FedUpUSA

Archive for the ‘Fail’ Category

Yesterday I described three fatal flaws in the Eurozone; today we look at three more structural reasons the zone and its common currency the euro are doomed.

I have accepted an invitation to join ChrisMartenson.com as a contributing editor.  I am honored by the invitation from Chris and Adam, and will be contributing in-depth analyses once or twice a month. Today’s post is a reprint of my first article,The Fatal Flaws in the Eurozone and What They Mean To You.

As most of you know, the Web is only free to users; creating and hosting original content is not free.  There are few ways for those of us who create the original content to be compensated, and one is a subscription/paywall model.   As a result, the actionable elements of my analyses will be available exclusively to enrolled members of ChrisMartenson.com. Most of you are familiar with this model, as many sites (iTulip, for example) use it as a means of supporting the costs of providing original content.

Chris Martenson.comprovides a wealth of information for free, and oftwominds.com will continue to be free.  As the traffic has grown, the costs of hosting this site have skyrocketed (dedicated servers are not free). My goal is to provide value to both visitors and enrolled members; the free portion of my contributions will be cross-posted here on oftwominds.com.

Your readership and support are greatly appreciated.

On a side-note: the long dollar trade that I have presented here since May appears to be playing out as the charts suggested.

Reason #1:: The Imbalance between Exporting and Importing Nations

An intrinsic source of instability is the imbalance between export powerhouse Germany, which generates huge trade surpluses, and its trading partners in the EU that run large trade and budget deficits— Portugal, Italy, Ireland, Greece, and Spain.

Those outside of Europe may be surprised to learn that Germany’s exports are roughly equal to that of China ($1.2 trillion) even though Germany’s population of 82 million is a mere 6% of China’s 1.3 billion. (Germany and China are the world’s top exporter nations, while the U.S. trails as a distant third.)

Germany’s emphasis on exports places it in the so-called mercantilist camp, which depends on exports for their growth and profits. Since the inception of the euro, Germany’s exports rose an astonishing 65% from 2000 to 2008 while its domestic demand was near zero. Without strong export growth, Germany’s economy would have been at a standstill. The Netherlands, which reaped a $33 billion trade surplus from a population of only 16 million residents, is another example of a Eurozone country which runs substantial trade surpluses.

The “consumer” countries, on the other hand, run large current account (trade) deficits and large government deficits. Italy, for instance, has a $55 billion trade deficit and a budget deficit of about $110 billion. Total public debt is a whopping 115.2% of GDP.

Spain, with about half the population of Germany, has a $69 billion annual trade deficit and a staggering $151 billion budget deficit; fully 23% of the government’s budget is borrowed.

Though German wages are generous, the German government, industry and labor unions kept a lid on production costs even as exports leaped. As a result, the cost of labor per unit of output—the wages required to produce a widget—rose a mere 5.8% in Germany in the 2000-2009 period, while equivalent costs in Ireland, Greece, Spain, and Italy rose by roughly 30%.

The consequences of these asymmetries in productivity, debt, and deficit spending within the Eurozone are subtle. In effect, the euro gave mercantilist, efficient Germany a structural competitive advantage by locking the importing nations into a currency, making German goods cheaper than domestically produced goods.

Put another way, by holding down production costs and becoming more efficient than their Eurozone neighbors, Germany engineered a de facto devaluation of its own products within the Eurozone at the expense of its importing neighbors.

Reason #2: The Euro Removed the Mechanism of Currency Devaluation

The euro had another deceptively pernicious consequence. The overall strength of the currency enabled debtor nations to rapidly expand their borrowing at low rates of interest. In effect, the euro masked the internal weaknesses of debtor nations running unsustainable deficits and those whose economies had become precariously dependent on the bubble in housing (Ireland and Spain) for growth and taxes.

Prior to the advent of the euro, when overconsumption and over-borrowing began hindering an importing, “consumer” economy, the imbalance was corrected by an adjustment in the value of each nation’s currency. This currency devaluation would restore the supply-demand and credit/debt balances between mercantilist and consumer nations.

For instance, the Greek drachma would fall in value versus the German mark, effectively raising the cost of German goods to Greeks, who would then buy less German products. The trade deficit would shrink, and lenders would demand higher rates for Greek government bonds, effectively pressuring the government to reduce its borrowing and deficit spending.

But now, with all 17 nations locked into a single currency, devaluing currencies to enable a new equilibrium is impossible. As a result, Germany is faced with the unenviable task of bailing out its “customer nations.” Meanwhile, the residents of Greece, Italy, Spain, Portugal, and Ireland are faced with the unenviable task of cutting government benefits to realign their budgets with the productivity of their underlying national economies.

Germany helped enable the over-borrowing of its profligate neighbors by buying their government bonds; according to BusinessWeek, German banks are on the hook for almost $250 billion in the troubled Eurozone nations’ bonds.

This has pushed Germany into a double-bind. If Germany lets its weaker neighbors default on their sovereign debt, German banks will fail, but if Germany becomes the “lender of last resort,” then the German taxpayers end up footing the bailout bill.

If public and private debt in the troubled nations keeps rising at current rates,  it’s possible that even mighty Germany may be unable (or unwilling) to fund an essentially  endless bailout. That would create pressure within both Germany and the debtor nations to jettison the single currency as a good idea (in theory), but an ultimately unworkable one in a 17-nation bloc as diverse as the Eurozone.

Reason #3: Crushing Private and Public Debts

Banks around the world have a major challenge in the next few years: trillions of dollars in debt must be “rolled over” or refinanced. Globally, banks owe about $5 trillion to bondholders and other creditors that will come due by 2012, according to the Bank for International Settlements (BIS).

But European lenders have a substantial share of that burden: About half of the liabilities—some $2.6 trillion–are in Europe.

The BIS has several fundamental concerns about this stupendous Eurozone debt load. One is that banks desperate for refinancing will compete with governments such as those in Greece and Spain, which must also roll over gigantic sums in the global bond market. Competition for bondholders’ favors will result in higher credit costs for business and consumers, with predictable consequences: Higher borrowing costs lead to reduced economic activity.

The BIS’s second great concern is the gargantuan sums that have been promised to citizens in Eurozone social welfare programs. As Europe’s working-age population shrinks and the number of its retirees rises, the ability of governments to pay the benefits and service the huge debts that have been accumulated is in question.

The choices facing governments with rising social welfare costs and debt costs are bleak. Either cut benefits or raise taxes on a dwindling base of workers–or both.

The bottom line: The flaws in the structure of the European Union and euro cannot be resolved by face-saving compromises and additional bailouts.

Since the devolution of the Eurozone and the euro is baked in, as investors we need to think through the consequences of a probably messy restructuring of the EU and the euro.  In Part II of this report: Positioning Yourself for the Devolution of the Euro, we delve into the most probable series of outcomes for the euro  and how investors can position themselves to protect and possibly increase the purchasing power  of their capital vs. this troubled currency.

Click here to access Part II of this report (free executive summary, enrollment required for full access).

Charles Hugh Smith – Of Two Minds

The coming failure of Operation Twist – The Federal Reserve resurrects a program from the 1960s named after the Twist Dance.  Appropriate timing for a Dancing with the Stars nation.

The Federal Reserve has literally run out of ideas.  Operation Twist, a throwback to the 1961 action taken by the Fed named after the Twist Dance fad at the time, is now back in 2011.  This time the Fed plans to purchase $400 billion of bonds with 6 to 30 year maturities while selling bonds with shorter term maturities.  The Federal Reserve continues to deal with a debt crisis with more debt.  The market has quickly spoken shaving off 700 points in two days and many global markets are now solidly back in bear market territory.  The problem with this program is that it assumes that the only problem with the economy is that not enough people are borrowing and spending.  The Fed goes after interest rates like a lion after a zebra.  Interest rates are not a problem.  Rates are at historical lows.  The problem of course is that household income has gone south for well over a decade.  The only true winners with these low rates are the banks who can access cheap money to wildly speculate in the stock market casino.

Operation Twist largely benefits the too big to fail banks

The recent Federal Reserve move only makes it cheaper for banks to borrow and speculate.  As the above chart highlights, banks already have an abundant amount of money in their excess reserves.  Banks before Operation Twist had $1.6 trillion in reserves that are readily available to lend to the public.  The problem is twofold:

-1.  Banks are keeping this money because of their horrific balance sheets.

-2.  Banks are now back to using due diligence and with the average per capita income at $25,000 not many credible borrowers are coming to the table.

In other words, these excessively low rates continue to bailout the too big to fail banking syndicate.  This comes at the expense of savers and those that are prudent.  The average savings account in the U.S. is paying roughly 0 percent while banks can charge 15 percent or higher on credit cards.  Banks can simply keep that $1.6 trillion and actually earn interest on it.  Wouldn’t you like to get free money and earn easy interest on it?  The mission of the Fed is to protect the banking system and this is like rule number one of the banking Ten Commandments.  The success of the overall economy is only a factor if it aligns with banking profits.

Operation Twist is also a failure because households in America are in the process of deleveraging after reaching a peak crisis in debt.  Households are maxed out.

Read the rest at My Budget 360

Fed Bubble Blowing: A Study Of Denial

Posted by Karl Denninger

Ben Bernanke once again steps into the realm of (intentional?) misdirection with the following missive:

The financial crisis that began in August 2007 has been the most severe of the post-World War II era and, very possibly–once one takes into account the global scope of the crisis, its broad effects on a range of markets and institutions, and the number of systemically critical financial institutions that failed or came close to failure–the worst in modern history. Although forceful responses by policymakers around the world avoided an utter collapse of the global financial system in the fall of 2008, the crisis was nevertheless sufficiently intense to spark a deep global recession from which we are only now beginning to recover.

“Although the firefighters showed up and threw tens of thousands of gallons of water on the fire, thus preventing the ultimate collapse of the structure, the fire was nonetheless intense enough to destroy the contents of the building.”

Even as we continue working to stabilize our financial system and reinvigorate our economy, it is essential that we learn the lessons of the crisis so that we can prevent it from happening again. Because the crisis was so complex, its lessons are many, and they are not always straightforward

“Fire, especially in a structure, is a very complex process.  The usual process of fire beings with the heating of one or more items until they begin to combine with oxygen in the air, releasing energy and producing a self-sustaining series of chemical reactions that we call ‘fire’.  This in turn causes the heating of other items that contain chemical compounds that can both burn and melt.  These chemical processes are extremely complex and so the lessons are not always straightforward in explaining the chemical reactions that take place.”

What Bernanke doesn’t mention is that The Fed ran around playing “Backdraft” setting the damn fires for twenty years and now wants credit as a “hero” for “putting out” their own acts of financial arson!

Surely, both the private sector and financial regulators must improve their ability to monitor and control risk-taking. The crisis revealed not only weaknesses in regulators’ oversight of financial institutions, but also, more fundamentally, important gaps in the architecture of financial regulation around the world. For our part, the Federal Reserve has been working hard to identify problems and to improve and strengthen our supervisory policies and practices, and we have advocated substantial legislative and regulatory reforms to address problems exposed by the crisis.

This sort of nonsense is amazing.  Bernanke then goes on to continue with an “analysis” of the 2000-2005 monetary policy conditions, including his favorite “tool”, the “Taylor Rule.”

The problem with the entire remainder of this “analysis” is that it simply refuses to acknowledge the truth found in the following graphs.  Let’s start with my favorite:

“Something” happened around 1985, didn’t it Ben?  What was “it”?

Simple: The leverage ratio – that is, the amount of debt outstanding in the economy for each dollar of GDP, began to rise precipitously.  This happens to be roughly correlated with the so-called “modern era” of Central Banking by The Fed, just a few short years before Alan Greenspan took office and continuing to this day.

But what caused this expansion?

Simple: A long line of “deregulatory” actions taken beginning with The Depository Institutions Deregulation and Monetary Control Act of 1980, and then the Garn-St. Germain Depository Institutions Act of 1982.  This, along with the ever-present thing called “human greed”, led to rampant real-estate speculation in the 1970s and early 1980s.  It was this unsound real-estate lending that ultimately led to the S&L bust, along with the expansion of brokered deposits and linked financing.

The expansion of leverage led directly to the bust and the “answer” to it in the mid 1980s was even more expansion of leverage!

We then had, in succession, even more booms and busts.  LTCM, Latin America’s debt explosion, the “Asian Tiger” explosion, The Tech Bubble and of course The Housing Bubble.

All of these were caused by one thing – the rapid expansion of leverage – that is, debt – compared to GDP.

It took more than twenty years to go from 150% of GDP to 175% of GDP in total systemic debt outstanding, an increase of about 17%.

Since then – less than thirty more years - we have more than doubled the debt-to-GDP ratio.

This has generated the following distortions in alleged “GDP”:

That is, during the decade of the 1960s, about 10% of the alleged GDP didn’t actually occur (not growth, aggregate output) through growth – it happened due to additions in borrowing beyond that which was paid off.  In the 1970s, 16%.  In the 1980s, 20%, in the 1990s, 16.3% and in the 2000, 21.6%.

Borrowing that produces something – that is, productive investment through the use of financing – will produce a negative percentage contribution.  Simply put, if I borrow $100,000 to buy a CNC machine and it’s aggregate output (ex-costs such as material, employees and the like) over the financed period is $300,000 then it produces a negative aggregate impact on debt-to-GDP ratios, because GDP grows faster than the debt does.

Monetary and regulatory policy is primarily responsible for the above table.  When people are in effect paid to borrow they will do so with wild abandon and use those funds not for productive investment but rather to speculate with.  Further, when those who commit fraud through various schemes are not forced to eat their own cooking, either financially or criminally then they will use leverage as a means to skim off “rents” from various parts of the economy for themselves by making an effective claim that 2 + 2 = 6.

The problem with using things like the so-called “Taylor Rule” is that one must make sure you include in “inflation” the actual price signals of all goods and services.  This, of course, is not done.  The average household spends 30-50% of it’s post-tax income on housing-related items, including the home itself, utilities (which are mostly energy or energy-derived in some form or fashion), food, and of course taxes imposed by governments and insurance costs mandated by the use of leverage to purchase same.  Another 16% of GDP is consumed by health care, making these two general categories of expenses account for the majority of all personal spending.

Yet “CPI”, or what we call “inflation”, does not count actual home price changes – it instead uses what’s called “owner’s equivalent rent“.  The BLS considers purchased housing investment, not shelter – that is, not consumption.  Yet the BLS also considers improvements and repairs to housing part of investment even though those items are clearly consumed!  In other words, they attempt to impute the rental cost of owned property.

This is, however, invalid.  Research has shown that most homeowners retain their house for about seven years on average.  Further it is clear that a home is in fact shelter as it’s prime purpose, not “investment”, and further the expenditure of funds to reverse the inevitable effect of entropy is claimed as investment rather than expense as well!

Health care expenditures are similarly (and deliberately) understated.  Most persons gain the bulk of their health care as part of their compensation – that is, they do not directly spend that money.  This in turn causes the BLS to dramatically understate price inflation in health care expense because most of it does not show up in the consumer price index.  Specifically:

The weights in the CPI do not include employer-paid health insurance premiums or tax-funded health care such as Medicare Part A and Medicaid.

These distortions are critically important because they in turn drive public policy and public perception, and that, in turn, is how we wind up with a series of asset bubbles.

From a mathematical perspective the problem is relatively simple:

As soon as you start refinancing to avoid paying off debt, or writing loans that are not contemplated as amortizing, you have entered The Ponzi Zone.

Identifying these sorts of financing is trivial.  Among them:

• Balloon, “Option ARM” and other exotic, non-amortizing mortgages.
• Commercial Real Estate and other forms of corporate loans that are “interest only” and have to be rolled at maturity.
• Debt issues that include “PIK” sorts of features (so-called “Toggle” bonds, etc.)
• Credit card “rollover” offers that provide a zero-interest period with no balance transfer cost, effectively permitting the “parking” of debt at a zero rate (for a period of time.)

All of these features tell you that the economic cycle has entered a “Ponzi” phase that will soon inevitably result in a bust.

But when one looks to the “why” rather than the “what” the cause is clear: Negative real interest rates – that is, rates anywhere on the curve that are below the rate of actual price inflation, inevitably lead to excessive speculative borrowing and asset bubbles.

It is here that Bernanke and his predecessor have completely and utterly blown it, and they appear to either not realize it or are desperately hoping they can keep you from figuring it out.

The Federal Government uses things like “owners equivalent rent” and other similar distortions in CPI to prevent having to pay out cost-of-living increases in entitlement programs.  But The Fed is not compelled to use the BLS and BEA numbers in conducting economic policy.  Indeed, The Fed employs a literal army of economists who are quite capable of developing their own independent price measurements – if they wanted to.

Bernanke also alleges that:

What policy implications should we draw? I noted earlier that the most important source of lower initial monthly payments, which allowed more people to enter the housing market and bid for properties, was not the general level of short-term interest rates, but the increasing use of more exotic types of mortgages and the associated decline of underwriting standards. That conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary. Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates. Moreover, regulators, supervisors, and the private sector could have more effectively addressed building risk concentrations and inadequate risk-management practices without necessarily having had to make a judgment about the sustainability of house price increases.

What was your first clue Ben?

There was clear evidence of demonstrably unsound financial underwriting by banks you have primary regulatory authority over as early as 2004.  You did nothing.

You claim to have issued “guidance” in 2005 on non-traditional mortgages, yet they were offered by banks such as Wachovia right into the maw of the bust, with them attempting to personally solicit me for one in the spring of 2008, more than three years later!  Instead of taking them up on it I shorted their stock, as that offer was a clear display of idiocy that I was certain would lead to their demise. 

I was right, but you still claim you didn’t “see the problem.”

Clearly you did not regulate – you stood back and watched the bubble inflate.  You even said (just a few months before the bottom fell out of housing) that you believed house prices were supported by “strong fundamentals.”

This claim was either a bald lie or a product of profound blindness.  Either way it does not speak well of your capacity for discernment, say much less judgment.

In addition the peddling of paper with radically inflated claims of “quality” was also evident early in the bubble.  This too is under your domain – fraud is always punishable and the law is supposed to be enforced.  There is no need for more regulation – just enforcement of existing law.  When one takes a package of loans that has a true risk-adjusted return of 300 basis points over Treasuries of the same duration it is impossible to produce a set of securities with a blended return higher than 300 basis points, and it is also impossible for anyone to sell a credit default swap against that package (that they can actually perform on) for less than the true risk-adjusted spread.  Since nobody works for free the true return on a CDS + Debt, where “Debt” has some risk-adjusted return over Treasuries of equivalent duration, must always be less than simply buying the Treasuries!

As a consequence there is never a market for such a “synthetic” bond+protection that is “as safe as government debt” UNLESS someone is intentionally mis-pricing risk BECAUSE AT AN HONEST ASSESSMENT OF RISK AND THUS PRICE THE COMBINATION MUST ALWAYS RETURN LESS THAN AN ACTUAL RISK-FREE GOVERNMENT BOND!

Nobody in their right mind would select such a combination at a blended yield of 3%, for example, if the equivalent-duration US Treasury was yielding 3.5%. 

These products were able to be marketed only because they were laced through and through with fraudulent misrepresentations.  That someone was cheating was obvious to anyone who pulled their head out of their ass and looked at what was being packaged and at what yield it was being sold.  Again, directly or indirectly The Fed had the supervisory authority to put a stop to these practices and refused to do so.

The bottom line is that asset bubbles do not just magically appear – they happen because of negative real interest rates and intentional and pernicious fraud, both of which occur as a consequence of intentional obscurity and outright lies.

Our economy and people deserve better.  It is a fact, whether we like it or not, that we cannot have and sustain the sort of “economic growth” we have been sold over the last 30 years on an indefinite forward basis, as you cannot continually take on debt at a rate that exceeds productive output – eventually you will default.  Instead of facing the truth – a long-term growth rate roughly approximating the growth in population, or about half of what we have allegedly “enjoyed”, we have used debt pyramiding – that is, serial Ponzi schemes, to produce the illusion of dramatically higher economic growth.

There is no evidence that you, or anyone in Congress, has yet had their “Come to Jesus” moment with the blunt mathematical facts.  Attempting to blow another bubble – which is the inherent path you are attempting to take – risks destruction of our nation’s political system and economic future.

There are hard choices to make and economic adjustment to the realities of our debt load and what this portends for economic growth on a forward basis will not be easy.  It is, however, both inevitable and necessary.  The longer we continue to try to deny the math the worse the ultimate outcome.

It was time for the adults to be allowed in the room and the children restrained in August of 2007, as I have previously said.  More than two years of continued banter and bovine excrement from you and others has not changed a thing.   We have solved nothing and you have learned nothing.

In short, it is time for you to step down.

An Introspective Look At The Future Of America

By Craig Harris
earthblog.news@gmail.com

As we close out 2009 and look forward into 2010 and beyond, this has been a year of near financial catastrophe and monumental change, none of which benefited America or ordinary Americans. Late in 2008 and throughout 2009, events have happened in the US which would have been labeled unfathomable just a few short years ago, and yet already these monumental changes are expected to be filed into the memory hole and Americans are expected to believe nothing has changed.

As we exit the year, we are told the US is a laissez-faire free market economy and yet the US government is now the largest owner of housing in the US as well as the owner of last resort for some of the largest and completely insolvent US corporations. The Federal Reserve, a privately and anonymously owned and controlled corporation chartered with issuing the nations currency, were given the green light by themselves to transfer to themselves and their shareholders the people’s wealth in the form of their future labor. The FED balance sheet has ballooned to become a junk bond warehouse as they overtly and covertly buy their own debt, immune from any sort of oversight, regulation or auditing and operating above the law. Along with that, increasingly coercive brute force measures are now routinely necessary to manage and manipulate so called “free market” asset prices which are cheerled by so called “financial news media” whose board members and management are all the same people who transferred the people’s wealth to themselves. The corporate media party line idea of a “free market US economy” now seems like a distant memory and it all feels like systemic fraud, corruption, malfeasance and organized crime at the very highest levels.

During 2009 we have seen the continued collapse of American industry amid wave after wave of layoffs. The corrupt corporate media cartel likes to trot out a group of FED sponsored shills who call themselves “professors” to call this a “jobless recovery” although it’s difficult to imagine a recovery where American industry has collapsed and is now owned by the government. US cities both large and small have been decimated by the loss of the US manufacturing base. Detroit now resembles a third world country with a 50% unemployment rate. Ransacked, foreclosed houses go for a dollar apparently because no one who has a choice is willing to own property or live there. The US has an officially stated unemployment rate of ten percent and a real unemployment rate of over 20 percent. Wall Street may have recovered due to a direct injection of capital from the future labor of the people, but there has been no action taken whatsoever to improve the situation of the average citizen as the disconnect between the ruling Oligarchs and Wall Street, the real economy and the lives of ordinary Americans continues to widen. The people’s bailout money, which represents the future labor of Americans, went directly into the pockets of the people who created the crisis in the first place because they are in the enviable position of being “too big to fail”. Interestingly, or sadly, the same people and institutions responsible for and who profited from the catastrophe are still in charge and have handed even more power and control to themselves. Although there has been talk in Washington of “too big to fail” being undesirable, the result of the post collapse policies have resulted in ever fewer, ever larger players with more power and control and instead of being “too big to fail” now wield so much money and power that they demonstrate wholesale ownership of the entire US political body.

Due to the post collapse monetary and fiscal policies, the people have now been saddled up with an unpayable level of debt. The cause of the near total collapse of the financial system was too much debt and the “solution” has has been even more debt piled on to the original debt. During the year, the Dallas FED estimated the financial obligations of the US government at 99 trillion dollars. The head of the TARP program estimated the bailout cost at 24 trillion dollars. Totaled together the US has in the neighborhood of 120 trillion dollars of current and future obligations on an annual revenue of around 2 trillion dollars which is falling due to high unemployment, higher state and local taxes and fees and lower wages. Cutting that down to size, imagine earning 200,000 a year and having a debt of 12 million dollars. In short, the US dollar has become a token of an unpayable debt and thus the anchor of the entire global financial system is a ponzi fraud. It becomes impossible to compute the value of anything as measured in a fraudulent currency that represents an unpayable debt.

The banking system is not lending money because it’s still insolvent. The people, having lost over 5 trillion dollars in the real estate bust are also collectively insolvent. Many US states and cities are bankrupt or near bankrupt. One in nine Americans subsist on food stamps. Even as a college education has become unaffordable to most Americans, college graduates now find themselves jobless. One in seven households now have their adult children living back at home due to the inability to find a job. The homeless population is growing and tent cities sprouted up across America during 2009. The estimated homeless population in LA alone is 40,000 people a night. People in the US if they have a job are working longer and harder to make the same income. Wages have remained stagnant and the real cost of living continues to spiral ever higher for ordinary Americans. The new man in charge, elected on a platform of “change”, has delivered his change in the form of change=no change, or how do you like your change now?

By any metric you choose, whether it’s the median home costing half the median income even at artificially low interest rates, to the ballooning cost of insurance, healthcare, education or anything else people spend their money on, the US is experiencing a rapid decline in the standard of living for ordinary Americans and an emerging ultra rich ultra powerful shadow oligarch rule amid a generalized and widespread financial and social decay. The US population is becoming a nation of voiceless serfs with fewer and fewer remaining civil and property rights and a rapidly decaying standard of living, the antitheses of everything America is said to represent and strive for.

The hypocrisy and fraud of the oligarch rule corporate media story line is now nearly impossible for an educated, informed adult to digest. As Jim Grant pointed out recently, according to Section 19 of the Coinage Act of 1792, the penalty prescribed for any official who fraudulently debased the people’s money is death, yet in 2009 debasing the people’s money resulted in a “man of the year” award from the self serving corporate media who will be next in line for a bailout from the people for their good service to the new oligarch rule. This organized crime, this theft, occurring right out in the open, may explain why employees of the largest US financial institution are now not allowed to gather in groups larger than 12 outside and their executives are carrying firearms. In an affront to the intelligence and sensibility of any citizen of this planet, the new US president expanded a war he was elected to end and started a new frontier in Pakistan, for that he was awarded a Nobel Peace Prize. The people who were awarded hundreds of billions of dollars of the people’s money because they lost all their money are skimming millions and billions off the top for themselves and their associates in what they call “bonuses”. 2009 has been a year of egregious assault on the American public by the people in charge.

The “people’s representatives” as they like to be called, no longer represent the people at all but instead solely represent and pledge allegiance to the special interests and corporate lobbyists who have bought and paid for their votes, along with the media oligarchs who control who sits in the seats. Regardless of whether they call themselves Democrats or Republicans, they are a group of self important, self serving, morally bankrupt, corrupt, clueless buffoons and criminals running unchecked by a complicit corporate media.

Every American should be ashamed, embarrassed and sad that their country has been bought and sold to an organized criminal enterprise which includes the entire political body and the media. The only thing the “people’s representatives” have in common is contempt for the people they are ostensibly representing. It is revolting for any American to watch these cretins heaping praise Ben Bernanke at the congressional theater of the absurd. His institution has already debased the dollar by 95% and failed miserably in every mandate they had since they took over in 1913. If any American has managed to retain or save any money, he can now put it on deposit in their banking system and earn a negative real return (a loss of his purchasing power) while at the same time the banks will take his deposit and loan it to his brother at 30% interest. So Mr Bernanke the money printer has control over the largest legal loan sharking operation ever concocted and it is funded by the America people, against the America people.

During 2009, the leadership has taken actions which benefit the corporations and special interests who own them, while showing nothing but wanton disregard for the millions of citizens whose lives their sponsors have destroyed. What we are headed towards in the US if we are not there already, is a Straussian society of ultra rich, ultra powerful oligarchs and a serfish powerless population with no middle class to speak of. The US president De Jour is, and from here on out will be a yes man, subservient to the ultra powerful too big to fail oligarchs who control the money and power and are responsible for putting him in the drivers seat. This is not compatible whatsoever with prosperity, democracy or anything else the US still holds itself out as. Here at the end of 2009, the United States has morphed into a bankrupt fascist oligarchy which owns the military machine as a policy enforcement tool, the entire political body and the media. It isn’t going to fix itself because the fraud, corruption and malfeasance is systemic. It meets every definition of organized crime and it’s all happening right out in the open.

In my way of thinking, this is not at all unlike the breakdown of the Soviet Union where for a period of time a sort of mafia of oligarchs weilded the wealth and power, carved up the remaining wealth of the country among themselves and had their way with the country amid a climate of manufactured fear, chaos and decay. The key point being that the people in control are out to make money and increase their power at the expense of the citizens. Mr Orwell said “the purpose of power is power” and that statement needs to be well understood. These megalomaniac, sociopathic aspirations of ever more power and control by an elitist group of criminals come at the expense of America and future Americans. It doesn’t matter whatsoever to the oligarchs because they have property waiting in Croatia. When the remaining wealth has been extracted from America, they will all pull out and the citizens will be left with a rusted out bankrupt hull. I believe the circumstances for this eventuality have already been created, just not yet realized due to the enormous size of the economy and the momentum it has. In other words, I believe it’s collapsing as fast as it can although living through it seems like slow motion. When viewed from the future in a historical context however, I think it will have seemed fairly rapid.

The financial markets have deteriorated into a Las Vegas casino atmosphere where the the only consistent winners are the house and the too big to fail entities trading on foreknowledge and inside information shared freely between the treasury and the few remaining large trading houses. The entire system is bankrupt, fraudulent, corrupt and irretrievably broken. The anchor of the global financial system, the US dollar, has become the worlds largest ponzi scheme and the remaining 95% of the worlds population would like a new, viable standard. At this point however, despite any action the FED may or may not take, the US debt is far too large to ever be repaid. It is questionable if the interest payments will even be serviceable if interest rates were to rise, and the only reason interest rates are low is because the FED is using brute force. At this time the only way out without a complete collapse is to inflate away the debt, thus turning a deflationary collapse into a long period of inflationary decay and declining standard of living.

I have been of the opinion that what we saw in October 2008 was a collapse of the global fiat financial system which was more or less expected due to the collapse of the real estate bubble. I have reminded my subscribers that when I was forecasting a drop in real estate prices of as much as 50% during the heyday of the mania, that sounded unfathomable. What I believe is in store for our future sounds nearly as unfathomable now as that idea did back then. I believe the reason it sounds unfathomable is due to the constant barrage of lies, misinformation and propaganda from the tight knit corporate media oligarchy which has essentially merged with the new power structure of the US in a corrupt, overt form of fascism that would make Mussolini blush or Goebbels the propagandist nod in approval.

Over a period of decades and with one FED induced serial bubble after another, the financial system finally reached an unsustainable level of debt and leverage in 2008. When the FED started raising interest rates, when the real estate bubble burst, it involved so much debt and leverage that the whole system failed, pricing models and risk models failed, and the banking system quickly became insolvent.

I believe we have already had a systemic collapse, and the only thing the FED can do now is alter the look and feel of the collapse and to manage the allocation of the remaining wealth. In the end, whether by deflationary collapse or inflationary decay, the result of the collapse will feel the same to the US general population regardless of the interim path taken.

If the FED had done nothing, the whole system would have quickly degenerated into a deflationary collapse and failure of the financial system due to insolvency. The course the FED chose however is the one myself and many others predicted beforehand…the FED chose to solve the problem of too much debt by creating even more debt by taking the unprecedented action of buying it’s own debt under euphemisms like “quantitative easing” and “debt monetization” and also covert buying to artificially force negative real return rates of interest. Through this course of action, the FED so far has been able to turn what would have been a rapid deflationary collapse into a decaying inflationary depression which is euphemistically called “a recession that is now over” by the six people who control 96% of the global media and attempt to pass off propaganda as “news” to a woefully mis informed, dumbed down and apathetic general public.

Going forward, If the FED doesn’t buy enough of their own debt, then interest rates on the long end would rise and the risk becomes a deflationary collapse into insolvency for the FED and it’s banking system. If interest rates remain effectively at zero on the short end and artificially suppressed by quantitative easing on the long end, then the real estate market can recover and the banks can regain solvency. If interest rates rise as the free markets would argue for however, then the real estate market sinks even further, the US dollar rises, and greater insolvency of the banks follows. The higher interest rates go, the thinner the knife edge gets and the FED would quickly find itself staring into another October 2008 collapse kind of situation. On the other hand, if by buying enough of their own debt they can keep short and long term interest rates down, then the free money percolates through the banking system, puts pressure on the dollar, lifts commodity and real estate prices and pulls out of the collapse via inflating away the debt so long as they can avoid run away hyperinflation in the process. This is the path we have traveled throughout 2009.

The key point is that the FED has had the option of doing two things…creating even more debt in order to save itself and the banking system, or do nothing and watch themselves collapse into a mass of failure, loss of power and control, insolvency and domino style bankruptcy and default. They have chosen the expected course, which is to increase the debt and print money, which is the way they save themselves and their banking system. In short, given a choice between saving the people and saving themselves after a collapse, they have taken the expected course which is to attempt to save themselves. What else would you expect? If they had wanted to save the people they would have taken the peoples bailout money and handed it to them in the form of a check. Instead they handed it to the banks.

Although they have been somewhat successful in reducing the insolvency of the banking system, they have effectively created a giant wealth transfer mechanism whereby all the money that disappeared in the collapse was re created out of thin air and given to the banks and wall street. I think of it as a sort of shell game. The money disappeared from Mom and Pop’s 401k and re appeared on the balance sheets of the banks via freshly created new money (debt). As a result, we have something still called “free market capitalism” which is not free market capitalism at all. We have emerged from this crisis with a sort of financial oligarchy where a few entities who control all the wealth and power also control politics and media. Understanding this will help to understand issues like “healthcare reform” which will involve you paying more and getting less, with the primary beneficiaries being the oligarchies who control health care and insurance.

The one major point I have to make at this time is throughout 2009, there was no action taken that put the average citizen in a better position, but instead during the course of the year there was a gigantic wealth transfer from the citizens to the banking system, effectively orchestrated by the so called “people’s representatives” who are in fact, all owned by the banking system and Wall Street with half a dozen or so oligarchies and lobbyists in a public display of fraud, malfeasance and corruption that sets a new historical precedent.

I have been and remain of the opinion that the ultimate “solution” to this crisis will be for the entities who now control the wealth and power to accumulate even more wealth and power via a global central bank and global currency which now for the first time in public has been discussed on and off throughout 2009 and described as the New World Order by such luminaries as Henry Kissinger. So looking out beyond 2010, I see a new global reserve currency emerging and a global central bank which will effectively also be a global governing authority where the heads of state effectively report to the group of central bankers and their anonymous shareholders who effectively control the money, power and politicians on a global scale. When the global currency is introduced, only then do I expect a sort of collapse of the US dollar versus this global currency. In this way, the world can carry on while the former global reserve currency called the US dollar will be free to depreciate to a level where solvency is regained and the now unpayable US debt is inflated away to the point where it can be repaid in depreciated dollars. US citizens will experience a continued decay as the US becomes to resemble more and more, a third world country. Detroit is already there. The corporate media won’t show it to you but if you do a youtube search on Detroit what you see will shock you.

My view of the world tends to be the long view. Throughout 2009 I have been positioned and trading in in various hard assets including but not limited to gold silver, back month crude oil, Soybeans, raw land and Americana. I own and trade some Chinese shares but no US equities or bonds. I have lost confidence in the US leadership. I have lost confidence in the fairness of the “system” where some elite entities are free to keep the profits and nationalize their losses. I have opted to opt out by embarking on a long term effort to transfer more and more capital “off wall street” and their organized crime ring they call the banking system, and instead investing in things without fraudulent or impaired balance sheets. At some point in the future, I want to be short US 10 and 30 year bonds because it is nonsensical to me that anyone would be willing to loan a bankrupt country money for 30 years at an interest rate of 4% or so. The only reason this situation exists today is due to the FED monetizing debt and attempting to manipulate the long end using brute force.

So as we head off into 2010, I see a lot of uncertainty in the short term. If interest rates rise and the US dollar gets stronger, by mid year I would expect a repeat of October 2008. What I expect to happen over the longer term however is that the FED will ultimately print enough money to attempt to slowly inflate the debt away to a manageable amount amid a generalized and severe decay in terms of the standard of living for Average Americans. At some point along the line, I expect the world reserve currency role to be moved into a global currency and for the US dollar to be allowed to float against it without the benefits associated with the world currency role, and for the US standard of living to continue to decline and eventually decay into a societal collapse followed by something different. I expect China to emerge as the dominant economic power in the world and to purchase a large amount of US assets. Somewhere along the line I also expect the Nobel Peace Prize recipient to bomb Iran because he will be ordered to do so by the people who control the money.

Personally, based on what I see coming over the long term I have elected to forego city life and have embarked on a long term project in the picturesque Appalachian foothills in an effort to increase my degree of self sufficiency and insulate myself from the continued decay and declining standard of living sweeping the country. My long view for the US is high inflation which will not show up in the government’s fraudulent statistics, along with a declining standard of living, increasing decay and ultimately leading to chaos, societal and government collapse in the US within a decade or two, maybe sooner.

I would like to end by quoting Marc Faber with one of the most compelling quotes of 2009. I find this quote compelling because the price of anything as measured by a fraudulent standard is meaningless. To me, it is a gift to be able to still exchange US dollars for anything with real value.

“I would buy every three months some gold and not worry so much about the price because the weight stays the same”

For some reason Zero Hedge is prone to take a great deal of heat (both directly radiated and reflected) whenever we opine on the (rather obvious to us) prospect that interest rates might actually (quelle surprise) rise in this environment.  Today, rather than engage in “we told you so” gloating, or endure the repetitive pleadings of commentators that this or that Treasury auction was really a success if you just look a little deeper at the figures, we’ll just quote Bloomberg quoting other fixed income observers on today’s auction of two years, in an article “ambiguously” titled “U.S. 2-Year Yields Highest Since October After $44 Billion Sale.”

Treasury two-year note yields reached the highest levels since October as an investor class that includes foreign central banks bought the least of the debt in five months at today’s record-tying $44 billion auction.

Indirect bidders purchased 34.8 percent of the notes, the lowest amount since July, and below the average for the past 10 sales of 45 percent. Treasuries of all maturities have fallen 3.6 percent this year, according to Bank of America Merrill Lynch indexes. That would be the worst performance since at least 1978, when Merrill began collecting the data.

We aren’t really sure how this will be spun into a “good thing,”™ but we are sure that someone will find a way.  Back to you, CNBC.

Adam Smith, Charles Darwin and George Washington are not only rolling in their graves, they are dancing the macarena. A new study by the UMich School of Business has found what everyone has known since the crisis began, if not centuries prior: that the biggest, crappiest banks were guaranteed to get more bailout funding the more political ties they had (and more kickbacks they had offered). Is this sufficient to claim that capitalism in its purest sense has been corrupted beyond repair, courtesy of political intervention and constant pandering? Probably not, but it sure makes a damn good argument. In any case, the data is sufficient for all bears to start keeping a track of which banks are increasing their lobbying efforts and funding: those are the ones where the greatest weakness is likely still to be uncovered (if it hasn’t already). And while the political relationship probably is not a big surprise to any realistic readers, another finding of the study makes a solid case for abolition of the “apolitical” Federal Reserve:

A new study by Ross professors Ran Duchin and Denis Sosyura found that
banks with connections to members of congressional finance committees
and banks whose executives served on Federal Reserve boards were more
likely to receive funds from the Troubled Asset Relief Program, the
federal government’s program to purchase assets and equity from
financial institutions to strengthen its financial sector.

The unsupervised Federal Reserve gets to make or break banks, presumably under the gun of its one and only master, Goldman Sachs, which has already destroyed its major historical competitors: Bear Stearns and Lehman Brothers. This is a sufficient condition to not only audit the central bank but to immediately seek its abolition, and also to commence anti-trust proceedings against Goldman Sachs which is not only a monopoly, but by extension has veto power over the very regulatory mechanism that is supposed to keep it “fair and honest.” The system is truly broken.

More findings from the study:

Further, their research shows that TARP investment amounts were
positively related to banks’ political contributions and lobbying
expenditures, and that, overall, the effect of political influence was
strongest for poorly performing banks.

Can someone reminds us what the core premise of capitalism is again, and why we pretend to live in anything other than a hard core socialist society?

One of the professors of the study had this to say:

“Our results show that political connections play an important role in
a firm’s access to capital. The effects of political ties on federal capital investment
are strongest for companies with weaker fundamentals, lower liquidity
and poorer performance — which suggests that political ties shift
capital allocation towards underperforming institutions.”

The US financial system now need a new four letter acronym: everyone knows TBTF. We hereby annoint the Too Blatantly Briby To Fail (TB²TF) category of financial institutions. We posit that in 5 years there will be two banks in the former group: JP Morgan and Goldman Sachs, while every single other bank will make up the latter.

Among the specific data findings:

The researchers used four variables to measure political influence: 1)
seats held by bank executives on the board of directors at any of the
12 Federal Reserve banks or their branches (the Federal Reserve is
involved in the initial review of CPP applications from the majority of
qualified banks); 2) banks with headquarters located in the district of
a U.S. House member serving on the Congressional Committee on Financial
Services or its subcommittees on Financial Institutions and Capital
Markets (which played a major role in the development of TARP and its
amendments); 3) banks’ campaign contributions to congressional
candidates; and 4) banks’ lobbying expenditures.

They found that a board seat at a Federal Reserve Bank was
associated with a 31 percent increase in the likelihood of receiving
CPP funds, while a bank’s connection to a House member on key finance
committees was associated with a 26 percent increase, controlling for
other bank characteristics such as size and various financial
indicators.

The last data point is truly troubling: while it is one thing to pander to corrupt politicians, at least when their transgressions are made public they can and will be booted out. Yet what checks and balances exist to punish current and former Fed staffers who endorse near-bankrupt companies, in self-evident conflict of interest acts, for enhanced survival? As the Fed is accountable to nothing and nobody, save Goldman Sachs, one can argue that Goldman decides the fate of the very core of the US financial system: which firms get the thumbs up and down treatment. This is an unbelievalbe travesty of both the constitutional and the tenets of capitalism and must be rectified immediately. It certainly helps that the president, being a Constitutional law professor, will surely get right on it.

“Our findings also suggest that qualified financial institutions were
more likely to receive an investment from CPP if they were bigger and
had lower earnings and lower capital,” said Duchin, U-M assistant
professor of finance. “This is consistent with an investment strategy
seeking to support systematically important institutions experiencing
financial distress.”

If this study’s finding are confirmed and repeated independently by other research teams, it is safe to say that any pretense America has to being an efficient capitalism system (where those who can no longer compete, disappear) can be used to wipe the nation’s collective backside. Between this, and a choice of US dollars and Treasuries, Cottonelle is starting to see some serious competition.

h/t Geoffrey Batt