FedUpUSA

Archive for the ‘Socialism’ Category

The Corruption of America

The numbers tell us America is in decline… if not  outright collapse.

I say “the  numbers tell us” because I’ve become very sensitive to the impact this  kind of statement has on people. When I warned about the impending bankruptcy  of General Motors in 2006 and 2007, readers actually blamed me for the  company’s problems – as if my warnings to the public were the real problem,  rather than GM’s $400 billion in debt.

The claim was absurd. But the resentment my work  engendered was real.

So please… before you read this issue, which makes  several arresting claims about the future of our country… understand I am  only writing about the facts as I find them today. I am only drawing  conclusions based on the situation as it stands. I am not saying that these  conditions can’t improve. Or that they won’t improve.

The truth is, I am optimistic. I believe our country is  heading into a crisis. But I also believe that… sooner or later… Americans  will make the right choices and put our country  back on sound footing.

Please pay careful attention to the data I cite. And  please send me corrections to the facts. I will happily publish any correction  that can be substantiated. But please don’t send me threats, accusations  against my character, or baseless claims about my lack of patriotism. If I  didn’t love our country, none of these facts would bother me. I wouldn’t have  bothered writing this letter.

I know this is a politically charged and emotional  issue. My conclusions will not be easy for most readers to accept. Likewise,  many of the things I am writing about this month will challenge my subscribers  to re-examine what they believe about their country. The facts about America today tell a painful story about a country in a  steep decline, beset by problems of its own making.

One last point, before we begin… I realize that this  kind of macro-economic/political analysis is not, primarily, what you pay me  for. You rightly expect me to provide you with investment opportunities –  whether bull market, bear market, or total societal collapse. And that’s what  I’ve done every month for more than 15 years.

But that’s not what I’ve done this month. You won’t  find any investment ideas at all in these pages. This issue is unlike any other  I have ever written.

I’m sure it will spark a wave of cancellations –  costing me hundreds of thousands of dollars. I fear it will spark a tremendous  amount of controversy. Many people will surely accuse me of deliberately  writing inflammatory things in order to stir the pot and gain attention. That’s  not my intention. The truth is, I’ve gone to great lengths throughout my career  to protect my privacy.

I am speaking out now because I believe someone must.  And I have the resources to do it. I am  sharing these ideas with my subscribers because I know we have arrived at the  moment of a long-brewing crisis.

Our political leaders, our business leaders, and our  cultural leaders have made a series of catastrophic choices. The result has  been a long decline in America’s standard of living.

For decades, we have papered over these problems with  massive amounts of borrowing. But now, our debts total close to 400% of GDP,  and America is the world’s largest borrower (after being the world’s largest  creditor only 40 years ago)… And the holes in our society can no longer be  hidden…

We’ve reached the point where we will have to fix what  lies at the heart of America’s decline… or be satisfied with a vastly lower  standard of living in the future.

How do I know? How do I statistically define the  decline of America?

The broadest measure of national wealth is per-capita  gross domestic product (GDP). Economists use this figure to judge standards of  living around the world. It shows the value of the country’s annual production  divided by the number of its citizens. No, the production isn’t actually  divided among all  the citizens, but this measure provides us with a fair  benchmark to compare different economies around the world. Likewise, this  measure shows the growth (or the decline) in wealth in societies across time.

So… is America growing richer or poorer based on  per-capita GDP? Seems like a simple enough question, doesn’t it? Is our economy  growing faster than our population? Are we, as individuals, becoming more affluent?  Or is the pie, measured on a per-person basis, growing smaller?

This is the most fundamental measure of the success or  the failure of any political system or culture. Are the legal and social rules  we live under aiding our economic development or holding us back? What do the  numbers say?

Unfortunately, it’s a harder question to answer than it  should be. The problem is, we don’t have a sound currency with which to measure  GDP through time. Until 1971, the U.S. dollar was defined as a certain amount  of gold. And the price of gold was fixed by international agreement. It didn’t  actually begin to trade freely until 1975. Therefore, the value of the U.S. dollar  (and thus the value of U.S. production, which is measured in dollars) was  manipulated higher for many years.

Even today, our government’s nominal GDP figures are  greatly influenced by inflation. The influence of inflation is particularly  pernicious in GDP studies. You see, inflation, which actually reduces our  standard of living, drives up the amount of nominal GDP. So it creates the  appearance of a wealthier country… while the nation is actually getting  poorer.

The only real way to accurately measure per-capita GDP is  to build our own model. The need to build our own tools tells you something important  – the government doesn’t want anyone to know the answer to this question. It  could easily publish data far more accurate than the indexes it puts out. But  government doesn’t want anyone to know. And it wants to be able to say  “those aren’t the real data” when studies like ours produce bad news.

So pay attention to how we built our charts. You can  see for yourself that our data are far more accurate than the government’s  figures. Our data are based on the real purchasing power of the currency, not  the nominal numbers, which are completely meaningless in the real world.

The question we are trying to answer is: What would  per-capita GDP numbers look like, if we used a real-world currency, like gold,  or a basket of commodity prices, instead of the paper-based U.S. dollar? What  would the figures be if we measured GDP in sound money instead of the  government’s funny money?

Here’s how we figured it out. We took the government  numbers for nominal GDP and measured them first against commodity prices, and  later (after it began to trade freely) gold. We used a standard commodity index  (the CRB) up to 1975 and gold post-1975. The result of this analysis shows you  the real trend in U.S. per-capita  GDP, as measured on a real-world purchasing power basis.

Our analysis shows you what’s actually happened to our  real standard of living. The results, we suspect, will surprise even the most  bearish among you.

America is in a steep decline.

Americans Are  Getting Poorer – Fast

Let me anticipate the “official” criticism of  our study. Many people will claim that our numbers aren’t “real.”  They will say that we “mined” the data to produce a chart that showed  a steep decline.

That’s simply not so. All we’ve done is convert the  government’s nominal GDP stats into a fixed currency value that’s based on  real-world purchasing power. The fact is, our data are far more accurate than  the government’s because they represent the real-world experience. That’s why our data are far more closely  correlated to other real-world studies of wealth in America.

Consider, for example, annual sales of automobiles.  Auto sales peaked in 1985 (11 million) and have been declining at a fairly  steady rate since 1999. In 2009, Americans bought just 5.4 million passenger  cars. As a result, the median age of a registered vehicle in the U.S. is almost  10 years.

Our data shows that real per-capita wealth peaked in  the late 1960s. Guess when we find the absolutely lowest median age of the U.S.  fleet? In 1969. At the end of the 1960s, the median age of all the cars on the  road in the U.S. was only 5.1 years. Even as recently as 1990, the median age  was only 6.5 years.

Rich people buy new cars. Poor people do not.

Most important, our data “proves” something I  know many of you have felt or perceived for many years. You’ve seen the decline  of your neighborhoods. You’ve gone years without being able to earn more money  in your job. Or you’ve seen your purchasing power decrease to the point where  you’re now substituting lower-quality products on your grocery list for the  brand-name products you used to buy.

You can see how much harder it is on your children to  find good jobs, to buy good housing or a new car. As a result, few people under  the age of 40 have the same kind of “life story” as their parents.

And because they can’t “make it,” many have decided to “fake it.” The average college  student now graduates with $24,000 in debt… and by his late 20s has racked up  more than $6,000 in credit card debt. Meanwhile, median earnings for Americans  aged 25-34 equals $34,000-$38,000. (Source: Demos.org, “The Economic State  of Young America,” November 2011.)

Can you imagine starting your life out as an adult with  a personal debt-to-income level at close to 100%?  What does this say about the state of our economy? What does this say about the  state of our culture?

Who Suffers Most

It’s not only the young that are having trouble in  America. It is also the old.

Debt levels among households headed by people older  than 62 have been rising for two decades. The average mortgage size for this population is now $71,000 – five times  larger than it was in 1987 (adjusted for inflation), according to William Apgar  of Harvard’s Joint Center for Housing Studies.

Older Americans are also more reliant on credit card  debt than ever before… credit card debt.  From 1992 through 2007 (which is the latest data available) older Americans took on  credit card debt at a faster pace than the population as a whole. According to USA Today, lower- and middle-income  Americans aged 65 and older now carry an average of more than $10,000 in credit  card debt, up 26% since only 2005.

Given average interest rates of 20% for these debts,  it’s a fair bet that these obligations will never be repaid. But they will have  a terrible impact on the standard of living of these older Americans.

What in the heck is going on? Don’t Americans pay off  their mortgages before they retire? Don’t they work hard during their careers,  save, and invest, so they can move to Florida and spend their retirement in  comfort?

Older Americans living with credit card debt! This  doesn’t sound like America, does it? Or maybe it does.

My bet is that most of my subscribers know that  something has gone terribly wrong with America. It’s not easy to figure out how  all of this happened… but you know from your own experiences that these  numbers aren’t wrong. It might not be pleasant to think about… but these  figures paint a sad but accurate picture: America  is not the country it was 40 years ago. These changes are warping our economy,  politics, and culture.

In this month’s issue, I’d like to try to define a few  of the core reasons we’re in this situation. I can’t possibly analyze all the  factors that have led to this decline. But I want to document the growth of  graft in politics. I want to demonstrate – with real facts and examples – how  public company leadership has deteriorated. And I want to document some of the  things that are occurring in the broader society, all of which I believe are  linked to this fundamental decline in our standard of living.

You see, I believe the decline of our country is  primarily a decline of our culture.

We have lost our sense of honor, humility, and the  dedication to personal responsibility that, for more than 200 years, made our  country the greatest hope for mankind. I want to detail some of the factors  that gave rise to the current entitlement society. We have become a country of  people who believe their well-being is someone else’s responsibility.

I’ve labeled these problems: The Corruption of America.

These problems manifest themselves in different ways  across institutions in all parts of our society. But at their root, they are  simply facets of the same stone. They are all part of the same essential  problem.

The corruption of America isn’t happening in one part  of our country… or in one type of institution. It is happening across the  landscape of our society, in almost every institution. It’s a kind of moral  decay… a kind of greed… a kind of desperate grasp for power… And it’s  destroying our nation.

Henry Paulson and Jon Corzine - formerly of Goldman Sachs

The Ethos of  ‘Getting Yours’

Americans know, in their bones, that something terrible  is happening. Maybe you can’t articulate it. Maybe you don’t have the  statistics to understand exactly what’s going on. But my bet is, you think  about it a lot.

For me, a poignant moment of recognition came this  month.

Bloomberg news published an article based on  confidential sources about how Henry Paulson, the former CEO of Goldman Sachs  and the Republican U.S. Treasury secretary during the financial crisis, held  a secret meeting with the top 20 hedge-fund managers in New York City in late  July 2008. This was about two weeks after he testified to Congress that Fannie  Mae and Freddie Mac were “well-capitalized.”

I knew for a fact that what Paulson told Congress  wasn’t true. I wrote my entire June 2008 newsletter detailing exactly why  Fannie and Freddie certainly had billions in losses that they had not yet  revealed to investors – $500 billion in losses, at least. There was no question  in my mind, both companies were insolvent – “zeros,” as I explained.

And yet, in front of Congress, the U.S. Treasury  secretary was saying exactly the opposite. Either I was a liar… or he was.

Then… only a few days later… what did Paulson tell  those hedge-fund managers?

He told them the same thing I had written in my  newsletter. He told them the opposite of what he’d said publicly to Congress. He told these billionaire investors  that Fannie and Freddie were a disaster… They would require an enormous,  multibillion-dollar bailout… The U.S. government would have to take them  over… And their shareholders would be completely wiped out.

Here you had a high-government official, explicitly  lying to Congress (and by extension, the general public), while giving the real  facts to a group of people who represented the financial interests of the  world’s wealthiest folks. The story didn’t come to the public’s attention for two years.

This was the most outrageous example of graft and  corruption I have ever seen. Certainly it involves more billions of dollars in  misappropriated value than any other similar story I can recall. These managers  had the risk-free ability to make tens of billions of dollars, if not hundreds  of billions, by using derivatives to capitalize on what they knew was the  imminent collapse of the world’s largest mortgage bank. Who picked up the tab?  You know perfectly well. It was you and me, the taxpayers.

(One of the investment managers present at this meeting  was Steve Rattner, who by that point was already deeply involved in another bit  of graft, his efforts to bribe New York state pension-fund managers for large  investments into his hedge fund, from which he earned perhaps as much as $100  million. He later settled the charges for a mere $10 million shortly after  Andrew Cuomo was elected governor of New York.)

The Bloomberg story… about a crooked Treasury  secretary handing a room full of crooked billionaires inside information worth  billions of dollars… hardly caused a ripple. As far as I know, no actions are  being planned against Henry Paulson or any of the hedge-fund managers involved.  No other major media outlet picked up the story. I saw nothing about it from  the Department of Justice or the Securities and Exchange Commission.

What does that say about our country when even the most  egregious kind of corruption – involving hundreds of billions of dollars – is  simply ignored?

It seems like everyone in our country has lost his moral  bearing, from the highest government officials and senior corporate leaders all  the way down to schoolteachers and local community leaders. The ethos of my  fellow Americans seems to have changed from one of personal integrity and  responsibility to “getting yours” – the all-out attempt, by any means  possible, to get the most amount of benefits with the least amount of work.

You can see this in everything from the lowering of  school standards (revising the SAT) to the widespread use of  performance-enhancing drugs in professional, college, and high school sports.  Cheating has become a way of life in America.

I have an idea about how this happened… about the  root cause of this kind of corruption and why it was inevitable, given some of  the basic facts regarding how we’ve organized our government and our  corporations.

Let me show you the numbers – the hard facts – behind  what’s happened to our country…

The Corruption of  Politics

I’ll start with one of the biggest factors in the  decline of our civilization – the link between welfare, education, crime, and  politics.

It is routinely alleged in national political debates  that something is fundamentally unfair and un-American about the huge  “wealth gap” between the poorest Americans and the wealthiest. Some  politicians like to argue that the poor never have a real shot at the American  dream, and as a nation, we owe them more and more of our resources to correct  this injustice. Most important, it is alleged that only the government has the  resources to correct this inequality.

This is a dangerous notion…

First, it promotes the idea of entitlement. Entitlement  is a fairly new idea in the American political lexicon – perhaps because most  of our nation’s wealth is still fairly new. The American idea of entitlement  argues that because you were born into a rich society, other people owe you  something. The idea has become pervasive in our culture. It underlies the basic  assumptions behind the idea of a “wealth gap.” Implicit is the  assumption that successful Americans haven’t rightfully earned their wealth…  that in one way or another, they’ve taken advantage of the society and have an  obligation to give back most of what they’ve “taken.”

As you’ll see, I believe the idea of entitlement lies  at the root of many of our most serious cultural problems.

The more obvious problem is the idea that the  government is responsible for fixing the “wealth gap.” But the  government has proved wholly ineffective at dealing with poverty in America.  The data is nearly conclusive that government efforts are far more likely to be  the cause of the wealth gap than the solution.

The simple fact is, the government has to take  resources from someone before it can dole them out to others. And this act of  taking turns out to be economically destructive. It reduces the market’s  incentives for entrepreneurs. The more you take from the productive members of  society, the less productive they become. That’s the primary lesson of the  history of socialism. Yet… many of our political leaders seem oblivious to  this iron law of human nature.

Consider a simple analysis that compares the  unemployment rate with the size of the federal government’s spending, as  measured against GDP. (We created this chart after reading a similar analysis   at  Mark Perry’s excellent financial blog, Carpe Diem.)

As you can see in this chart, the larger the government grows as a  percentage of our economy, the higher unemployment rises. The more government, the less opportunity. These figures are  similar when studied comparatively across many different countries.

We also know from decades of experience that little of  the government’s funding for the poor will ever reach those who are actually in  need. Instead, these kinds of socialist policies end up sending billions of dollars into  the hands of unions, “community organizers,” and other sponsors of  the Democratic Party. This tightens their political control of America’s inner  cities, which have become the source of our country’s most intractable social  problems.

Believe me, I have reams of data and decades of case  studies for these conclusions. But before we get to my  proof, I want you to simply assume that what I’m saying is 100% correct. Assume  most of the government’s social spending ends up corrupting the politics of the  inner city. Assume these efforts actually make the “wealth gap”  larger. Assume these policies and the politicians who sponsor them are actually  creating a society of complete dependence, where the spread of ignorance has  created entire generations of people who aren’t educated enough to know they’ve  been enslaved by their own leaders.

If these things  are true, if my conclusions are exactly right, what would America’s poorest  communities look like today?

It has now been almost 50 years since the start of the  War on Poverty, President Lyndon Johnson’s program to radically increase  domestic welfare spending. These programs and their various spinoffs have been  at the center of Democratic politics ever since. In fact, if you compare  speeches about these programs from the mid-1960s until today, you will find the  verbiage never changes. Obama is merely echoing the same calls for “social  justice” that Robert Kennedy used in his ill-fated 1968 campaign for  president.

But besides the soaring rhetoric, besides the promise  of a “chicken in every pot,” what have these programs actually  achieved? The wholesale destruction of urban communities across America,  communities that are overwhelmingly African American. If the intention of these  programs had been to destroy black communities, you could have hardly done more  damage than the last 50 years of Democratic policy.

I don’t think most Americans realize how dangerous  these communities have become or the toll they take on our country as a whole.  That’s primarily because talking about this problem is seen as racist. That’s  complete nonsense. The victims of these policies are primarily black people.  Trying to help them restore dignity and independence to their communities isn’t  a racist goal. It’s humanitarian.

And let me offer a prediction… Sooner or later, the  people in these communities are going to finally point their finger at the  politicians who’ve lied and pandered to them for decades, all while stealing  from them at every turn. When that moment comes, having a track record of  correctly speaking out about the real nature of these problems will be a  valuable political asset.

No, I’m not running for office… I’m just trying to  buck-up the politicians who I know read this letter. They need to get out in  front of this issue.

Let me give you some of the numbers that define the  enormous scope of these problems.

According to the NAACP, Texas taxpayers spent $175  million in 2009 to imprison residents from a small part of Houston – only 10  zip codes out of 75. Thus, people from neighborhoods that are home to only  about 10% of the city’s population account for more than 33% of the state’s  entire $500 million annual prison spending. These neighborhoods are  overwhelmingly poor and African American.

In Pennsylvania, taxpayers will spend $290 million in  2009 to imprison residents from just 11 of Philadelphia’s neighborhoods,  representing about 25% of the city population. On this relatively small urban  area, the state will spend roughly half its $500 million prison budget. These neighborhoods are overwhelmingly poor and  African American.

In New York, taxpayers will spend $539 million to  imprison residents from only 24 of New York City’s 200 different neighborhoods.  Only 16% of the city’s population lives in these areas, but they will account  for nearly half of the  state’s  $1.1 billion prison budget. These  neighborhoods are overwhelmingly poor and African American.

America has many problems… but these neighborhoods  represent more than a society in decline. Life  in these places reflects a complete collapse of Western civilization. What’s happening in these communities? A breakdown of the family and the  resulting collapse of the school system. What you have left is crime – violent  and political.

In Detroit, only 27% of the black male students in the  school system graduate from high school. This  is not a racial problem: Only 19% of the white male students graduate from  those same schools. What’s causing this problem? A complete breakdown of  society. When communities can no longer teach their children the most basic  academic skills, such as reading, math, history, literature, and economics…  what future can we expect? And what kind of society do you expect after several  generations of total ignorance?

These problems are still found primarily in urban  areas, but they are spreading across the country. In Pinellas County, Florida,  only 21% of black male students graduate from high school. In Palm Beach  County, Florida, you find a similar number. Likewise Duval County, Florida…  and Jefferson Parish, Louisiana… and Charleston County, South Carolina. In  Nebraska, only 40% of black male students graduate from high school. In Nevada,  only 45%. In New York state, only 25%.

What opportunities are available in America to people  without even a basic education? The New York Times reports almost 70% of  black males without a high school diploma are unemployed in the United States.

In many predominantly black, urban communities, the  actual unemployment rate is close to 100% for young dropouts. Given these  figures, it isn’t surprising that many of these people end up in jail.

According to various studies, black males who dropped  out of school by age 16 are four times more likely to end up in jail than those  who remained in school. Crime is literally all they know. Likewise, a black  youth whose mother was a high school dropout is 88% more likely to end up in  jail. These are the two primary reasons nearly one in 11 adult black men are  either in jail or on parole.

How did this all happen? How did we end up with expensive schools that can’t  teach? How did we end up with young mothers who aren’t married? How did we end  up with entire generations of people who won’t – and probably can’t – work in  the labor force? How did we end up with a skyrocketing prison population? The  prison population in America has soared from less than half a million people in  1980 to more than 2.5 million people today. More than 7 million adults are in  prison or on parole in the United States. We  have an incarceration rate that’s seven times higher than any other industrialized  nation.

The land of the free?

Let’s ask the most basic question: What has the  gigantic increase in welfare spending and education spending done for the  underclass of America? It seems apparent that growth in federal spending has  caused far more harm than good. When you study these neighborhoods, what you  find is a horrifying story that’s been repeated, generation after generation  since the early 1960s. It’s a story of families who have been destroyed by  their dependency on the state.

The truly extraordinary part is that all  these  things happened after these  neighborhoods began voting and electing their own (typically black and  Democratic) leadership. The socialism they voted for themselves led most  directly to the destruction of their communities. It was their own mayors, ward  leaders, and congressmen who chose this path for these communities.

Let me show you one case study – Detroit.

How Socialism Came  to America… and Destroyed  Detroit

In 1961, the last Republican mayor of Detroit, Louis C.  Miriani, lost his re-election bid. He probably would have lost to anyone who  ran against him because he was known to be a crook. He later served 10 years in  prison for tax evasion.

The man who defeated him, Jerome Cavanagh, was a  Democrat. He ushered in a new kind of politics in Detroit. Cavanagh, who was  white, got elected by promising to give Detroit’s African American population  the civil rights they deserved. But he didn’t stop there. Seeing the political  advantage to serving this community’s interests, he did all he could to bring  government benefits and government spending to Detroit’s black community.

Cavanagh brought socialism to Detroit.

Mayor Cavanagh was the only elected official to serve  on President Johnson’s Model Cities task force. The program was modeled after  Soviet efforts to rebuild whole urban areas in Eastern Europe. At the time,  this centralized approach to urban development was proclaimed as an advantage  to the Soviet system, something that could give them an edge in the Cold War.

Detroit received widespread acclaim for its leadership  in the program, which attempted to turn a nine-square-mile section of the city  (with 134,000 inhabitants) into a “Model City.” To help finance the  effort, Cavanagh pushed a new income tax through the state legislature and a  “commuter tax” on city workers. He promised the mostly poor and black  residents of the Model City area that the rich would pay for all of these  benefits. He bought their votes with taxes they didn’t have to pay.

It was classic American socialism.

More than $400 million was spent on the program – and  that was back when quarters still had actual silver in them. The feds and  Democratic city mayors were soon telling people where to live, what to build,  and what businesses to open or close. In return, the people received cash,  training, education, and health care.

But they didn’t like being told what to do… or how to  live. Not surprisingly, the Model Cities program was a disaster for Detroit.  Within five years, it had helped trigger a complete breakdown of civil order  and the city’s population began to rapidly decline.

On July 23, 1967, police attempted to break up a  notorious “blind pig” in the heart of the new Model City. Blind pigs  were after-hours clubs that featured gambling and prostitution. They were part  of the black culture of Detroit, with many having been in operation since the  Prohibition period. The community tolerated these establishments – but the  political leadership didn’t want any blind pigs in the new Model City area.

On this particular night, at this particular club, the  community was celebrating the return of two Vietnam War veterans. More than 80  people had packed into the club. The police decided to arrest everyone present,  including the two war vets. This outraged the entire neighborhood, which began  to riot. The scene turned into the worst race riot of the 1960s.

As my friend Doug Casey likes to say about the War on  Poverty, “The poor lost.”  The violence killed more than 40 people and left more than 5,000 people  homeless. One of the first stores to be looted was a black-owned pharmacy.  The largest black-owned clothing store in the city was also burned to the  ground. Cavanagh did nothing to stop the riots. (He claimed a large police  presence would make matters worse.) Five days later, President Johnson sent in  two divisions of paratroopers to put down the insurrection.

The situation destabilized the entire city. Most of the  people who could afford to leave did. Over the next 18 months, 140,000 upper-  and middle-class residents – almost all of them white – left the city.

And so, you might ask… after five years of  centralized planning, higher taxes, and a fleeing population, what did the  government decide to do with its grand experiment? You’ll never guess…

Seeing it had accomplished nothing but failure… The  government expanded the Model City program with 1974′s Community Development  Block Grant Program. Here again, politicians would decide which groups (and  even individuals) would receive state funds for various “renewal”  schemes. Later, big business was brought into the fold. In exchange for various  concessions, the Big Three automakers “gave” $488 million to the city  for use in still more redevelopment schemes in the mid-1990s.

What happened? Even with all of their power and all of  the money, centralized planners couldn’t succeed with any of their plans.  Nearly all of the upper- and middle-class citizens left Detroit. The poor fled,  too. The Model City area lost 63% of its population and 45% of its housing  units from the inception of the program through 1990.

Even today, the crisis continues. At a recent auction  of nearly 9,000 seized homes and lots, less than one-fifth of the available  properties sold, even with bidding starting at $500. You literally can’t give  away most of the property in Model City areas today. The properties put up for  sale represented an area the size of New York’s Central Park. Total vacant land  in Detroit now occupies an area the size of Boston. Detroit properties in  foreclosure have more than tripled since 2007.

None of this is surprising. It’s exactly what you’d  expect to see given the implementation of a socialist scheme like a Model  Cities’ program. Quite simply, coercion doesn’t work for economic development.  You cannot tax yourself into prosperity.

It might buy votes… but sooner or later the voters  will realize all that’s been promised was a lie. Won’t they?… Maybe not.

You see, the failure of the Model Cities program and of  the War on Poverty wasn’t surprising. What is surprising is that every  single mayor of Detroit since 1961 has been a Democrat. And extremely  liberal, black politicians have filled almost every major political office in  the city since the mid-1960s.

For example, John Conyers, Jr. has represented most of  Detroit’s worst neighborhoods since 1965. Today, Conyers is the  second-longest serving congressman in the House. And his election track record  could be described as “Putin-esque.” Conyers doesn’t merely win all of his election campaigns… He wins by  margins that aren’t explainable in a normal, two-party system.

He defeated Republican Robert Blackwell in 1964,  getting 84% of the vote. He was re-elected 13 times in a row from that  district, all with a greater margin of  victory than 85%. Ironically, the district was so ill-served by his  socialistic policies that about half of the people moved away. The population  losses led to redistricting. From then on, his margin of victory has fallen…  to “only” around 80%.

These election results don’t seem reasonable, do they?  They aren’t. By controlling the state legislature in Michigan, the Democrats  are able to draw the congressional districts in a way that guarantees them  almost permanent control. It’s no different than what despots do all over the  world. They hold an “election.” But it’s only for show.

And what do the Democrats do with this power? They push  a form of American socialism. This political system features transfer payments,  government jobs, and lucrative government contracts to voters in exchange for  political support – and in many cases, outright bribes. They do all of these  things under the cover of “progressive” politics and “social  justice.”

But if you brush away the veneer, what you find is a  history of abuse of power, corruption, and outright bribery. Conyers himself  was found guilty of several minor ethical violations in 2006 – mainly of using  his staff as personal servants, forcing them to babysit and chauffer his  children. In 1992, he was one of the most egregious abusers of the House  Banking scandal. He wrote 273 bad checks and left his account overdrawn for  nine months. But that’s all small-time graft compared to how things really work  in his office and in his district.

How do I know? Well… just ask yourself where Conyers’  wife sleeps today.

Monica Conyers, the wife of the second-longest tenured  congressman in the United States, sleeps in a federal prison in West Virginia.  She pled guilty to bribery in June 2009. She is serving a 37-month sentence  for accepting $60,000 in bribes as the president pro tempore of the Detroit  City Council. And yet… and yet… Conyers won re-election handily in  2010.

How is that possible?

These kinds of people and their political philosophy  have destroyed what was once America’s fourth-largest city. There is almost  nothing left of what was the capital of America’s industrial heartland. It’s  not hard to understand what has happened. When you start taxing people at  extremely progressive rates to pay for socialist “benefits”… when  you start telling them which schools their children must attend… when you  start giving jobs away to people based on political patronage, race, or  anything other than ability… you quash human freedom, you create dependency.  And you deter capital and investment… which bogs down productivity and economic  growth. If continued for long enough, it leads to social collapse.

And Conyers is hardly an anomaly. Just look at those  same blighted districts in Houston and Philadelphia…

In Houston, most of the city’s worst neighborhoods in  terms of high-school graduation rates and crime are found in Texas  Congressional District 18, where Democrats have won every election since the  district was created through re-zoning in 1972. In 1994, Sheila Jackson Lee won  the seat by promising to deliver more federal benefits to her constituents…

To appreciate the sterling representation the Honorable  Ms. Jackson Lee provides, consider this… In 2010 in bizarre remarks before  Congress, she demanded the government recognize victory in Vietnam. You can try  to figure out what she’s talking about here.  She also alleged racism on the part of her fellow  members of Congress who were voting against raising the debt ceiling. Don’t  believe it? View for yourself.

In Philadelphia, Chaka Fattah represents the worst parts  of the city, Pennsylvania’s 2nd Congressional District. The 2nd District is the  fifth-most Democratic Congressional District out of the 435 in Congress (and  the most Democratic outside of New York) based on the consistency and margin of  Democratic victories. A black Democrat has held the seat since 1963.

Among Chaka Fattah’s political highlights is his  economically illiterate plan to implement a 1% surcharge on all financial  transactions and transfers in lieu of all other forms of tax. This ill-fated  plan, which hasn’t gotten a single co-sponsor, ignores everything we know about  actual human behavior. (If you implemented such a cost to financial  transactions, the viability of those transactions would be destroyed and they  wouldn’t occur.)

Fattah’s other notable political position is his  support for convicted cop killer Mumia Abu-Jamal. Mumia’s case has been a cause  célèbre for years. The details of his endless appeals are tedious… just  know the evidence presented against him is overwhelming. And the Fraternal  Order of Police has consistently campaigned against Fattah’s re-election over  his support of Mumia.

The larger point is… These districts are among the  most blighted in our nation. Society has broken down there to a horrible  degree. Opportunity has vanished… Crime is rampant… Dependency on the state  is the norm. The leadership in these communities should be the most  scrutinized, their elected positions among the most contested. And yet, they  are the safest seats in Congress. The  officials dominance goes  unchallenged.

Why haven’t these policies and these leaders been  dropped – even after they’ve pled guilty to outright bribery? You would think  having experienced enough failure, having lived through horrible riots,  terrible crime, total economic collapse, brazen corruption… that sooner or  later, the voters in Detroit (and many other cities in America) would come to  their senses. But that’s not what happened. Instead, these systems have  continued to fail up to the point of total collapse. It is as if one part of  our society decided to run off the cliff… and then continued to do so for decades.

Why? Why did this happen? Why does it continue to  happen?

Read the rest at Stansberry Research

“The worst crime against working people,” so said Samuel  Gompers, “is a company which fails to operate at a profit.”

Gompers, of course, is known by the history books as the father of  the labor  union movement in America. He was founder of the American  Federation of Labor. It may seem incongruous for such an important labor figure to say such a  thing about profit, but Gompers appreciated  something back then that perhaps a  few of today’s labor leaders don’t.  An economy without profit is an economy in  deep, deep depression.

Profit and the self-interest motive behind it were under relentless  attack  not so long ago. The radicalism of the 1960s was dead set  against them, laying  most of society’s ills at the feet of greedy,  profit-hungry and selfish  capitalists. Anti-profit sentiment was even  more popular in Europe and Africa,  where it helped boost the socialist  agenda and a wave of  nationalizations.

In more recent years, however, a better understanding of profit has  taken  hold in surprising places. Communist China started implementing  it in the late  1970s as an incentive for moribund state industries and  previously prohibited  private enterprise. And in my files is an English translation of an article that  appeared in a most unlikely place.  Here’s a key excerpt:

“The economic situation of enterprises will have to depend directly  on  profit, and profit cannot fulfill its function until prices are  liberated from  subsidies. Over the centuries, humankind has found no  more effective measure of  work than profit. Only profit can measure the quantity and quality of economic  activity and permit us to relate  production costs to results effectively and  unambiguously . . . .  Our  suspicious attitude toward profit is a historical misunderstanding, the result  of the economic illiteracy of people . . .”

Those words were written by economist Nikolaay Shmelyov in the June  1987  issue of Novy Mir, the leading political and literary journal of  the then-Soviet  Union, no less. The Soviets, after years of anti-profit propaganda and policies  that produced a world-class basketcase  economy, were showing signs of shedding  some of that economic  illiteracy. There’s truth in one of the jokes that was  making the  rounds in Moscow just before the collapse of the Soviet system in  1991, namely, that to find a genuine believer in Marxism these days, one has  to  visit universities in the United States.

Thanksgiving Day is a particularly appropriate time to reflect on the meaning  and value of profit. The settlers at Plymouth colony who  started the holiday  tradition nearly wiped themselves out early on when they set up a communal,  socialistic economy. Each person was producing for everybody else and received  an equal share of the total  production. In the absence of a strong profit  motive, the settlers  starved until Gov. Bradford altered the arrangement.  Thereafter, men  and women produced for profit and the result was bountiful  harvests  with full Thanksgiving tables.

The people who don’t like profit prefer to extol the virtue of  selflessness,  the charitable motive. Don’t get me wrong here, I’m not  opposed to charity. A  loving, caring concern for others is a beautiful  thing, and Americans have  always been the most charitable, giving  people on the planet. But the fact  remains that profit is responsible  for more good things—by a long shot—than all  the charity in the world.

Consider this as you feast at the table today. The people who raised  the  turkey didn’t do so because they wanted to help you out. The others who grew the  cranberries and the yams didn’t go to the trouble and  expense out of some  altruistic, charitable impulse. If you think those  folks and the others who made  almost everything else you own performed  their tasks as sacrificial rituals,  then you probably believe McDonalds when they say, “We do it all for  you.”

In Marxist North Korea, they have a regime that works night and day  to see  that nobody makes a profit or owns a private business. There  won’t be anything  like Thanksgiving dinner in North Korea today, and  that’s no  coincidence.

As for me, you can count on me saying a prayerful thanks for more  than just  good food today. I’m going to say thanks for the profit  motive which made it all  possible. When God instilled a measure of  productive self-interest into the  human mind, he knew what he was  doing.

Lawrence W. Reed is president of the Foundation for Economic Education — www.fee.org — and president emeritus of the Mackinac Center for Public Policy.

Michigan Capitol Confidential

The politicians are now reduced to begging:

(Reuters) – Prime Minister George Papandreou pleaded for patience from Greeks growing increasingly angry with relentless austerity efforts, telling a newspaper his government was struggling to prevent a financial “catastrophe.”In an interview with the weekly Proto Thema newspaper, Papandreou said the government was fighting to stop Greece defaulting on its debts but the road ahead was hard.

“I would very much like to guarantee everyone an immediate solution, a better life today,” he told the newspaper in an interview which hit newsstands Saturday.

“I would be the happiest man in the world if I could do that but I can’t and I have a duty to be honest and tell this truth to every Greek citizen,” he said.

Finally, the truth.

Here are some realities for everyone to think about and (hopefully) understand:

Government cannot expand faster than domestic economic output does.  That is, if you want government to get bigger, the economy must get bigger to support it.

Growth in the economy must come from economic surplus, not borrowing.  Economic surplus is what you have left after you (1) labor, and (2) pay for all of the things you must buy with that labor.  Whether your payment is direct (e.g. you pick strawberries and get to keep X% of your output) or indirect (you are paid a wage in “dollars” and then spend that money) the fact remains that economic growth can, in the long run, only come from economic surplus.

The process by which economic surplus is turned into economic expansion is called capital formation.  Capital formation is not borrowing; borrowed funds are fungible (that is, interchangeable) with formed capital but they are not the same thing.  Only capital formation produces lasting prosperity.  Replacing formed capital with borrowed funds produces bubbles; these are inherently pyramid schemes in both concept and execution and thus must eventually burst.

Due to inefficiency in all things, including the markets, when a bubble bursts you’re worse off than if it had never occurred in the first place.  This is the principle known simply as “there’s no such thing as a free lunch.”  It’s true in thermodynamics and it’s also true in economics.

Trade deficits are self-correcting phenomena without explicit and intentional acts by the government and monetary authority to cover up their natural effects.  Specifically, a trade deficit causes capital to drain from the deficit nation to the surplus nation.  This in turn makes their currency balance shift and shuts down the cycle all on its own.  Only intentional and willful distortion, in this case by injecting “credit” to replace capital, allows it to continue.  Yes, the Chinese are responsible for what has happened in this regard with offshoring, but so are our politicians and Federal Reserve!  Any actual means of addressing this problem must include all guilty parties.

Politicians turn to producing bubbles when they want to promise you something they cannot pay for via voluntary taxation.  And make no mistake on this point: All taxation is voluntary.  Greece is showing us this fact in stark relief.  The people can withdraw their consent to taxation any time they’d like.  Sure, they have to go on a general strike to do so, which is the inhibiting factor – it results in personal pain.  But it’s the correct, non-violent and legal means to tell the government to stuff it when it comes to their tax policies.

There are only two means to compel a government to act when it becomes co-opted by minority interests, such as what happened with the bailouts, banks and similar foolishness.  One is lawful and the other is not.  The unlawful means comes through violence.  In the “common name” we call these “riots” when they’re localized and small (e.g. looting, etc.)  When they’re not we call them “Revolution”, and the legal term for inciting one is “Sedition.”  The key point to remember about the latter is that on a historical basis you have a very low probability of success through revolution — most of the time what comes out of a revolution is worse than what you started with.  Keep that in mind before you go pining for it, because you are much more likely to get a Hitler out the other end of that process than a George Washington, and the outcome is generally not under your control.

The lawful means of compelling a government to act is called a “General Strike.”  It is a refusal to work, and it is effective because it is work that is taxable.  If you perform none then there is nothing to tax; ergo the government’s finances collapse.  This is what is happening in Greece.

Beware, however, that if you demand that which is impossible, you won’t get it – no matter whether you press that demand through a General Strike or through unlawful means.  That’s simply because that which cannot happen won’t. 

There is no such thing as a Unicorn that craps out pretty colored candies.

In the case at hand in the United States we have a government on both sides of the aisle that has made promises that are mathematically impossible to keep.  That same government conspired with The Fed and with Wall Street to blow a series of bubbles that led you to believe, over the space of 30 years, that you could have more than you can actually pay for with your work output.  This claim was a lie and it infested virtually every area of our nation.  Housing, education, medical care – all were used as a means to blow up the bubble to larger and larger dimension whenever it threatened to collapse and expose the frauds.

These claims were active frauds as anyone who examined them with any sort of critical eye toward the mathematical realities of the claims knew they were crap and could never happen. 

As just one example of dozens the claim that “house prices are expected to increase 10% a year for the foreseeable future” was interpreted by many as “it’s safe to finance the purchase of a house and then withdraw the claimed increase in value as this will go on forever” (see the foreseeable future words for justification in the common man’s reliance.) 

The lie is the mathematical impossibility of this.  A $150,000 house that appreciated at that rate for 10 years would be worth $389,000.  But over 30 years that same $150,000 house would be “worth” $2,617,410.  Nobody ever asked the obvious question: Exactly how was a “middle class” person going to afford to buy a $389,000 house, say much less a $2,617,410 one?

They couldn’t, of course, but this was the lie that was run.

In College education land the same lie was run.  It led to an outrageous increase in college costs that dramatically outstripped earnings for degree-holding graduates.  This in turn made college a bad deal nearly across-the-board and as it occurred colleges and lenders lobbied Congress to change the law so that when your kid got rooked by this scam they couldn’t file bankruptcy and force those who blew the bubble to eat the loss.

We did the same thing with Medical Care.  By providing “free” (or nearly so) care to Seniors and illegal immigrants, with the former being told “they paid for it” through Medicare taxes (a bald lie as on average they only put in 1/3rd in inflation-adjusted dollars as to what is spent on them) and the latter being simply told “you deserve it” the increase in medical insurance costs has run approximately 9% annually and will continue until and unless policies are changed.  This means that the $700 a month insurance policy for the reasonably-healthy 50 year old ($8,400 a year) who has been promised “no reduction in his Medicare” will cost $171,477 a year by the time he’s 85 with no adjustment for the higher expense that comes with age.  That is, today’s 15 year old will be forced to pay $171,477 a year for his medical insurance when he reaches 50.  Obviously, he won’t as that amount is more than three times today’s median family income and even if we allow a 3% inflation rate (which we should not) it will be more than 100% of the median family income in inflated dollars!  Since you can’t pay more for something than you earn in total, what the politicians are telling you they will do cannot happen.

This, fundamentally, is the problem.

The slams and frankly slanderous lies coming from the so-called “Tea Party” jackasses are just as bad as those coming from the Soros mouthpieces.  They’re all lies. 

As an example:

I am saying that no matter what your reasoning is, beyond Pensacola Florida’s limited provincialism, or that of other small city’s, the VAST MAJORITY of the OWS crowd, its organizers and “friends” (ACORN, SEIU, UAW, AFL-CIO, Ayres, Dohrn, Obama & Co. underwritten by George Soros who certainly never made a dime on Wall Street), are NOT OUR FRIENDS.

THEY ARE THE ENEMY!

Well, yes.  Now prove that the VAST MAJORITY of the “OWS” crowd on a national basis is affiliated with or paid for and/or underwritten by George Soros and those others who you claim have done so.

Prove it.  And do so under the rules of strict proof, because this sort of claim is an extraordinary one.  I didn’t see any evidence of it – at all.

There was one table that was clearly union-oriented.  It contained members of the local transportation union trying to get a petition going against Veolia, a foreign company that the local area apparently hired to run the city buses.  Is their complaint legitimate?  I don’t know; I haven’t looked at it yet.  I did take their flier and will see what I can find out.  It will be a feature article later this week, I suspect.

But there was no hidden agenda here; these were clearly people asking for a redress of grievances.  Isn’t that what you’re supposed to do when you have grievances?

They are generally the crowd of entitlements and breaking America down, dumming America down, LEGALIZING ILLIGALS, and making what made America wealthy in the first place – capitalism – into something evil, into something it isn’t and never was.

Oh really?  What “Capitalism” is present in making student loans non-dischargable, so that the student who does a dumb thing in taking them goes bankrupt and is hounded for life while the lender and their cronies can double – or more – the debt owed and lose nothing?  These same so-called “Capitalists” include the Mortgage Bankers Association who strategically defaulted on their own building mortgage, a common (and perfectly legal) tactic in the business world, yet they tell people it’s immoral to do it themselves, and when possible these same “capitalists” get the laws changed so you, the people, cannot do what they did and do themselves!

Capitalism?  Where, may I ask?  The penalty for making bad loans is you go bankrupt!

When you change the laws so that the other guy goes bankrupt and you get to keep the loot the word for that is not capitalism, it is THEFT.

Where are the so-called “Tea Party” people that should be arguing for the REVOCATION OF BANK AND CORPORATE CHARTERS when they steal in this fashion?  Isn’t that the same thing at a corporate level as imprisonment is at a personal level?  It sure is!

Now explain the so-called “Tea Party’s” utter refusal to demand that Wachovia have its charter revoked for drug money laundering, something they admitted to doing, or shall we talk about the drug company that got caught twice committing the same criminal offense of marketing for unapproved purposes with the second offense occurring as they were negotiating a trivial FINE for the first one!

The so-called “Tea Party” is “for” the drug war, but refuses to demand that the penalties enforced against PERSONS who participate in the distribution of drugs be applied against CORPORATIONS that are part and parcel of the same offense!

They are the Politics of Envy, of DISTRIBUTING of OTHER’S PROPERTY. Of other’s sweat and blood; of other’s future, the eventual and certain diminishing of the quality of lives of our children. And equal society where the LCD’s run things for the LCD’s benefit. Where excellence is punished, stupidity and commonness rewarded.

Again, oh really?  What’s Capitalist about Citifinancial who had their former chief risk officer testify under oath that the firm was selling on loans that they knew did not meet underwriting guidelines – that is, they knew they were defective and not what was represented to buyers.  This isn’t conjecture and it wasn’t a “small number” either – he testified that 80% of the loans they made in 2007 were defective.

Is it “capitalism” when I sell you a car showing 50,000 miles on the odometer but I rolled it back from 150,000, or is that theft and fraud when you buy said car and discover later that the engine and transmission are basically worn out, and thus you paid $10,000 for something that was worth $2,000?  I fucked you out of the other $8,000 – I stole it – and in every other area of business when I do that it’s illegal.

That is not capitalism – it is theft.  THAT is what you are supporting.

Reducing the ability of our nation to defend itself. That is what it’s about. It is redistributing the nation’s revenues from defense to various social programs (green energy and glabal warming concerns) under the phake and phoney flag of blaming banks and “banksters” for everything that went wrong with the economy and the human race. The irony never sparks in their minds that the banks allowed 99% of Americans to own a home in the first place.

Oh, “reducing our ability to defend ourselves”, eh?  This is why after 9/11, when we knew that the majority of the people who did it came from and were funded by Saudi Arabia, we did not act against them? 

What are we “defending”, may I ask?  Oh I don’t have to: We’re defending “access” to cheap oil.  We’re promulgating a failed foreign policy that has now turned to propping up literal Kings and Dictators (Chavez anyone?) so we don’t have to face the fact that we didn’t do what was required to have a secure and thermodynamically sound energy policy for 30 years.

What went wrong, and why the unions are out in force, is the FACT the $85/hw wages the UAW now takes for granted cannot compete with $2-5/hr wages in Korea, Taiwan and China and the $1 TATA Motors pays in India to manufacture low end cars in second and third world countries in Asia and Africa – the only global sector that is actually growing.

And what is your solution?

My solution is to stop the stupid, including but not limited to those who want to promote mathematically bankrupt and therefore stupid policies in the monetary, economic, trade policy, tax policy and energy realm.

We cannot have illegal aliens in this nation at the behest of so-called “capitalists” who are simply exploiting effective slaves, smug in the knowledge that not only can they not complain when abused (lest the INS get called) but that when or if they get hurt, have a baby, or send their kids to school they will get to force, literally at gunpoint, everyone else to cover those costs they shoved up everyone else’s ass.  The bleeding heart liberals are bad enough, but it is the hard-core right that has serially pandered to the “demand” for illegal labor for the farmers, home builders, lawn services and poultry houses across this nation!  I stand for ejecting every illegal immigrant from this nation right now!

We cannot have a Federal Reserve that believes in “2% inflation” when the law says STABLE PRICES.  A 2% increase is not stable; over the average man’s working life of 45 years that leads to prices that are 244% of where they were when he was 20.  This makes it impossible for him to save for retirement; he either “takes risk” or winds up with literally 1/3rd of what he saved when he was 18.  This is theft and fraud; the value I earned and that represents my economic surplus is mine and when you steal it whether you do it a penny at a time or all at once you’re still a thief.

We cannot have a Federal Government that spends more than it takes in via taxes for so-called “social programs” – or anything else, including “defense.”  Compound growth – the very nature of exponents – makes such concepts, irrespective of where you try to run them, literally impossible to sustain over the long haul.  This rock we call “Earth” is of finite size, mass and resource.  Those resources are vast but the “dominionists” who believe they are infinite are factually wrong.  The House, Republican controlled, has not put forward a budget containing one dollar in actual spending reduction and they continue to pass “continuing resolutions” to permit continued increases in spending despite the Senate’s refusal to follow The Constitution and pass a damn budget!  Republicans support “The Rule of Law” my ass.

We cannot have an economic system where debt grows faster than output does.  The fundamental nature of exponents — mathematical law — guarantees that any such attempt will fail.  Those who argue otherwise are doing the equivalent of persecuting Galileo, are just as evil, and should be tried and imprisoned for their crimes that they intentionally and willfully inflict upon society with their factually bankrupt and morally evil stupidity.

You want to know what I stand for? 

THAT is what I stand for.

It is why I started writing The Market Ticker in 2007, when I saw the exact same wingnut crap being run by Bush and company after seeing the same bullshit run by the lefty redistributionist Clinton and company in the 1990s with his willful and intentional refusal to deal with obvious frauds in the Internet space that led to the Nasdaq market collapse.  I gave interviews at the time (1998/99) stating exactly this.  It was a known fact that the claimed “doublings” were not happening yet they were reported in so-called “Earnings” reports.  Literal thousands of people knew this was a lie and yet not one person was indicted or imprisoned for these intentionally false statements.  When I saw evidence of the same crap again in 07 I decided that it was not going to happen to the public a second time without me raising hell about it.

It was that fact and the fact that the so-called “conservatives” in fact had stolen the wealth and futures of people from infants to young adults who they scammed into taking unpayable loans for “college” while changing the laws so they could not petition for bankruptcy and blew an intentional housing bubble while offshoring our jobs at the same time, thereby guaranteeing both a monstrous bubble and the ensuing bust that led me to this publication.

It was the fact that McCain and his advisors knew damn well that this was theft and fraud yet he suspended his campaign to bail out the thieves that led me to publicly denounce him and everyone involved in it.

It was the fact that instead of focusing on this where The Tea Party began with both my call for tea bags to be sent to Congress and Santelli’s scream, which was focused on exactly the same scams and theft, the so-called “Tea Party” instantly turned to “Guns, Gays and God” and gave a complete and utter pass to the intentional theft that led us to where are now, and has to this day refused to demand that those who participated in that theft face the music for their acts and that the stupid lenders go bankrupt right next to the stupid borrowers who must be afforded the same opportunity, including students who were scammed into taking unpayable loans with ridiculously rosy and intentionally false projections of job prospects that the math PhDs at those colleges had to know were factually impossible.

It is the fact that despite claiming to be for “fiscal responsibility” The Tea Party folded with many of its members voting Yes to the debt ceiling increase, refusing to publicly denounce the Ryan and McConnell plans that do not cut one single dollar of federal expenditures; they in fact both RAISE federal expenditures. Worse, both plans contain projections (such as Ryan’s “5% growth rates”) that have never been sustained on a forward basis over the time projected in the history of the nation once one subtracts out additional systemic debt.  In other words these plans are knowing and willful frauds upon the public and the Tea Party is supporting them. Even the CBO, which has historically always projected a too-rosy future on a fiscal basis (they projected in 2000, remember that the nation would have no debt whatsoever by 2010!) says these plans rely on unreasonably-rosy projections into the future.

You want to know why I said “Fuck the Tea Party”, called it out before the 2010 elections as a bunch of bullshit artists playing the same tired “Guns, Gays and God” song that the Catholic Church ran against Galileo oh so long ago?

THAT is why I did so and will continue to do so right up until people just like you who claim to be “affiliated” with that “movement” (which you stole from one Sam of some 200+ years ago; you no more own it than I do as it’s an idea, not a person or organization) quit perverting that idea and pissing on the graves of men who actually were great, actually had sound ideas, and gave us this nation – a nation you seek to destroy through utterly bankrupt and knowingly-fraudulent promises just as do the hard-core leftists.

Incidentally, the Catholic Church eventually apologized for what they did.  The Tea Party has not.

PS: You want to know why I should have not had to write Leverage?  It’s found right here – it is the willful and intentional refusal to understand what you learn in fifth grade, which is the subject of a rather dry academic lecture you can find online.  It is this willful and intentional refusal to deal with these fundamental mathematical facts that led to the outright theft and fraud in our economy and government, and until the so-called “Tea Party” comes to face mathematics you’re just as much a part of the scam as is the left.  Period.

Get a read of this…..Greece’s Middle Class Revolt Against Austerity:

This business owners’ absolute refusal to pay any taxes resembles an uprising of the ownership class, rather than the working class, a rebellion of the self-employed business owners who have long been the backbone of Greek society. These are not the people who weaseled their way into Greece’s oversized civil service; these are people who put their money in the private sector, working 12-hour days, seven days a week. Or so Belitsakos says.

That’s a problem.  And why is this happening?  Read this from France….

“If there is one field in which one must deplore that imagination took power without ever wanting to assume the responsibilities, it is finance: the citizens of the communities concerned will have to pay for twenty years for the nutty creativity of banking sector hotshots. Yet we know what comes next: more taxes, less spending and a freeze on future investment,” the paper concludes.

Only if they’ll pay…

The reality is this: The alleged “prosperity” that was bought during those years was false.

No government can in fact provide services to the population on a durable basis that the population will not pay for with current taxes.  Not here, not in Greece, not in France, not anywhere.

All the claims of “financial engineering” are in fact lies.  None of them actually do work because they can’t work.  It is mathematically impossible over the longer term.

Look, go back to Excel.  In cell A1 put in “10″ and in cell B1 put in “10″.  This will represent 10 units of GDP and 10 units of debt (pick your units, billions, trillions, euros, dollars, whatever)

In cell A2 put in “=A1 * 1.04″  That’s 4% GDP growth.  Now extend that downward 100 rows (CTRL-C on cell A2, then click cell A3 and drag it down to A100, then hit CTRL-V)

In cell B2 put in “=B1 * 1.07″  That’s 7% debt growth in the economy as a whole.  Now extend that downward 100 rows too just as above.

Take the range of A and B and graph them.

That’s what we tried to do.  These are not hypothetical numbers – the approximately 3% spread has existed since the 1950s and it is mathematically impossible for it to work in the long term.  When this became apparent in the 1980s we stomped on the accelerator with more and more scams to keep the illusion alive.

Now, if you want to see how badly you’re really screwed, set up a column “C1″ and make it “=B1 * .05″  This will be the blended rate of interest across the entire debt.  Extend that and include it in the graph.

Go ahead an play with the numbers all you want.  You will find the following is absolutely true as a matter of mathematical fact:

• No matter what you do, so long as debt expands faster than output (GDP) the two curves will run away from each other.  You can change how long it takes but not the outcome.
• No matter the rate of interest, so long as it is positive, you eventually cannot pay.  Again, you can change how long it takes before the interest expense exceeds all of your output (and thus it is impossible to pay) but not the outcome.

It does not matter if you like these facts or not.  It does not matter how you figure the percentages or what you do with interest rates.  You cannot change the outcome so long as debt expands faster than output.  This is a mathematical fact and no amount of bluster and bullshit will change it, any more than you can legislate that 2 + 2 = 5 and actually make it so.

Now here’s the worse news.  That 4% GDP and 7% debt growth?  The latter is also the rate of the growth of the US Federal Government over the last ten years -= it has doubled in size over the last decade, while the economy has expanded about 40%, or ~3% annually.  The fraud of “baseline budgeting” and the claims of both of our political parties are mathematically certain to lead to the same result as you see in that graph — unless we cut it out.

This is also a perfect illustration of what’s wrong with socialism – a real-time demonstration. Eventually the only people left working to support everyone else decide they aren’t going to do it anymore OR the taxes become so high, it just collapses the business.

The Market-Ticker

So many to choose from this week…. Buffett and BAC (which I already wrote on), Bernanke’s continued mendacity and of course the destruction of real liquidity in the markets due to all the gaming and schemes that the “Wall Street Capitalists” have engaged in over the last few years.

But today’s column is reserved for those topics I haven’t explored this week.  We’ll begin with this:

The Elko County Sheriff’s Office was notified in July of possible sexual contact between David Ralph Anderson, 61, and a girl younger than 14.

According to Elko Justice Court records, the victim told investigators that on seven to 10 occasions between 2010 and this year, Anderson allegedly taught the victim about various sexual acts and had sexual contact in the form of touching each other’s genitals.

Alleged perverts aren’t anything special, right?  Well, this one is.  The article says he’s a TSA employee.

Still want to go through that security line to fly, do you?  There wouldn’t be anything special about being a TSA employee that might be attractive to an alleged pervert, is there?  Oh yeah, there is – you get to grope the balls of little boys and fondle little girls breasts, and it’s part of your job description.

Why do we allow this as citizens of this nation again?

You can never eliminate as a prospective matter all perverts – by definition until the first time they get caught, arrested, tried and (hopefully) imprisoned you don’t know they’re perverts.  But you can refuse to create government-sponsored and mandated positions where people like this can molest thousands of kids as part of their job!

What sort of sick society have we become that we’re willing to subject not only ourselves but our kids to sexual abuse simply to exercise our constitutional right to travel?  And don’t give me this “privilege” crap – you (as an adult) may be able to consent to being groped (legally) to get on a plane (the difference between sexual assault and simple sex is in fact consent) but the premise of someone being a minor is that they cannot consent as a matter of law and you cannot consent for them.  Arguing that this is acceptable is identical to arguing that a parent should be able to “consent” to their child sleeping with an uncle – or anyone else for that matter.  Disgusted yet?  You should be – with yourself.

In the first runner-up slot for outrage of the week we have this regarding JP Morgan:

The U.S. Treasury Department announced an $88.3 million settlement with JPMorgan Chase & Co. (JPM) for apparent violations of international sanctions programs, including Cuban assets control and anti-terrorism regulations.

The Treasury said that JPMorgan through its correspondent banks maintained prohibited financial transactions with sanctioned entities in countries including Cuba and Iran.

The JPMorgan payment agreed upon by the Office of Foreign Assets Control, known as OFAC, involves “egregious” violations for five years, according to a Treasury Department statement.

JP Morgan, of course, sees it differently and called them “rare incidents”, unrelated and isolated.

Uh huh.  Treasury says they were egregious violations of the law and went on for five years.

We can argue over whether Cuba should have sanctions upon it, or Iran for that matter.  Nonetheless it is the law, and if you so much as move $5 to one of these prohibited entities you’re subject to huge fines and potential imprisonment.

When a big bank does it?  Well gee, we’ll just issue a tiny little fine for five years of misconduct, indict nobody and imprison nobody, despite the fact that real people in real parts of the bank authorized and performed these transfers.

That is, real people broke the law – either intentionally or through willful blindness.

If the penalty for holding up a bank was simply paying a fine equal to the amount you stole, how many times would your corner bank be held up between noon and 4 PM every day?

That’s what I thought.

Then there’s this stupidity on Bernanke and “Fed activism”:

Advice from Ben S. Bernanke, scholar, to Ben S. Bernanke, Federal Reserve chairman: Be bold.

Really?  What’s the record on “being bold”?

I count three successive chairmen who were in fact utter fuckups and trashed our long-run economic prosperity by putting in place economic and monetary theories that are trivially disprovable using nothing more than fifth-grade mathematics.  That one of them received a PhD for advocating even more of the same crap is an outrage and indictment against so-called “higher” education.  They were high all right, but elevation above the crowd in intellectual prowess most-certainly isn’t what is being referred to.

Other Fed chairmen also have been criticized for bold action. Volcker in the early 1980s pushed interest rates to a record 20 percent to target inflation above 13 percent. While prices eventually dropped, the economy fell into a 16-month recession in July 1981 after emerging from a six-month slump in July 1980.

Prices dropped?  The hell they did.  Even the government’s own twisted statistics do not show contraction in prices – that is, reversion to the mean. The Millennials may not remember this but I sure do and so do people older than I. Indeed, what happened was that the modern ponzi economic “expansion” born of the lie that credit growth is in fact economic growth (it is not; output must always grow faster than credit or mathematically you are eventually screwed!) was born, nurtured, fed and then exploded – twice – into full-blown economic crises from which we have not escaped and won’t until we stop running monetary and fiscal policies that have proven bereft of merit.

Not only is the mathematics clear on this but so is the empirical evidence – a 30-year unbroken track record of failure.

Greenspan, after the 2001 recession, slashed the Fed’s benchmark interest rate to 1 percent in late June 2003, the lowest since 1958, and held it there for a year in a bid to fend off what he called a remote chance of deflation. Critics blame him for inflating the housing bubble that burst in 2007 and thrusting the economy into recession by holding interest rates too low for too long.

Even so, Bernanke has presided over even more economic upheaval.

Yeah, and every bit of it was self-inflicted by himself and the two chairsatan before him.

Why doesn’t anyone talk about the 1920-21 deflationary recession?  It would be called a Depression except that it didn’t last long enough to be classified as one.  In terms of the delta on prices (some 37% at the wholesale level – downward!) and collapse in industrial output it was the most-violent that I can find a contemporary record on.  The stock market was cut in half and unemployment soared.

The cause of the collapse was over-exuberant hiring post WWI and the release of a huge number of Army members back into the civilian labor pool.

What’s interesting is that there was a Presidential election and Warren Harding presided over nearly all of this. Harding received counsel to intervene from one Mr. Hoover – yes, that Mr. Hoover, who was at the time Commerce Secretary.

He refused that advice and the market and economy cleared within 18 months, posting the largest single-year industrial output gain ever in the history of the United States.  Not only that but unemployment returned to the full-employment level as well.

Activism by the federal government and federal reserve works and a “hands off” policy of letting those who get in over their head with leverage, overcapacity and debt doesn’t, eh?

Isn’t selective memory – and how it’s used to block out the success of the government refusing to prop up idiots and swindlers alike a funny thing?

Oh, incidentally, there are nations who have figured out that the debt ponzi doesn’t work.  Spain is one of them.

The amendment (to the constitution) calls for public debt not to exceed 60 percent of gross domestic product, though the ceiling may be breached in the case of “natural catastrophe, economic recession or emergencies.” The parties pledged to pass a separate law by June next year that will set a maximum structural deficit of 0.4 percent of GDP to be met by 2020, the same year the debt limit comes into effect.

0.4%, or in essence a balanced budget, and public debt may not exceed 60% of GDP.

The ruling party in Spain is the Socialist party.  Even die-hard redistributionist political actors, if they look at the math and stop lying to themselves and the public, find the truth inescapable and ultimately come to the correct conclusion: You must pay for the government services you wish to receive, all of them, with current tax revenues – not promises to pay tomorrow.

Wake up America; it’s a disgrace that a socialist nation can and does out-think you at a fifth grade level of comprehension.

Will Greece Let EU Central Bankers Run Riot Over Sovereignty?

Courtesy of Michael Hudson

When Greece exchanged its drachma for the euro in 2000, most voters were all for joining the Eurozone. Their hope was that it would ensure stability, and that this would promote rising wages and living standards. Few saw that the stumbling point was tax policy. Greece was excluded from the eurozone the previous year as a result of failing to meet the 1992 Maastricht criteria for EU membership, limiting budget deficits to 3 percent of GDP, and government debt to 60 percent.

The euro also had other serious fiscal and monetary problems at the outset. There is little thought of wealthier EU economies helping bring less productive ones up to par, e.g. as the United States does with its depressed areas (as in the rescue of the auto industry in 2010) or when the federal government does declares a state of emergency for floods, tornados or other disruptions.

As with the United States and indeed nearly all countries, EU “aid” is largely self-serving – a combination of export promotion and bailouts for debtor economies to pay banks in Europe’s main creditor nations: Germany, France and the Netherlands. The EU charter banned the European Central Bank (ECB) from financing government deficits, and prevents (indeed, “saves”) members from having to pay for the “fiscal irresponsibility” of countries running budget deficits. This “hard” tax policy was the price that lower-income countries had to sign onto when they joined the European Union.

Also unlike the United States (or almost any nation), Europe’s parliament was merely ceremonial. It had no power to set and administer EU-wide taxes. Politically, the continent remains a loose federation. Every member is expected to pay its own way. The central bank does not monetize deficits, and there is minimal federal sharing with member states. Public spending deficits – even for capital investment in infrastructure – must be financed by running into debt, at rising interest rates as countries running deficits become more risky.

This means that spending on transportation, power and other basic infrastructure that was publicly financed in North America and the leading European economies must be privatized. Prices for these services must be set high enough to cover interest and other financing charges, high salaries and bonuses, and be run for profit – indeed, for rent extraction as public regulatory authority is disabled.

This makes countries going this route less competitive. It also means they will run into debt to Germany, France and the Netherlands, causing the financial strains that now are leading to showdowns with democratically elected governments. At issue is whether Europe should succumb to centralized planning – on the right wing of the political spectrum, under the banner of “free markets” defined as economies free from public price regulation and oversight, free from consumer protection, and free from taxes on the rich.

The crisis for Greece – as for Iceland, Ireland and debt-plagued economies capped by the United States – is occurring as bank lobbyists demand that “taxpayers” pay for the bailouts of bad speculations and government debts stemming largely from tax cuts for the rich and for real estate, shifting the fiscal burden as well as the debt burden onto labor and industry. The financial sector’s growing power to achieve this tax favoritism is crippling economies, driving them further into reliance on yet more debt financing to remain solvent. Aid is conditional upon recipient countries reducing their wage levels (“internal devaluation”) and selling off public enterprises.

The tunnel vision that guides these policies is self-reinforcing. Europe, America and Japan draw their economic managers from the ranks of professionals sliding back and forth between the banks and finance ministries – what the Japanese call “descent from heaven” to the private sector where worldly rewards are greatest. It is not merely delayed payment for past service. Their government experience and contacts helps them influence the remaining public bureaucracy and lobby their equally opportunistic replacements to promote pro-financial fiscal and monetary policies – that is, to handcuff government and deter regulation and taxation of the financial sector and its real estate and monopoly clients, and to use the government’s taxing and money-creating power to provide bailouts when the inevitable financial collapse occurs as the economy shrinks below break-even levels into negative equity territory.

Regressive tax policies – shifting taxes off the rich and off property onto labor – cause budget deficits financed by public debt. When bondholders pull the plug, the resulting debt pressure forces governments to pay off debts by selling land and other public assets to private buyers (unless governments repudiate the debt or recover by restoring progressive taxation). Most such sales are done on credit. This benefits the banks by creating a loan market for the buyouts. Meanwhile, interest absorbs the earnings, depriving the government of tax revenue it formerly could have received as user fees.

The tax gift to financiers is based on the bad policy of treating debt financing as a necessary cost of doing business, not as a policy choice – one that indeed is induced by the tax distortion of making interest payments tax-deductible.

Buyers borrow credit to appropriate “the commons” in the same way they bid for commercial real estate. The winner is whoever raises the largest buyout loan – by pledging the most revenue to pay the bank as interest. So the financial sector ends up with the revenue hitherto paid to governments as taxes or user fees. This is euphemized as a free market.

Promoting the financial sector at the economy’s expense

The resulting debt leveraging is not a solvable problem. It is a quandary from which economies can escape only by focusing on production and consumption rather than merely subsidizing the financial system to enable players to make money from money by inflating asset prices on free electronic keyboard credit. Austerity causes unemployment, which lowers wages and prevents labor from sharing in the surplus. It enables companies to force their employees to work overtime and harder in order to get or keep a job, but does not really raise productivity and living standards in the way envisioned a century ago. Increasing housing prices on credit – requiring larger debts for access to home ownership – is not real prosperity.

To contrast the “real” economy from the financial sector requires distinctions to be drawn between productive and unproductive credit and investment. One needs the concept of economic rent as an institutional and political return to privilege without a corresponding cost of production. Classical political economy was all about distinguishing earned from unearned income, cost-value from market price. But pro-financial lobbyists deny that any income or rentier wealth is unearned or parasitic. The national income and product accounts (NIPA) do not draw any such distinction. This blind spot is not accidental. It is the essence of post-classical economics. And it explains why Europe is so crippled.

The way in which the euro was created in 1999 reflects this shallow vision. The Maastricht fiscal and financial rules maximize the commercial loan market by preventing central banks from supplying governments (and hence, the economy) with credit to grow. Commercial banks are to be the sole source of financing budget deficits – defined to include infrastructure investment in transportation, communication, power and water. Privatization of these basic services blocks governments from supplying them at subsidized rates or freely. So roads are turned into toll roads, charging access fees that are readily monopolized. Economies are turned into sets of tollbooths, paying out their access charges as interest to creditors. These extractive rents make privatized economies high-cost. But to the financial sector that is “wealth creation.” It is enhanced by untaxing interest payments to banks and bondholders – aggravating fiscal deficits in the process.

The Greek budget crisis in perspective

A fiscal legacy of the colonels’ 1967-74 junta was tax evasion by the well to do. The “business-friendly” parties that followed were reluctant to tax the wealthy. A 2010 report stated that nearly a third of Greek income was undeclared, with “fewer than 15,000 Greeks declar[ing] incomes of over €100,000, despite tens of thousands living in opulent wealth on the outskirts of the capital. A new drive by the Socialists to track down swimming pool owners by deploying Google Earth was met with a virulent response as Greeks invested in fake grass, camouflage and asphalt to hide the tax liabilities from the spies in space.” (Helena Smith, “The Greek spirit of resistance turns its guns on the IMF,” The Observer)

As a result of the military dictatorship depressing public spending below the European norm, infrastructure needed to be rebuilt – and this required budget deficits. The only way to avoid running them would have been to make the rich pay the taxes they were supposed to. But squeezing public spending to the level that wealthy Greeks were willing to pay in taxes did not seem politically feasible. (Since the 1980s almost no country has enacted Progressive Era tax policies.) The 3 per cent Maastricht limit on budget deficits refused to count capital spending by government as capital formation, on the ideological assumption that all government spending is deadweight waste and only private investment is productive.

The path of least resistance was to engage in fiscal deception. Wall Street bankers helped the “conservative” (that is, fiscally regressive and financially profligate) parties conceal the extent of the public debt with the kind of junk accounting that financial engineers had pioneered for Enron. And as usual when financial deception in search of fees and profits is concerned, Goldman Sachs was in the middle. In February 2010, the German magazine Der Spiegel exposed how the firm had helped Greece conceal the rise in public debt, by mortgaging assets in a convoluted derivatives deal – legal but with the covert intent of circumventing the Maastricht limitation on deficits. “Eurostat’s reporting rules don’t comprehensively record transactions involving financial derivatives,” so Greece’s obligation appeared as a cross-currency swap rather than as a debt. The government used off-balance-sheet entities and derivatives similar to what Icelandic and Irish banks later would use to indulge in fictitious debt disappearance and an illusion of financial solvency.

The reality, of course, was a virtual debt. The government was obligated to pay Wall Street billions of euros out of future airport landing fees and the national lottery as “the so-called cross currency swaps … mature, and swell the country’s already bloated deficit.” (Beat Balzli, “How Goldman Sachs Helped Greece to Mask its True Debt,” Der Spiegel). The report adds: “One time, gigantic military expenditures were left out, and another time billions in hospital debt.”

Translated into straightforward terms, the deal left Greece’s public-sector budget deficit at 12 percent of GDP, four times the Maastricht limit.

Using derivatives to engineer Enron-style accounting enabled Greece to mask a debt as a market swap based on foreign currency options, to be unwound over ten to fifteen years. Goldman was paid some $300 million in fees and commissions for its aid orchestrating the 2001 scheme. “A similar deal in 2000 called Ariadne devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans.” JPMorgan Chase and other banks helped orchestrate similar deals across Europe, providing “cash upfront in return for government payments in the future, with those liabilities then left off the books.”

The financial sector has an interest in understating the debt burden – first, by using “mark to model” junk accounting, and second, by pretending that the debt burden can be paid without disrupting economic life. Financial spokesmen from Tim Geithner in the United States to Dominique Strauss-Kahn at the IMF claimed that the post-2008 debt crisis is merely a short-term “liquidity problem” (lack of “confidence”), not insolvency reflecting an underlying inability to pay. Banks promise that everything will be all right when the economy “returns to normal” – if only the government will buy their junk mortgages and bad loans (“sound long-term investments”) for ready cash.

The intellectual deception at work

Financial lobbyists seek to distract voters and policy makers from realizing that “normalcy” cannot be restored without wiping out the debts that have made the economy abnormal. The larger the debt burden grows, the more economy-wide austerity is required to pay debts to banks and bondholders instead of investing in capital formation and real growth.

Austerity makes the problem worse, by intensifying debt deflation. To pretend that austerity helps economies rather than destroys them, bank lobbyists claim that shrinking markets will lower wage rates and “make the economy more competitive” by “squeezing out the fat.” But the actual “fat” is the debt overhead – the interest, amortization, financial fees and penalties built into the cost of doing business, the cost of living and the cost of government.

When difficulty arises in paying debts, the path of least resistance is to provide more credit – to enable debtors to pay. This keeps the system solvent by increasing the debt overhead – seemingly an oxymoron. As financial institutions see the point approaching where debts cannot be paid, they try to get “senior creditors” – the ECB and IMF – to lend governments enough money to pay, and ideally to shift risky debts onto the government (“taxpayers”). This gets them off the books of banks and other large financial institutions that otherwise would have to take losses on Greek government bonds, Irish bank obligations bonds, etc., just as these institutions lost on their holdings of junk mortgages. The banks use the resulting breathing room to try and dump their bond holdings and bad bets on the proverbial “greater fool.”

In the end the debts cannot be paid. For the economy’s high-financial managers the problem is how to postpone defaults for as long as possible – and then to bail out, leaving governments (“taxpayers”) holding the bag, taking over the obligations of insolvent debtors (such as A.I.G. in the United States). But to do this in the face of popular opposition, it is necessary to override democratic politics. So the divestment by erstwhile financial losers requires that economic policy be taken out of the hands of elected government bodies and transferred to those of financial planners. This is how financial oligarchy replaces democracy.

Paying higher interest for higher risk, while protecting banks from losses

The role of the ECB, IMF and other financial oversight agencies has been to make sure that bankers got paid. As the past decade of fiscal laxity and deceptive accounting came to light, bankers and speculators made fortunes jacking up the interest rate that Greece had to pay for its increasing risk of default. To make sure they did not lose, bankers shifted the risk onto the European “troika” empowered to demand payment from Greek taxpayers.

Banks that lent to the public sector (at above-market interest rates reflecting the risk), were to be bailed out at public expense. Demanding that Greece not impose a “haircut” on creditors, the ECB and related EU bureaucracy demanded a better deal for European bondholders than creditors received from the Brady bonds that resolved Latin American and Third World debts in the 1980s. In an interview with the Financial Times, ECB executive board member Lorenzo Bini Smaghi insisted that:

First, the Brady bonds solution was a solution for American banks, which were basically allowed not to ‘mark to market’ the restructured bonds. There was regulatory forbearance, which was possible in the 1980 but would not be possible today.

Second, the Latin American crisis was a foreign debt crisis. The main problem in the Greek crisis is Greece, its banks and its own financial system. Latin America had borrowed in dollars and the lines of credit were mainly with foreigners. Here, a large part of the debt is with Greeks. If Greece defaulted, the Greek banking system would collapse. It would then need a huge recapitalization – but where would the money come from?

Third, after default the Latin American countries still had central banks that could print money to pay for civil servants’ wages, pensions. They did this and created inflation. So they got out [of the crisis] through inflation, depreciation and so forth. In Greece you would not have a central bank that could finance the government, and it would have to partly shut down some of its operations, like the health system.

Bini Smaghi threatened that Europe would destroy the Greek economy if the latter tried to scale back its debts or even stretch out maturities to reflect the ability to pay. Greece’s choice was between submission or anarchy. Restructuring would not benefit “the Greek people. It would entail a major economic, social and even humanitarian disaster, within Europe. Orderly implies things go smoothly, but if you wipe out the banking system, how can it be smooth?” The ECB’s “position [is] based on principle … In the euro area debts have to be repaid and countries have to be solvent. That has to be the principle of a market-based economy.” (Ralph Atkins, “Transcript: Lorenzo Bini Smaghi,” Financial Times, May 27)

A creditor-oriented economy is not really a market-based, of course. The banks destroyed the market by their own central financial planning — using debt leverage to leave Greece with a bare choice: Either it would permit EU officials to come in and carve up its economy, selling its major tourist sites and monopolistic rent-extracting opportunities to foreign creditors in a gigantic national foreclosure movement, or it could bite the bullet and withdraw from the Eurozone. That was the deal Bini Smaghi offered: “if there are sufficient privatizations, and so forth – then the IMF can disburse and the Europeans will do their share. But the key lies in Athens, not elsewhere. The key element for the return of Greece to the market is to stop discussions about restructuring.”

One way or another, Greece would lose, he explained: “default or restructuring would not help solve the problems of the Greek economy, problems that can be solved only by adopting the kind of structural reforms and fiscal adjustment measures included in the program. On the contrary it would push Greece into a major economic and social depression.” This leverage demanding to be paid or destroying the economy’s savings and monetary system is what central bankers call a “rescue,” or “restoring market forces.” Bankers claim that austerity will revive growth. But to accept as a realistic democratic alternative would be self-immolation.

Unless Greece signed onto this nonsense, neither the ECB nor the IMF would extend loans to save its banking system from insolvency. On May 31, 2011, Europe agreed to provide $86 billion in euros if Greece “puts off for the time being a restructuring, hard or soft, of Greece’s huge debt burden.” The pretense was a “hope that in another two years Greece will be in a better position to repay its debts in full.” Anticipation of the faux rescue led the euro to rebound against foreign currencies, and European stocks to jump by 2 per cent. Yields on Greek 10-year bonds fell to “only” a 15.7 percent distress level, down one percentage point from the previous week’s high of 16.8 percent when a Greek official made the threatening announcement that “Restructuring is off the table. For now it is all about growth, growth, growth.”

How can austerity be about growth? This idea never has worked, but the pretense was on. The EU would provide enough money for the Greek government to save bondholders from having to suffer losses. The financial sector supports heavy taxpayer expense as long as the burden does not fall on itself or its main customers in the real estate sector or the infrastructure monopolies being privatized.

The loan-for-privatization tradeoff was called “aiding Greece” rather than bailing out German, French and other bondholders. But financial investors knew better. “Since the crisis began, 60 billion euros in deposits have been withdrawn from Greek banks, about a quarter of the country’s output.” (Atkins, FT.) These withdrawals, which were gaining momentum, were the precise size of the loan being offered!

Meanwhile, the shift of 60 billion euros off the balance sheets of banks onto the private sector threatened to raise the ratio of public debt to GDP over 150 per cent. There was talk that another 100 billion euros would be needed to “socialize the losses” that otherwise would be suffered by German, French and other European bankers who had their eyes set on a windfall if heavily discounted Greek bonds were made risk-free by carving up Greece in much the same way that the Versailles Treaty did to Germany after World War I.

The Greek population certainly saw that the world was at financial war. Increasingly large crowds gathered each day to protest in Syntagma Square in front of the Parliament, much as Icelandic crowds had done earlier under similar threats by their Social Democrats to sell out the nation to European creditors. And just as Iceland’s Prime Minister Sigurdardottir held on arrogantly against public opinion, so did Greek Socialist Prime Minister George Papandreou. This prompted EU Fisheries Commissioner Maria Damanaki “to ‘speak openly’ about the dilemma facing her country,” warning: “The scenario of Greece’s exit from the euro is now on the table, as are ways to do this. Either we agree with our creditors on a program of tough sacrifices and results … or we return to the drachma. Everything else is of secondary importance.” And former Dutch Finance Minister Willem Vermeend wrote in De Telegraaf that ‘Greece should leave the euro,’ given that it will never be able to pay back its debt.”

As in Iceland, the Greek austerity measures are to be put to a national referendum – with polls reporting that some 85 percent of Greeks reject the bank-bailout-cum-austerity plan. Its government is paying twice as much for credit as the Germans, despite seemingly having no foreign-exchange risk (using the euro). The upshot may be to help drive Greece out of the eurozone, not only by forcing default (the revenue is not there to pay) but by Newton’s Third Law of Political Motion: Every action creates an equal and opposite reaction. The ECB’s attempt to make Greek labor (“taxpayers”) pay foreign bondholders is leading to pressure for outright repudiation and the domestic “I won’t pay” movement. Greece’s labor movement always has been strong, and the debt crisis is further radicalizing it.

The Power of Money Creation
The aim of commercial banks is to replace governments in creating money, making the economy entirely dependent on them, with public borrowing creating an enormous risk-free “market” for interest-bearing loans. It was to overcome this situation that the Bank of England was created in 1694 – to free the country from reliance on Italian and Dutch credit. Likewise the U.S. Federal Reserve, for all its limitations, was founded to enable the government to create its own money. But European banks have hog-tied their governments, replacing Parliamentary democracy with dictatorship by the ECB, which is blocked constitutionally from creating credit for governments – until German and French banks found it in their own interest for it to do so. As University of Missouri-Kansas City Professor Bill Black summarizes the situation:

“A nation that gives up its sovereign currency by joining the euro gives up the three most effective means of responding to a recession. It cannot devalue its currency to make its exports more competitive. It cannot undertake an expansive monetary policy. It does not have any monetary policy and the EU periphery nations have no meaningful influence on the ECB’s monetary policies. It cannot mount an appropriately expansive fiscal policy because of the restrictions of the EU’s growth and stability pact. The pact is a double oxymoron – preventing effective counter-cyclical fiscal policies harms growth and stability throughout the Eurozone.”

Financial politics are now dominated by the drive to replace debt defaults by running a fiscal surplus to pay bankers and bondholders. The financial system wants to be paid. But mathematically this is impossible, because the “magic of compound interest” outruns the economy’s ability to pay – unless central banks flood asset markets with new bubble credit, as U.S. policy has done since 2008. When debtors cannot pay, and when the banks in turn cannot pay their depositors and other counterparties, the financial system turns to the government to extract the revenue from “taxpayers” (not the financial sector itself). The policy bails out insolvent banks by plunging domestic economies into debt deflation, making taxpayers bear the cost of banks gone bad.

These financial claims are virtually a demand for tribute. And since 2010 they have been applied to the PIIGS countries. The problem is that revenue used to pay creditors is not available for spending within the economy. So investment and employment shrink, and defaults spread. Something must give, politically as well as economically as society is brought back to the “Copernican problem”: Will the “real” economy of production and consumption revolve around finance, or will financial demands for interest devour the economic surplus and begin to eat into the economy?

Technological determinists believe that technology drives. If this were so, rising productivity would have made everybody in Europe and the United States wealthy by now, rich enough to be out of debt. But there is a Chicago School inquisition insisting that today’s needless suffering is perfectly natural and even necessary to rescue economies by saving their banks and debt overhead – as if all this is the economic core, not wrapped around the core.

Meanwhile, economies are falling deeper into debt, despite rising productivity measures. The seeming riddle has been explained many times, but is so counter-intuitive that it elicits a wall of cognitive dissonance. The natural view is to think that the world shouldn’t be this way, letting credit creation load down economies with debt without financing the means to pay it off. But this imbalance is the key dynamic defining whether economies will grow or shrink.

John Kenneth Galbraith explained that banking and credit creation is so simple a principle that the mind rejects it – because it is something for nothing, the proverbial free lunch stemming from the principle of banks creating deposits by making loans. Just as nature abhors a vacuum, so most people abhor the idea that there is such a thing as a free lunch. But the financial free lunchers have taken over the political system.

They can hold onto their privilege and avert a debt write-down only as long as they can prevent widespread moral objection to the idea that the economy is all about saving creditor claims from being scaled back to the economy’s ability to pay – by claiming that the financial brake is actually the key to growth, not a free transfer payment.

The upcoming Greek referendum poses this question just as did Iceland’s earlier this spring. As Yves Smith recently commented regarding the ECB’s game of chicken as to whether Greece’s government would accept or reject its hard terms:

This is what debt slavery looks like on a national level. … Greece looks to be on its way to be under the boot of bankers just as formerly free small Southern farmers were turned into “debtcroppers” after the US Civil War. Deflationary policies had left many with mortgage payments that were increasingly difficult to service. Many fell into ‘crop lien’ peonage. Farmers were cash starved and pledged their crops to merchants who then acted in an abusive parental role, being given lists of goods needed to operate the farm and maintain the farmer’s family and doling out as they saw fit. The merchants not only applied interest to the loans, but further sold the goods to farmers at 30 per cent or higher markups over cash prices. The system was operated, by design, so that the farmer’s crop would never pay him out of his debts (the merchant as the contracted buyer could pay whatever he felt like for the crop; the farmer could not market it to third parties). This debt servitude eventually led to rebellion in the form of the populist movement. (Yves Smith, “Will Greeks Defy Rape and Pillage By Barbarians Bankers? An E-Mail from Athens,” Naked Capitalism, May 30, 2011.)

One would expect a similar political movement today. And as in the late 19th century, academic economics will be mobilized to reject it. Subsidized by the financial sector, today’s economic orthodoxy finds it natural to channel productivity gains to the finance, insurance and real estate (FIRE) sector and monopolies rather than to raise wages and living standards. Neoliberal lobbyists and their academic mascots dismiss sharing productivity gains with labor as being unproductive and not conducive to “wealth creation” financial style.

Making governments pay creditors when banks run aground

At issue is not only whether bank debts should be paid by taking them onto the public balance sheet at taxpayer expense, but whether they can reasonably be paid. If they cannot be, then trying to pay them will shrink economies further, making them even less viable. Many countries already have passed this financial limit. What is now in question is a political step – whether there is a limit to how much further creditor interests can push national populations into debt-dependency. Future generations may look back on our epoch as a great Social Experiment on how far the point may be deferred at which government – or parliaments – will draw a line against taking on public liability for debts beyond any reasonable capacity to pay without drastically slashing public spending on education, health care and other basic services?

Is a government – or economy – be said to be solvent as long as it has enough land and buildings, roads, railroads, phone systems and other infrastructure to sell off to pay interest on debts mounting exponentially? Or should we think of solvency as existing under existing proportions in our mixed public/private economies? If populations can be convinced of the latter definition – as those of the former Soviet Union were, and as the ECB, EU and IMF are now demanding – then the financial sector will proceed with buyouts and foreclosures until it possesses all the assets in the world, all the hitherto public assets, corporate assets and those of individuals and partnerships.

This is what today’s financial War is about. And it is what the Greeks gathering in Syntagma Square are demonstrating about. At issue is the relationship between the financial sector and the “real” economy. From the perspective of the “real” economy, the proper role of credit – that is, debt – is to fund productive capital investment and economic growth. After all, it is out of the economic surplus that interest is to be paid.

This requires a tax system and financial regulatory system to maximize the growth. But that is precisely the fiscal policy that today’s financial sector is fighting against. It demands tax-deductibility for interest, encouraging debt financing rather than equity. It has disabled truth-in-lending laws and regulation keeping prices (the interest rate and fees) in line with costs of production. And it blocks governments from having central banks to freely finance their own operations and provide economies with money.

Banks and their financial lobbyists have not shown much interest in economy-wide wellbeing. It is easier and quicker to make money by being extractive and predatory.

Fraud and crime pay, if you can disable the police and regulatory agencies. So that has become the financial agenda, eagerly endorsed by academic spokesmen and media ideologues who applaud bank managers and subprime mortgage brokers, corporate raiders and their bondholders, and the new breed of privatizers, using the one-dimensional measure of how much revenue can be squeezed out and capitalized into debt service. From this neoliberal perspective, an economy’s wealth is measured by the magnitude of debt obligations – mortgages, bonds and packaged bank loans – that capitalize income and even hoped- for capital gains at the going rate of interest.

Iceland belatedly decided that it was wrong to turn over its banking to a few domestic oligarchs without any real oversight or regulation over their self-dealing. From the vantage point of economic theory, was it not madness to imagine that Adam Smith’s quip about not relying on the benevolence of the butcher, brewer or baker for their products, but on their self-interest is applicable to bankers? Their “product” is not a tangible consumption good, but interest-bearing debt. These debts are a claim on output, revenue and wealth; they do not constitute real wealth.

This is what pro-financial neoliberals fail to understand. For them, debt creation is “wealth creation” (Alan Greenspan’s favorite euphemism) when credit – that is, debt – bids up prices for property, stocks and bonds and thus enhances financial balance sheets. The “equilibrium theory” that underlies academic orthodoxy treats asset prices (financialized wealth) as reflecting a capitalization of expected income. But in today’s Bubble Economy, asset prices reflect whatever bankers will lend. Rather than being based on rational calculation, their loans are based on what investment bankers are able to package and sell to frequently gullible financial institutions. This logic leads to attempts to pay pensions out of a “wealth creating” process that runs economies into debt.

It is not hard to statistically illustrate this. The amount of debt that an economy can pay is limited by the size of its surplus, defined as corporate profits and personal income for the private sector, and net fiscal revenue paid to the public sector. But neither today’s financial theory nor global practice recognize a capacity-to-pay constraint. So debt service has been permitted to eat into capital formation and reduce living standards – and now, to demand privatization sell-offs.

The Icelandic Alternative

As an alternative is to such financial demands, Iceland has provided a model for what Greece may do. Responding to British and Dutch demands that its government guarantee payment of the Icesave bailout, the Althing recently asserted the principle of sovereign debt:

“The preconditions for the extension of government guarantee according to this Act are:

1. That … account shall be taken of the difficult and unprecedented circumstances with which Iceland is faced with and the necessity of deciding on measures which enable it to reconstruct its financial and economic system.

This implies among other things that the contracting parties will agree to a reasoned and objective request by Iceland for a review of the agreements in accordance with their provisions.

2. That Iceland’s position as a sovereign state precludes legal process against its assets which are necessary for it to discharge in an acceptable manner its functions as a sovereign state.”

Instead of imposing the kind of austerity programs that devastated Third World countries from the 1970s to the 1990s and led them to avoid the IMF like a plague, the Althing is changing the rules of the financial system. It is subordinating Iceland’s reimbursement of Britain and Holland to the ability of Iceland’s economy to pay:

“In evaluating the preconditions for a review of the agreements, account shall also be taken to the position of the national economy and government finances at any given time and the prospects in this respect, with special attention being given to foreign exchange issues, exchange rate developments and the balance on current account, economic growth and changes in gross domestic product as well as developments with respect to the size of the population and job market participation.”

This is the Althing proposal to settle its Icesave bank claims that Britain and the Netherlands rejected so passionately as “unthinkable.” So Iceland said, “No, take us to court.” And that is where matters stand right now.

Greece is not in court. But there is talk of a “higher law,” much as was discussed in the United States before the Civil War regarding slavery. At issue today is the financial analogue, debt peonage.

Will it be enough to change the world’s financial environment? For the first time since the 1920s (as far as I know), Iceland made the capacity-to-pay principle the explicit legal basis for international debt service. The amount to be paid is to be limited to a specific proportion of the growth in its GDP (on the admittedly tenuous assumption that this can indeed be converted into export earnings).

After Iceland recovers, the Treasury offered to guarantee payment for Britain for the period 2017-2023 up to 4 per cent of the growth of GDP after 2008, plus another 2 per cent for the Dutch. If there is no growth in GDP, there will be no debt service. This meant that if creditors took punitive actions whose effect is to strangle Iceland’s economy, they wouldn’t get paid.

No wonder the EU bureaucracy reacted with such anger. It was a would-be slave rebellion. Returning to the application of Newton’s Third Law of motion to politics and economics, it was natural enough for Iceland, as the most thoroughly neoliberalized disaster area, to be the first economy to push back.

The past two years have seen its status plunge from having the West’s highest living standards (debt-financed, as matters turn out) to the most deeply debt-leveraged. In such circumstances it is natural for a population and its elected officials to experience a culture shock – in this case, an awareness of the destructive ideology of neoliberal “free market” euphemisms that led to privatization of the nation’s banks and the ensuing debt binge.

The Greeks gathering in Syntagma Square seem to need no culture shock to reject their Socialist government’s cave-in to European bankers. It looks like they may follow Iceland in leading the ideological pendulum back toward a classical awareness that in practice, this rhetoric turns out to be a junk economics favorable to banks and global creditors. Interest-bearing debt is the “product” that banks sell, after all. What seemed at first blush to be “wealth creation” was more accurately debt-creation, in which banks took no responsibility for the ability to pay. The resulting crash led the financial sector to suddenly believe that it did love centralized government control after all – to the extent of demanding public-sector bailouts that would reduce indebted economies to a generation of fiscal debt peonage and the resulting economic shrinkage.

As far as I am aware, this agreement is the first since the Young Plan for Germany’s reparations debt to subordinate international debt obligations to the capacity-to-pay principle. The Althing’s proposal spells this out in clear terms as an alternative to the neoliberal idea that economies must pay willy-nilly (as Keynes would say), sacrificing their future and driving their population to emigrate in a vain attempt to pay debts that, in the end, can’t be paid but merely leave debtor economies hopelessly dependent on their creditors.

In the end, democratic nations are not willing to relinquish their political planning authority to an emerging financial oligarchy.

No doubt the post-Soviet countries are watching, along with Latin American, African and other sovereign debtors whose growth has been stunted by predatory austerity programs imposed by IMF, World Bank and EU neoliberals in recent decades. We should all hope that the post-Bretton Woods era is over. But it won’t be until the Greek population follows that of Iceland in saying no – and Ireland finally wakes up. 

Financial Times columnist Martin Wolf writes that the eurozone “has only two options: to go forwards towards a closer union or backwards towards at least partial dissolution. … either default and partial dissolution or open-ended official support.”[8] But ECB intransigence leaves little alternative to breakup. Europe’s payments-surplus nations are waging financial war against the deficit countries. Without a common union based on mutual support within a mixed economy – one capable of checking financial aggression – the European Central Bank replaced the military high command. Its bold gamble is whether the Greeks will be as stupid as the Irish, not as smart as the Icelanders.

As published in Counterpunch

Footnotes

[1] Louise Story, Landon Thomas Jr. and Nelson D. Schwartz, “Wall St. Helped to Mask Debt Fueling Europe’s Crisis,” The New York Times, February 13, 2010.

[2] At the time of the spring 2010 bailout French banks held €31 billion of Greek bonds, compared to €23 billion by German banks. This helps explain why French President Nicolas Sarkozy sought to take major credit for the bailout, based on a May 7, 2010 discussions with EU Commission President José Manuel Barroso, ECB President Jean-Claude Trichet and Eurogroup President Jean-Claude Juncker.

[3] Landon Thomas Jr., “New Rescue Package for Greece Takes Shape,” The New York Times, June 1, 2011.

[4] Ibid.

[5] Emma Rowley, “Greece risks ‘return to drachma,’” The Telegraph, June 1, 2011.

[6] Idris Francis, “Greece leaving the EMU: From taboo to fashionable?” Open Europe blog, June 1, 2011. (I am indebted to Paul Craig Roberts for drawing my attention to this source.)

[7] Martin Wolf, “Intolerable choices for the eurozone,” Financial Times, June 1, 2011.

ZeroHedge