power as a political tool.

By aul Ilargi Meijer on 25 uly 2017 for the Automatic Earth -
(https://www.theautomaticearth.com/2017/07/central-banks-are-the-crisis/)


Image above: The men who brought it down - Richard Reich, Alan Greenspan and Larry Somers.  From (https://www.dailymaverick.co.za/article/2014-02-24-how-close-we-were-to-a-global-financial-meltdown-in-2008-now-we-know/#.WXomwIqQxE4).

If there’s one myth -and there are many- that we should invalidate in the cross-over world of politics and economics, it‘s that central banks have saved us from a financial crisis. It’s a carefully construed myth, but it’s as false as can be. Our central banks have caused our financial crises, not saved us from them.

It really should -but doesn’t- make us cringe uncontrollably to see Bank of England governor-for-hire Mark Carney announce -straightfaced- that:

“A decade after the start of the global financial crisis, G20 reforms are building a safer, simpler and fairer financial system. “We have fixed the issues that caused the last crisis. They were fundamental and deep-seated, which is why it was such a major job.”

Or, for that matter, to see Fed chief Janet Yellen declare that there won’t be another financial crisis in her lifetime, while she’s busy-bee busy building that next crisis as we speak. These people are now saying increasingly crazy things, and that should make us pause.

Central banks don’t serve people, or even societies, as that same myth claims. They serve banks. Even if central bankers themselves believe that this is one and the same thing, that doesn’t make it true. And if they don’t understand this, they should never be let anywhere near the positions they hold.

You can pin the moment central banks went awry at any point in time you like. The Bank of England’s foundation in 1694, the Federal Reserve’s in 1913, the ECB much more recently. What’s crucial in the timing is where and when the best interests of the banks split off from those of their societies.

Because that is when central banks will stop serving those societies. We are at such a -turning?!- point right now. And it’s been coming for some time, ‘slowly’ working its way towards an inevitable abyss.

Over the past few years the Automatic Earth has argues repeatedly, along several different avenues, that American society was at its richest between the late 1960s and early 1980s. Yet another illustration of this came only yesterday in a Lance Roberts graph:

Anyone see a recovery in there? Lance uses 1981 as a ‘cut-off’ date, but the GDP growth rate as represented by the dotted line doesn’t really begin to go ‘bad’ until 1986 or so.

At the tail end of the late 1960s to early 1980s period, as the American economy was inexorably getting poorer, Alan Greenspan took over as Federal Reserve governor in 1987.

A narrative was carefully crafted by and for the media with Greenspan as an ‘oracle’ or even a ‘rock star’, but in reality he has been instrumental in saddling the economy with what will turn out to be insurmountable problems.

Greenspan was a major driving force behind the repeal of Glass-Steagall, which was finally established through the Gramm-Leach-Bliley act of 1999. This was an open political act by the Federal Reserve governor, something that everyone should have then protested, and still should now, but didn’t and doesn’t.

Central bankers should be kept far removed from politics, anywhere and everywhere, because they represent a small segment of society, banks, not society as a whole.

Because of the ‘oracle’ narrative, Greenspan was instead praised for saving the world. But all that Greenspan and his accomplices, Robert Rubin and Larry Summers, actually did in getting rid of the 1933 Glass-Steagall act separation between investment- and consumer banking was to open the floodgates of debt, and even more importantly, leveraged debt.

All part of the ‘financial innovations’ Greenspan famously lauded for saving and growing economies. It was all just more debt on top of more debt.

Greenspan et al ‘simply’ did what central bankers do: they represent the best interests of banks. And the world’s central bankers have never looked back. That most people still find it hard to believe that America -and the west- has been getting poorer for the past 30-40 years, goes to show how effective the narratives have been.

The world looks richer instead of poorer, after all. That this is exclusively because of rising debt numbers wherever you look is not part of the narratives. Indeed, ruling economic models and theories ignore the role played by both banks and credit in an economy, almost entirely.

Alan Greenspan left as Fed head in 2006, after having wreaked his havoc on America for almost two decades, right before the financial crisis that took off in 2007-2008 became apparent to the world at large. The crisis was largely his doing, but he has escaped just about all the blame for it. Good PR.

With Ben Bernanke, an alleged academic genius on the Great Depression, as Greenspan’s replacement, the Fed just kept going and turned it up a notch. It was no longer possible in the financial world to pretend that banks and people had the same interests, so the former were bailed out at the expense of the latter.

The illusionary narrative for the public, however, remained intact. What do people know about finance, anyway? Just make sure the S&P goes up. Easy as pie.

The narrative has switched to Bernanke, and Yellen after him, as well as Mario Draghi at the ECB and Haruhiko Kuroda at the Bank of Japan, saving the world from doom. But once again, they are the ones who are creating the crisis, not the ones saving us from it. They are saving the banks, and saddling the people with the costs.

In the past decade, these central bankers have purchased $20-$50 trillion in bonds, securities and stocks. The only intention, and indeed the only result, is to keep banks from falling over, increase their profits, and maintain the illusion that economies are recovering and growing.

They can only achieve this by creating bubbles wherever they can. Apart from the QE programs under which they bought all those ‘assets’, they used -and still do- another tool: lowering interest rates to the point where borrowing money becomes so cheap everyone can do it, and then do it some more.

It has worked miracles in blowing stock market valuations out of all realistic proportions, and in doing the same for housing markets in locations all over the globe.

The role of China’s central bank in this is interesting too, but it is such an open and obvious political tool that it really deserves its own discussion and narrative. Basically, Beijing did what it saw Washington do and thought: why hold back?

Fast forward to today and we see that we’ve landed in a whole new, and next, phase of the story. The world’s central banks are all stuck in their own – self-created – bubbles and narratives. They all talk about how they solved all the issues, and how they will now return to normal, but the sad truth is they can’t and they know it.

The Fed stopped purchasing assets through its QE program a while back, but it could only do that because Frankfurt and Japan took over. And now they, too, talk about quitting QE. Slowly, yada yada, because of control, yada yada, but they know they must.

They also know they can’t. Because the entire recovery narrative is a mirage, a fata morgana, a sleight of hand.

And that means we have arrived at a point that is new and very dangerous for the entire global economy and all of its people.

That is, the world’s central bankers now have an incentive to create the next crisis. This is because they know this crisis is inevitable, and they know their masters and protégés, the banks, risk suffering immensely or even going under.

‘Tapering’, or whatever you might call the -slow- end to QE and the -slow- hiking of interest rates, will prick and blow up bubbles one by one, and often in violent fashion.

When housing bubbles burst, economies lose the primary ingredient for maintaining -let alone increasing- their money supply: banks creating money out of thin hot air. Since the money supply is one of the key components of inflation, along with velocity of money, there will be fantastic outbursts of debt deflation. You’ve never seen -let alone imagined- anything like it.

The worst part of it is not government debt, though that, when financed with bond sales, is not not an instrument to infinity and beyond either. But the big hit to economies will be private debt.

Where in many bubble areas, and they’re too numerous too mention, eager potential buyers today fret over affordable housing supply, it’ll all turn on a dime and owners won’t be able to sell without being suffocated by crippling losses.

Pension funds, which have already suffered perhaps more than any other parties because of low interest ZIRP and NIRP policies, have switched en masse to riskier assets like stocks. Well, another whammy, and a bigger one, is waiting just outside the door. Pensions will be so last century.

That another crisis is waiting to happen, and that politics and media have made sure that just about no-one at all is aware of it, is one thing. We already knew this, a few of us. That the world’s main central bankers have an active incentive to bring about the crisis, if only by sitting on their hands long enough, is new. But they do.

Yellen, Draghi and Kuroda may opt to leave before pulling the trigger, or be fired soon enough. But whoever is in the governor seats will realize that unleashing a crisis sooner rather than later is the only option left not to be blamed for it.

Let the house of dominoes crumble now, and they can say “nobody could have seen this coming”, while at the same time saving what they can for the banks and bankers they serve. That option will not be on the table for much longer.

We should have never given them, let alone their member/master banks, the power to conjure up trillions out of nothing, and use that power as a political tool. But it is too late now.

.

Ready, Set, Splat!

SUBHEAD: If the credit-worthiness of France takes a wrong turn, it will upset the global currency system.

By James Kunstler on 24 April 2017 for Kunstler.com-
(http://kunstler.com/clusterfuck-nation/ready-set-splat/)


Image above: Marine Le Pen and Emmanuel Macron were big winners in first round of French election for presidency. From (https://en.news-front.info/2017/02/05/french-elections-le-pen-and-macron-rally-supporters/).

As I write, the French stock market (the CAC 40), is doing a grand jeté (up 4.5 percent!) in celebration of Emmanuel Macron’s assumed slaying of the dragon Le Pen. But that was just the first round under the interesting French election system.

Consider that two other candidates who were eliminated, Monsieurs Fillon and Mélenchon, got nearly 40 percent of the vote. Are we so sure about where their voters go in the second and final round two weeks from now?

I suspect that most Americans — even the ones who follow Rachel Maddow — are about as interested in French politics as differential calculus.

Macron, 36, is a blank slate.

He was finance minister under current president François Hollande, of the Socialist Party, but declared during the election campaign that he’s not a socialist, he only wanted to be of service to his country, and this time he ran under his own party, En Marche!

He appears to represent the continuation of business-as-usual with the European Union, which seems to put him on the wrong side of history at this crucial moment — if you suppose, as I do, that the EU is so riddled with hopeless financial contradictions and centrifugal political tensions that it is unlikely to persist.

Yet, understandably, people are reluctant to change the system they’re living under. Le Pen wants to blow the EU up, especially the bureaucracy lodged in Brussels that has become a self-serving and self perpetuating monster.

Blowing up the EU would necessarily, it seems, mean the end of the European Central Bank, and with it the scams and Ponzi schemes that have provided an appearance of normality, despite an official 10.5 percent unemployment rate in France and a constant chain of public massacres by resident Jihadistas of one sort or another, some of them perpetrated by radical refugees allowed in under EU policy.

Macron might serve the interests of the American Deep State, which is determined to drive a wedge between Europe and the Chinese-Russian-Iranian “silk road” economic bloc that would consolidate trade in the Eastern Hemisphere.

The US wants “the West” to remain what it had been for seventy years: the dominant posse. Even if the underlying conditions remained the same, this might not be possible.

But those underlying conditions are changing, and in ways that much of the political maneuvering across the West cannot alter, or even comprehend, for instance, the inability of these mature industrial economies to grow anymore. That is largely a function of the end of affordable energy.

Unfortunately, the absence of growth portends not stagnation but collapse as society fails to generate enough new wealth to pay its debts.

Now, we’ve seen a pretty impressive demonstration of advanced nations playing financial games to cover up this corrosive condition. But the dishonesty at work is pretty obvious, and the problem with dishonesty in financial affairs is that it represents unreality.

The accrued momentum in colossal sums of money flowing this way and that way has allowed unreality to reign in international finance for a while. But that is now flying apart. The ultimate reality, politicians and economists will soon discover, is that you can’t create your own reality.

So whatever you think now about the French election, or the fate of the EU, is liable to change as the great debt crack-up our time finally gets underway and suddenly every nation has to scramble desperately to keep its shit together.

That magic moment may be at hand this week as the US congress returns from Easter recess to face its budget and debt ceiling dilemmas.

If the credit-worthiness of this country takes a wrong turn, it will upset the global currency system.

In fact, it will rip a hole in financial time-and-space into which the presumed value of all sorts of things represented on paper and computer drives will disappear, never to be seen again.

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IMF paper on abandoning cash

SUBHEAD: Cash payment allows the buyer and seller to be free of an information trail on every transaction.

By Norbert Haering on 5 April 2017 for NorbertHaerig.en -
(http://norberthaering.de/en/32-english/news/808-imf-anti-cash-guidelines)


Image above: Photo illustration of the shrinking role of cash money. From (http://www.truthdig.com/eartotheground/item/the_world_bank_and_the_imf_are_enabling_the_next_crisis_20161010).

[IB Publisher's note: Payments cash are popular for dealing one-on-one with individuals providing local services and products without international banksters getting a slice of the action. It also allows the buyer and seller to be free of an information trail on every transaction in their lives. It's called freedom.]

The International Monetary Fund (IMF) in Washington has published a Working Paper on “de-cashing”. It gives advice to governments who want to abolish cash against the will of their citizenry. Move slowly, start with harmless seeming measures, is part of that advice.
In “The Macroeconomics of De-Cashing”, IMF-Analyst Alexei Kireyev recommends in his conclusions:

Although some countries most likely will de-cash in a few years, going completely cashless should be phased in steps. The de-cashing process could build on the initial and largely uncontested steps, such as the phasing out of large denomination bills, the placement of ceilings on cash transactions, and the reporting of cash moves across the borders. Further steps could include creating economic incentives to reduce the use of cash in transactions, simplifying the opening and use of transferable deposits, and further computerizing the financial system.

The private sector led de-cashing seems preferable to the public sector led decashing. The former seems almost entirely benign (e.g., more use of mobile phones to pay for coffee), but still needs policy adaptation. The latter seems more questionable, and people may have valid objections to it. De-cashing of either kind leaves both individuals and states more vulnerable to disruptions, ranging from power outages to hacks to cyber-warfare. In any case, the tempting attempts to impose de-cashing by a decree should be avoided, given the popular personal attachment to cash. A targeted outreach program is needed to alleviate suspicions related to de-cashing; in particular, that by de-cashing the authorities are trying to control all aspects of peoples’ lives, including their use of money, or push personal savings into banks. The de-cashing process would acquire more traction if it were based on individual consumer choice and cost-benefits considerations.

Note, that the author is not talking about unreasonable objections and imagined disadvantages: He does count it among the advantages of de-cashing in the very next paragraph that personal savings are pushed into banks and he also does count total control of all aspects of financial life under the pros, as in the last sentence of the last quote below.

“As de-cashing gives incentives to economies’ agents to convert their currency in bank deposits, the deposit base of the banking system will increase, which can help reduce the lending rates and expand credit.”

And finally the advice to do it together:

Coordinated efforts on de-cashing could help enhance its positive effects and reduce potential costs. At least at the level of major countries and their currencies, the authorities could coordinate their de-cashing efforts. Such coordinated efforts are, in particular, important in the decisions to phase out large denomination bills for all major currencies, to use ceilings and other restrictions on cash transactions, and to introduce the reporting requirements for cash transactions or their taxation. For currency areas, a single decashing policy would be clearly preferable to a national one. Finally, consensus between the public and the private sector and outreach on the advantages and modalities of gradual decashing should be viewed as key preconditions for its success.

The differences between currency and transferable deposits are also remarkable. They are often used by both sides of the debate on the pros and cons of de-cashing.

First, currency can become technically obsolete. Banknotes fade and break, and the efforts to remedy the problem with plastics is of little help and involve unneeded costs. Transferable deposits do not have this problem.

Second, payments with currency are anonymous, which makes them a popular vehicle for abuse, tax avoidance, terrorism financing, and money laundering. Transferrable deposits are personified and generally cannot be used for these purposes.

Third, currency is prone to counterfeiting, at times on a large scale.  Transferrable deposits are not.

Fourth, currency is often perceived as a means to preserve privacy, i.e., economic operators generally are not interested in the history of the currency of their transaction.

Also, the individual right for privacy is usually enshrined in laws and transferrable deposits store each step of the payment history, which can be viewed as a threat to privacy.

Transferable deposits lead to full transparency, at least to the issuing bank, and a complete record of transactions, which in virtue of law can be used by tax and law enforcement authorities.

The paper lists a fair number of advantages and disadvantages of cash, but makes no explicit attempt to argue that overall the disadvantages are more important. The language and the recommendations make the bias more than clear, though.

Needless to say that, as with all scandalous, antidemocratic recommendations, the ones described here are officially only those of the author, not of the IMF.

See also:
Ea O Ka Aina: In praise of cash 3/6/17
Ea O Ka Aina: The War on Cash has begun 2/17/17
Ea O Ka Aina: Creepy Cashless Society 10/19/16
Ea O Ka Aina: NIRP and the War on Cash 9/10/16
Ea O Ka Aina: The War on Cash 8/25/16


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Blindness at Davos

SUBHEAD: The current model of economic growth is not only unsustainable, but the source of our problems.

By S. G. Vombatkere on 26 January 2017 for Counter Currents  -
(http://www.countercurrents.org/2017/01/26/blindness-at-davos/)


Image above: Entrance at 2017 Davos Forum .  From (http://www.telegraph.co.uk/business/2017/01/19/europes-ideological-civil-war-laid-bare-davos/).

The World Economic Forum (WEF), a Swiss non-profit foundation for public-private cooperation “committed to improving the state of the world by engaging business, political, academic, and other leaders of society to shape global, regional, and industry agendas”, met in Davos from 17-20 January of 1027, as it does every year, in an ambience of high-level meetings interspersed by opulent partying.

It is essentially an annual jamboree to bring together many hundreds of extremely rich and powerful top business magnates, international political leaders, selected intellectuals, and journalists from around 100 countries, “to discuss the most pressing issues facing the world”. WEF focuses on business profit and national economic benefit.

Post the unrealistic Millenium Development Goals (MDGs) of 2000, the 2016 WEF was about 17 sustainable development goals (SDGs) with a 15-years time target ending 2030. SDGs were to “transform our world” by ending poverty, protecting the planet, and ensuring prosperity for all. The means of achieving these goals was through economic growth, social development and environmental protection.

In a world of over seven billion people, a majority of whom live in abject poverty, it is difficult to imagine more reality-disconnected persons meeting in a more inappropriate forum to discuss how to end poverty, protect the planet and ensure prosperity for all.

Development by economic growth
Economic growth is understood as increasing economic activity of business, commercial, industrial and services sectors measured by growth of the gross national product (GNP).

All countries, independent of political ideology, single-mindedly pursue economic development based on GDP growth, targets for which are set in percentage points for each year. GDP growth is in turn based upon increasing consumption of all kinds and trade of all kinds, including armaments. It pre-supposes endless material growth based upon extraction-manufacture-transport-consumption within the ecological resource base, the finiteness of which most economists are unable to take into account.

 Every stage of the extraction-manufacture-transport-consumption mantra is entirely based upon the continuing extraction-refinement-transport-consumption of oil as a fuel.

The finiteness of the resource-base is both in terms of being the source of materials and a sink for the polluting outputs of the extraction-manufacture-transport-consumption processes.

This model of development is vigorously pursued worldwide notwithstanding that in the 1974 Cocoyoc United Nations Conference, the combined wisdom of all nations held that:

“Our first concern is to redefine the purpose of development. This should not be to develop things but develop man. Human beings have basic needs: food, shelter, clothing, health, education. Any process of growth that does not lead to their fulfilment – or even worse, disrupts them – is a travesty of the idea of development”.

Ending poverty
In the last 42 years, the United Nations has not withdrawn or modified its 1974 people-based definition of the purpose of development. But all participant countries have quietly jettisoned the jointly agreed purpose of development and adopted a model in which the social, economic, political and cultural development of people is at best secondary. This has caused enormous socio-economic inequality within and between nations, and this inequality is growing. For example, in India, one of the economically more unequal countries, the richest 1% own 58% of the wealth, with social status proportional to wealth. According to one assessment, the richest 1% of all humanity will soon own over half of the world’s private wealth.

The sustainability of such growth in socio-ecological terms is being increasingly questioned. The anti-Wall Street protests of 2011 in USA are fundamentally against inequality between the top 1% and the rest 99%. But somehow, the reasons behind these protests and many others worldwide, do not appear to have even been considered by the decision makers in Davos over the years.

In the context of sustainable economic growth, one of the Davos goals of SDG is to eradicate poverty in all its forms by 2030. Indeed, SDG Target 17.19 seeks to: “… by 2030, build on existing initiatives to develop measurements of progress on sustainable development that complement GDP”.

 Reliance on the GDP-based model of economic development that is responsible for current and growing inequality is paradoxical, and it is apt to consider Einstein’s words:  

“Problems cannot be solved by the same level of thinking that created them. Without changing our pattern of thought, we will not be able to solve the problems we created with our current patterns of thought”.

It does not call for any great learning to appreciate that economic inequality increasing within a finite and shrinking resource base, leads to increase in poverty both in numbers and degree. Thus, pursuing the present economic growth model which is the cause of the huge and growing economic inequality both within and between countries, makes the SDG of poverty eradication in 15 years unachievable.

Protecting the planet
This SDG aim, going beyond semantics, betrays a mindset that humans, with their technology, can control the elemental forces of nature to “protect the planet”. The reason for articulating this aim is that the human activity of industrialization by enormous consumption of energy (fossil fuels) has caused threats to humanity itself.

The understanding that humans are a part of the planet and of the eco-systems that are at the very root of life itself, is absent from the anthropocentric mindset which seeks to protect the planet. The planet per se does not need protection.

The human species is urbanizing rapidly precisely because of the availability of fossil fuels. Urbanization is nothing but a concentration of human populations, connected intimately with availability of energy in more concentrated form, which fossil fuels provide. Today, more than half of all humans are urban creatures, who are parasitic on the energy base.

China and India, together comprising around half of humanity, both encourage urbanization as policy, both inexplicably blind to the resource-base imperative.

The energy-consumption inequality within urban agglomerations is demonstrated by the fact that the small percentage of the wealthy generate far more garbage (this includes indirectly generated industrial effluents) than the vast majority of the poor.

This garbage, mostly and increasingly non-biodegradable, pollutes surface and sub-surface water bodies, air and soil, and oceans, with visible and invisible pollution.

The 2011 Fukushima nuclear disaster continues to pollute the ocean with radionuclides with no real end in sight, while containing the disaster (preventing meltdown) consumes huge fossil fuel energy. All this is about degrading the environment and polluting the planet which SDGs aim to protect.

At the rural levels, agriculture is heavily energy-based, with industrial inputs like fertilisers and varying degrees of mechanization. (The growing focus on organic farming is precisely because of realisation of the ill-effects of chemical farming on pollution of soil and water, and human health).

Agricultural produce from farm-to-(urban)table is entirely dependent on fossil fuel for transportation, storage, treatment and processing. Consumption of fuel and all industrial products in agriculture produces pollution.

Every industrial output – extracted raw material, semi-finished and finished goods and the manufacturing processes – needs huge inputs of (fossil fuel) energy, and at every stage of its manufacture and transportation from under the earth to its point of consumption, needs more energy.

Products like the aircraft and automobile are of no use unless fuel is available for consumption, and in use, they generate more pollution.

Every industrial product has a “useful life” and after it is consumed, it is junk, garbage, trash; and every industrial production process produces effluents during manufacture.

It is axiomatic that more consumption means more pollution, and less consumption means less pollution, “consumption” and “pollution” being of all sorts. As the human species as a whole consumes more, it pollutes more.

And this has resulted in global warming which is causing sea level rise and manifesting as climate change, challenging life forms on the planet to adapt or perish. There is the joke of the meteorologist getting himself transferred because the weather did not agree with him.

Now Earth’s climate is changing, and humanity as a whole only has this planet and nowhere else to go, leave alone “protecting” Earth.

Prosperity for all
When the WEF included “ensuring prosperity for all” in world transformation, perhaps they meant that all seven billion human inhabitants of our planet would be sufficiently well-off to enjoy adequate nutritious food, clean water and clean air, and have enough in terms of housing, clothing, health care, education and a satisfying occupation or job which brings in enough earnings to support a family. All this in 15 years, by 2030. This is not different from the development that the 1974 Cocoyoc Conference defined.

But somewhat in keeping with the Human Development Index, prosperity should also include some intangibles like access to social, economic and political justice; liberty of thought, belief, expression, faith and worship; and equality of status and opportunity.

It has been cogently argued elsewhere that without a modicum of justice, liberty and equality within a society, socio-economic inequality cannot be reduced, and without reducing inequality, poverty cannot be meaningfully alleviated, far less ended. The WEF aims of world transformation by ending poverty and ensuring prosperity for all, may be well-intentioned.

However, what is highly questionable is whether at all they are practicable under the present GDP-based model of economic development adopted the world over, and which, within the finite resource base, is causing economic polarization and social unrest within societies.

Inconvenient truth
This paper brings uncomfortable facts to the foreground, and risks being branded as pessimistic for presenting the “dark side”. But rather than being pessimistic, it is about reality and the dangers of complacency that SDGs unintentionally propagate.

An analogy which was presented in Al Gore’s documentary film “An Inconvenient Truth”, concerns the reaction of the frog either dumped into a vessel of hot water, or placed in a vessel of water that is heated gradually. If dumped into hot water, the frog promptly jumps out, but if in the latter circumstance, it keeps adjusting until it is too late and becomes unable to jump out.

The analogy can be extended to say that humanity is like the frog in water that is being heated (global warming) by its own actions. Humanity is now sitting in the comforting warm water of SDGs. It has to act now to jump out – to a future of lower energy consumption in societies which truly embrace the values of justice, liberty and equality.

GDP-driven economic growth drives consumption, which is the primary cause for global warming. In today’s world, unsustainable GDP-based economics drives politics – and the tail wags the dog. In a sustainably transformed world, ending poverty and ensuring prosperity for all would only be possible when politics is guided by principles of justice, liberty and equality, and development is re-defined, starting perhaps with its definition in the UN Cocoyoc Conference of 1974.

World leaders have to understand that the current model of economic growth, especially in the context of finite resources and global warming, is not only unsustainable, but that it is the cause of the existential problem facing humanity. They need to understand the symbiosis of human and natural systems, realise the import of the gathering clouds of climate change, and take prompt action.

SDGs are nowhere near realistic enough. But even now it is not too late. However, if it is left until it is too late, humanity may not be able to “jump out” and even if it somehow does, there will be nowhere to go.

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Hedge funds economic predictions

SUBHEAD: QE will end either in hyperinflation, or a deflationary supernova resulting in bartering.

By Tyler Durden on 9 December 2016 for Zero Hedge -
(http://www.zerohedge.com/news/2016-12-09/top-hedge-funds-predict-how-it-all-will-end)


Image above: A barter transaction of trading a fish for seed corn. From (https://danthropological.com/2015/04/24/to-barter-or-not-to-barter-is-that-really-the-question/).

In early 2009, roughly at the time when this blog was launched which coincided with the start of the greatest monetary experiment of all time, we warned that there are two ways it will end: either in hyperinflation, or a deflationary supernova, the failure of currency and, eventually, barter.

Now, almost eight years later, some of the world's top hedge funds are in agreement, and they are worried.

As the WSJ reports, these prominent hedge fund managers join an increasingly bigger and louder chorus which says central bank bond buying programs that are pumping trillions of dollars into global markets will end badly.

In yesterday's main event, the ECB said it would extend its asset purchase program to the end of next year, buying bonds at a reduced rate. As the following chart from BBG projects, at the ECB's revised rate of bond purchases, its balance sheet will soon surpass that of the Fed.

So what happens next? Prominent managers have told The Wall Street Journal in recent interviews of their doubts about the endgame for quantitative easing around the world.

“There’s no non-messy way out of this,” said Luke Ellis, chief executive of Man Group, one of the world’s biggest hedge-fund firms with $80.7 billion in assets. “There’s two versions” of how this ends, he added. Either central banks could move to so-called ‘helicopter money,’ where they buy debt from the government, which then spends the proceeds or gives it to the population to spend.

This “for a few years looks golden then leads to hyperinflation,” he said. Or the speed at which money circulates within the economy could grind to a halt. “Then you effectively have a barter economy,” he said.

In a series of exclusive interviews with the Journal, hedge-fund executives overseeing around $280 billion in total highlighted a range of problems created by quantitative easing.

The problems they highlight are precisely those that QE was designed to solve, and are exactly the same problems we warned about since the 2009, for which we have been repeatedly branded some variation of "fake news." Now the skepticism has become mainstream.

This is what will happen,\ according to the hedge fund managers interviewed by the WSJ:

Damage to economic growth
Rather than kick-starting growth, quantitative easing may do the reverse. Some managers fear it distorts financial markets and undermines capitalism. That system relies on profit-hungry investors to differentiate between strong and weak companies—funding the strong while letting the weak die. QE, say some managers, doesn’t differentiate.

For instance, the Bank of England is buying the debt of firms it deems make “a material contribution” to the U.K. economy. That has led some investment banks and companies to create new debt especially for it to buy. The ECB has bought €48.2 billion ($51.2 billion) of corporate debt since June, but the hoped-for private-sector investment hasn’t materialized.

“What does a market do? It’s a voting mechanism,” said Michael Hintze, billionaire founder of hedge fund CQS, which runs around $12 billion in assets. “Instead you’ve got this 800-pound gorilla out there who’s hoovering up assets.

“There’s a misallocation of capital and an opportunity cost to the real economy,” added Mr. Hintze, whose portfolio is up 30% this year, ranking it one of the world’s top-performing hedge funds. “It means GDP is not growing as much as it might.”

Some put it even more strongly. “It’s definitely destructive of economic growth,” said Crispin Odey, founder of Odey Asset Management, which runs $8.2 billion in assets.

“Capitalism dies a death,” said Mr. Odey, who sees government policy as the main factor influencing markets. His fund, a top performer after the credit crisis, is down sharply this year because of being too bearish. “It’s all policy. It’s the Kremlin. And I’m in the gulags.”

Damage to society
In her speech to the governing Conservative Party conference in October, U.K. Prime Minister Theresa May spoke of “some bad side effects” from quantitative easing as people with assets got richer while those without them suffered. U.S. President-elect Donald Trump has said low rates have robbed savers.

Those side effects include “envy and distress” within society, “as people think ‘I can’t get out of where I am,’” said Andrew McCaffery, group head of solutions at Aberdeen Asset Management, who looks after $170 billion in assets.

Ultralow interest rates mean the large part of the population with few financial assets begins to despair of how to generate income to fund retirement, he said.

“People see a developing black hole,” he said. This “increases the sense of there being little to lose for many” people.

Andrew Law, chief executive of New York-based Caxton Associates LP, which runs around $7.8 billion, said quantitative easing averted economic depression after the financial crisis.
But he added: “The losers of QE are society, and democracy is also a loser, because central banks are not publicly elected officials.”

Deflation
Quantitative easing was also introduced as a way of increasing private-sector spending and raising inflation. Some investors even worried it would spark hyperinflation and rushed to buy gold. Instead, say some managers, it has led to deflation.

“It took me a long time to work it out,” said CQS’s Mr. Hintze. “It’s a very complex issue.” He said that massive amounts of liquidity mean that “liquidity’s not worth much anymore,” which leads to negative interest rates. “I do think it [QE] is a massive deflationary force. The reason is because money is worth less but the price of real assets goes up.”

Mr. Odey said quantitative easing leads to deflation because weaker competitors are kept alive by cheap debt as “zombie” companies.

Hard stop
Finally, hedge-fund managers see difficulty in ending quantitative easing.

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9/11 The Day America Ended

SUBHEAD: We built the Freedom Tower at the WTC site and denied ourselves the very freedom it symbolizes. 

By Juan Wilson on 11 September 2016 for Island Breath -
(http://islandbreath.blogspot.com/2016/09/911-day-america-ended.html)


Image above: WTC2, the south tower of the World Trade center, begins its collapse to the ground after being hit with commercial jet. From (https://www.pinterest.com/pin/334321972311799824/).

Conspiracy theories abound. And they are like fractal geometries. The deeper you look the more complicated they may seem.

Fractal noun
a curve or geometric figure, each part of which has the same statistical character as the whole. Fractals are useful in modeling structures (such as eroded coastlines or snowflakes) in which similar patterns recur at progressively smaller scales, and in describing partly random or chaotic phenomena such as crystal growth, fluid turbulence, and galaxy formation.

As a result I personally have found going down the rabbit hole of conspiracies useless. This began for me with the Kennedy Assassination. What I think is important is to question the 'authorized version" of evtents and to get a gist of who has benefited from the results of the disaster the conspiracy may have produced.

In the case of the 9/11 attacks on the World Trade Center and Pentagon it is clear that it was executed for the Bush regime by the Saudi Arabians.

The Bush Team (Cheney-Rumsfeld-Rice) wanted and got their excuse for an endless war for American domination in the Middle East as well as the fascist takeover the the operation of the United States. Cheney, in particular, had business interests that could take advantage of our military response to 9/11.

Freedom as individuals in America has never been more threatened by our intelligence and security services as it is today. 

Bursting Bubbles
Often not linked to the 9/11 disaster was the crash of the DotCom Bubble. The over enthusiastic investment in the burgeoning commercial possibilities of the internet at the turn of the millennium featuring startups like GeoCities.com and Pets.com went sour. It seemed the American economy had been euphoric for a business model with yet no substance.

In less than a decade the DotCom Bubble was followed by the speculative Real Estate Bubble bursting in 2008-2009. The following The Great Recession still roils through our economy. We have not recovered from that and have been floating with only our nostrils above the water on a billowing bubble of debt ($20trillion or so). It's been provided by the Central Banks by way of Quantitative Easing, Zero Interest Rate Percent loans (ZIRP) to banks and now Negative Interest Rate Percent (NIRP) bank savings accounts.

But that Debt Bubble is about to burst now. With our current economic model growth and employment cannot be restored without destroying the planet. We will now face the consequences of that with either Hillary (and the NSA) or Donald (and the KGB) at the helm.

The strategy the banksters see going forward is to get rid of the cash economy. It provides too much cover for individual freedom of trade. It denies the banks a slice of every transaction. It can't be easily confiscated or devalued. It means not every step of your life will cannot be monitored.

One Little Grid Failure

It seems pretty clear that the Power Grid and Information Networks are as vital to our continuity as a working civilization as agriculture, highways, factories and ports that are the foundation of our infrastructure.

The power and information systems have become ever more crucial to our continuity as a nation. So much so that people cannot survive without them. 

Problem is they are so delicate that minor glitches can take them down and make our live inconvenient... and major interruptions can cause widespread havoc and chaos.

The "cashless" economy the Techno-Optimists dream of seems cool. Just tapping your iPhone for a Starbuck's coffee, or whizzing through a tollbooth with your EasyPass sticker seems convenient.

The downside of such dependencies exists too. Recently I went for lunch to a Kauai Island Brewery and Grill on the south side. They have great beer and like many restaurants today use networked iPads for orders and billing. Bills are paid at the front desk on an iPad using an attached SquareUp credit card reader.

The brew pub only a few hundred yards from the main KIUC main Port Allen power plant so a power grid failure wasn't likely. However, that doesn't protect them from irregularities of the internet.

As we were coming through the  door the staff, including head waiter, were focused around the card reading iPad at the entrance. It wasn't reading cards. The place was packed and many tables were set to rollover customers.  

The staff was realizing that many might be leaving without a way to pay their bills. They were only letting in new customers who said they could pay cash. We had cash. This lasted only about five minutes but as he seated us the sweat still gleamed on the head waiters forehead.

An electronic cashless economy will not persist for very long, even if it could be deployed. It's too delicate. More likely we will over time descend from a cash economy to a trade/barter/gifting economy.

This is totally lost on most Americans today.

We are is such deep self denial that we built the "Freedom Tower" at the site of the old World Trade Center as we denied ourselves the very freedoms it supposedly symbolizes.

Decentalize Now!

There is no way off this high and fragile branch we cling to, but we must climb down from this perch or to fall to our deaths. Getting down successfully means being reliant on yourself and local resources for all necessities. But in your heart you already knew that.
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