Showing posts with label Great Disruption. Show all posts
Showing posts with label Great Disruption. Show all posts

Coming Apart at the Brink

SUBHEAD: We have reached a point where there is no possibility of revival within the current system.

By Alastair Crooke on 18 June 2017 for the Automatic Earth -
(https://www.theautomaticearth.com/2017/06/coming-apart-the-imperial-city-at-the-brink/)


Image above: Oil painting by Thomas Cole "The Consummation of Empire" 1836. From original article.

[Automatic Earth's publisher Raul Ilagi Meier's introduction: The Conflicts Forum, directed by former British diplomat and MI6 ‘ranking figure’ Alastair Crooke, sent me another unpublished article by Alastair and asked if the Automatic Earth would publish it. But of course. Previous articles by Alastair published here are: ‘End of Growth’ Sparks Wide Discontent in October 2016, Obstacles to Trump’s ‘Growth’ Plans in November 2016 and What is this ‘Crisis’ of Modernity? in January 2017.]

David Stockman routinely refers to President Trump as the ‘Great Disrupter’. But this is not a bad quality, he insists. Rather, it is a necessary one: Stockman argues (my paraphrasing) that Trump represents the outside force, the externality, that tips a ‘world system’ over the brink: It has to tip over the brink, because systems become too ossified, too far out on their ‘branch’ to be able to reform themselves.

It does not really matter so much, whether the agency of this tipping process (President Trump in this instance), fully comprehends his pivotal role, or plays it out in an intelligent and subtle way, or in a heavy-handed, and unsubtle manner. Either serve the purpose. And that purpose is to disrupt.

Why should disruption be somehow a ‘quality’? It is because, during a period when ‘a system’ is coming apart, (history tells us), one can reach a point at which there is no possibility of revival within the old, but still prevailing, system.

An externality of some sort – maybe war, or some other calamity or a Trump – is necessary to tip the congealed system ‘over’: thus, the external intrusion can be the catalyst for (often traumatic) transformational change.

Stockman puts it starkly:
“The single most important thing to know about the present risk environment [he is pointing here to both the political risk as well as financial risk environment], is that it is extreme, and unprecedented. In essence, the ruling elites and their mainstream media megaphones have arrogantly decided that the 2016 [US Presidential] election was a correctible error”.
But complacency simply is endemic: “The utter fragility of the latest and greatest Fed bubble could not be better proxied than in this astounding fact. To wit, during the last 5,000 trading days (20 years), the VIX (a measure of market volatility) has closed below 10 on just 11 occasions. And 7 of those have been during the last month! … That’s complacency begging to be monkey-hammered”, Stockman says.

Former Presidential candidate, Pat Buchanan concurs: “President Trump may be chief of state, head of government and commander in chief, but his administration is shot through with disloyalists plotting to bring him down.

We are approaching something of a civil war where the capital city seeks the overthrow of the sovereign, and [to achieve] its own restoration. Thus far, it is a nonviolent struggle, though street clashes between pro- and anti-Trump forces are increasingly marked by fistfights and brawls. Police are having difficulty keeping people apart. A few have been arrested carrying concealed weapons.

That the objective of this city is to bring Trump down, via a deep state-media coup, is no secret. Few deny it.”

The extraordinary successful ‘manufacture’ and ‘parachuting-in’ of Macron into the French Presidential election by the French élite, precisely has given to the globalised Deep State (including their US counterparts), renewed confidence that Europe and America’s slide towards ‘populism’, is indeed a ‘correctable error’. European elites now can barely contain their revived schadenfreude at the Brexiters’ and at the Populists’ presumed discomfort (see here).


Image above: Oil painting by Thomas Cole "The Destruction of Empire" 1836. From original article.

But despite the palpable danger to the integrity of the political system itself, Stockman notes, “it is no inconsiderable understatement to suggest that the S&P 500 at 2440 is about as fragile as the ‘market’ has ever been.

Any untoward pinprick could send it into a tailspin … Doug Kass said it best in his recent commentary:
“Over history, as we have learned, a Minksy Moment develops when investor sentiment becomes complacent after long periods of prosperity and the data is ignored, and doesn’t seem to matter anymore, as I wrote in “It’s a ‘Bohemian Rhapsody’ Market: Nothing Really Matters … to investors.” 
In short, the market has become ‘zombie’ (in the sense of residing within a psychological defence mechanism – as, when to contemplate the alternative – simply is too threatening to the psyche) [emphasis added].

Daniel Henninger, in a Wall Street Journal op-ed, writes:
“Donald Trump’s election has caused psychological unhingement in much of the population. But the Trump phenomenon only accelerated forces that were plummeting in this direction before the 2016 election…

“Impossible to miss, though, is how jacked up emotional intensity has become in American politics. The campaign rallies of both Mr. Trump and Bernie Sanders often sat on the edge of violence. Reporters describe political town hall meetings as full of “angry” voters. Shouting down the opposition in these forums or on campus has been virtually internalized as standard behavior. Refusal to reason is the new normal. And then, the unreason is euphemized as free speech.

Explaining away these impulses as a routine turn of the populist political cycle is insufficient. Something more permanent is happening.”
It is not, of course just the markets which are threatened by unperceived risk. Trump shall not be forgiven for challenging the sacrosant meme of a world divided between (good) ‘liberal’ democracies (led by the US and its European allies) and (bad) illiberal autocracies (led today, by President Putin’s Russia): by snubbing NATO and withdrawing from the Paris Climate Agreement, Professor Michael Klare writes;
“We’ve been told, President Trump is dismantling the liberal world order created by Franklin D Roosevelt at the end of World War II”.
An offence, it seems, against something somehow sacral: recently, US comedienne Kathy Griffin posted a video of herself holding the bloody, severed head of Donald Trump. “But that wasn’t the end of it” Henninger notes.
 “We may assume that as Ms. Griffin was creating her video, the artists at New York’s Public Theater, were rehearsing their production of Julius Caesar, the one in which Central Park audiences watch ‘Caesar’ as a blond-haired Donald Trump, who is pulled down from a podium by men in suits, and assassinated with plunging knives … Whatever once fastened the doors of people’s minds to something secure and stable has become unhinged.”
Mike Vlahos (Professor at the US Naval War college and John Hopkins) tells us that, as a military historian and global strategist, he became curious to know just why it is that ‘world systems’ do ‘come apart’. His first, intuitive sense was that their collapse generally was brought about by some massive external force such as war, pestilence or famine, and by the concomitant mass migrations of peoples.

But when he and his students completed their research, he concluded that though these factors had often played an important part, they were not the prime cause of the system coming apart. Rather, he identified a number of key triggers:
  • The elites became stratified, and politics frozen
  • The peoples’ allegiance became taken for granted, at the same time that the elites chose to ignore threats to the peoples’ way of life
  • Social mobility declined, and change is fiercely resisted
  • Rather, élites work to maximize their wealth and status.
  • Elite authority becomes excessively militarized – and justified as ‘saving civilization’.
He concludes from this study;
“The situation that we inhabit today […] here in the imperial city in Washington DC, is that it is absolutely hollowed out … it is incapable of offering anything to its own people, the American people … I think we have reached a point where there is no possibility of revival within the current system that exists. The current system is set upon … is determined to eat itself out in a kind of civil war that is coming, and at the end of that, it will be done, will be finished”.

“The Methoni, one of the great nations of the late Bronze Age, had this same problem with the élites and the 1% that we have today, and they were overthrown. That’s 3300 years ago, and it keeps happening again and again.

And the very structure of the decadent relationships in late periods where élites refuse to accommodate, refuse to adapt, refuse to be sensitive to needs of the larger whole of society, means this has to happen. There has to be an overthrow … for things eventually to get better, to be renewed. In other words, you can’t renew from within”.


Image above: Oil painting by Thomas Cole "The Desolation of Empire" 1836. From original article.

Is this the situation today? The pre-conditions that Professor Vlahos relates, in terms of élite hubris, self-regard, and disdain for the real concerns of people are there (the polarization of US society at the US election provides the empirical evidence for this). And Stockman, in calling Trump the ‘Great Disrupter’ plainly implies that he might be precisely the ‘externality’ (coming from outside the élite) – that might tip things ‘over’. This surely is what Stockman means when he warns about ‘the present risk environment’ being extreme.

Of course, the usual retort is that Trump offers no coherent alternative conceptual vision for the future, but only seized successfully upon a number of key insights: the power of cultural nationalism, the pain felt by the casualties of globalism, the impact of a hollowed-out US economy, and the need to put America first.

This is true. These insights do not constitute a vision for the future, but why should one expect that, from the ‘Disrupter’? His ‘agency’ is that of catalyst, not that of final ‘constructor’. That comes later.

So, from whence does ultimate societal renewal come? The classic answer is that after ‘disruption’ nothing much is left standing amidst the (metaphoric) ruins of whatever stood as the reigning ‘modernity’.

Historically, renewal was effected through a communal ‘reaching back’- beyond the roots of whatever represented the contemporary crisis – to delve back, deep into the archetypal cultural history of a people. The rummaging in collective memory, allows a narrative to shape, about why the present ‘hurt’ befell its people, and to bring forward, transformed into contemporary meaning, some ‘solution’: a new meta-historical understanding.

Plainly, this (a type of spiritual renewal) is not President Trump’s ‘bag’. (Steve Bannon’s the more so, perhaps?)

What does all this mean in practical terms? First, it suggests that most of us still prefer not to address the stark reality that “the objective of this city (DC), is to bring Trump down, via a deep state-media coup” and the bitter political trench warfare, which this portends. We prefer to rest in complacency, (as zombies for now), until a crisis squarely hits us – in a personal way.

Secondly, thoughts of an easy return to the status quo ante (such as via Vice-President Pence standing-in), is problematic (Macron’s election in France notwithstanding). Since the élites (all of them), have, in their ‘war’ against ‘populists’ and deplorables, totally lost legitimacy and authority for a substantive part of their populations. And they will not – cannot – adapt. For, that is their nature.

This is the moment, Professor Vlahos notes, when a system – i.e. US operational governance – begins to ‘come apart’. Individuals, cabals within government, whole departments of state, look to their own self-awarded ‘authority’, rather than to that of the government as mandated by the electorate.

Thus we have this past week, the Senate voting 97-2 to impose further sanctions on Russia. Another wrench jammed into Trump’s foreign policy wheels – and explicitly conceived to paralyse and impede the President.

Thirdly, the intent is – like some Amazonian reptile venom – to ‘bite’ him with so much innuendo and assorted investigations and further allegations, that Trump, like the reptile’s victim, remains awake – but incapable of moving a muscle: A true zombie, in fact, as the reptile feeds on its living corpse.

Fourth, this zombified US President, will shortly face the requirement to negotiate with Congress an exit from a bubbling financial sphere soaring upwards, whilst a moribund real economy trails downwards – under pressure from the fast-approaching debt-ceiling deadline.

The Senate’s slap at the President’s face with the Russia sanctions vote suggests it is more likely that he will be tossed another spanner: this time aimed at the wheels of the ‘Trump reflation’ program.

What other insights might history offer? Two, perhaps: Professor Vlahos, during his discussion with John Batchelor, the latter points out that, even at the very moment that the hub of the Roman Empire already had fallen apart, the collapsing Empire was celebrated the most, when it was imitated at the furthest edges of Empire: by the peoples of Gaul and Germany, for example.

Are we not seeing the same today, in Europe, as Merkel and Macron vow to keep the liberal, globalist values of the American Empire alive — at the edges of the American Empire — in Europe?

And lastly, the constituency that historically led renewal? Professor Vlahos: “The Roman legions, the Czarist armies, the German Imperial armies and the Ottoman armies”.

The Pentagon élites should note well.


http://www.islandbreath.org/2017Year/06/170618empire4big.jpg
Image above: Oil painting by Thomas Cole 1836 series on "The Course of Empire - The Pastoral State". From (http://www.artfixdaily.com/artwire/release/1791-nature-and-the-american-vision-the-hudson-river-school) Click to enlarge..

[IB Publsiher's note: Above is another of American painter Thomas Cole's series. This one illustrates the arcadian or pastoral state. It's not clear if it follows or  precedes Empire. We, at Island Breath, are hoping and planning for the latter.]

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What's going on with the Banks?

SUBHEAD: This week emergency bank meetings throughout the world including two with Obama and the Fed. 

By David Haggith on 12 April 2016 for The Great Recession Blog-
(http://wolfstreet.com/2016/04/12/what-in-the-worlds-going-on-with-banks-this-week-emergency-meetings-summits-crashing-eu-banks/)


Image above: a pensioner tries to enter a Greek National Bank branch to receive part of her pension in the island of Crete on July 9, 2015. From (http://www.cnbc.com/2015/07/11/greek-banks-to-run-out-of-money-by-monday-without-ecb-help.html).

[IB Publisher's note: This story is already a day old. It would seem there is some anticipated economic convulsion about to take place. Be prepared. This from SuperStation 95: "RUMORS swirling say "Martial Law discussions over a banking system failure" are the reasons President Obama and Vice President Biden are to meet with Fed. Chair Janet Yellen today after the Federal Reserve's Emergency Meeting this morning.  In the history of the United States, it has never before taken place that both the President AND Vice President meet "unexpectedly" with the Federal Reserve.  Speculation is already flowing all over Washington, DC that it may have something to do with "the survival of the government." Members of the House and Senate are said to have been "up all night" in discussions and meetings; with floods of phone calls back and forth."]

Just about every major banker and finance minister in the world is meeting in Washington, DC, this week, following two rushed, secretive meetings of the Federal Reserve and another instantaneous and rare meeting between the Fed Chair and the president of the United States.

These and other emergency bank meetings around the world cause one to wonder what is going down. Let’s start with a bullet list of the week’s big-bank events:
  • The Federal Reserve Board of Governors just held an “expedited special meeting” on Monday in closed-door session.
  • The White House made an immediate announcement that the president was going to meet with Fed Chair Janet Yellen right after Monday’s special meeting and that Vice President Biden would be joining them.
  • The Federal Reserve very shortly posted an announcement of another expedited closed-door meeting for Tuesday for the specific purpose of “bank supervision.”
  • A G-20 meeting of finance ministers and central-bank heads starts in Washington, DC, on Tuesday, too, and continues through Wednesday.
  • Then on Thursday the World Bank and the International Monetary Fund meet in Washington.
  • The Federal Reserve Bank of Atlanta just revised US GDP growth for the first quarter to the precipice of recession at 0.1%.
  • US banks are widely expected this week to report their worst quarter financially since the start of the Great Recession.
  • The European Union’s new “bail-in” procedures for failing banks were employed for the first time with Austrian bank Heta Asset Resolution AG.
  • Italy’s minister of finance called an emergency meeting of Italian bankers to engage “last resort” measures for dealing with 360-billion euros of bad loans in banks that have only 50 billion in capital.

President Obama’s meeting with Fed Chair Yellen

It is rare for presidents to meet with the chair of the Federal Reserve. The last time President Obama met with Janet Yellen was in November of 2014, a year and a half ago. It is even more rare for the vice president of the United States to join them. In fact, I’ve heard but haven’t verified that it has never happened in a suddenly called meeting with the Fed before.

For security reasons, the president and vice president don’t regularly attend the same events. There are, of course, many planning sessions or emergency meetings where they do get together, but not with the head of the Federal Reserve. Emergency meetings where the VP is included in the planning session would include situations related to dire national security in case the VP winds up having to take over.

(George Bush and Dick Cheney were exceptional to the point that everyone commented on how often the VP was included in meetings with the president, but I always figured that was because George Bush couldn’t think and speak without Cheney acting as the ventriloquist.)

In fact the meeting with the prez and vice prez is so rare that the White House is bending over backwards to assure the entire nation that the president is not meeting with Yellen to try to influence the Fed, which is required to act independently of politics (so they claim).

According to the White House, President Obama is meeting with the Fed chair and Biden to discuss the nation’s “longer-term economic outlook,” even though Yellen just told the entire nation that the economy was strong and had arrived nearly back at “full health.” The president says they will be “comparing notes.”

Do their notes about the nation’s outlook disagree? “Compare notes” sounds sufficiently vague to cover everything imaginable.
White House spokesman Josh Earnest said both Obama and Yellen are focused on ways to expand economic opportunities for the U.S. middle class. He called the meeting an opportunity for the two to “trade notes” while emphasizing that Yellen makes decisions about monetary policy independently. (SFGate)
Either such meetings are, indeed, extremely rare, or the White House doth protest to much because they spent more time this week emphasizing what the president was not going to do than what he was going to do in assuring us all that the president will not try to influence Yellen.
“The president has been pleased with the way that she has fulfilled what is a critically important job,” Earnest said. He added that Obama has “the utmost respect for the independent nature of her role.”
Earnest also said that, “even in a confidential setting” Obama would not “have a conversation that would undermine” the Fed’s ability to make “critical financial decisions independently.” I’m waiting to here the next words — “trust us!”

If such meetings with the Fed are so rare they require careful defensive explanation, why the sudden call of the meeting, oddly timed between two specially called, emergency meetings of the Fed — or, at least, “expedited” meetings of the Fed. It can’t just be that the president wants to plan what he will be saying at this week’s G-20 conference, if he’s to speak there. That kind of planning would happen in advance because one knows the conference is coming.

One striking peculiarity of the president’s meeting with the Fed is that it appeared to have been called immediately after the Fed announced Monday’s “expedited” meeting of the Board of Governors.

We are in an election cycle, and I already speculated in my last article that, with the anti-establishment, Fed-hating candidates Sanders and Trump doing so well in their bids for the presidency, we could be sure the Administration would be doing all it can with the Fed to put some accelerant on this economy and forestall the recession that I believe we have already begun.

A recession would prove Trump and Sanders right in their statements about a coming recession or about the failed recovery actions of the Fed and Wall Street. So, the Fed and the President have every reason to work together to make sure an announcement of recession never happens. That could be what “comparing notes” on the economy’s future means — how do we assure the economy doesn’t fall apart in the next few months before the election since we have that common interest?

(In that case, the president is right that he will not be influencing the Fed — not in the sense of telling it what to do. He will be brainstorming with the Fed what they can both do in their own self-interest. No need for presidential persuasion or coercion because the Fed’s head is in the noose with the presidents if this economy fails.)

That would explanation why the White House is saying, in advance of any accusations, that the president isn’t trying to influence the Fed. They want to get ahead of the story. (Of course, it could just be that they recognize such rare meetings will lead to the kind of speculation I’m now brattishly doing.)

Tuesday’s specially called meeting of the Board of Governors under “expedited procedures”

Here is the announcement the Fed posted at the end of last week for Monday’s meeting (italics mine): 

Advanced Notice of a Meeting under Expedited Procedures

It is anticipated that the closed meeting of the Board of Governors of the Federal Reserve System at 11:30 AM on Monday, April 11, 2016, will be held under expedited procedures, as set forth in section 26lb.7 of the Board’s Rules Regarding Public Observation of Meetings, at the Board’s offices at 20th Street and C Streets, N.W., Washington, D.C. The following items of official Board business are tentatively scheduled to be considered at that meeting.
Meeting Date: Monday, April 11, 2016
Matter(s) Considered
1. Review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks.
A final announcement of matters considered under expedited procedures will be available in the Board’s Freedom of Information and Public Affairs Offices and on the Board’s Web site following the closed meeting.

Dated: April 7, 2016
The promised update after the meeting merely added,
Effective April 11, 2016, the meeting was closed to public observation by Order of the Board of Governors 1 because the matters fall under exemption(s) 9(A)(i) of the Government in the Sunshine Act (5 U.S.C. Section 552b(c)), and it was determined that the public interest did not require opening the meeting.
I’ve worked with boards for enough years to know they can always find a reason something is not in the public interest … and to know how generically they word things whenever they have a closed-door session. One day later, the Fed put out an announcement of another special meeting to be held on Tuesday, after the suddenly scheduled meeting with the president:

Advanced Notice of a Meeting under Expedited Procedures

It is anticipated that the closed meeting of the Board of Governors of the Federal Reserve System at 2:00 PM on Tuesday, April 12, 2016, will be held under expedited procedures, as set forth in section 26lb.7 of the Board’s Rules Regarding Public Observation of Meetings, at the Board’s offices at 20th Street and C Streets, N.W., Washington, D.C. The following items of official Board business are tentatively scheduled to be considered at that meeting.
Meeting Date: Tuesday, April 12, 2016
Matter(s) Considered
1. Bank Supervisory Matter
A final announcement of matters considered under expedited procedures will be available in the Board’s Freedom of Information and Public Affairs Offices and on the Board’s Web site following the closed meeting.

Dated: April 8, 2016
O.K. Two expedited, closed meetings in a row accompanied by a meeting with the president and vice president in between, which the White House, itself, associated with these closed-door meetings, that is so rare it required special White House defense as to what would not be happening in the president’s meeting between these two sessions.

The first meeting was nominally to talk about setting interest rates, which the FOMC will be meeting to consider again later this month, having just postponed their scheduled increase in March. The second meeting is more interesting. If you have served on board or worked with boards that go into closed session, you know they always use the most generic terminology that is still truthful when announcing the meeting and when reporting in minutes what happened in the meeting.

The fact that it is a bank supervisory matter makes it sound like a particular concern, not a general discussion about supervisory policy. Something is the matter somewhere that requires an immediate meeting right after another immediate meeting … behind closed doors. That particular matter immediately requires central-bank supervision.

Boards hold closed meetings when they have to talk about specific institutions or individuals with details that they don’t want to go public. This all comes very close to sounding like some bank somewhere is in trouble, and the trouble is big enough to call a special meeting of the very august board of governors right after they just had a special meeting, and if you know these kinds of guys, they don’t like wasting their time in excessive meetings.

Naturally, I am as curious as you probably are about why so many last-minute meetings behind closed doors and with the president and vice president at a time when all major central bank heads in the world will be meeting with finance ministers in Washington, DC. So, I cast about for some possible related stories in order to what could be the matter, and I found several very hot issues going on this same week.

The recession that has already begun

Atlanta Fed revises US GDP down AGAIN! The president’s meeting with the Fed and the Fed’s two meetings with the Fed were all called right after the Atlanta Federal Reserve Bank revised the revisions of its previous revisements to say the US economy now looks like it will report in for the first quarter at 0.1% growth.
It seems I cannot write fast enough to keep up with the Federal Reserve’s downward revisions of anticipated US GDP growth for the first quarter of 2016. No sooner did I click “publish” on my last article where I noted they had just revised their estimates of GDP down to a 0.4% growth rate than I read an article stating they have revised it again down to 0.1%!

Isn’t this where I said this quarter was going? That last number is within a rounding error of going negative and is less then the margin of error for their data. It was only back in February that the Fed anticipated a cruising speed of 2% growth for GDP in the first quarter. They have revised that number down almost every week.

Of course, the fact that the Fed and the President called an unscheduled, closed-door meeting to include the VP does not mean there is any connection between the events, and I certainly am not concluding even for myself that there is something dire happening here … but stay with me. There is more to perk the ears.

That’s no minor announcement for a coincidence in timing. What if the numbers to be reported are even worse than has been anticipated, and the Fed is seeing bank trouble in some of those numbers, and the President has received advanced information about some of those numbers? What if they foresee turmoil as the numbers come out? All speculation on my part, of course.

What isn’t speculation on my part is that Wall Street is already predicting that this week’s quarterly bank reports are going to look like the start of the Great Recession, and some pretty big players are using some pretty severe language.
Analysts say it has been the worst start to the year since the financial crisis in 2007-2008 and expect poor first-quarter results when reporting begins this week…. Analysts forecast a 20 percent decline on average in earnings from the six biggest U.S. banks, according to Thomson Reuters I/B/E/S data. Some banks, including Goldman Sachs Group Inc (GS.N), are expected to report the worst results in over ten years. (Reuters
Whoa! That means a report for Goldman Sachs that is worse than any time just prior to or during the Great Recession! When you consider how bad the last decade has been, being worse than that is pretty bad. Moreover, the timing is considered unusually nasty:
This spells trouble for the financial sector more broadly, since banks typically generate at least a third of their annual revenue during the first three months of the year…. Bank executives have already warned investors to expect major declines…. Citigroup Inc (C.N) CFO John Gerspach said to expect trading revenue more broadly to drop 15 percent versus the first quarter of last year. JPMorgan Chase & Co’s (JPM.N) Daniel Pinto said to expect a 25 percent decline in investment banking. Several bank executives have warned about declining quality of energy sector loans.
“The first quarter is going to be ugly and we don’t think that necessarily gets recovered in the back half of the year,” said Jerry Braakman, chief investment officer of First American Trust, which owns shares of Citigroup, JPMorgan, Wells Fargo and Goldman. “There are a lot of challenges ahead.”
Yes, one of the biggest areas of bank troubles is emerging now from defaults in the energy sector that I have been saying will play a major role in birthing this banking crisis. (Translate that primarily oil and gas.)
BofA’s Michael Contopoulos warned last week, it may be the worst default cycle in history with “cumulative losses over the length of the entire cycle could be worse than we’ve ever seen before.”
Over the weekend, the FT got the memo with a report that … said that “the global bond default rate by companies is running at its highest since 2009 with the US accounting for the vast majority, according to rating agency Standard & Poor’s. A further four defaults this week, with three coming from the troubled oil and gas sector, pushed the overall tally to 40 with a little over a quarter of 2016 done.” (Zero Hedge)
According to the Wall Street Journal, these defaults are from “massive energy loans that most investors didn’t even know about until recently.” The recovery rate of these bad debts is falling extremely fast.
The growth of the high-yield bond market allowed drillers to take on far more debt than in past booms, leaving them more vulnerable to default. The emergence of shale technology allowed companies to expand reserves and the loans backed by those properties. Some of those loans may now be underwater. (Bloomberg
You can thank the Fed’s zero-interest-rate policy for that easy, crazy credit bubble!
Is anyone starting to feel a little financial crisis deja vù? Last time it was declining housing-sector loans. This time, as I’ve been saying for the last few months we would soon see, it’s declining energy-sector loans. Same song, different verse. Looks like all of that is now materializing.

In code words, Wells Fargo tells us that their trench-worthy report has not even begun to fully write down the bad debts or move into foreclosures that would cause write-downs: (That is, at least, what I read in public bankerspeak.)
John Shrewsberry, Wells Fargo’s chief financial officer, said on a January call with analysts. “We were working with each customer to help them work through this. It doesn’t do us any good to accelerate an issue, or to end up as the holder of a number of oil leases as a bank.
Since we start the big-bank reporting season on Wednesday, we should know right away if this is the next leg down in the Epocalypse, but you will probably have some coded language to look through.

Something as big as this would certainly merit a flash meeting with the president and vice president, multiple meetings of the board of governors, and a G-20 financial summit in Washington along with meetings with the IMF and World Bank.

Not saying that’s what it is. Just sniffing out the kinds of stories that could be related to all these meetings, some planned earlier, others suddenly and all held somewhat secretively.

Austrian bank failure echoes Great Depression

Five and a half years ago, I wrote an article here that mentioned how the Great Depression took its second and deepest plunge in 1931 because of the failure of a private Austrian bank named Credit Anstalt.
In May 1931, a Viennese bank named Credit-Anstalt failed. Founded by the famous Rothschild banking family in 1855, Credit-Anstalt was one of the most important financial institutions of the Austro-Hungarian Empire, and its failure came as a shock because it was considered impregnable…. The fall of Credit-Anstalt—and the dominoes it helped topple across Continental Europe and the confidence it shredded as far away as the U.S.—wasn’t just the failure of a bank: It was a failure of civilization. (Bloomberg
Now, as I’ve been writing about the start of what I believe will be the the second and worst dip of the Great Recession, another Austrian bank is crumbling.

Austria created Heta Asset Resolution AG when it nationalized all the bad loans of Hypo Alpe-Adria-Bank International five years ago to rescue that bank and its depositors by creating a “bad bank” to contain the problems. It went down something like this:

Hypo Alpe-Adria bank, when it was still owned by the small Austrian state of Carinthia, was a cesspool of corruption. It involved bankers, politicians, and powerbrokers in Austria and the Balkans. It was the perfect union of money and power. Investigators found 160 instances of suspected fraud….
Six of the bank’s former executives have been convicted of crimes.
“I’m not aware of a criminal case bigger than this one,” explained Christian Böhler, whose forensics team started investigating the bank in 2011. “It was a mix of greed, criminal energy, and utter chaos.” (Wolf Street)

Hypo’s troubles began, much as Credit Anstalt’s had before it, when it was required to adjust its books to reflect the true value of its collateral assets after the value of real estate in southeastern Europe collapsed. Everything fell apart upon the realization of how little it was actually worth.
Austria’s central bank governor Ewald Nowotny and his task force recommended that Hypo’s toxic assets of €17.8 billion should be put into a “bad bank.” But to stop the drag on public finances, the federal government should not guarantee Hypo’s bonds. At the time, Austrian taxpayers had already plowed €4.8 billion into Hypo to bail out these bondholders.
He then explained on TV to incredulous Austrians that this deal would nudge the budget deficit over the 3% limit set by the Maastricht Treaty and push the government’s debt from 74.4% of GDP to 80% of GDP. This one rotten, state-owned bank in Carinthia was causing this much damage to the country’s finances!
The government, at that point, set a one-year moratorium on all payments to the “bad bank’s” bondholders.

After burning through 5.5 billion euros of taxpayer money to no avail and discovering a
7.6billion-euro hole in its balance sheet still remained to be filled, Finance Minister Hans Joerg Schelling ended support in March 2015. Surprise, surprise, the bad bank created by the government to put a fence around all the bad debts of the original bad bank became nothing but a black hole of debt, swallowing all money poured into it with nothing to show for the effort.

That didn’t stop Schelling from claiming the nationalized bank was in good health in order to put a good face on things, as leaders are inclined to do when dealing with really bad stuff in order to protect the public from a scare.

Yesterday, under the first application of Europe’s new forced “bail in” procedures, Austria ordered a haircut to the banks bondholders. Sighs. This is apparently what happens if your money is invested in a bank with “good health.”

It does, indeed, sound a tad bit like Credit Anstalt. Now the moratorium is up, and it’s time to start dishing out the bad news to the bondholders under Europe’s new rules:

Austria officially became the first European country to use a new law under the framework imposed by Bank the European Recovery and Resolution Directive to share losses of a failed bank with senior creditors as it slashed the value of debt owed by Heta Asset Resolution AG.

The highlights from the announcement…
  • a 100% bail-in for all subordinated liabilities,
  • a 53.98% bail-in, resulting in a 46.02% quota, for all eligible preferential liabilities,
  • the cancellation of all interest payments from 01.03.2015, when HETA was placed into resolution pursuant to BaSAG,
  • as well as a harmonisation of the maturities of all eligible liabilities to 31.12.2023. ((SuperStation95)
This is actually some much-needed relief from how things used to work:
Throughout the Financial Crisis, and since, there has been one rule: bank bondholders will always be bailed out at the expense of everyone else. The sanctity of bank bonds reigned supreme, no matter what government and central banks had to do to keep it that way. Bank bonds weren’t allowed to be judged by the capital markets. They were simply untouchable. Underpaid and overtaxed workers would have to bail out bank bondholders when these recklessly managed banks collapsed.
That was the rule in the US when the Fed, and to a lesser extent the federal government, bailed out the banks. And that was the rule during the debt crisis in Europe. (Wolf Street cont.)
Europe’s new rules were intended to make sure that depositors did not take all the loss and that tax payers don’t absorb all the loss. Heta, because it was a government created “bad bank,” apparently does not have depositors, as it was the creditors and stock holders who were pooled into the “bad bank” who take the hit. The preferred creditors at the Austrian bank have been told they will have to take a 54% haircut, meaning the bonds they have purchased will recover forty-six cents on the euro.

 The big-money (preferred) creditors of the bank, however, don’t like the new rules. They complained and are still holding out for ninety-two cents on the euro. That doesn’t bode well for anything being left for the smaller creditors, whose money will, in the very least, be kept in a lockbox for seven years because payouts to the non-Majors don’t wind up until 2023.

Major bond-holders demanding a smaller hit include Pimco, Commerzbank and the already deeply troubled Deutsche Bank. (Anybody see how things can quickly move down the line like dominoes when you consider the size of some of the worried creditors who are complaining that the hit will be too hard for them?)

The “subordinated liabilities,” as I understand the complex breakdown (for which I have been unable to find any clear definitions), appears to include bondholders who took a second position to the “preferred liabilities” in getting their money back and third-party investors in the bank. It also appears to include the partners in the bank.

If so, then this is exactly how bank failures should happen. The investors are slated to lose 100% of their money first, allowing for the smaller loss by the bondholders.

It is the investors who elect the board that governs the bank and who fill the board positions and who make the decisions of who will be CEO; so, of course, they should lose all of their money before anyone else does. Creditors (bond holders) should be next, as they are often large institutions like PIMCO that have more than enough capacity to investigate risk before investing.

Depositors should always be last, as most of them have no capacity whatsoever to investigate the real risk of banks and nowhere near enough money to put into a bank to make it worth a serious and useful investigation of risk. They are acting in trust … and particularly in trust that government regulators are doing their job.

Too bad the United States doesn’t operate this way!

What kind of spinoff can the settlement of Heta have to other institutions? Well, last month, the Association of German Banks had to bail out a small bank called Duesseldorfer Hypothekenbank AG because its hit as a creditor of Heta would have killed it. Though Duesseldorfer is a small bank, it was apparently deemed too big to fail because, once again, government bailouts went to the rescue.

Given that such an agreement happened on Sunday afternoon, and that central banks and regulatory bodies usually talk with other national bodies that may be affected, I have to wonder if the thought of how Europe might react on Monday had anything to do with Monday’s sudden meetings of the Fed.

Italian banks on final crash-landing approach

As if all that were not bad enough for the start of a week in banking news, Italy’s minister of finance called an emergency meeting over the past weekend of Italian bankers to engage “last resort” measures for dealing with 360-billion euros of bad loans in banks that have only 50 billion in capital.
Finance minister Pier Carlo Padoan has called a meeting in Rome on Monday with executives from Italy’s largest financial institutions to agree final details of a “last resort” bailout plan.
Yet on the eve of that gathering, concerns remain as to whether the plan will be sufficient to ringfence the weakest of Italy’s large banks….
Italian bank shares have lost almost half their value so far this year amid investor worries over a €360bn pile of non-performing loans — equivalent to about a fifth of GDP. (Contra Corner)
Could that have had anything to do with the flurry of bank meetings in the US. I have no idea, but I do have to wonder, with so much smoke everywhere in the banking industry, is there a fire we need to know about? You can be sure, we’ll be the last to know, and any announcement of what’s really going down will hit like Bear Sterns or Lehman Brothers. One day, all the central bankers are talking like things are fine. The next day a major vertebrae is knocked out of the nation’s financial spine.
Or maybe presidents and central bankers are just making sure things generally hold together through the election cycle. Such a bad-news week for banks around the world certainly doesn’t sound like all is well as our smiling central bankers, president and VP, say it is. I don’t know any top secrets to reveal, but the smoke is killing me.

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The Sky is Not Falling

SUBHEAD: If you want food, then GO MAKE FOOD. Be a producer, not a consumer.

By Eric A. on 8 July 2013 for Of Two Minds -
(http://www.oftwominds.com/blogjuly13/EricA7-13.html)


Image above: Raised bed garden constructed from edgum railway sleepers. From (http://deepgreenpermaculture.com/diy-instructions/raised-garden-beds/).

Lately John Michael Greer has been popping up in the blogosphere with well-thought and well-researched insights about the Arc of Empires throughout history. He proposes that like Spengler and others have proposed, Empire rises in a certain recognizable fashion, peaks in a certain fashion, but most importantly falls in a predictable fashion.

Any cursory look at history will tell you this is true, but is likewise easily understood from systems analysis: an Empire, by definition, is the process of extracting wealth from the periphery to the core. What happens once the colonies, frontier, the developing world is already paying all possible tribute?

The only remaining expansion is to both expand the periphery by colonizing ones own citizens, and to shrink the Core to ever-fewer insiders, both of which we see now. Ultimately, the core becomes an oligarchy of a few dozen while the colonized people become everyone else in the system--a 99.9999% vs the 0.0001%, an unstable situation that predictably collapses.

Greer has two returning points with this: one is that this never leads to the end of the world, and the implied point I remarked on in my previous essay: that these things unfold in their own time over the expanse of many years.

The attraction to believe in cultural, financial, or ecological Armageddon is deeply compelling. One can even find data to support these beliefs from commentators or scientists that share one’s outlook. However, in over 2,000 years this has never turned out to be the case. Let’s take two sudden and remarkable ones: The Crash of 1929 and "The Year Without a Summer" in 1816.

During the Crash there was a 90% loss of value for the proxy of the largest US companies. This was accompanied by the closure of hundreds of banks and the confiscation of savings accounts, along with a drop of trade by 60%, GDP by 25%, and a rise in unemployment to 25%.

This was a sudden, severe break in events that had broad, deep repercussions. Was it severe, unprecedented even? Yes. Yet even with a crash of this magnitude, what happened? 99% of people tightened their belts, made do, and carried on.

There were points of extreme desperation recorded by photographers such as Dorothea Lange and writers like Steinbeck, however, this under-reports the same conditions throughout the previous 100 years of Industrialization, such as the Massachusetts child mill workers, the Ludlow Coal Massacre of 1914, or the beating or shooting workers during the steel strike of 1919. Although the numbers and locations fluctuate, there are poor people and oppressive conditions in all countries at all times. We need to compare the average trouble to the peak trouble.

 Statisticians such as John Williams, using a consistent methodology between then and now, mark our present unemployment rate as high as 25% -- the same as during the Great Depression. He also records a 2% drop in GDP every year for 8 years, or a 20% drop in GDP—same as the Great Depression. How did it feel in 1935? How does it feel now to you now? Because that’s how it was.

So what should we do to prepare for the Great Depression? Well, I hate to inform you, but it’s already too late. We’re already in it, so you already know what should you have done in 2001, 2007 or now.

Is it Armageddon? Would stocking beans or bullets in 1999 or 2005 have been helpful to you? For more on this subject, you could read reports from other countries where similar things have happened, writer FerFal from Argentina for instance, or Selco from the war in Serbia, but I think you’ll find the same thing: the problem did not happen that fast, nor did the world end. Challenges were mostly composed of steadily increasing economic pressure with ever-increasing risks of failure. Rent, taxes, debt, sickness, crime: the same challenges as in the good times, only harder.

But the Depression is surely light stuff: let’s move on to an epic ecological catastrophe, the "Year Without a Summer".

In 1815, Mount Tambora in Indonesia exploded with earth-shaking force. It was the largest eruption in 1,300 years, with an explosion audible in Sumatra 2,000km away. Volcanic ash filled the skies, blotting out the sun, and snow fell in Albany in June. River ice flowed in Pennsylvania in July. Frost fell every month of the year in areas of Canada, the US, and Europe. The entire crop was lost before the bitter and endless winter of 1817 where deep-harbor New York recorded temperatures of -26 F (-32 C). Prices rose suddenly through the western world and food riots broke out. This is as close as the modern world has ever come to a nuclear holocaust and nuclear winter.

Never heard of it? That’s odd. You would think the largest explosion and climate event in 1,300 years would have more effect on daily life.

And that’s my point. The world doesn’t end. Nor does it change very quickly or without going through a long series of steps.

I could recount the 85 Million killed in World War II, the 200 Million killed by the Black Death in the 1300s, Communist purges of Stalin and Mao and so on, but the point is the same: things don’t change very quickly or very much. In fact, we’re already in the middle of the next great crisis and you didn’t notice. So are things going to suddenly change tomorrow, next week, next year?

I bring this up because what we THINK will happen determines what we DO in response. For many this has been ignoring risks completely, complete with buying new houses, investing in that 401k, and taking Caribbean Cruises. For others, it’s to stock up on guns, canned goods, and bunker down waiting for the zombie apocalypse.

I propose neither way is sensible, because of the way the world changes ponderously and one step at a time.

Our emotional desire to find either a return to normal or an instant end of everything colors our approach, fatally compromising our ability to accurately prepare for real challenges that are far more likely or even certain. However, comparing to previous crises we can reliably predict what is most likely to happen and where our real risks lie.

As there are a constellation of risks, let’s just take one example of risk and its solution, that I’m personally familiar with: Food Security.

Do you need food security? With 1 in 5 Americans on food stamps and a 25% unemployment rate, I’m going to guess that if you don’t need it already, there’s a good possibility you will in the future.

And that’s only for economic reasons: looking back over history we find major wars with rationing at 70-year intervals. Then there are unique events like Tambora, the Dust Bowl, or has been lately suggested, Global Warming and/or violent weather.

In addition, modern food crops are far more concentrated than ever in history. Concentrated into geographical regions with certain requirements such as oil-hungry irrigation, planting, tilling, and harvesting equipment that will be expensive if not impossible to continue. Concentrated also genetically, where 5 major crops account for most of the calories grown on earth, and of those, a huge proportion are similar strains (corn, wheat) if not near-clones of each other (bananas, Holsteins). This is in addition to the ever-fewer seed producers and the enormous increase in GMO and terminator seeds.

And this is presuming that we have the money to buy food or that we won’t be turned out of our homes by eviction, foreclosure, or war.

With such a variety of factors, how do we create a food plan? By looking to history, of course.

Starting with our two events, how could one have best prepared? Preparations for 1816 are simple: enough food for 1-2 years along with a reserve of heating fuel for the pounding winter of '17. Alternately, you could say that food was available even in this hard time—the problem was price, not availability. So arguably one could have stored a year’s worth of either food or money.

At the same time, if you had stored food only, the 1816 economy was 90% farming: you might have lost the house or farm with the lack of crop income while town dwellers could be evicted away from their pantry when high fuel prices caused them to miss rent. Looked at another way, you could say that food rose sharply in price relative to money and rent. So if you had food in store, you could have sold it to get by--under those conditions, storing food WAS storing money.

How does this compare to the 1929? In the Depression, wholesale prices collapsed and food got far cheaper—but only if you could find the scarce money to buy it with. The Depression wasn’t over in a year, either, but lasted from '29 through '39, then through 1945 with the war rationing for over 20 years of grinding hardship. In Europe, the food and fuel crisis persisted far longer as whole nations were tediously reconstructed from rubble.

While storing food might have helped a little, it’s clearly unrealistic both to buy 10 years’ worth ahead of time and expect to store it safely through the greatest turmoil of the 20th century. If instead you had stored money, you might have done well in America, but only if you were outside stocks, bonds, banks, commodities and real estate. And storing money in the battle zones of Europe would not have been much help at all.

Two very different events with two very different responses, and with food concentration and weather volatility, our needs are different again today. Is there any way to create food stability at low cost, with broad genetic, political, and weather stability with low storage requirements?

Let me ask you a question: why are you storing food in the first place? Is it to eat it? And where does food come from? From the cupboard, from the store, from your paycheck? No. It comes from the ground.

We live in a money paradigm. All things are delivered for money (trade). All goods are compared to money (prices). Then we live and die by our trade and the money-signals that prices give us. Stop trade, wobble the prices around, and we starve by millions.

We also swim in a consumer paradigm. We work to get people halfway around the world buy our stuff so that we can buy stuff back from them. Why? If you want an apple, which is easier: to work, trade that work for money through the online banking system, have money load that apple on a tractor in New Zealand, ship it to a warehouse, a cargo ship, a truck, a store, your car, then your mouth? Or is it easier just to go in the back yard and pick one?

Worried about prices? All those middle men must be paid, from New Zealand to New Hampshire. Which do you think is cheaper? Which do you think is more reliable? Which do you think tastes better?

What I’m saying is, if you want food, then GO MAKE FOOD. Be a producer, not a consumer. And the best part is that if you produce food, whether by seed or tree, it will produce over and over for 10, 20 or 100 years. Through the long Depression. You can sell it in a war or food interruption. You can pick varieties that do not require inputs of oil or water and are not susceptible to genetic crisis. Even if you get turned out, seeds are small, legal, valuable, and the skill to grow them is easily transported. For stability, for price, for size, for long-term reliability, nothing beats making your own.

How do you get cheap food stability? Make it yourself. In Part Two I’ll cover a variety of ways ordinary people can create their own food plan.

• This two-part essay asks if we are already in a Depression, and speaks to the resilience of human communities. Part 2 (to be published tomorrow) will address time-tested ways of increasing our food security that are within reach of many of us.

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This is an Extraordinary Time

SUBHEAD: We have two economies - the simulacrum one of stocks soaring, and the real one of earnings and hours-worked plummeting.

By Charles Hugh Smith on 22 June 2013 for Of Two Minds -
(http://charleshughsmith.blogspot.co.uk/2013/06/this-is-extraordinary-time.html)


Image above: Illustration of for article on Casino Banking in The Freeman. From (http://www.lovingtruthbooks.com/Res.aspx?xr=t&Sku=2859).

It's as if we have two economies - the simulacrum one of stocks soaring and the real one of earnings and hours worked plummeting.

It is difficult to justify the feeling that we are living in an extraordinary moment in time, for the fundamental reason that it's impossible to accurately assess the present in a historical context.

Extraordinary moments are most easily marked by dramatic events such as declarations of war or election results; lacking such a visible demarcation, what sets this month of 2013 apart from any other month since the Lehman Brothers' collapse in 2008?

It seems to me that the ordinariness of June 2013 is masking its true nature as a turning point. Humans soon habituate to whatever conditions they inhabit, and this adaptive trait robs us of the ability to discern just how extraordinary the situation has become.

In my 59-year lifetime, the dramatic, this-is-history-happening moments are obvious: the Kennedy assassination, 9/11, and so on. Other tidal changes developed over a period of months or years: Watergate, which ballooned from a minor break-in to a constitutional crisis, is a good example. So is the financial meltdown of 2008, which actually began back in 2001 when the Federal Reserve chose a policy of super-low interest rates and super-abundant liquidity to lessen the post-dot-com recession.

I have an unavoidable sense that May-June 2013 is the high water mark of the political/financial response to the global financial meltdown of 2008. Nothing systemic has changed in the five years; the status quo financial and political systems have made cosmetic reforms, but the power structures have not changed at all.

The status quo has simply ramped up its traditional policies: since lowering interest rates didn't spark a strong recovery, then lower rates to zero, and so on: more money creation, more credit creation, more bond purchases, more subsidies for housing, more transfers of private debt to the public ledger--more of what has failed spectacularly.

That's what marks June 2013 as extraordinary: the Powers That Be have gone all-in. If their policies fail to ignite a self-sustaining recovery in the real economy, there are no policy options left.

Those who don't follow finance might not have noticed the extraordinary nature of recent financial events: Japan's stock market rose by 75% since December before reversing sharply, the U.S. S&P 500 climbed 24% in 2013, gold crashed by over $200 in a matter of hours, and the Japanese yen has lost a quarter of its value (in U.S. dollars) in a matter of months.

None of this makes sense in terms of the real economy: U.S. corporations didn't suddenly become 25% more profitable; Japan's economy did not expand by 75% in five months, and none of the fundamentals in the value of gold suddenly changed overnight.

These rapid, gargantuan fluctuations are disconnected from the real economy. This in itself is extraordinary. The financial press explains these bubble-like advances and collapses in terms that only make sense to financiers: the yen-dollar pair, the yen carry trade, etc.

That complex, abstract financier policies and trading strategies now dominate stocks, bonds and precious metals is also extraordinary.

I have endeavored to understand the fundamentals behind these wild fluctuations proposed by the media, and have concluded none of it makes any sense in conventional economic terms. To mention just one example: gold has traditionally been viewed as a hedge against inflation. Gold's collapse is being attributed to lower expectations of inflation. OK, so there's no inflation, ergo, the global economy is in slow-growth/no-growth mode, hence no inflation. Then what is powering global stocks higher? We're told "an improving global economy" is the driving force, but the data on this supposed recovery is mixed at best.

Some observers claim gold dropped because the yen dropped and the U.S. dollar strengthened, but a glance at the 10-year chart of gold and the dollar quickly disproves any correlation: gold rose when the dollar dropped and when it rose.

This is another extraordinary thing about the present: none of these moves make any sense. Pundits and analysts are seeking explanations after the fact, postulating correlations as causes with little historical backing. It's as if the financial media is incapable of confessing none of this makes sense, and instead the media piles one complex explanation on top of another to justify what is clearly an extraordinary disconnect between the real economy and asset valuations.

Bottom line: even if the global economy is improving (and there is ample evidence that data is being juiced or manipulated), it isn't improving enough to justify stocks rising by 25% to 75% in a matter of months.

Real estate is also back in bubble territory, in those markets with plentiful capital and limited inventory: we're back to bidding wars and dozens of people competing for the right to buy an ordinary home.

The bond prices of fatally insolvent European governments have fallen, as if these economies have suddenly been restored to health and fast growth by European Central Bank (ECB) intervention. European stock markets are roaring higher as well. Neither makes any sense in terms of traditional risk-pricing, price-earnings ratios and so on.

We are living in an extraordinary global financial experiment, in which financier tricks (zero interest rates and massive injections of credit and liquidity) have been pushed to their red-line limit in the hopes that these extraordinary measures will finally, after five long years, trigger a self-sustaining expansion of the real economy.

Those in charge of the experiment are constantly reassuring us it has already succeeded. I think the data shows the experiment is in the final blow-off stage in which the beaker full of toxic ingredients is bubbling with dangerous vigor.

There is one last extraordinary feature of this time: the data "proving" the experiment is successful is self-referential: drop interest rates to zero and subsidize housing, and voila, you get a surge in building permits. Take one full-time job and turn it into 1.5 part-time jobs, and voila, the unemployment rate declines and the number of jobs increases.

Then take these metrics (higher permits and jobs), weigh them heavily in your measure of leading indicators, and then declare the leading indicators "prove" the recovery is self-sustaining.

All this leads to a question: what would happen to the economy if all the financier tricks were stopped, and the price of risk, credit, assets, etc. were discovered by the marketplace?

It's as if we have two economies: the simulacrum one of stocks rising 75% in a few months, and the real one of household earnings (down) and hours worked (down). Eventually these two economies will have to merge into one. I sense 2013 will be the critical year when the schizophrenia is resolved one way or the other.



Financialization, Debtocracy, Diminishing ReturnsSUBHEAD: Every asset (housing, bonds and stocks) that depends on cheap  abundant credit is doomed.

By Charles Hugh Smith on 20 June 2013 for Of Two Minds - 
(http://charleshughsmith.blogspot.co.uk/2013/06/every-asset-that-depends-on-cheap.html)

About a month ago I asked What If Stocks, Bonds and Housing All Go Down Together? (May 24, 2013). Why would such an outrageous thought even occur to me?

Four words: financialization, debtocracy, diminishing returns. The entire global economy, developed and developing nations alike, is now dependent on cheap, abundant credit for everything: for "growth," for asset inflation, and ultimately for central state deficit spending, which props up all the cartels, rentier arrangements, fiefdoms and armies of toadies, lackeys, apparatchiks and embezzlers that suck off the Status Quo.

I have long endeavored to explain the harsh reality of neofeudal, neocolonial financialization: Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012) and the neofeudal debtocracy that depends on low yields (interest rates) to enable enormous deficit spending: Why Krugman and the Keynesians Are Lackeys for the Neofeudal Debtocracy (April 24, 2013).

The wheels fall off the entire financialized debtocracy wagon once yields rise.There's nothing mysterious about this:

1. As interest rates/yields rise, all the existing bonds paying next to nothing plummet in market value

2. As mortgage rates rise, there's nobody left who can afford Housing Bubble 2.0 prices, so home prices fall off a cliff

3. Once you can get 5+% yield on cash again, few people are willing to risk capital in the equities markets in the hopes that they can earn more than 5% yield before the next crash wipes out 40% of their equity

4. As asset classes decline, lenders are wary of loaning money against these assets; if the collateral for the loan (real estate, bonds, stocks, etc.) are in a waterfall decline, no sane lender will risk capital on a bet that the collateral will be sufficient to cover losses should the borrower default.

Let's take a look at four charts about housing and household net worth. For the middle class, the home remains the key asset, so housing and household net worth are correlated.

Since 1970 mortgage rates  rates were pushed to 17+% to snuff inflation in the early 1980s, and they've dropped over the past 30 years to historic lows: the rate for a fixed-rate 30-year conventional mortgage was about 3.5% a few weeks ago. It has now risen above 4%.

In the golden age of growth from 1991 to 2002, mortgages rates bounced between about 7% and 9%. The band from 1970 to 1979 was about 7.5% to 10%.

In other words, in eras of strong growth and low inflation, mortgage rates have been around 7% to 9%. So what happens to the monthly payments when the mortgage rate doubles from 4% to 8%? The monthly payments rise by about 54%. And what happens to the price of houses when rates double? They fall to the point that households borrowing money at 7.5% - 8% can afford to buy a house, i.e. a price much lower than today's Housing Bubble 2.0 prices.

If mortgage debt had expanded at the previous rate, total debt would be closer to $5 trillion instead of $10 trillion.

When debt becomes cheap and abundant: debt rises faster than wages or assets.

But hasn't household wealth increased mightily in the past decades? Here is a chart that plots the relationship of household net worth and total credit owed, i.e. debt:

Household wealth may be rising, but what this chart reveals is debt is rising even faster--that's why the line is declining. Put another way, every dollar of new debt is generating less and less wealth.

You might think that The Federal Reserve's policy of making credit cheap and abundant would goose people to consume and invest more money. Alas, the velocity of money is hitting historic lows: the Fed may be creating credit but people and enterprises aren't putting that money into circulation.

It's called diminishing returns: every dollar of debt creates interest payments, but it's no longer doing households or enterprises any good. The Fatal Disease of the Status Quo: Diminishing Returns (May 1, 2013).

That's why all asset classes that depend on cheap, abundant credit are doomed: once yields/rates rise, the valuations of those assets implode. And once valuations implode, there's not enough collateral left to support the loans used buy all those cheap-credit-inflated assets. So the financial system also implodes.

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The Last Christmas in America

SUBHEAD: The end of work and the end of mass affluence. Welcome to The Last Christmas in America (TLCIA).

By Charles Hugh Smith on 20 December 2012 for Of Two Minds -
(http://charleshughsmith.blogspot.co.uk/2012/12/the-last-christmas-in-america.html)


Image above: Christmas Gift Wrapping Station from Bed Bath & Beyond for $19.99 seems to be made of thin plastic sheet and netting. Imported (Price excludes shipping). From (http://www.bedbathandbeyond.com/product.asp?sku=40558301&).

As unemployment rose toward 10%, the January 1975 cover of Ramparts Magazine blared: The End of Affluence: The Last Christmas in America. (TLCIA)

The government responded quickly to unemployment, high inflation and rising budget deficits: It started manipulating data to mask the politically inconvenient realities of rising inflation, unemployment and deficits by playing switcheroo with Social Security Trust Funds, inflation data, etc.--games it continues to play to cloak reality from the media-numbed public.

The Bear market, and thus the "real" recession, lasted 16 years - from 1966 to 1982. Now statistics are echoing that last great recession with rising prices for essentials, systemically high unemployment and stagnant wages.

We all know the 16-year recession/malaise had a "happy ending": Huge new oil fields were discovered in Alaska, the North Sea, West Africa and elsewhere, ushering in a renewed era of cheap, abundant petroleum.

President Reagan "saved" Social Security for a generation by raising contributions paid by employer and employees, and he heralded a "lower taxes, higher permanent deficits" ideology that is now accepted as the norm: Deficits don't matter, even when they reach the trillions, because our good friends the Gulf Oil Exporters and Asian exporters will buy all our debt forever and ever, keeping interest low forever and ever.

(And if they drop the ball, then the Federal Reserve will print money and buy the Treasury bonds. Sweet! We don't need any external buyers, just the Federal Reserve.)

Then the U.S. created and launched two revolutionary technologies which both created new wealth around the globe: The personal computer (microprocessor and cheap RAM) and the Internet (TCP/IP, Ethernet, and the commercialization of Tim Berners-Lee's World Wide Web with free browsers) spawning the generation-long boom of the 1980s and 90s.

But when the wheels fell off that boom in 2000, the U.S. did not create a new engine of wealth: It opted instead for a devilishly insidious simulacrum of wealth - debt which rose at an exponential rate throughout the economy.

Borrowed money and phony financial legerdemain (mortgage-backed securities, derivatives based on the MBS, etc. etc.) from 2000-2007 created what I have termed a "bogus prosperity": No actual new wealth was created, only a brief and doomed bubble of debt-based housing valuations was inflated which followed the classic model set down by the Tulip Craze in Holland hundreds of years ago: An insane boom and crushing bust.

We have to revisit the early 1970s for a reality check. In post-industrial America circa 1970, a huge surplus of food was grown by a mere 2% of the workforce. The cornucopia of manufactured goods was produced by about 20% of the workforce (hence the phrase "post-industrial"), and other than essential government services like the Armed Forces, police and the courts, the rest of society's work was either service-oriented paper-pushing relating to affluence (insurance), do-good selfless work (Peace Corps, churches) or leisure-related; entertainment, films, travel, amusement parks, stereos, clubs, etc.

This was not all fantasy. A friend of mine supported an entire house of hippies in late-60s Pittsburgh on his union steelworker job, and had plenty of money left to save for his trip to San Francisco. (As I recall, the rent for the big old house was less than $200 per month.) Hippies were the first ardent dumpster-divers/scavengers, driven not by poverty but by the idea that since that our society generated so much waste and surplus, why bother working?

As noted here many times before, the purchasing power of American workers' wages reached a plateau around 1973 and has been declining ever since.

One key point which is usually overlooked when comparing "The Last Christmas in America" circa 1974 and TLCIA circa 2012: The wealth distribution in the U.S. was much flatter then. CEOs of financial institutions did not earn $10 million each; there were no hedge funds with chiefs pulling down $600 million each (yes, that was the average "compensation" for the top ten fund managers at the hedgies' glorious peak), and even minimum wage ($1.60/hour in the late 60s, I know because my wage stub recorded it) bought far more goods (purchasing power) then than minimum wage does now.

Not only was gasoline cheap, but housing was far and away cheaper than it is today. Just about any G.I./Vet could buy a house with his/her V.A. benefits (3% down), and anyone else could scrimp and save for a few years and then buy a house for 2 or 3 times their annual wage at an interest rate around 6%.

Even in the the most expensive city in the U.S. in terms of cost-of-living, Honolulu, I was able to rent an old studio apartment in 1973 for $120/month--$525 in today's dollars. My tuition and student fees at the University of Hawaii per semester in 1971-75 was $117--$514 in today's dollars. Can you find an apartment in a high-cost city for $500 and go to a four-year state university for $500/semester (not including books of course)? No. Was the state or Federal government running stupendous deficits to provide this education? No.

Meanwhile, in TLCIA circa 2012, obscene "compensation packages" are defended as "free enterprise." Well, what did we have in 1973? Unfree enterprise? Amidst all the ideologically convenient defenses of heavily skewed "compensation," we have to admit that the dream of affluence combined with leisure was based on the presumption of society's wealth being distributed somewhat evenly, not by a Communist central state but by the "free enterprise" system and modest common-sense government regulation (limited work hours, overtime, minimum wage, etc.) which protected employees from the excessive exploitation of the late 19th century and early 20th century Monopoly Capitalists.

Now we face a future which might well be called the End of Work for up to a third of the current workforce. Since agriculture employs about 2% of the workforce, industrial/factory production about 11%, essential transportation and essential government each a bit more, we have to ask: In an economy in which 70% of GDP is consumer spending, how many jobs are actually essential? How much actual wealth is being created/produced in the U.S. and sold overseas? Is giving people with Medicare coverage 13 costly and often ineffective medications and endless MRI tests actually creating wealth, or it mostly squandering it?

We might also ask: How much of the consumer economy is superfluous if wage-earners shift values and decide saving is more important than consuming? How many malls, storefronts, internet retailers, restaurants, fast-food joints, etc. can a newly-frugal economy support? How many dog-walkers, derivative salespeople, nail shops, carpenters, financial planners, realtors, etc. does an economy need if the FIRE economy (finance, insurance and real estate) is shrinking?

Based on the tremendous size of the service/FIRE economy and government, I have estimated that 30 million jobs out of the current 142 million-strong workforce are superfluous (114 million full-time, 38 million part-time). Many government positions are essential; police, meat inspectors, rangers, tax collectors, meter maids, etc., but dozens of agencies could be eliminated without any visible effect on the economy except to the wage-earners who lost their jobs.

If 10 million more jobs disappear, so do all the taxes those wage-earners paid; if the 5 million homes in the pipeline go through foreclosure, the inflated property taxes the owners once paid will disappear, too. Once businesses close, it's not just wages which disappear - all the junk-fees governments levy disappear, too; the business taxes, the licensing fees, the permits, transaction fees, etc.

Does anyone think all these taxes and levies can fall and government employment will be funded by some other source? Yes, the Federal government can borrow money for a few more years at low interest rates; but soon, the surplus money which has piled up in exporters' accounts will be gone, and the endless borrowed trillions will actually start costing real money--money that will be diverted from government employment to pay the interest on all that wonderful debt everyone loved when they got a piece of it.

So how does a society deal with the End of Work when it also means The End of Affluence, even for many of those with jobs? How does government deal with declining tax revenues and rising interest rates?

The death throes of the debt-based consumerist lifestyle are already visible beneath the glossy propaganda of "rising revenues this Christmas season."

The Fed is desperately attempting to re-inflate the debt bubble by lowering interest and mortgage rates and buying up all sorts of semi-toxic/impaired debt.What the Fed dreads is the reality we all feel and see; fear of the future due to diminished wealth and shaky incomes. If your assets have been slashed, you feel poorer because you are poorer. Borrowing more at any interest rate will not make anyone feel wealthier.

People who fear their income may plummet due to layoffs or their hours being cut are not in the euphoric mood to borrow more, and banks which cannot dare to lose more money loaning to people who will default have cut off credit to millions of previously rabid consumers of debt.

And let's not forget that much of what is purchased in this frenzy is needless, superfluous crap. My wife saves the most egregiously gift-buying-frenzy advertising circulars, and one from Bed, Bath & Beyond caught my eye.


Image above: Bed Bath & Beyonds standing valet, with black faux leather finish and steel accents, is perfect for organizing your daily wardrobe needs. Measures 18" L x 17" W x 35" H. Imported.

There is no difference between this "1001 Best Gifts" from BB&B and a parody of consumerist excess. Hmm, how about an "executive standing valet" rack of wood and plastic for $99.99.

To make this poor-quality contraption, a forest somewhere in a Third-World kleptocracy was cut down and precious, irreplaceable oil was burned shipping the lumber to China and from that factory to the U.S. across 6,000 miles of Pacific Ocean.

We know this spindly piece of garbage will break in a matter of days, weeks or maybe if the owner is especially careful, months; then the legs will break loose of the base, the towel bar will pull out, etc. and the "we cut down a priceless rain forest to make this" piece of human handiwork will be put on the curb where a diesel-burning garbage truck will haul it to the landfill along with all the spoiled food Americans throw out.

The 16-bottle wine cellar/cooler from China (labeled Cuisinart for your consuming pleasure) for $199.99 might come in handy storing something once it's unplugged--but a cardboard box will probably do just as well.

I for one will not mourn the last Christmas in America. Good riddance to the flaunting of borrowed money and the heedless, desperate purchase of valueless "goods" as gifts for an insolvent nation awash in too much of everything but common sense, integrity, gratitude, accountability and healthy living.
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End of the World a flop

SUBHEAD: Many prophets were disappointed as the day wore on and the world did not come to an apocalyptic end.

By Mark Stevenson on 21 December 2012 for Huffington Post -
(http://www.huffingtonpost.com/2012/12/21/end-of-the-world-2012_n_2344389.html)


Image above: Mayan shamans take part in a ceremony on December 21, 2012, celebrating the end of the Mayan cycle known as Bak'tun 13 and the start of the Maya new age, at the Tikal archaeological site. Fromoriginal article.

In Merida, Mexico, this December 21st started out as the prophetic day some had believed would usher in the fiery end of the world. By Friday afternoon, it had become more comic than cosmic, the punch line of countless Facebook posts and at least several dozen T-shirts.

At the ruins of the ancient Mayan city of Chichen Itza, thousands chanted, danced and otherwise frolicked around ceremonial fires and pyramids to mark the conclusion of a vast, 5,125-year cycle in the Mayan calendar.

The doomsayers who had predicted apocalypse were nowhere to be seen. Instead, people showed up in T-shirts reading "The End of the World: I Was There."

Vendors eager to sell their ceramic handicrafts and wooden masks called out to passing visitors, "Buy something before the world ends."

And on Twitter, (hash)EndoftheWorld had become one of the day's most popular hash tags.

For the masses in the ruins, Dec. 21 sparked celebration of what they saw as the birth of a new and better age. It was also inspiration for massive clouds of patchouli and marijuana smoke and a chorus of conch calls at the break of dawn.

The official crowd count stood at 20,000 as of mid-afternoon, with people continuing to arrive. That surpassed the count on an average day but not as many as have gathered at the ruins during equinoxes.

The boisterous gathering Friday included Buddhists, pagan nature worshippers, druids and followers of Aztec and Maya religious traditions. Some kneeled in attitudes of prayer, some seated with arms outstretched in positions of meditation, all facing El Castillo, the massive main pyramid.

Ceremonies were being held at different sides of the pyramid, including one led by a music group that belted out American blues and reggae-inspired chants. Others involved yelping and shouting, and drumming and dance, such as one ceremony led by spiritual master Ollin Yolotzin.


"The world was never going to end, this was an invention of the mass media," said Yolotzin, who leads the Aztec ritual dance group Cuautli-balam. "It is going to be a good era. ... We are going to be better."

Ivan Gutierrez, a 37-year-old artist who lives in the nearby village, stood before the pyramid and blew a low, sonorous blast on a conch horn. "It has already arrived, we are already in it," he said of the new era. "We are in a frequency of love, we are in a new vibration."

But it was unclear how long the love would last: A security guard quickly came over and asked him to stop blowing his conch shell, enforcing the ruin site's ban on holding ceremonies without previous permits.

Similar rites greeted the new era in neighboring Guatemala, where Mayan spiritual leaders burned offerings and families danced in celebration. Guatemalan President Otto Perez Molina and Costa Rican President Laura Chinchilla attended an official ceremony in the department of Peten, along with thousands of revelers and artists.

At an indigenous South American summer solstice festival in Bolivia, President Evo Morales arrived on a wooden raft to lead a festival that made offerings to Pachamama, Mother Earth, on a small island in the middle of Lake Titicaca.

The leftist leader and 3,000 others, including politicians, indigenous shamans and activists of all stripes, didn't ponder the end of the world, just the death of the capitalist system, which Morales told the crowd had already happened amid "a global financial, political and moral crisis."

"The human community is in danger because of climatic reasons, which are related to the accumulation of wealth by some countries and social groups," he told the crowd. "We need to change the belief that having more is living better."

Despite all the pomp, no one is certain the period known as the Mayas' 13th Baktun officially ended Friday. Some think it may have happened at midnight. Others looked to Friday's dawn here in the Maya heartland. Mexico's National Institute of Anthropology and History even suggested historical calculations to synchronize the Mayan and Western calendars might be off a few days. It said the Mayan Long Count calendar cycle might not really end until Sunday.

One thing, however, became clear to many by Friday afternoon: The world had not yet ended.

John Hoopes, an assistant professor of anthropology at the University of Kansas, was at the ruins, using the opportunity to talk about how myths are created.

"You don't have to go to the far corners of the earth to look for exotic things, you've got them right here," he noted.

End-of-the-world paranoia, however, has spread globally despite the insistence of archeologists and the Maya themselves that the date meant no such thing.

Dozens of schools in Michigan canceled classes this week amid rumors of violence tied to the date. In France, people expecting doomsday were looking expectantly to a mountain in the Pyrenees where they believe a hidden spaceship was waiting to spirit them away. And in China, government authorities were cracking down on a fringe Christian group spreading rumors about the world's end, while preaching that Jesus had reappeared as a woman in central China.

Gabriel Romero, a Los Angeles-based spiritualist who uses crystal skulls in his ceremonies, had no such illusions as he greeted the dawn at Chichen Itza.

"We'll still have to pay taxes next year," he said.

As if to put the final nail in the coffin of such rumors, Bob McMillan of the University of Arizona's Lunar and Planetary Laboratory confirmed Friday that no large asteroids are predicted to hit anytime soon.

And Bill Leith, a senior science adviser at the U.S. Geological Survey, noted that as far as quakes, tsunamis and solar storms for the rest of the day, "we don't have any evidence that anything is imminent."

Still, there were some who wouldn't truly feel safe until the sun sets Friday over the pyramids in the Yucatan peninsula, the heartland of the Maya.

Mexico's best-known seer, Antonio Vazquez Alba, known as "El Brujo Mayor," said he had received emails with rumors that a mass suicide might be planned in Argentina. He said he was sure that human nature represented the only threat Friday.

"Nature isn't going to do us any harm, but we can do damage to ourselves," he said.

Authorities worried about overcrowding and possible stampedes during celebrations Friday at Mayan sites such as Chichen Itza and Uxmal, both about 1 1/2 hours from Merida, the Yucatan state capital. Special police and guard details were assigned to the pyramids.

Yucatan Gov. Rolando Zapata said he for one felt the growing good vibes, and not just because his state was raking in loads of revenue from the thousands of celebrants flooding in.

"We believe that the beginning of a new baktun means the beginning of a new era, and we're receiving it with great optimism," Zapata said.___
Associated Press writer Romina Ruiz-Goiriena in Iximche, Guatemala, and Florent Bajrami in Bugarach, France, contributed to this report.

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