ANTIESTABLISHMENTARIAN

Finance, Fuel Prices, Economics, Markets

Why Tiny Greece Matters

Its true that the debt problems of the tiny Greek economy seems all out of proportion to the fears it has struck in the world markets. Friday saw a lot of people trying to downplay it, noting that the economies of Greece and Portugal are only 2% and 1% of EU GDP respectively. Even Jim Puplava was making that argument yesterday. But the shockwaves sent by the Dubai default, which was even smaller, are establishing a pattern here.

The size of the economies involved is not the issue. What lies behind it is the Domino Theory that involves the interconnectedness of a handful of world megabanks that not only hold those loans, but also have issued most of the CDS insurance on those bonds, as well as interest rate swaps such as JPMs over $70 trillion worth of interest rate derivatives.

Governments around the world with the US in the lead, are making the same many of the mistakes made during the Great Depression. To wit, raising taxes on a sinking economy while grossly manipulating markets. Sinking back into recession means declining tax revenues are very likely to push marginal nations such as the PIIGS over the edge and into default. European banks made most of those loans and hold the bonds. US banks insure them, along with interest rates. The raising of taxes almost guarantees that the world economy will slide back into recession (assuming one believes that we ever got out, which most don’t).

If this isn’t a perfect set up for a domino chain reaction of crisis, I don’t know what is. And add to all this the fact the insolvency not only of the mega banks, but now national governments, has been papered over. Not only has virtually none of the structural problems that caused the present state of affairs been repaired, these problems have been made far worse. This fact has been thoroughly revealed, discussed and ignored over the last two years.

The contagion in southern Europe poses a severe risk of an all-out financial plague breaking out. It threatens not only the Euro but the entire EU itself. Most bets are on the probability that the EU will have no choice but to bail out Greece and Portugal, which will only incite the remaining and larger PIIGS to come a-begging to the ECB. So, where does it stop? Were not talking about bailing out mere banks here but a half dozen nations, which could easily wreck the Euro and lead to an even greater currency crisis as the world’s second largest currency.

So what we have here is tiny Greece being akin to the assassination of Archduke Ferdinand (who?) starting WWI when nobody even knew who the hell he was. The proverbial straw that breaks the camel’s back. And yet world banks and economies are so fragile that the current situation can be likened to a hemophiliac walking through a briar patch desperately try to avoid being scratched and bleeding to death. The probability of not getting scratched while picking blackberries is pretty slim.

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February 6, 2010 Posted by | Economics | Leave a comment

Gangster Banks Refuse to be Regulated

There is not only no hope that our economy will recover unless that criminal mafia know as banks are reigned in with a bull whip, but even no hope that it will not continue to sink into severe regression and depression.

Congress has proposed some very weak new regulations for banks, but as soon as the gangsters heard about it they sent out howls of protest, saying no way, forget about it. And congress did. They bowed to the mafia bosses because the dons of Wall Street simply threaten to cut off the money those rats called congressmen need to gain re-election. Ergo, whatever Wall Street wants, Wall Street gets.

The economy cannot recover because innumerable bankrupt enterprises are being kept afloat with borrowed money. The massive amounts of debt we have accumulated quite simply drains the economy of necessary capital to keep it prospering. With the USG pulling $2 trillion of capital out of the economy every year, and hundreds of billions being paid out to foreign entities to service that debt, the economy is denuded of necessary capital. We have now reached the point that instead of productive enterprise, the number one money-making enterprise in this nation is speculating in financial markets. The insolvent zombie banks are surviving by borrowing from the Fed at zero percent interest and plunking it down into every speculative gamble imaginable. For example, it is reported that 20% of Goldman Sachs revenue last quarter was from speculating in US Treasury bonds alone.

The ten largest “banks” account for 40% of all stock market trades. They don’t do much lending anymore since there are few credit worthy entities left that wish to borrow, so despite the lowest interest rates in history, credit continues to collapse. Greenshoots? I won’t even bother to dignify that horse hockey. The consumer is finally starting to roll over and play dead as the banks have slashed consumer credit and hiked interest rates to levels that would make Joe Gambino blush. It will certainly stimulate the economy to gouge credit card accounts with 30% rates. Banks can rent money for 0.025% and charge 30% and above, a spread of 29.975 or better. Positively stimulating.

So with real unemployment approaching 20% and rising by a half million or better per month (and those are only the one’s they deign to count), with consumer credit being slashed, with wages and salaries on the decline, with the US dollar collapsing, which causes the price of all imports to rise, what are we then to say about the 70% consumer economy, that it is recovering? Sure, and you might as well claim that gold coins are falling from the sky.

The only way the US economy would be able to recover would be to seize the top ten banks and liquidate them, since they are technically insolvent anyway. All those trillions in worthless mortgages need to be purged from the system. Pretending that they don’t exist is what Japan did and put them into a 20 year depression that is now getting worse. The US is following that path precisely, yet the results will not be the same, the results will be far worse because the yen is not the world currency. And when the US dollar is repudiated, even Walmart will look like a luxury retailer. If, that is, there is still a Walmart left to sell Chinese goods no American could afford to buy.

The gangster bankers hold this nation in their iron grip and are milking it dry, just as Thomas Jefferson and Andrew Jackson said they would if control of money were turned over to them. It was as predictable as the sun rising.

October 17, 2009 Posted by | Economics | , , , , , , , , , , , | Leave a comment

Life on the Edge

In watching the markets and the action of the rats in DC and NY over the last couple weeks, I really find myself at a loss for words that can used in public, though I have plenty of words on the tip of my tongue that can’t. I am watching a once great nation disintegrate and descent into a cauldron of political and financial crime and corruption far beyond anything we could have imagined. It brings to mind Sinclair Lewis’s novel, “It Can’t Happen Here.” Of course, it can, and it is. Below is a picture of what our predicament looks like.

Does this look like something we can recover from?

Does this look like something we can recover from?

Harvard economics professor Ken Rogoff said that the level of debt major governments have taken on to tackle the financial crisis is of considerable concern. In a series of recent comments, Prof Rogoff cautions that countries like the US have been running up such significant national debts as a proportion of their total economies that there is the potential for default at some point in the future.

“There’s no question that the most significant vulnerability as we emerge from recession is the soaring government debt,” Prof Rogoff told Bloomberg. “It’s very likely that it will trigger the next crisis as governments have been stretched so wide.”

“Talk about a big bubble that really affects the global economy,” he said recently of the US’s deficit, which is expected to reach $1.84 trillion for the current fiscal year. That represents 13pc of estimated GDP – the highest level since the end of World War Two. [If we back out government borrowing and spending from GDP – which we should – that percentage is really more like 26%, and the debt/GDP ratio would be well over 400%.]

“The huge run-up in government debt has led to patently unsustainable fiscal policies across a number of major countries. So far, the rest of the world’s been willing to finance it, primarily with savings from China and elsewhere, but if investors’ confidence is shaken, we might see the interest rates on long-term debt rising, and rising very sharply.”

Like to the tune of 15-20% says 77 year old former hedge fund giant Julian Robertson. “If Japan or China cease buying our debt, we are facing Armageddon.”

These fears are growing fast as the Fed comes under increasing fire for kiting the stock markets to ridiculously high levels. Take AIG for example, a bust company if ever there were one, its stock has soared from $9 to $46 in only two months. No rational person would buy AIG stock; what’s going here is obvious. The rats who run this nation like a personal fiefdom are engaged in what can only be called criminal market manipulation of the type that is statutorily illegal. The Fed and SEC not only look the other way – as they have been doing for more than a decade – but are directly engineering the kiting of the stock markets by driving interest rates down to insanely low levels so as to force money into equities.

The word now is that the Fed is targeting the money market funds. This will strip mom and dad of whatever little they have left in retirement savings. The idea being mom and pop should be encouraged to speculate in stocks. This is an outrage. One can only wonder when the American people will wake to this massive robbery and extortion. My guess is not until they’ve got virtually nothing left. That day is rapidly approaching.

September 24, 2009 Posted by | Economics | Leave a comment

Inflation/Deflation Debate Continues

Robert Prechter – “2010 will go down as the most deflationary year in history.” [Financial sense.com interview, September 7, 2009]

Bob Prechter , CEO of Elliott Wave International, and an unabashed deflationist, has called every step of the current financial crisis correctly. For that reason I listen to what he has to say carefully. The following summarizes that interview.

It is evident that most people believe that the Fed is responsible for creating the massive housing and credit bubble that just popped. I happened to be one of them, but have just discovered, thanks to Bob Prechter, that I was wrong. Here’s why.

  • *(Did the Fed lower interest rates to 1% after 911 and the 2002 recession? Yes, they did.
  • *When the Fed lowers rates, for whom do they lower them? The banks, of course.
  • *Did the lowering of those rates result in bank borrowing from the Fed, causing bank loans to go parabolic? No, it did not.
  • *Why not? Well, despite the low rates, those loans are OVERNIGHT or very short term loans used only for the purpose of maintaining a reserve level. Banks don’t like to borrow from the Fed, so it is a myth the Fed likes to perpetuate that they control interest rates. They do not, and never have.
  • *Okay, so where did the money/credit that caused the housing bubble come from? Mortgage Backed Securities (MBS), that’s where. Banks lured in investors in mortgage bonds with unrealistically high rates of return at a very low price through the scam of crap mortgages.

In other words, banks borrowed the money out of the existing stock of money and used that to lever up the money supply with their 10:1 fractional reserve lending basis which actually is more like 30:1 since they do not maintain 10% reserves, it is more like 3%. So the bottom line is that the bubble was leveraged up out of the existing stock of money. As the bank regulator, this is the Fed’s fault for allowing them to do this. They could have controlled this bubble easily by simply raising the reserve requirement back up to 10%. That would have stopped it dead in its tracks. It also would have wiped out Wall Street, so they didn’t do this
.
The current common wisdom is that the Fed is printing money like mad. That is totally false. But, you say, the Fed is buying $1.25 trillion in mortgage bonds with printed money! EVERYONE KNOWS THAT!!! Everyone is WRONG. The Fed is playing a shell game by exchanging one type of bond for another. Here’s why. Prior to the Fanny/Freddy collapse, none of the MBS were government guaranteed, though many people falsely assumed they were. You see how widespread false assumptions can be? Even China assumed that they were. In the end China forced the US to guarantee their bonds, but not all bonds. Then congress passed the bail out and guaranteed all future MBS debt issuance. All the Fed is now doing is simply making exchanges of one type for another, the guaranteed for the non guaranteed. This includes all the swaps with FCBs. They are not creating new money, they’re playing games with old money.

Yes, the Fed has/will monetize $300 billion of T-bonds to support auctions when necessary. This is basically an emergency bond auction support fund to be used as necessary, and that amounts to little more a cotton seed in the wind.

In reality the Fed is not printing money; its balance sheet consists government guaranteed MBS, bank loans and tons of repurchase agreements, which are basically swaps, which it expects the banksters to honour.

In truth the Fed is trying to stop a massive deflation of toxic paper assets by means of exchanging them for better paper assets, but the fact remains that most of what the Fed has in its account bears government guarantees, for whatever value that might be. It is creating more debt, but not more money since the new debt merely replaces the old, so that is money neutral.

In the words of Prechter, “The Fed is only being a little less conservative than it was in 1930. They are not about to destroy themselves.”

Now you can understand why the dollar refuses to tank and the T-bond market doesn’t crash, and the Fed isn’t worried about the dollar. The whole problem here is that the Fed is never going to tell the truth. It creates illusions to serve its own purposes and is quite content to let the markets believe in the myths of its own creation. The Fed is more than happy to support the illusion it has created of monetary inflation; that keeps the markets lubricated without having done a thing.

The fact is that if you can read the Fed balance sheet, the truth is not hard to find. Not many people know how.

The Fed has failed to stem the credit collapse and asset deflation. Yet it eagerly tells us it has. At best it has temporarily slowed it down, mainly by a sleight of hand. This nation suffers from a massive overload of credit that cannot be repaid. When debt is defaulted, new loans are not made and so the money supply shrinks. So when the effects of the Fed putting bubble gum in cracks of the dike wear off, the economy will resume its debt liquidation with a vengeance. The second leg down of the Greatest Depression lies directly ahead.

Well, then how do you account for rapidly rising prices over the last decade? Certainly Fed policies did add to monetary inflation, for only that can account for the dollar’s loss of value during this period. It is the levering up of credit, combined with rapidly expanding demands on commodities, that did the trick.

Understand here, that credit and money are not the same thing. Similar but not the same. The credit created by banks becomes debt that has to be repaid out of existing money supply. The credit becomes money when turned into a deposit in the borrowers account. It is extinguished when it is repaid out of existing money supply. Note this carefully: When a loan is defaulted upon, the borrower’s debt then becomes the bank’s debt; the bank looses money it never had. And that is where your deflation comes from.

Defaulting debt RAISES the value of money by reducing its supply. That is why people who are betting against the dollar have been and will continue to be wrong.

September 6, 2009 Posted by | Economics | Leave a comment

The Economy Is Recovering

Shiela Bair, the head of the FDIC declares today that the economy is recovering. And the proof is right here.

bank failures

The above graph charts the ever-growing FDIC list of probable bank failures. That is what they call a parabolic curve. The FDIC fund is now bust; it now has to turn to all us fabulously rich taxpayers to bail out these gangsters and racketeers. The FDIC is not the solution, it IS the problem. Having all their deposits guaranteed by the taxpayer, most of the risk to  the banksters is pawned off on us so they can engage in wild speculations that proceed to destroy our economy, buy off all the political rats and drive us all down the road to ruin.

Any bets on the number of failed banks for 2010? Private estimates are in the range of 700-800, or 10% of all banks. No problemo, senior, we jes preent mucho mas pesos. Seguridad en toto.

August 27, 2009 Posted by | Economics | Leave a comment

Dow 4,000 or 40,000?

This was an interesting question posed by Dr. Mark Farber in an interview last weekend. His answer was that there is a good probability of both.

There are a lot of great contrarian minds working to try to foresee the future as a result of the events of the last two years. By now they’ve worked through all possibilities and one of them will come to pass. The concensus is growing that the outcome may be indicated in one word: Argentina. All the establishment economists claim that could never happen because we are the United States, not a third world banana republic. They see through clouded eyes; the similarities between the US and Argentina in 1990 are remarkable similar and growing by the day.

As most of you know, Argentina suffered a monetary collapse and hyperinflation that was so bad that even the IMF couldn’t bail them out. Most people think that inflation came first, collapse second, but that is not the case. Argentina first experienced a bond market collapse due to excessive foreign debt. This debt was accumulated due to social policies that wrecked its economy, namely fascism disguised as socialism. Sound familiar? The entire nation was spending more than it was producing, by a lot. It had moderate inflation but by no means extreme money printing or excessive credit. Productivity just kept falling and falling and government kept borrowing ever more until the day came that no one would buy its bonds. Virtually overnight its bond market collapsed and its currency became worthless. Sound familiar? Think Iceland.

Argentina’s problem never was too much money and credit creation but falling productivity and supply. As its currency depreciated, the cost of its import dependency grew into the vicious cycle that guaranteed its ultimate collapse. Sound familiar? This is how you get hyperinflation out of depression. It’s main components are not money supply but foreign debt, imports, and collapsing productivity and finally currency collapse. Virtually all those factors are present in the US in spades, and but for the fact that the dollar is the world currency, we would have collapsed long ago.

Dr. Farber points out that there is no conceivable way that the US is going to cut back on its debt binge; if it does, its economy collapses. Unless some unexpected event intervenes, it is almost guaranteed that the NY-DC rats will ride this horse right over the cliff. And the main reason is that real productivity does not figure into establishment calculations. In the name of political expedience, they have buggered the productivity indexes as badly as they have all the others so that it presents them with a totally false picture. These are people who think that whatever it is that Wall Street does constitutes productivity, when, in fact, Wall Street finance is parasitical. It does not add to the economy but detracts. They think that finance constitutes 20% of GDP, when it is actually a net drag on GDP. Therefore GDP is overstated by 40% from this alone.

But wait! It gets worse. Government taxation and spending is also called productivity. I know that’s hard to believe but its true. Government spending also counts for another 15-20% of GDP, so when we back all this out, what’s left of real GDP? Argentina, that’s what.

We do not have significant monetary inflation and yet prices of necessities are rising significantly. The reason is simply falling supply. As the real economy contracts, businesses fail or cut back production and supply declines. And yet the money supply remains relatively stable so we have the same amount of money chasing fewer goods. This is not what you hear the mainstream economists talking about, is it? Plus, we now have a two-tiered economy: Wall Street and everyone else. And while government pumps trillions into Wall Street, money and credit are being withdrawn from everyone else. The Wall Street money then proceeds to bid up the price of most assets including stocks and commodities. Meanwhile both food and energy are subject to rising demand from that part of the world we used to think didn’t matter. The economy contracts while stock markets look great.

What is left of our maladjusted economy is only being kept afloat by USG borrowing and spending, mainly at the top while real productivity (making real stuff) continues to shrink. One of these days the US bond market will simply roll over and die. And when it dies, the dollar goes with it. There will be no warning, it will just happen as quickly as the Soviet Union vanished over night. And the very next day you will know and understand the meaning of hyperinflation: instantaneous readjustment of the price of all imports, followed shortly thereafter by all domestic goods and services. Gasoline at $20-30 gallon, a shirt made in Malaysia, $200, a pair of socks, $50. A cell phone battery, $600. And so on.

Instant, overnight poverty, and there will be no warning whatsoever.

I will conclude this piece as I began it. How do we get the Dow first at 4,000, then 40,000? Pumping the “economy” up with borrowed money will ultimately appear to confirm their propaganda of a recovery and at some point they shut off the pump. The markets will rather quickly go into free fall and by the time they hit 4,000 they will turn the pumps back on, while adding a few more pumps. The dollar will slide badly, like down to about 50, at which point the markets rocket upwards and lead to the bond market collapse and the rest is history.

There will be only one way to provide a small amount of protection from this event. Gold and silver won’t do it because, in all probability these metals will be outlawed and/or confiscated. It will be useable in whatever black markets develop, but you will be unable to use it pay your major bills like utilities, mortgages, etc or even in chain stores, assuming there are any left. You’d have to sell gold for dollars on the black market ( and likely get a very bad price for precious gold) and by the time you deposited that cash in the bank and wrote a check on it, its value would already have fallen by half.

That way would be to aggressively buy into stocks when they reach their bottom at 4,000 or whatever and wait for the rocket ride upwards. At some point before the final collapse you have to make a decision to cash out of stocks, likely with a 10X or better profit. In this way you avoid the loss to the scalpers in the precious metals black market and are sitting on a large pile of inflated cash. Then, when the collapse comes, you rush out and spend it all on the stuff you need like food and other necessities. Then you can use your gold and silver for purchases of goods in the black markets for goods that eventually will develop. In this way you stretch the purchasing power of both cash dollars and precious metals to the max.

And then the only way to give yourself any longer term protection for more than a few months would be to enter the black market for goods yourself where you have a chance of getting paid in real money. The truth is that the only real protection will be street smarts. If you can live by your wits, you’ll make out. If not, there are likely bread lines and soup kitchens in your future.

August 24, 2009 Posted by | Economics | Leave a comment

Supply-Side Hell – Again

Does anyone remember supply side economics? Art Laffer was Ronald Reagan’s economics advisor who advocated a new idea he called supply side economics. Reagan was elected in 1980 after the disastrous 1970’s and Jimmy Carter. Inflation was running 16% and the economy was in the dumps. We had an oil embargo and fuel and materials prices doubled. But it was not so much money creation that caused the inflation as it was prolonged recession and other factors that reduced the production of goods. “More money chasing fewer goods,” was the refrain.

target-shelf

In addition to Volker throwing on the brakes of lending, Laffer’s idea was to make it more profitable for producers to produce more stuff. Enter tax cuts and other industry friendly legislation. The rest is history, but supply side economics was labeled by Reagan’s buffoon successor as “voodoo” economics. The truth was that once the economy got going again, there was no longer any need for supply side economics; it had done its job.

You can see from this that one way to produce high inflation apart from increasing the money supply is to reduce the supply of goods drastically. Unfortunately, recessions and depressions have a nasty habit of doing just that. To have inflation, it is not necessary to increase money supply, just reduce goods and prices will rise dramatically.

I believe that this is what we will soon be facing. All producers are being badly squeezed. They are already reducing the size of packaging and cutting quality to try to survive. When they’ve exhausted these means, and many of them gone bankrupt, supplies of all good will shrink dramatically. Look around in the big chain stores, you can see it happening already. Shelf space is shrinking, they’re not carrying as many goods. Forget money supply, money is disappearing faster than it can be replaced. Its the ever-shrinking supply of goods that is going to bite us in the ass with shark’s teeth. Prices will begin to rise regardless of money supply.

We’re already got 18% of the workforce unemployed and without an income and not spending. There is no way you can have monetary inflation under those circumstances. And they say GDP is only down 5%. Baloney. We are in a deflationary depression which will soon turn into an inflationary one. But it will be prices that inflate, not money supply, since the supply of goods is shrinking fast.

The hardest hit areas of supply will be food, energy, metals and commodities in general, along with some manufactured goods that involve materials shortages. Meanwhile, asset values will continue to deflate.

August 22, 2009 Posted by | Economics | , , , , , , | Leave a comment

What’s Good for . . . .

What’s good for the consumer is good for the economy. Of course nobody in government or finance or economics would ever say that. When the consumer starts saving and paying off debt, those people shiver in their boots, for it means that Joe Sixpack is not going on another credit binge, and instead he’s stockpiling new capital for the economy.

The consumer economy won’t revive because the consumer has nothing left with which to revive it. Having eyes do you see?

consumer credit

No credit, no consumer because his bank balances say he ain’t got no cash.

The Washington rats and stock sharks hate to see this because they want more bubbles, more credit binges and mountains of debt reaching to the moon. Yet the system is already collapsing due to so much debt, and it will continue to collapse. Two years ago I pronounced the 70% consumer economy is over, dead, done and finished; it cannot and will not be revived regardless of whatever new credit bubbles are being blown.

This latest has been christened the Government Finance Bubble and has been launched by the incomprehensible level of borrowing, spending, lending and bailing out being done. All this money is heading straight for the top of the economic pyramid to bloat the paper markets world wide. This will be the last bubble the Federal Reserve will ever blow before it is finally torn down or burned down by angry mobs of the desperate and deprived. And it will not last even a year before it, like all bubbles, collapses in upon itself in a great cloud of noxious fumes.

I’ll give it to about the first of next year when that inevitably happens.

August 7, 2009 Posted by | Economics | Leave a comment

How’s the Economy Really Doing?

They used to say as GM goes so goes the USA.  That’s out and it now probably more like Caterpillar, the preeminent US heavy manufacturer. Here’s the latest earnings report:

Worsening end market demand and continuous reduction in the dealer inventory have led a steeper than anticipated decline of 41% (y-o-y) in the CAT’s revenues to $7.98 bn in 2Q09 from $13.62 bn in 2Q08. Total machine sales and engine sales declined 49% and 32%, respectively, while the revenues from financial products declined 13%. Decline in machine and engine sales was primarily volume driven and was across all geographies. Machine sales in North America, EAME (Europe, Middle East and Africa), Asia Pacific and Latin America declined a significant 51%, 61%, 25% and 47%, respectively.

Cat’s operating profit for 2Q09 is down 91.9%.

Which is very close to saying, there isn’t any profit, but it sure beats a loss. Never mind, the clock is still ticking. Notice the clever way of using the 41% number in y-o-y? That’s the way the media does it to present a rosier picture. Since when does last year count?

July 22, 2009 Posted by | Economics | Leave a comment

Playing Taps

We all know that the USG is utterly dependent on foreign buying of its debt to remain afloat, as it is utterly impossible that its trillion dollar deficits could be financed from within.

Bloomberg 6/15/09 -Total net purchases of long-term equities, notes and bonds rose a net $11.2 billion, compared with buying of $55.4 billion in March, the Treasury said today in Washington. Including short-term securities such as stock swaps, foreigners sold a net $53.2 billion of U.S. financial assets, compared with net buying of $25 billion the previous month.

Total net purchases rose? Only in the media is a decline an increase.  How Orwellian.

This is  outright deception. Properly written, that statement should read: Total net purchases of long-term equities, notes and bonds fell by 80% in the second quarter from the first quarter.

Understand that clearly. Foreign buying of US debt just fell by 80%.

That, folks, is the beginning of the end of America’s great experiment of financing what it cannot pay for. Couple that with the ongoing international effort to dump the dollar as reserve currency, and we have the makings of the biggest financial disaster in history.

Incredible. In the face of immanent national disaster, the official response is to accelerate borrowing and spending. I will guarantee you that within two years the US dollar will be worth next to nothing, and that buying a new pair of shoes will be classified as a major expenditure.

June 15, 2009 Posted by | Economics | Leave a comment