What Bernanke Doesn’t Understand About Debt Deflation and the Economy

Then he just now posted a second blog on Quantitative Easing, which he ends with pointing out why it might “work” but also suggests that it would lead to yet another financial bubble. Again, very Outside the Box thinking. It has me going ‘hmmm.’

Steve Keen is Associate Professor of Economics & Finance at the University of Western Sydney, and author of the popular book Debunking Economics. He has won numerous awards and is widely published in academia. Seems quite the serious guy. You can read his material at http://www.debtdeflation.com/blogs/.

Your working on Labor Day analyst,

John Mauldin, Editor Outside the Box

What Bernanke Doesn’t Understand

By Steve Keen

Bernanke’s recent Jackson Hole speech didn’t contain one reference to the key force driving the American economy right now: private sector deleveraging (here’s the previous year’s speech for comparison’s sake). The reason the US economy is not recovering from this crisis is because all sectors of American society took on too much debt during the false boom of the last two decades, and they are now busily getting themselves out of debt any way they can.

Debt reduction is now the real story of the American economy, just as real story behind the apparent free lunch of the last two decades was rising debt. The secret that has completely eluded Bernanke is that aggregate demand is the sum of GDP plus the change in debt. So when debt is rising demand exceeds what it could be on the basis of earned incomes alone, and when debt is falling the opposite happens.

I’ve been banging the drum on this for years now, but it’s a hard idea to communicate because it’s so alien to the way most economists (and many people) think. For a start, it involves a redefinition of aggregate demand. Most economists are conditioned to think of commodity markets and asset markets as two separate spheres, but my definition lumps them together: aggregate demand is the sum of expenditure on goods and services, PLUS the net amount of money spent buying assets (shares and property) on the secondary markets. This expenditure is financed by the sum of what we earn from productive activities (largely wages and profits) PLUS the change in our debt levels. So total demand in the economy is the sum of GDP plus the change in debt.

I’ve recently developed a simple numerical example that makes this case easier to understand: imagine an economy with a nominal GDP of $1,000 billion which is growing at 10 percent a year, due to an inflation rate of 5 percent and a real growth rate of 5 percent, and in which private debt is $1,250 billion and is growing at 20% a year.

Aggregate private sector demand in this economy — expenditure on all markets, including asset markets — is therefore $1,250 billion: $1,000 billion from expenditure from income (GDP) and $250 billion from the change in debt. At the end of the year, private debt will be $1,500 billion. Expenditure is thus 20 percent above the level that could be financed by income alone.

Now imagine that the following year, the rate of growth of GDP continues at 10 percent, but the rate of growth of debt slows from 20 to 10 percent. GDP will have grown to $1,100 billion, while the increase in private debt this year will be $150 billion — 10 percent of the initial $1,500 billion total and therefore $100 billion less than the $250 billion increase the year before.

Aggregate private sector demand in this economy will therefore be $1,250 billion, consisting of $1,100 billion from GDP and $150 billion from rising debt — exactly the same as the year before. But since inflation has been running at 5 percent, aggregate demand will be 5 percent lower than the year before in real terms. So simply stabilising the debt to GDP ratio results in a fall in demand in real terms, and some markets — commodities and/or assets — must take a hit.

Putting this example in a table, we get the following illustration:

Variable/Year	Year 1	Year 2
Nominal GDP	1000	1100
Growth rate of Nominal GDP	10%	10%
Real growth rate	5%	5%
Inflation Rate	5%	5%
Private Debt	1250	1500
Growth rate of Private Debt	20%	10%
Change in Private Debt	250	150
Nominal Aggregate demand (GDP + Change in Debt)	1250	1250

Notice that nominal aggregate demand remains constant across the two years – but this means that real output has to fall, since half of the recorded growth in nominal GDP is inflation. So even stabilising the debt to GDP ratio causes a fall in real aggregate demand. Some markets – whether they’re for goods and services or assets like shares and property – have to take a hit.

Now let’s apply this to the US economy for the last few years, in somewhat more detail. There are some rough edges to the following table — the year to year changes put some figures out of whack, and some change in debt is simply compounding of unpaid interest that doesn’t add to aggregate demand — but in the spirit of “I’d rather be roughly right than precisely wrong”, at your leisure please work your way through the table below.

Its key point can be grasped just by considering the GDP and the change in debt for the two years 2008 and 2010: in 2007-2008, GDP was $14.3 trillion while the change in private sector debt was $4 trillion, so aggregate private sector demand was $18.3 trillion. In calendar year 2009-10, GDP was $14.5 trillion, but the change in debt was minus $1.9 trillion, so that aggregate private sector demand was $12.6 trillion. The turnaround in two years in the change of debt has literally sucked almost $6 trillion out of the US economy.

That sucking sound will continue for many years, because the level of debt that was racked up under Bernanke’s watch, and that of his predecessor Alan Greenspan, was truly enormous. In the years from 1987, when Greenspan first rescued the financial system from its own follies, till 2009 when the US hit Peak Debt, the US private sector added $34 trillion in debt. Over the same period, the USA’s nominal GDP grew by a mere $9 trillion.

Ignoring this growth in debt — championing it even in the belief that the financial sector was being clever when in fact it was running a disguised Ponzi Scheme — was the greatest failing of the Federal Reserve and its many counterparts around the world.

Though this might beggar belief, there is nothing sinister in Bernanke’s failure to realize this: it’s a failing that he shares in common with the vast majority of economists. His problem is the theory he learnt in high school and university that he thought was simply “economics” — as if it was the only way one could think about how the economy operated. In reality, it was “Neoclassical economics”, which is just one of the many schools of thought within economics. In the same way that Christianity is not the only religion in the world, there are other schools of thought in economics. And just as different religions have different beliefs, so too do schools of thought within economics — only economists tend to call their beliefs “assumptions” because this sounds more scientific than “beliefs”.

Let’s call a spade a spade: two of the key beliefs of the Neoclassical school of thought are now coming to haunt Bernanke — because they are false. These are that the economy is (almost) always in equilibrium, and that private debt doesn’t matter.

One of Bernanke’s predecessors who also once believed these two things was Irving Fisher, and just like Bernanke, he was originally utterly flummoxed when the US economy collapsed from prosperity to Depression back in 1930. But ultimately he came around to a different way of thinking that he christened “The Debt Deflation Theory of Great Depressions” (Fisher 1933).

You would think Bernanke, as the alleged expert on the Great Depression — after all, that’s one of the main reasons he got the job as Chairman of the Federal Reserve — had read Fisher’s papers. And you’d be right. But the problem is that he didn’t understand them — and here we come back to the belief problem. The Great Depression forced Fisher — who was also a Neoclassical economist — to realize that the belief that the economy was always in equilibrium was false. When Bernanke read Fisher, he completely failed to grasp this point. Just as a religious scholar from, for example, the Hindu tradition might completely miss the key points in the Christian Bible, Bernanke didn’t even register how important abandoning the belief in equilibrium was to Fisher.

To know this, all you have to do is read Bernanke’s summary of Fisher in his Essays on the Great Depression:

The idea of debt-deflation goes back to Irving Fisher (1933). Fisher envisioned a dynamic process in which falling asset and commodity prices created pressure on nominal debtors, forcing them into distress sales of assets, which in turn led to further price declines and financial difficulties. His diagnosis led him to urge President Roosevelt to subordinate exchange-rate considerations to the need for reflation, advice that (ultimately) FDR followed.

Fisher’s idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects.” (Bernanke 2000, p. 24)

There’s no mention of disequilibrium there, and though Bernanke went on to try to develop the concept of debt-deflation, he did so while maintaining the belief in equilibrium. Compare this to Fisher himself on how important disequilibrium really is in the real world:

We may tentatively assume that, ordinarily and within wide limits, all, or almost all, economic variables tend, in a general way, toward a stable equilibrium… But the exact equilibrium thus sought is seldom reached and never long maintained. New disturbances are, humanly speaking, sure to occur, so that, in actual fact, any variable is almost always above or below the ideal equilibrium…

It is as absurd to assume that, for any long period of time, the variables in the economic organization, or any part of them, will “stay put,” in perfect equilibrium, as to assume that the Atlantic Ocean can ever be without a wave. (Fisher 1933, p. 339)

We might not be in such a pickle now if economics had started to become more of a science and less of a religion by following Fisher’s lead, and abandoning key beliefs when reality made a mockery of them. But instead neoclassical economics completely rebuilt its belief system after the Great Depression, and here we are again, once more experiencing the disconnect between neoclassical beliefs and economic reality.

For the record, here’s my “GDP plus change in debt” table for the 1930s, to give us some idea of what the next decade or so might hold if, once again, we repeat the mistakes of our predecessors.

Bernanke, B. S. (2000). Essays on the Great Depression. Princeton, Princeton University Press. Fisher, I. (1933). “The Debt-Deflation Theory of Great Depressions.” Econometrica 1(4): 337-357. Click here to download this post as a PDF file.

Back to the Future – (The second post)

Things are looking grim indeed for the US economy. Unemployment is out of control — especially if you consider the U-6 (16.7%, up 0.2% in the last month) and Shadowstats (22%, up 0.3%) measures, which are far more realistic than the effectively public relations U-3 number that passes for the “official” unemployment rate (9.6%, up 0.1%).

The US is in a Depression, and the sooner it acknowledges that — rather than continuing to pretend otherwise — the better. Government action has attenuated the rate of decline, but not reversed it: a huge fiscal and monetary stimulus has put the economy in limbo rather than restarting growth, and the Fed’s conventional monetary policy arsenal is all but depleted.

This prompted MIT professor of economics Ricardo Cabellero to suggest a more radical approach to monetary easing, in a piece re-published last Wednesday in Business Spectator (reproduced from Vox). Conventional “Quantitative Easing” involves the Treasury selling bonds to the Fed, and then using the money to fund expenditure — so public debt increases, and it has to be serviced. We thus swap a private debt problem for a public one, and the boost to spending is reversed when the bonds are subsequently retired. Instead, Caballero proposes

a fiscal expansion (e.g. a temporary and large cut of sales taxes) that does not raise public debt in equal amount. This can be done with a “helicopter drop” targeted at the Treasury. That is, a monetary gift from the Fed to the Treasury. (Ricardo Caballero)

The government would thus spend without adding to debt, with the objective of causing inflation by having “more dollars chasing goods and services”. This is preferable to the deflationary trap that has afflicted Japan for two decades, and now is increasingly likely in the US. So on the face of it, Cabellero’s plan appears sound: inflation will reduce the real value of financial assets, shift wealth from older to younger generations, and stimulate both supply and demand by making it more attractive to spend and invest than to leave dollars languishing, and losing real value, in the bank.

However, though this is indeed the right time to consider radical solutions, Cabellero’s proposal would do only half the required job. Focusing on the good bit, one reason we got into this predicament in the first place was because private sector, debt-based money swamped public sector, fiat money. Ultimately we need to return to the public-private money balance we had in the 1950s and early 1960s.

But if getting “Back to the Future” was all we needed to do, then our problems would already be over, because Ben’s Helicopter Drop of late 2008 has got us there already: the ratio of M0 to M2 is now almost 0.25, far higher than the 1960 level of 0.14, while the ratio to M3 is back where it was then (using Shadowstats data, which I can’t publish here since it’s proprietary).

So why aren’t we “Back To The Future” already? Why isn’t the economy booming once more, and why is inflation giving way to deflation?

Because, though the money supply is back to where it was in 1960, the debt to money ratio is utterly different. Even after Ben’s Helicopter Drop, the debt to base money ratio is almost twice what it was in 1960, and over 3 times what it was back in the Golden Days of the 1950s.

This points out the blind spot in the thinking of even progressive Neoclassicals like Cabellero, who are willing to consider unconventional policies: they don’t understand how money is created in our credit-driven economy. Because of that, they don’t appreciate how much of that credit has financed a glorified Ponzi Scheme rather than investment, nor do they comprehend the impact that private sector deleveraging is having on aggregate demand.

I’ve covered the first topic ad nauseam in my post ” The Roving Cavaliers of Credit”, so I won’t repeat myself here. Instead I’ll focus on the obvious message from the above chart: if the government simply pumps its money into the system without restraining the financial system from financing speculation on asset markets, the best we can hope for is a repeat of this crisis, on an even larger scale, some years down the track. To see that, all we have to do is look at what happened back in the 1980s.

The Debt to M0 ratio, which had risen sixfold since the 1950s, went into sudden reverse as the economy imploded when the Savings and Loans fiasco ended. The growth of debt collapsed, and the State tried to rescue the financial sector from its follies by fiscal policy and boosting the money supply. That rescue ultimately succeeded when the recession of the 1990s finally ended, but since finance was emboldened rather than reformed, it simply financed two further fiascos: the DotCom madness and then the Subprime scam.

The reason why the 1990s rescue isn’t working this time stands out more clearly when you look at the changes in debt and M0 in raw dollar terms (the scale of the change in M0 is 1/5th that for the change in debt in next two graphs). In the 1990s crisis, the rate of growth of private debt slowed by 2/3rds, but it didn’t actually fall; and a quadrupling of the rate of growth of M0 (starting half a year after debt growth slowed down) was enough, after several years, to let the Wall Street party resume.

This time, the change in debt has turned solidly negative — having growth at up to $4 trillion p.a., it is now shrinking at over $2 trillion. Ben’s far larger quantitative easing (when compared to Alan’s back in 1990-94) simply hasn’t been enough to fight a private sector that is now seriously deleveraging.

QE2 could nonetheless work, if Cabellero’s plan was executed with gusto. But if all we do is effect a monetary rescue, and yet leave the finance sector untouched, then it will reborn once again as an even bigger Ponzi Scheme.

Do we really want to go through all that again?

I’ll explain two truly major financial reforms that could prevent another credit and asset bubble in a subsequent piece.

Investor Shift from U.S. Treasury Bonds and into Gold and Commodities?

 

For the past decade, prices in Japan have been stable or fallen, in an economy where the central bank has pegged its overnight loan rate near zero-percent, and where 10-year bond yields haven’t climbed above 2-percent. Between 1991 and 1995, Tokyo spent $2.1-trillion on public works, in an economy that’s less than half the size of the United States, in order to lift its economy out of a severe downturn caused by the bursting of a real estate and stock market bubble in the early 1990’s.

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By 1996, Japan’s economy started to rebound, growing at a +3% clip, but it was stymied by premature spending cuts and tax increases, due to concerns about ballooning budget deficits. In total, Japan spent $6.3-trillion on construction-related public investment between 1991 and September 2008. But while spending remained high, Japan never escaped its recurring bouts with deflation and recessions. Instead, Japan accumulated the largest public debt in the developed world, equaling 180% of its $5.5-trillion economy, – while failing to generate a sustainable recovery.

The size of America’s $820-billion stimulus plan is far less than what Japan spent, and now that various programs are being phased-out, traders in the G-7 bond markets have begun to fear that the US-economy could stumble into a “double-dip” recession, leading to a Japanese style deflationary trap. As of May, Japan’s year-over-year core deflation rate stood at -1.6%, and in August, its 10-year government bond yield briefly slipped below 1%, for the first time in seven-years.

If deflationary psychology takes hold among consumers, they’ll wait for still lower prices, before buying, adding to the deflationary spiral. And as Japan’s experience suggests, deflation can increase the financial pain of a traditional recession. When deflation strikes, lower sales prices cut into business profits and in turn, prompts companies to trim payrolls. That undermines consumers’ buying power, leading to a vicious cycle of more pressure on profits, jobs, and wages, – and cutbacks in purchases of new equipment. Likewise, bond yields can stay unbelievably low.

The Fed has vowed not to make the same mistake as the Bank of Japan, which waited too long to ease its monetary policy in the early 1990’s. Taking note of Japan’s experience, the Fed pledged in March 2009, to buy $1.45-trillion of mortgage securities backed by Fannie Mae and Freddie Mac, and $300-billion of long-term Treasury bonds. During the Great Depression, the Fed allowed the money supply to fall rapidly, and consumer prices fell 10% between 1929 and 1933.

On Sept 1st, Philadelphia Fed chief Charles Plosser said he would be open to further bond purchases if he saw deflation as a real risk. “I would certainly entertain the solution if I feared deflation, and if expectations were coming unglued in that direction. Then we would have to take actions,” he warned. Treasury bond traders should be careful for what they wish for. Soon after the Fed launched QE-1 in March 2009, the US-Treasury’s 10-year yield turned sharply higher, climbing from 2.60%, to as high as the impenetrable 4-percent level, just two months later.

Unleashing QE-1 ignited fears in the T-bond market of “too-much” money chasing “too-few” goods, that would unleash good, old-fashioned, – Inflation, – the magic elixir for debtors, but injurious for lenders. Sure enough, following a time lag of about four-months, the Rogers International Commodity Index, (RICI), containing a basket of 36-commodities, began to surge sharply higher on a year-over year basis, climbing from a reading of -54% in July 2009, to as high as +37% in Q’1, 2010.

The upward surge in global commodity inflation and Treasury bond yields converged in Q’1, 2010. The RICI peaked at +49%, while the ten-year T-note yield peaked at 4-percent. At about the same time, the Fed was winding down QE-1, buying its last batch of MBS’s in March 2010. Since then, shockwaves from the Greek debt crisis, and a stoppage of the Fed’s money injections, helped trigger a sharp downturn in Treasury yields, and also knocked the commodity inflation into negative territory. 

For all the smug confidence about a sustainable economic recovery this year, sentiment turned upside down by August. The flavor of the month shifted 180-degrees to talk about a “double-dip” US-recession and a slide into a Japanese style deflationary trap. As Mark Twain used to say, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

When it comes to judging the true rate of inflation, an investor can choose to rely on government statistics, which are often fudged by apparatchiks, for political purposes, or an investor can observe the dollars and cents that move the commodities market, for real-time clues about the future direction of inflation or deflation. Using this simple rule of thumb, the RICI is now trading near a zero rate of inflation, signaling that the bond market’s fear of a deflationary trap is overblown.

In Japan, the central bank and the ministry of finance (MoF) manhandled the JGB’s 10-year yield within a narrow range between 1% and 2%, for the past seven years. Massive overdoses of liquidity injections over the years have left the $8.5-trillion JGB market dysfunctional. Still, it was of great interest, when 10-year JGB yields briefly slipped below the psychological 1%-level, in late August.

The historic slide in Japanese bond yields mirrored the US-dollar’s slide to a 15-year low against the Japanese yen. Every time the US-dollar falls by 1-yen, it reduces Japanese exporter profits by about 0.90%, and weakens the Nikkei-225 index.  The yen has risen 11% against the dollar so far this year, driven by safety-seeking flows lately on fears the US-economy may be sliding into a “double-dip” recession, and worries that Greece might ask for a restructuring of its debts.

Yields on Japan’s 30-year bonds briefly fell below the 20-year yield, – projecting a flat yield curve, and sliding to the fault line of a highly dangerous inverted curve. “Currency rates have come to a critical juncture,” warned Japan’s deputy banking chief Kohei Otsuka on August 11th. “A rapid yen rise would boost deflationary factors, so the government and BOJ must act as one in considering our commitment to act against deflation,” he said. On August 27th, Japan’s Prime-minister Kan vowed to take strong measures to stop the dollar’s slide against the yen.

On August 30th, the BOJ tried to stop the US-dollar’s slide, by boosting its deposits in the local banking system to 30-trillion yen ($350-billion), up from 20-trillion yen previously. Increasing the supply of yen briefly boosted the US-dollar to as high as 86-yen. The Fed’s decision to delay QE-2 for awhile longer, also gave the US-dollar some respite from bearish currency speculators. However, the intervention effort fizzled, and within a few days, the US-dollar tumbled to 83.50-yen. On Sept 7th, Japanese Finance chief Yoshihiko Noda said Tokyo would take decisive steps to cap the yen’s rise, including intervening in the FX market to weaken the yen.

Ironically, the biggest reaction to the BoJ’s injection of an extra 10-trillion yen, was in the JGB market, where ten-year yields boomeranged, and spiked upwards to as high as 1.20%, marking a 30-basis point jump from a low of 0.90% hit in late August. Traders have long memories of the bursting of the JGB bubble in the second half of 2003, that saw yields ratchet upwards from a record low of 0.53% to as high as 1.65% within four-months. Already, investors who locked-in JGB 10-year yields below 1% last month, have suffered a 2% capital loss over the past few days.

Trying to push ultra-low JGB yields even lower is like trying to push a helium balloon under water. In order for JGB 10-year yields to stay below 1%, the deflation rate in Japan must average a negative 2-percent. There is an absolute limit to how far long-term bond yields can fall, and with the BoJ’s overnight loan rate pegged at 0.10%, the probability of an inverted yield curve is near zero-percent. Only foreigners can still make money in JGB’s if the yen continues to climb higher the Euro and US-dollar. But the yen’s potential gains from here would be much tougher, if Tokyo’s financial warlords are prepared to engage in full-scale battle.

Fears of “double-dip” recessions in Japan and the US couldn’t dent summer rallies in key industrial commodities, such as copper, rubber, and steel – traded on the Shanghai Futures Exchange. In each case, the rallies were supported by a reduction in supply. Orders by Beijing to Chinese steel mills to trim output by 25-million tons annually prompted a rally in steel prices across Asia. That equals 4% of China’s record crude steel output, and a quarter of the nation’s excess supply.

China, the world’s largest natural rubber user, is expected to boost imports 10% this year after “robust demand” from tire makers depleted inventories to the lowest level in seven-years. Natural rubber prices climbed to 26,200-yuan ($3,850) /ton on the Shanghai exchange, the highest level since July 2008. Rubber stockpiles tracked by the Shanghai Futures Exchange declined to 14,770-tons on June 24, the lowest since Feb 2003, and fell sharply from 24,700-tons last week.

About half of the world’s rubber supply is used for making tires. China’s tire exports jumped 30% in the first six months from a year earlier to 87-million tires as demand from developing countries outweighed lost sales in the US, which levied a 35% tariff on China-made tires. Total vehicle sales in China were 56% higher compared with a year ago to 1.22-million units, boosting the demand for rubber.

Copper futures in Shanghai rebounded 20% over the past ten-weeks, tracking gains on the Shanghai red-chip index. Global copper miners put a floor under the London copper market at $6,000 /ton, by cutting output 6% in the first half of this year. Copper stockpiles held at the London Metal Exchange were whittled down to 395,000-tons, down 28% since mid-February levels of 555,000-tons. In Shanghai, copper stocks dropped to 105,200-tons today, from 185,000-tons in April.

Still, when viewed from a longer-term perspective, the Rogers Int’l Commodity Index, and the Baltic Dry Index, are far below their bubble highs of 2008, and little changed from levels that prevailed 5-years ago. Chinese imports, a key driver of the “Commodity Super Cycle” in earlier years, rebounded to new all-time highs, yet the commodity indexes were left behind in the dust. China is taking advantage of the lower commodity prices, by restocking iron ore, coal, crude oil, and soybeans, from Australia, South Africa and South America, as it braces for the winter season, with droughts and floods across the globe causing a shortage of grains.

The US-government aims to keep inflation under wraps through greater regulation of commodity traders, in the event the Fed decides to unleash QE-2, and boosts the money supply. The CFTC began eyeing position limits after oil and other commodity prices soared to record highs in 2008, on signs that investment banking firms were dominating trade. The commodities market was valued at $2.9-trillion in December 2009, and US-investment banks held one-third of the contracts.
Wall Street Oligarchs, JP-Morgan Chase and Goldman Sachs, are closing their proprietary trading operations in commodities, in conformity with financial reform, after more than five-years of rapid expansion. Yet other legions of commodity speculators are entering the game, and in recent weeks, commodities such as oil, copper, cotton, grains, and gold had strong trading volume. Chinese and Indian demand for commodities is also expected to grow in the years ahead.

Interestingly enough, while fixed-income speculators are touting the illusion of a deflationary trap, the price of Gold is climbing to new all-time highs, hitting $1,260 /oz this week. The gold market is thriving in a world of ultra-low interest rates, and is squarely focused on the burgeoning size of the US-Treasury’s outstanding debt. On August 19th, the non-partisan Congressional Budget Office (CBO) forecast the US-budget deficit will hit $1.34-trillion this fiscal year ending Sept 31st.

CBO also predicted the budget deficit for fiscal year 2011, which begins on Oct 1st, would reach $1.15-triilion, bringing the Treasury’s debt to a record $14.55-trillion, and greater than 100% of the nation’s GDP. As a general rule of thumb, the price of gold climbs about $140- /oz for every $1-trillion increase in the amount of US-red ink. If correct, Gold could reach $1,400 /oz over the next 12-months, and could exceed this bullish forecast, if the Fed unleashes QE-2, as is widely expected.  

In Europe, the gold market is buoyed by widening yield spreads between 10-year German bond yields and those of Irish and Portuguese debt, which climbed to all-time highs this week, while the German-Greek yield spread increased to +990-basis points, exceeding the May 7th high. A Wall Street Journal report said its analysis showed bank stress tests published in July had understated some European banks’ holdings of risky government debt. The Irish/German 10-year government bond yield spread hit a lifetime high of +390-bps, or 40-bps wider on the day. The equivalent Portuguese yield spread hit its widest since May 10th at +360-bps.

The deepening crisis in Greece has resulted in near-record levels of unemployment. Official unemployment now stands at 12%, but hardest hit are younger workers, with 32.5% of all workers between 15-years and 24-years unemployed in May. Euro-zone bond traders are worried that Athens will eventually seek a restructuring, which could mean a 50% haircut for its lenders. Banks’ worldwide exposure to Greek debt in the first quarter of the year was $297-billion. The IMF foresees Greece’s debt topping out 150% of gross domestic product in 2012.

The amount of money flowing into US-bond funds is poised to exceed the cash that went into stock funds during the internet bubble, stoking concern that fixed-income markets are ripe for profit-taking. Investors poured $480-billion into mutual funds that focus on debt in the two years ending June, compared with the $497-billion received by equity funds from 1999 to 2000. American banks plowed $500-billion into Treasury bonds – stealth monetization of the government’s debt.

Presidente Chávez entregó títulos de adjudicación de tierras a pequeños productores de Táchira. Asi la Revolución Bolivariana esta haciendo P-R-O-P-IE-T-A-R-I-O-S de los pequeños productores desposeidos

Septiembre 5, 2010 – 21:08 (lmorales)

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Vea también
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Gobierno Bolivariano entregó titulos de tierras urbanas al pueblo aragüeño(Destacadas en video)
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El jefe de Estado explicó que en total recibirán certificados similares unos 500 campesinos de esa demarcación, quienes podrán legar la propiedad a sus descendientes / Chávez aseguró que el único requisito para el otorgamiento del título es el compromiso de los trabajadores con el fomento de la economía local y el respeto a la ecología

El Presidente de la República Bolivariana de Venezuela, Hugo Chávez, entregó títulos de adjudicación de tierras a 3 productores del estado de Táchira.

Durante la inauguración de la planta procesadora de leche, en el estado Táchira, el jefe de Estado explicó que “en total recibirán certificados similares unos 500 campesinos de esa demarcación, quienes podrán legar la propiedad a sus descendientes”.

Chávez aseguró que el único requisito para el otorgamiento del título es el compromiso de los trabajadores con el fomento de la economía local y el respeto a las prácticas ecológicas.

Añadió que “los productores podrán adquirir créditos en pos del desarrollo de las labores agropecuarias”.

El Mandatario Nacional subrayó que el socialismo comienza a asomarse en el país, y el pueblo junto a la nación camina hacia ese modelo.

Hizo un llamado a impulsar todos los sectores de la economía, para garantizar el bienestar de los venezolanos.

“Lo que tenemos que defender es el futuro, lo que hemos logrado hasta ahora es poco en relación con las potencialidades del país”, afirmó.

Recordó que Venezuela posee abundantes tierras fértiles, óptimas para la actividad agropecuaria.

Linguistic Nonsense and Liberal Economics

Liberal economics has long been recognized by a host of writers, some of whom are economists themselves, as a religious-like dogma. Like Tertullian who believed “because it is absurd,” economists accept the dogma not because it makes sense, but because it doesn’t.

Whoa, you say, show me the evidence, and I will.

Consider this situation: A fully grown person buys and consumes just enough food to maintain her/his weight. Sometimes, in order to taste the spice of variety, s/he buys foods that are more expensive then those s/he usually buys. So during some months, her/his expenditures on food are more than s/he spends in others, but her/his weight never varies.

This situation can be viewed as a microcosmic economy. An economist viewing it would say that because more money passed from the consumer to vendors in some months, the economy in those months grew. (See my piece, Gross National Product (GNP): How is it Calculated? What does it Measure?)

But the person did not grow. So what does an economist mean when she/he says that the economy is growing? Merely that more money is being transferred from consumers to vendors, but that does not mean that more goods and services are available for use by consumers. The material economy, the economy made up of actual goods and services, really has no definite relationship to the monetary economy that economists measure.

Consider these situations:

Over the past several years in the Dallas, TX area, a new sports-entertainment arena and a new professional football stadium were built. Then two older facilities devoted to the same activities were demolished. The result? Nothing essential changed. Dallas today has the same number of sports-entertainment arenas and professional football stadiums that it had before the newer ones were built. But two enormous piles of rubble were created.

Now a lot of money was spent building the new facilities, demolishing the older ones, and carting off the rubble, all of which economists count as additions to Gross (Domestic/National) Product. If these additions would have increased GP, the economists would have said that the economy grew. But the number of facilities did not. The pile of rubble did, however. The cost of the demolitions and carting off the rubble was also added to GP and the rubble itself is now considered by economists to be in the same category as building the new facilities. In other words, the rubble is by economic measures a form of production. a product, rubble was produced. By this reasoning, a society that spends a lot of money destroying itself is engaged in production. But production and destruction are opposites. Productive destruction is an oxymoron which makes no sense whatsoever.

Even more egregious examples of ungrowing growth exist. Consider a fine art auction at, for instance, Sotheby’s. Millions of dollars are often transferred from buyer to seller when an old master’s painting is sold. The money transferred counts as GP, but not a single thing is produced, not even a doodle. So now a category of unproductive production also exists. Producing nothing is a form of production. But that’s oxymoronic.

In April, it was reported that the number of new cars sold is likely to be less that the number of old cars junked. The result will be fewer cars in use in the material economy. But money is spent buying new cars and junking old ones, the sum of which is added to GP. If that raises GP, economists will say that the economy has grown, but the material economy will have shrunk. Now grow and shrink are opposites. Shrinking growth is an oxymoron. The economist’s absurd claim makes no sense.

Most computer users will recognize the term “floppy disk.” A floppy disk is a data storage medium that is composed of a disk of thin, flexible (floppy) magnetic storage medium encased in a plastic shell. The floppy disk has now pretty much been replaced by USB flash drives, external hard disk drives, CDs, DVDs, and memory cards.

The floppy disk itself underwent change. IBM introduced the eight-inch floppy disk in 1971. Then came the five and one quarter inch floppy disk, the three inch floppy disk, the two inch floppy disk, the two and one half inch floppy disk, and finally the ubiquitous three and one half inch floppy disk. As each new disk type was introduced, millions of older disks along with their drives were trashed. Over the past forty years, billions of floppy disks, each encased in plastic, have been transported to landfills. Most were still useful.

The Austrian economist Joseph Schumpeter became renowned when he made the phrase “creative destruction” into an economic theory. The floppy disk’s history is an example of what Schumpeter meant. He would have considered each new disk type a form of creation and the trashing of the older types as destruction.

But what is creative about this process? One form of magnetic data storage is merely replaced by another. Compared to the situation described in paragraph three above, it can be likened to the person’s replacing the tea she/he had been drinking with a new flavor of tea. Although the person is not forced to discard her/his old tea, the floppy disk user is eventually forced to discard her/his old disks and drives, and if she/he wants to preserve the data those disks contain, that data must be painstakingly transferred to a newer medium.

It is difficult, of course, to weigh the creativity against the destruction. Is creative destruction more creative than destructive or more destructive than creative? It varies, I suspect, by cases, but one thing is certain: creative destruction is an oxymoron. Creation and destruction are opposites. (See my piece, Creative Destruction and More Economic Nonsense.)

The floppy disk and most technological “improvements” fall into a category of products often sold as “new and improved.” But that phrase is insidiously oxymoronic. If the product is new, how can it be improved, and if it is improved, how can it be new? But the phrase evokes a deeper question. In what sense is improving an existing product creative?

Consider this example: A man goes to a store that employs an in-house tailor and buys a new suit. He picks one out, tries it on, summons the tailor who marks and pins the suit here and there. The tailor then takes possession of the suit, and the next day, the buyer returns for it. He tries it on and finds that its fit has been satisfactorily improved. Fine! But what has the tailor created? Most certainly not the suit! So are such “improvements” of existing products ever creative? When Microsoft, for instance, issues a “new and improved” version of Windows, has Microsoft created anything new? I don’t know, but most certainly that something new has been created is not obviously true.

These situations establish that no definite relationship exists between growth in the monetary economy that economists measure and the material economy that people utilize. Sometimes the material economy grows along with the monetary economy; sometimes the material economy is unchanged as the monetary economy grows, and sometimes the material economy shrinks while the monetary economy grows. These situations also show that what passes for our economy is uneconomical. Trashing perfectly good and useful things because something newer comes along is nothing but wasteful. So what we have is an uneconomical economy, but that’s no economy at all.

Anyone who understands how a language works knows that words are not singular; they come in families. A noun cannot have a meaning that is different from its adjectival or adverbial siblings. The orthographic differences between the forms serve merely to show the word’s function in a sentence. “Economical” and “economically” go with “economy”; “uneconomical” does not. An uneconomical economy is an oxymoron, sheer nonsense; it is absurd. So what’s known as liberal economics does not describe an economy at all; all it describes is a conglomeration of commercial practices based on nothing but happenstance. Arbitrarily calling these practices “the economy” doesn’t make them one.

Even some economists recognize this. J. Bradford DeLong writes, “One of the dirty secrets of economics is that there is no such thing as ‘economic theory.’ There is simply no set of bedrock principles on which one can base calculations that illuminate real-world economic outcomes. . . . The ‘economic principles’ underpinning their theories are a fraud—not fundamental truths. . . .” But then DeLong betrays his religiosity by saying, “Not surprisingly, I believe that. . . .” But why should anyone care what he believes; does he care what others believe? Do we care what Warren Jeffs, the Pope, the CIA, a Congressman running for office, or even the men who pick up our garbage believe? Good writing teachers continually tell their students not to tell what they believe but what they know. But no one with a religious-like ideology knows anything; if she/he did, she/he would not have to rely on beliefs. And even when reality has proven believers wrong over and over again, they, like Tertullian, continue to believe. Only people without knowledge cite their beliefs.

What people don’t understand about contradiction is that it cannot be contained. Once a contradiction becomes part of a person’s thinking, a belief, a theory, a dogma, or an ideology, contradictions and their resulting nonsense abound. The nonsense pops up everywhere. Here are just a few more examples:

Economists often refer to drops in the market as “corrections.” But the word “correction” can be used meaningfully only in relation to mistakes; what is right cannot be corrected. So if market lows are corrections, market highs are mistakes. But economists not only never tell people that, they cite market highs when describing the market’s condition. Isn’t that like measuring a student’s performance by the number of mistakes s/he makes? Wouldn’t it make more sense to cite the market’s lows when describing the market’s condition? After all, the lows are the corrected numbers.

People are told to save by investing in the market. An investor buys shares of stocks or bonds. These are known generically as securities. But market fluctuations demonstrate almost daily that these securities are insecure. That’s another oxymoron—the insecure security. Would people change their attitudes toward the market if they were plainly told that they were being sold securities that are insecure? I don’t know, but telling people that would at least be truthful.

And then there’s the ubiquitous marketing chant that no economist has ever debunked even though economists often lament the lack of saving by Americans—buy now and save; the more you buy, the more you save.

No, not here on Earth, in Heaven, or even Hell! Buying is done by spending and spending and saving are opposites. Saving by spending is impossible, sheer nonsense. But no economist has ever told a consumer that. Why? Because economists only concern themselves with adding up the money that is transferred from consumers to vendors. If Americans increased their savings, GP would decrease, the monetary economy would shrink. To prevent such shrinkage, business practices have been developed that make it impossible for people to really save. (See my piece, Why Americans Don’t Save.)

All of the foregoing demonstrates that the only goal this conglomeration of commercial practices called the economy has is to pick the pockets of consumers for the benefit of vendors, and economists are only concerned with adding up and increasing the take. Whether consumers benefit or not is irrelevant. The goal of this “economy” is theft.

Genius is not required to understand this or even to figure it out. All that is required is close attention to the language being used. People need to listen carefully to what is being said and then ask themselves, does that make sense? More often than not, they’ll conclude that it doesn’t.

Language is perhaps the most complicated tool human beings use. Senseless sentences can easily be put together that delude people. Such sentences can often delude the speaker her/himself. The position of words in a sentence is not a sufficient condition for meaningfulness. The words also have to have logical coherence. Liberal economics is made up of a host of sentences whose words lack such coherence.

It is difficult to understand how an entire profession of supposedly “educated” people continues to talk this trash until one realizes that such continuous usage is a characteristic of true believers exactly like Tertullian. Just as many believe that God separated night from day before He created the Sun and stars, economists believe in contradictory notions, not because they make sense but because they don’t.

The Ecstasy of Empire: How Close Is America’s Demise?

Without a revolution, Americans are history

by Paul Craig Roberts

The United States is running out of time to get its budget and trade deficits under control. Despite the urgency of the situation, 2010 has been wasted in hype about a non-existent recovery. As recently as August 2 Treasury Secretary Timothy F. Geithner penned a New York Times Column, “Welcome to the Recovery.”

As John Williams (shadowstats.com) has made clear on many occasions, an appearance of recovery was created by over-counting employment and undercounting inflation. Warnings by Williams, Gerald Celente, and myself have gone unheeded, but our warnings recently had echos from Boston University professor Laurence Kotlikoff and from David Stockman, who excoriated the Republican Party for becoming big spending Democrats.

It is encouraging to see a bit of realization that, this time, Washington cannot spend the economy out of recession. The deficits are already too large for the dollar to survive as reserve currency, and deficit spending cannot put Americans back to work in jobs that have been moved offshore.

However, the solutions offered by those who are beginning to recognize that there is a problem are discouraging. Kotlikoff thinks the solution is massive Social Security and Medicare cuts or massive tax increases or hyperinflation to destroy the massive debts.

Perhaps economists lack imagination, or perhaps they don’t want to be cut off from Wall Street and corporate subsidies, but Social Security and Medicare are insufficient at their present levels, especially considering the erosion of private pensions by the dot com, derivative and real estate bubbles. Cuts in Social Security and Medicare, for which people have paid 15% of their earnings all their life, would result in starvation and deaths from curable diseases.

Tax increases make even less sense. It is widely acknowledged that the majority of households cannot survive on one job. Both husband and wife work and often one of the partners has two jobs in order to make ends meet. Raising taxes makes it harder to make ends meet–thus more foreclosures, more food stamps, more homelessness. What kind of economist or humane person thinks this is a solution?

Ah, but we will tax the rich. The usual idiocy. The rich have enough money. They will simply stop earning.

Let’s get real. Here is what the government is likely to do. Once the Washington idiots realize that the dollar is at risk and that they can no longer finance their wars by borrowing abroad, the government will either levy a tax on private pensions on the grounds that the pensions have accumulated tax-deferred, or the government will require pension fund managers to purchase Treasury debt with our pensions. This will buy the government a bit more time while pension accounts are loaded up with worthless paper.

The last Bush budget deficit (2008) was in the $400-500 billion range, about the size of the Chinese, Japanese, and OPEC trade surpluses with the US. Traditionally, these trade surpluses have been recycled to the US and finance the federal budget deficit. In 2009 and 2010 the federal deficit jumped to $1,400 billion, a back-to-back trillion dollar increase. There are not sufficient trade surpluses to finance a deficit this large. From where comes the money?

The answer is from individuals fleeing the stock market into “safe” Treasury bonds and from the bankster bailout, not so much the TARP money as the Federal Reserve’s exchange of bank reserves for questionable financial paper such as subprime derivatives. The banks used their excess reserves to purchase Treasury debt.

These financing maneuvers are one-time tricks. Once people have fled stocks, that movement into Treasuries is over. The opposition to the bankster bailout likely precludes another. So where does the money come from the next time?

The Treasury was able to unload a lot of debt thanks to “the Greek crisis,” which the New York banksters and hedge funds multiplied into “the euro crisis.” The financial press served as a financing arm for the US Treasury by creating panic about European debt and the euro. Central banks and individuals who had taken refuge from the dollar in euros were panicked out of their euros, and they rushed into dollars by purchasing US Treasury debt.

This movement from euros to dollars weakened the alternative reserve currency to the dollar, halted the dollar’s decline, and financed the massive US budget deficit a while longer.

Possibly the game can be replayed with Spanish debt, Irish debt, and whatever unlucky country swept in by the thoughtless expansion of the European Union.

But when no countries remain that can be destabilized by Wall Street investment banksters and hedge funds, what then finances the US budget deficit?

The only remaining financier is the Federal Reserve. When Treasury bonds brought to auction do not sell, the Federal Reserve must purchase them. The Federal Reserve purchases the bonds by creating new demand deposits, or checking accounts, for the Treasury. As the Treasury spends the proceeds of the new debt sales, the US money supply expands by the amount of the Federal Reserve’s purchase of Treasury debt.

Do goods and services expand by the same amount? Imports will increase as US jobs have been offshored and given to foreigners, thus worsening the trade deficit. When the Federal Reserve purchases the Treasury’s new debt issues, the money supply will increase by more than the supply of domestically produced goods and services. Prices are likely to rise.

How high will they rise? The longer money is created in order that government can pay its bills, the more likely hyperinflation will be the result.

The economy has not recovered. By the end of this year it will be obvious that the collapsing economy means a larger than $1.4 trillion budget deficit to finance. Will it be $2 trillion? Higher?

Whatever the size, the rest of the world will see that the dollar is being printed in such quantities that it cannot serve as reserve currency. At that point wholesale dumping of dollars will result as foreign central banks try to unload a worthless currency.

The collapse of the dollar will drive up the prices of imports and offshored goods on which Americans are dependent. Wal-Mart shoppers will think they have mistakenly gone into Neiman Marcus.

Domestic prices will also explode as a growing money supply chases the supply of goods and services still made in America by Americans.

The dollar as reserve currency cannot survive the conflagration. When the dollar goes the US cannot finance its trade deficit. Therefore, imports will fall sharply, thus adding to domestic inflation and, as the US is energy import-dependent, there will be transportation disruptions that will disrupt work and grocery store deliveries.

Panic will be the order of the day.

Will farms will be raided? Will those trapped in cities resort to riots and looting?

Is this the likely future that “our” government and “our patriotic” corporations have created for us?

To borrow from Lenin, “What can be done?”

Here is what can be done. The wars, which benefit no one but the military-security complex and Israel’s territorial expansion, can be immediately ended. This would reduce the US budget deficit by hundreds of billions of dollars per year. More hundreds of billions of dollars could be saved by cutting the rest of the military budget, which in its present size, exceeds the budgets of all the serious military powers on earth combined.

US military spending reflects the unaffordable and unattainable crazed neoconservative goal of US Empire and world hegemony. What fool in Washington thinks that China is going to finance US hegemony over China?

The only way that the US will again have an economy is by bringing back the offshored jobs. The loss of these jobs impoverished Americans while producing over-sized gains for Wall Street, shareholders, and corporate executives. These jobs can be brought home where they belong by taxing corporations according to where value is added to their product. If value is added to their goods and services in China, corporations would have a high tax rate. If value is added to their goods and services in the US, corporations would have a low tax rate.

This change in corporate taxation would offset the cheap foreign labor that has sucked jobs out of America, and it would rebuild the ladders of upward mobility that made America an opportunity society.

If the wars are not immediately stopped and the jobs brought back to America, the US is relegated to the trash bin of history.

Obviously, the corporations and Wall Street would use their financial power and campaign contributions to block any legislation that would reduce short-term earnings and bonuses by bringing jobs back to Americans. Americans have no greater enemies than Wall Street and the corporations and their prostitutes in Congress and the White House.

The neocons allied with Israel, who control both parties and much of the media, are strung out on the ecstasy of Empire.

The United States and the welfare of its 300 million people cannot be restored unless the neocons, Wall Street, the corporations, and their servile slaves in Congress and the White House can be defeated.

Without a revolution, Americans are history.

Dr. Roberts was educated at Georgia Tech, the University of Virginia, the University of California, Berkeley, and Oxford University where he was a member of Merton College. He is the author or coauthor of 9 books and has published many articles in journals of scholarship. He served in the Congressional staff and was Assistant Secretary of the U.S. Treasury. He was awarded the Treasury’s Silver Medal for “outstanding contributions to the formulation of U.S. economic policy.” In 1987 the President of France recognized him as “the artisan of a renewal of economic science and policy” and awarded him the Legion of Honor.

Roberts was associate editor of the Wall Street Journal and columnist for Business Week, Scripps Howard News Service, and Creators Syndicate. He was Senior Research Fellow at the Hoover Institution, Stanford University, and William E. Simon Chair of Political Economy, Center for Strategic and International Studies, Georgetown University. He has been a columnist for French, German, and Italian newspapers. Today he is followed worldwide over the Internet.

Deceptive Economic Statistics: While Economists Lied the US Economy Died…

On August 17, Bloomberg reported a US government release that industrial production rose twice as much as forecast, climbing 1 percent. Bloomberg interpreted this to mean that “increased business investment is propelling the gains in manufacturing, which accounts for 11 percent of the world’s largest economy.”

The stock market rose.

Let’s look at this through the lens of statistician John Williams of shadowstats.com.

Williams reports that “the primary driver of a 1.0% monthly gain in seasonally-adjusted July industrial production” was “warped seasonal factors” caused by “the irregular patterns in U.S. auto production in the last two years.” Industrial production “shrank by 1.0% before seasonal adjustments.”

If the government and Bloomberg had announced that industrial production fell by 1.0% in July, would the stock market have risen 104 points on August 17?

Notice that Bloomberg reports that manufacturing accounts for 11 percent of the US economy. I remember when manufacturing accounted for 18% of the US economy. The decline of 39% is due to jobs offshoring.

Think about that. Wall Street and shareholders and executives of transnational corporations have made billions by moving 39% of US manufacturing offshore to boost the GDP and employment of foreign countries, such as China, while impoverishing their former American work force. Congress and the economics profession have cheered this on as “the New Economy.”

Bought-and-paid-for-economists told us that “the new economy” would make us all rich, and so did the financial press. We were well rid, they claimed, of the “old” industries and manufactures, the departure of which destroyed the tax base of so many American cities and states and the livelihood of millions of Americans.

The bought-and-paid-for-economists got all the media forums for a decade. While they lied, the US economy died.

Now, back to statistical deception. On August 17 the census Bureau reported a small gain in July 2010 residential construction housing starts. More hope orchestrated. In fact, the “gain,” as John Williams reports, was due to a large downward revision” in June’s reporting. The reported July “gain” would “have been a contraction” without the downward revision in June’s “gain.”

So, the overestimate of June housing not only made June look good, but also the downward correction of the June number makes July look good, because starts rose above the corrected June number. The same manipulation is likely to happen again next month.

If the government will lie to you about Iraqi weapons of mass production, Iranian nukes, and 9/11, why won’t they lie to you about the economy?

We now have an all-time high of Americans on food stamps, 40.8 million people, about 14% of the population. By next year the government estimates that food stamp dependency will rise to 43 million Americans. So last week Congress cut food stamp benefits. Let them eat cake.

Wherever one looks–food stamps, home foreclosures, bankrupted states, mounting joblessness, the message to long-suffering Americans from “their government” is the same: go eat cake, while we fight wars for Israel that enrich the military/security complex and while we bail out banksters whose annual incomes are in the tens of millions of dollars and up.

It is impossible to get any truth out of the US government about anything. If private companies used US government accounting, the executives would be prosecuted, convicted, and incarcerated.

“Our government” is committed to fighting wars to enrich the military/security complex and Israel’s territorial expansion at the expense of cuts in Social Security and Medicare.

All most members of Congress, especially Republicans, want to do is to pay for the pointless wars by cutting Social Security and Medicare.

When they worry about the deficit, it is usually Social Security and Medicare–so-called “entitlements” that are in the crosshairs.

You don’t have to be smart to see that Wall Street’s and the government’s response to the amazing US budget deficit is not to stop the senseless wars and bailouts of mega-millionaires, but to cut “entitlements.”

I will end this column on unemployment. “Our government” tells us that the unemployment rate is just under 10 percent, a figure that would have wrecked any post-Great Depression administration. But, again, “our government” is lying. The reported unemployment rate is just below 10% because the US government no longer, since the corrupt Clinton administration, counts Americans who have been unemployed for longer than one year. Once the unemployed hit one year and one day, they are dropped from the unemployment roles and no longer counted as unemployed.

Compare this fact with the number you read from the financial press. Right now, if measured according to the methodology of 1980, the US unemployment rate is about 22%. Thus, the reported rate of unemployment hides more than half of the unemployed.

And Secretary Treasury Tim Geithner welcomed us in the August 2 NewYork Times to “the recovery.”

Utterly amazing.

Media Complicity in Financial Crimes

Q: Why are media outlets doing such a bad job covering Wall Street?
A: Could it be, becausse they are owned by Wall Street?

When you connect the dots in your writing or look for deeper explanations behind the decisions of policymakers, market makers and media-makers, it’s easy to be dismissed as a conspiracy nut.

But forgive me for believing that those who serve interests have more clout than those that just speak out on issues. There are hidden relationships that sometimes predetermine what stories get media attention and which do not.

I have a current film out, Plunder the Crime of our Time, taking on big media companies to task for what passes as coverage of the financial crisis. I have been asking why they weren’t paying attention, didn’t warn us about it, or investigate too deeply into how it happened.

When I discovered that dodgy lenders and credit card companies pumped more than $3 billion into media advertising, which inflated the housing bubble between 2002 and 2007, I thought I had my answer.

Based on my own experience inside news networks, I could see that networks investigating their own advertisers in a tough economic climate was not exactly high on their agenda. It happens, but rarely.

Yet, even I, as savvy as I thought I was, missed an important link which was hidden in plain sight — who owns the very media institutions I was railing against?

Guess what: many owners are the very financial institutions that should have been exposed. Media is a business tied into other businesses and driven by interlocking directorates by a not-so-invisible umbilical chord.

It took a colleague, Barry James Dyke, author of ‘The Pirates of Manhattan,’ [click here for his video collection of the plundering] to give me a little guided online tour into this reality via Yahoo’s finance page. It’s easy to access but usually only used by investors, not investigative journalists like me.

I am not a stranger to corporate media ownership issues. Our Mediachannel even did a chart, some years back, showing how a handful of media giants owned most of the channels on broadcast and cable outlets.

What we didn’t do, then, is what Barry Dyke was showing me how to discover: who owns those same companies.

It’s all there, clearly available in easy to read charts to help you see how their stock is performing. On the left side of the chart, there is a section to click on entitled, “ownership.”

In the flash of a click, a display of ownership appears of the company I used to work for: ABC News. This information is mandated by laws designed to insure accountability and protect investors.

The first category is “Major Direct Holders.” At the top of the list is a former ABC News executive, Robert A. Iger who owns 850,790 shares [Eight Hundred Fifty Thousand Seven Hundred and Ninety]. Under him are other biggies who were given or helped to buy stock, allegedly to incentivize them. These holdings complement and add to their already generous salaries.

In truth, it’s all a form of looting of the shareholder value. Often these execs have more clout than the boards of directors they theoretically report to. Sometimes, it only takes a small percentage of shares to wield control. Together these insiders and what are called, 5% owners, own 7% of Disney, but exert disproportionate influence.

The next category on the chart is Institutional and Mutual Fund owners. They control 68%. And who are they? Fidelity, State Street Corporation, JP Morgan Chase and Company, Price T Rowe Associates, etc. etc.

The next category is “Top Mutual Fund holders” with the Fidelity Contra Fund owning $1.2 B [$1,200,000,000.00] in holdings; more than 36 million shares. In all, 1095, institutions own shares. But a few are more equal than others. The role that these largely unaccountable mutual funds play is rarely examined. Just listing their holdings doesn’t explore their influence.

Some mutual funds get an added benefit — access to employee retirement withholdings. So, they are not just funding Disney, but being funded by Disney with a guaranteed income stream even though the Funds, often, do not perform well.

Explains Barry Dyke: “It’s about control. Mutual fund companies get other people’s money through payroll deductions on their 401[k]s, and those fund companies, and the funds they control, own large stakes in companies like Disney.

Through lobbying, essentially with the Pension Protection Act of 2006, employers are exempt from liability-fiduciary responsibility as long as they use a mutual fund; a target date mutual fund more specifically. Employers are exempt from liability, mutual fund companies are exempt from liability from the get-go, and do a lousy job of looking out for shareholders.”

What he means here is their returns have been relatively low—and many have blown up. Forcing employees to invest with them is hardly fair if they are losing money.

Back on our list, there follows, “insider transactions.” Some of the information is considered N/A—not available.

Why is that?

I was at ABC News, and available, when Disney swooped in to buy the company in 1995 for $19 billion. It had been for sale for $11 billion just two years earlier. The deal was the largest media merger in history, to that point, and the second largest sum of money ever paid for a U.S. company.

Back in 1940, Walt Disney had first sold stock to lower the debt. The newer Disney took on billions in debt to finance its deals. Where did the money come from?

Why, no surprise, the very Wall Street banks and financial institutions they work with. Call it synergy, or call it collusion, but not the kind that leads to better programming or media responsibility.

The final phase-out of ABC occurred at a final shareholders meeting I attended in a New York TV studio on January 4, 1996. I wrote about it in my book, ‘The More You Watch, The Less You Know,’ noting that the vote to sell the company to the “Mouse House” (and, in the process, enrich its shareholders) passed by a vote of 121,000,000 to 437,000. It was only after the deal was done that questions from the floor were permitted.

So much for corporate democracy! I managed to get a question in –called on as “the man in the back of the room.” It annoyed my bosses.

I asked the former Chairman of Capital Cities, the first company to acquire ABC and then ABC’s departing leader, if he was “concerned” about what the merger would mean for our democracy. [One of Cap Cities’ founders and principals was the nefarious Iran-Contra conspirator William Casey who became Ronald Reagan’s secretive and sneaky CIA Director.]

There was no concern about my concern. My question was ridiculed and dismissed by Chairman Tom Murphy who said, “Am I concerned. No, I am not concerned.” Murphy had earlier told Charlie Rose that he enjoyed winning. He was asked what that meant to him.

“Making money” was his response. “Whoever makes the most wins. That’s how we keep score.”

In sharp contrast, media historian Robert McChesney was concerned, very concerned, writing later: “A specter now haunts the world; a global commercial media system dominated by a small number of super powerful, mostly U.S. based transnational media corporations. It is a system that works to advance the cause of the global market and promote commercial values, while denigrating journalism and culture not conducive to the immediate bottom line or long-run corporate interests. It is a disaster for anything but the most superficial notion of democracy — a democracy where, to paraphrase John Jay’s maxim, “those who own the world ought to govern it.”

Disney went on to acquire more stations. Their network now includes 200 affiliated stations, reaching nearly 100% of all U. S. television and 277 radio outlets, at last count. And they publish books, magazines, and financial and medical services information. The journalism they offer has noticeably declined as they slashed the number of employees in the News Division.

Just one recent and small example: towards the end of August, ABC News reported on new credit card rules, dryly reciting the new disclosures mandated in the new “reform” law. They did not mention that nothing was done to cap interest rates or, as the Wall Street Journal reported the next day, “the banks and credit card companies had jacked up the rates despite the flagging economy and the fact they can borrow money at record low rates.”

Why was that? Could it have anything to do with the interests of those who own Disney, ABC’s parent company?

You tell me. [Disney, by-the-by, offered its own credit card.] It also censored stories on pedeophiles at Disneyland.

Media companies always insist no one tells them what to do, with Fox News perhaps the most glaring and candid exception, considering Rupert Murdoch’s ideological leash.

Yet, even as the ‘Nets cover the money in politics that buys laws and rents politicians, they insist no one ever influences their coverage decisions — not investors, not advertisers, and certainly, not viewers.

President Obama, it is said, did Wall Street’s bidding because of all the money they shmeared on his campaign. But do the companies that own and control media companies, with billions at stake, have any say in “what does” and “does not” get on the air?

Never!

Bailing out casino capitalist speculators has triggered a fiscal crisis in the US

Former Treasury Secretary Hank Paulson wrote an op-ed in The New York Times, (Feb. 16)[1] outlining how to put the U.S. economy on rations. Not in those words, of course. Just the opposite: If the government hadn’t bailed out Wall Street’s bad loans, he claims, “unemployment could have exceeded the 25 percent level of the Great Depression.” Without wealth at the top, there would be nothing to trickle down.

The reality, of course, is that bailing out casino capitalist speculators on the winning side of A.I.G.’s debt swaps and CDO derivatives didn’t save a single job. It certainly hasn’t lowered the economy’s debt overhead. But matters will soon improve, if Congress will dispel the present cloud of “uncertainty” as to whether any agency less friendly than the Federal Reserve might regulate the banks.

Mr. Paulson spelled out in step-by-step detail the strategy of “doing God’s work,” as his Goldman Sachs colleague Larry Blankfein sanctimoniously explained Adam Smith’s invisible hand. Now that pro-financial free-market doctrine is achieving the status of religion, I wonder whether this proposal violates the separation of church and state. Neoliberal economics may be a travesty of religion, but it is the closest thing to a Church that Americans have these days, replete with its Inquisition operating out of the universities of Chicago, Harvard and Columbia.

If the salvation is to give Wall Street a free hand, anathema is the proposed Consumer Financial Protection Agency intended to deter predatory behavior by mortgage lenders and credit-card issuers. The same day that Mr. Paulson’s op-ed appeared, the Financial Times published a report explaining that “Republicans say they are unconvinced that any regulator can even define systemic risk. … the whole concept is too vague for an immediate introduction of sweeping powers. …” Republican Senator Bob Corker from Tennessee was willing to join with the Democrats “to ensure ‘there is not some new roaming regulator out there … putting companies unbeknownst to them under its regime.’”[2]

Mr. Paulson uses the same argument: Because the instability extends not just to the banks but also to Fannie Mae and Freddie Mac, Lehman Brothers, A.I.G. and Wall Street underwriters, it would be folly to try to regulate the banks alone! And because the financial sector is so far-flung and complex, it is best to leave everything deregulated. Indeed, there simply is no time to discuss what kind of regulation is appropriate, except for the Fed’s familiar protective hand: “delays are creating uncertainty, undermining the ability of financial institutions to increase lending to businesses of all sizes that want to invest and fuel our recovery.” So Mr. Paulson’s crocodile tears are all for the people. (Except that the banks are not lending at home, but are shoveling money out of the U.S. economy as fast as they can.)

As Mr. Obama’s chief of staff Emanuel Rahm put it, a crisis is too good a thing to waste. It’s a con man’s old trick to pressure the victim to make a decision fast. Having created the crisis, Wall Street wants to use its momentum to knock out any potential checks to its power. “No systemic risk regulator, no matter how powerful, can be relied on to see everything and prevent future problems,” Mr. Paulson explained. “That’s why our regulatory system must reinforce the responsibility of lenders, investors, borrowers and all market participants to analyze risk and make informed decisions,” In other words, blame the victims! The way to protect victims of predatory bank lending (and crooked sales of junk securities) is not new regulations but just the opposite: “to simplify the patchwork quilt of regulatory agencies and improve transparency so that consumers and investors can punish excesses through their own informed investing decisions.” Simplification means the Fed, not a Consumer Financial Protection Agency.

Moving in for the kill, Mr. Paulson explains that the Treasury is bare, having used $13 trillion to bail out high finance in 2008-09. So he warns the government not to run a Keynesian-type budget deficit. The federal budget should move into balance or even surplus, even if this accelerates the rise in unemployment and decline in wage levels as the economy moves deeper into recession and debt deflation. “We must also tackle what is by far our greatest economic challenge — the reduction of budget deficits — a big part of which will involve reforming our major entitlement programs: Medicare, Medicaid and Social Security.” The economy thus is to be sacrificed to Wall Street rather than reforming finance so that it serves the economy more productively. It is simple mathematics to see that if the government cannot raise taxes, it must scale back Social Security, other social welfare spending and infrastructure spending.

What is remarkably left out of account is that today’s financial crisis centered on public debts is largely fiscal crisis. It is caused by replacing progressive taxation with regressive taxes, and above all by untaxing finance and real estate. Take the case of California, where tears are being shed over the dismantling of the once elite University of California system. Since American independence, education has been financed by the property tax. But Proposition 13 has “freed” property from taxation – so that its rental value can be borrowed against and turned into interest payments to banks. California’s real estate costs are just as high with its property taxes frozen, but the rising rental value of land has been paid to the banks – forcing the state to slash its fiscal budget or else raise taxes on labor and consumers.

The link between financial and fiscal crisis – and hence the need for a symbiotic fiscal-financial reform – is just as clear in Europe. The Greek government has pre-sold its tax revenues from roads and other infrastructure to Wall Street, leaving less future revenue to pay its public debt. To cap matters, paying income tax is almost voluntary for wealthy Greeks. Tax evasion is hardly necessary in the post-Soviet states, where property is hardly taxed at all. (The flat tax falls almost entirely on labor.)

Throughout the world, scaling back the 20th century’s legacy of progressive taxation and untaxing real estate and finance has led to a public debt crisis. Property income hitherto paid to governments is now paid to the banks. And although Wall Street has extracted $13 trillion in bailouts just since October 2008, the thought of raising taxes on wealth to pay just $1 trillion over an entire decade for Social Security or health insurance is deemed a crisis that would lead Wall Street to shut down the economy. It is telling governments to shift to a regressive tax system to make up the fiscal shortfall by raising taxes on labor and cutting back public spending on the economy at large. This is what is plunging economies from California to Greece and the Baltics into fiscal and financial crisis. Wall Street’s solution – to balance the budget by cutting back the government’s social contract and deregulating finance all the more – will shrink the economy and make the budget deficits even more severe.

Financial speculators no doubt will clean up on the turmoil.

Financial Backlash: “Quantitative Easing” Will Trigger Another Wave of Mergers and Acquisitions

As I noted when the government started bailing out the big banks:

[The] Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws which rewards mergers in the banking industry.

Yesterday, former Secretary of Labor Robert Reich pointed out that quantitative easing won’t help the economy, but will simply fuel a new round of mergers and acquisitions:

A debate is being played out in the Fed about whether it should return to so-called “quantitative easing” — buying more mortgage-backed securities, Treasury bills, and other bonds — in order to lower the cost of capital still further.

The sad reality is that cheaper money won’t work. Individuals aren’t borrowing because they’re still under a huge debt load. And as their homes drop in value and their jobs and wages continue to disappear, they’re not in a position to borrow. Small businesses aren’t borrowing because they have no reason to expand. Retail business is down, construction is down, even manufacturing suppliers are losing ground.

That leaves large corporations. They’ll be happy to borrow more at even lower rates than now — even though they’re already sitting on mountains of money.

But this big-business borrowing won’t create new jobs. To the contrary, large corporations have been investing their cash to pare back their payrolls. They’ve been buying new factories and facilities abroad (China, Brazil, India), and new labor-replacing software at home.

If Bernanke and company make it even cheaper to borrow, they’ll be unleashing a third corporate strategy for creating more profits but fewer jobs — mergers and acquisitions.

Similarly, Yves Smith reports that quantitative easing didn’t really help the Japanese economy, only big Japanese companies:

A few days ago, we noted:

When an economy is very slack, cheaper money is not going to induce much in the way of real economy activity.

Unless you are a financial firm, the level of interest rates is a secondary or tertiary consideration in your decision to borrow. You will be interested in borrowing only if you first, perceive a business need (usually an opportunity). The next question is whether it can be addressed profitably, and the cost of funds is almost always not a significant % of total project costs (although availability of funding can be a big constraint)…..

So cheaper money will operate primarily via their impact on asset values. That of course helps financial firms, and perhaps the Fed hopes the wealth effect will induce more spending. But that’s been the movie of the last 20+ years, and Japan pre its crisis, of having the officialdom rely on asset price inflation to induce more consumer spending, and we know how both ended.

Tyler Cowen points to a Bank of Japan paper by Hiroshi Ugai, which looks at Japan’s experience with quantitative easing from 2001 to 2006. Key findings:

….these macroeconomic analyses verify that because of the QEP, the premiums on market funds raised by financial institutions carrying substantial non-performing loans (NPLs) shrank to the extent that they no longer reflected credit rating differentials. This observation implies that the QEP was effective in maintaining financial system stability and an accommodative monetary environment by removing financial institutions’ funding uncertainties, and by averting further deterioration of economic and price developments resulting from corporations’ uncertainty about future funding.

Granted the positive above effects of preventing further deterioration of the economy reviewed above, many of the macroeconomic analyses conclude that the QEP’s effects in raising aggregate demand and prices were limited. In particular, when verified empirically taking into account the fact that the monetary policy regime changed under the zero bound constraint of interest rates, the effects from increasing the monetary base were not detected or smaller, if anything, than during periods when there was no zero bound constraint.

Yves here, This is an important conclusion, and is consistent with the warnings the Japanese gave to the US during the financial crisis, which were uncharacteristically blunt. Conventional wisdom here is that Japan’s fiscal and monetary stimulus during the bust was too slow in coming and not sufficiently large. The Japanese instead believe, strongly, that their policy mistake was not cleaning up the banks. As we’ve noted, that’s also consistent with an IMF study of 124 banking crises:

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.

Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery. Of course, the caveat to these findings is that a counterfactual to the crisis resolution cannot be observed and therefore it is difficult to speculate how a crisis would unfold in absence of such policies. Better institutions are, however, uniformly positively associated with faster recovery.

But (to put it charitably) the Fed sees the world through a bank-centric lens, so surely what is good for its charges must be good for the rest of us, right? So if the economy continues to weaken, the odds that the Fed will resort to it as a remedy will rise, despite the evidence that it at best treats symptoms rather than the underlying pathology.

As I pointed out on August 11th:

“Deficit doves” – i.e. Keynesians like Paul Krugman – say that unless we spend much more on stimulus, we’ll slide into a depression. And yet the government isn’t spending money on the types of stimulus that will have the most bang for the buck: like giving money to the states, extending unemployment benefits or buying more food stamps – let alone rebuilding America’s manufacturing base. See this, this and this. [Indeed, as Steve Keen demonstrated last year, it is the American citizen who needs stimulus, not the big banks.]

***

Keynes implemented his policies in an era of much less debt than we have today. We’re now bankrupt, with debt levels so high that they are dragging down the economy.

Even if Keynesian stimulus could help in our climate of all-pervading debt, Washington has already shot America’s wad in propping up the big banks and other oligarchs.

***

Keynes implemented his New Deal stimulus at the same time that Glass-Steagall and many other measures were implemented to plug the holes in a corrupt financial system. The gaming of the financial system was decreased somewhat, the amount of funny business which the powers-that-be could engage in was reined in to some extent.

As such, the economy had a chance to recover (even with the massive stimulus of World War II, unless some basic level of trust had been restored in the economy, the economy would not have recovered).

Today, however, Bernanke, Summers, Dodd, Frank and the rest of the boys haven’t fixed any of the major structural defects in the economy. So even if Keynesianism were the answer, it cannot work without the implementation of structural reforms to the financial system.

A little extra water in the plumbing can’t fix pipes that have been corroded and are thoroughly rotten. The government hasn’t even tried to replace the leaking sections of pipe in our economy.

Quantitative easing can’t patch a financial system with giant holes in it.
What’s needed has been obvious to independent observers for years: Break up the big banks, prosecute the criminals whose fraud caused the financial crisis, and restore the rule of law and transparency.

Until those basic steps are taken, nothing else will work to fix our broken economy.

Global Collapse of the Fiat Money System: Too Big To Fail Global Banks Will Collapse Between Now and First Quarter 2011

Readers of my articles will recall that I have warned as far back as December 2006, that the global banks will collapse when the Financial Tsunami hits the global economy in 2007. And as they say, the rest is history.

Quantitative Easing (QE I) spearheaded by the Chairman of Federal Reserve, Ben Bernanke delayed the inevitable demise of the fiat shadow money banking system slightly over 18 months.

That is why in November of 2009, I was so confident to warn my readers that by the end of the first quarter of 2010 at the earliest or by the second quarter of 2010 at the latest, the global economy will go into a tailspin. The recent alarm that the US economy has slowed down and in the words of Bernanke “the recent pace of growth is less vigorous than we expected” has all but vindicated my analysis. He warned that the outlook is uncertain and the economy “remains vulnerable to unexpected developments”.

Obviously, Bernanke’s words do not reveal the full extent of the fear that has gripped central bankers and the financial elites that assembled at the annual gathering at Jackson Hole, Wyoming. But, you can take it from me that they are very afraid.

Why?

Let me be plain and blunt. The “unexpected developments” Bernanke referred to is the collapse of the global banks. This is FED speak and to those in the loop, this is the dire warning.

So many renowned economists have misdiagnosed the objective and consequences of quantitative easing. Central bankers’ scribes and the global mass media hoodwinked the people by saying that QE will enable the banks to lend monies to cash-starved companies and jump start the economy. The low interest rate regime would encourage all and sundry to borrow, consume and invest.

This was the fairy tale.

Then, there were some economists who were worried that as a result of the FED’s printing press (electronic or otherwise) working overtime, hyper-inflation would set in soon after.

But nothing happened. The multiplier effect of fractional reserve banking did not take off. Bank lending in fact stalled.

Why?

What happened?

Let me explain in simple terms step by step.

1) All the global banks were up to their eye-balls in toxic assets. All the AAA mortgage-backed securities etc. were in fact JUNK. But in the balance sheets of the banks and their special purpose vehicles (SPVs), they were stated to be worth US$ TRILLIONS.

2) The collapse of Lehman Bros and AIG exposed this ugly truth. All the global banks had liabilities in the US$ Trillions. They were all INSOLVENT. The central banks the world over conspired and agreed not to reveal the total liabilities of the global banks as that would cause a run on these banks, as happened in the case of Northern Rock in the U.K.

3) A devious scheme was devised by the FED, led by Bernanke to assist the global banks to unload systematically and in tranches the toxic assets so as to allow the banks to comply with RESERVE REQUIREMENTS under the fractional reserve banking system, and to continue their banking business. This is the essence of the bailout of the global banks by central bankers.

4) This devious scheme was effected by the FED’s quantitative easing (QE) – the purchase of toxic assets from the banks. The FED created “money out of thin air” and used that “money” to buy the toxic assets at face or book value from the banks, notwithstanding they were all junks and at the most, worth maybe ten cents to the dollar. Now, the FED is “loaded” with toxic assets once owned by the global banks. But these banks cannot declare and or admit to this state of affairs. Hence, this financial charade.

5) If we are to follow simple logic, the exercise would result in the global banks flushed with cash to enable them to lend to desperate consumers and cash-starved businesses. But the money did not go out as loans. Where did the money go?

6) It went back to the FED as reserves, and since the FED bought US$ trillions worth of toxic wastes, the “money” (it was merely book entries in the Fed’s books) that these global banks had were treated as “Excess Reserves”. This is a misnomer because it gave the ILLUSION that the banks are cash-rich and under the fractional reserve system would be able to lend out trillions worth of loans. But they did not. Why?

7) Because the global banks still have US$ trillions worth of toxic wastes in their balance sheets. They are still insolvent under the fractional reserve banking laws. The public must not be aware of this as otherwise, it would trigger a massive run on all the global banks!

8) Bernanke, the US Treasury and the global central bankers were all praying and hoping that given time (their estimation was 12 to 18 months) the housing market would recover and asset prices would resume to the levels before the crisis. .

Let me explain: A House was sold for say US$500,000. Borrower has a mortgage of US$450,000 or more. The house is now worth US$200,000 or less. Multiply this by the millions of houses sold between 2000 and 2008 and you will appreciate the extent of the financial black-hole. There is no way that any of the global banks can get out of this gigantic mess. And there is also no way that the FED and the global central bankers through QE can continue to buy such toxic wastes without showing their hands and exposing the lie that these banks are solvent.

It is my estimation that they have to QE up to US$20 trillion at the minimum. The FED and no central banker would dare “create such an amount of money out of thin air” without arousing the suspicions and or panic of sovereign creditors, investors and depositors. It is as good as declaring officially that all the banks are BANKRUPT.

9) But there is no other solution in the short and middle term except another bout of quantitative easing, QE II. Given the above caveat, QE II cannot exceed the amount of the previous QE without opening the proverbial Pandora Box.

10) But it is also a given that the FED will embark on QE II, as under the fractional reserve banking system, if the FED does not purchase additional toxic wastes, the global banks (faced with mounting foreclosures, etc.) will fall short of their reserve requirements.

11) You will also recall that the FED at the height of the crisis announced that interest will be paid on the so-called “excess reserves” of the global banks, thus enabling these banks to “earn” interest. So what we have is a merry-go-round of monies moving from the right pocket to the left pocket at the click of the computer mouse. The FED creates money, uses it to buy toxic assets, and the same money is then returned to the FED by the global banks to earn interest. By this fiction of QE, banks are flushed with cash which enable them to earn interest. Is it any wonder that these banks have declared record profits?

12) The global banks get rid of some of their toxic wastes at full value and at no costs, and get paid for unloading the toxic wastes via interest payments. Additionally, some of the “monies” are used by these banks to purchase US Treasuries (which also pay interests) which in turn allows the US Treasury to continue its deficit spending. THIS IS THE BAILOUT RIP OFF of the century.

Now that you fully understand this SCAM, it is left to be seen how the FED will get away with the next round of quantitative easing – QE II.

Obviously, the FED and the other central banks are hoping that in time, asset prices will recover and resume their previous values before the crisis. This is a fantasy. QE II will fail just as QE I failed to save the banks.

The patient is in intensive care and is for all intent and purposes brain dead, although the heart is still pumping albeit faintly. The Too Big To Fail Banks cannot be rescued and must be allowed to be liquidated. It will be painful, but it is necessary before there is recovery. This is a given.

Warning:

When the ball hits the ceiling fan, sometime early 2011 at the earliest, there will be massive bank runs.

I expect that the FED and other central banks will pre-empt such a run and will do the following:

1) Disallow cash withdrawals from banks beyond a certain amount, say US$1,000 per day; 2) Disallow cash transactions up to a certain amount, say US$10,000 for certain transactions; 3) Transactions (investments) for metals (gold and silver) will be restricted; 4) Worst-case scenario – the confiscation of gold AS HAPPENED IN WORLD WAR II. 5) Imposition of capital controls etc.; 6) Legislations that will compel most daily commercial transactions to be conducted through Debit and or Credit Cards; 7) Legislations to make it a criminal offence for any contraventions of the above.

Solution:

Maintain a bank balance sufficient to enable you to comply with the above potential impositions.

Start diversifying your assets away from dollar assets. Have foreign currencies in sufficient quantities in those jurisdictions where the above anticipated impositions are least likely to be implemented.

CONCLUSION

There will be a financial tsunami (round two) the likes of which the world has never seen.

Global banks will collapse!

Be ready.