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What is the difference between printing money and counterfeiting? There is none.

Counterfeiting is illegal because it is the false creation of value. The counterfeiter takes low-value paper and turns it into high-value money, which is fundamentally a claim on the real productive value of the economy that issues the currency and recognizes it as a proxy means of exchanging that productive value.

Counterfeiting is illegal because the counterfeiter creates no additional value–he creates only the proxy for value. Creating real value–adding meaningful goods or services to the economy–is tedious, hard work.  How much easier to simply transform near-worthless paper into a claim on actual goods and services.

If this is illegal, then would somebody please arrest the Board of the Federal Reserve for counterfeiting? The Fed has blatantly printed money without creating any real value to back up their added claims on productive value. Hence they are counterfeiting, pure and simple. A government based on rule of law would  arrest these fraudsters and cons at the earliest possible convenience.

And while you’re drawing up the indictment, can you also charge them with counterfeiting competence and policy, as they have demonstrated the Peter Principle par excellence: the Board has risen to its highest level of incompetence. Their  counterfeit policies have wreaked incomparable damage on the real productive economy.

The essence of counterfeit policy–a fake policy that claims to be something it is not–is “extend and pretend.” And the sole goal of  “extend and pretend” is self-preservation and the preservation of the Financial Elite which has tightened its grip on the nation’s throat as a direct consequence of Federal Reserve policies–notably “extend and pretend.”

“Extend and pretend” extends the “too big to fail” Financial Sector’s licence to mask its insolvency  and its licence to continue issuing debt, leverage and derivatives under false pretences, i.e. that the   risk and market value of these instruments are transparent. They are not.

In effect, the banks are also counterfeiters, as they are issuing debt–a claim on future productive value–without adding any actual value to the economy.

Thus the Fed and the Financial Sector are both diluting the base of actual real value with ever-expanding claims on real productive value by printing money and issuing debt.  If an economy creates 100 units of productive value, and issues 100 units of currency as a proxy claim on that value to be used as a means of exchange, then there is a 1-to-1 correspondence with the money claim on productive value and the actual value.

If someone prints another 100 units of money and starts buying assets with that money, then they are claiming 1 unit of money still equals 1 unit of production  though they have debased the currency so that it actually takes 2 units of money to represent 1 unit of productive value.

This is a con of the first order, which is why counterfeiting is illegal. If counterfeiting is illegal because it is a con, a fraudulent claim on real goods, services and assets, then how can money printing by the Fed (a private bank, mind you) be legal?

It can only be legal in a kleptocracy ruled by a Financial Elite bent on political and financial dominance, a Plutocracy whose wealth is all skimmed from the productive economy via ever-expanding issuance of money and debt.

When corporations and the State are one, we call it fascism. In the U.S., it has taken the form of financial fascism, and the Federal Reserve and Federal agencies (Treasury, Freddie Mac, FHA, etc.) are  the handlers and enablers of this kleptocratic financial fascism.  They add no value, they only steal value from those who create it.

Charles Hugh Smith – Of Two Minds

Jim Rogers, when he made that statement, was referring to the lunacy of using public money to preserve failed private enterprise in a “capitalist” economy. That is what we did, after all. We saved failed institutions, failed individuals, and failed thinking. That is wrong on many levels. But we went a step further: we saved dishonesty, criminality, and corruption. That is a far more serious proposition.

Bill Black is arguably the most important voice when it comes to the criminality that was preserved. If you are not well-versed in the criminal aspects of the crisis and in Gresham’s Dynamics, the following is an important video to watch (I recommend following the Powerpoint presentation while running the video – filmed 2/18/2010):

Powerpoint slides from the presentation can be viewed here.

Steinhardt Lecture 2010 at Lewis & Clark College presents Dr. William Black from The Resource Lab on Vimeo.

Capitalism requires failure. Without failure, the worst actors game the system so that they are able to thrive. In the process, they deprive honest entrepreneurs of opportunities that make a capitalist economy stronger and more resilient. Without failure, Gresham’s Dynamics – in banks, in ratings agencies, in government, in academia – are perpetuated and catalyzed. And without failure, moral hazard corrupts the thinking of all market participants; they are taught that crime pays and honesty is, in some ways, punished.

We have perpetuated criminal environments that are not going to resolve themselves. Those environments are once again buried in profits and bonuses and rising stock prices and lobbyist-written legislation that creates opacity. But the criminality has not been addressed. Since our leaders are not undertaking the house-cleaning that could rid us of the worst actors and send a message to others, we have to expect the corrosive results of institutionalized dishonesty to continue to undermine our capitalist economy in fundamental ways. Unfortunately, we likely will not have the luxury of being able to lower interest rates and loosen credit availability so as to paper over our economic problems next time… we have played those cards.

The USA has arguably been stressed to its limits when it comes to public debt, private debt, currency debasement, and interest rate drops. Add in rampant dishonesty in the highest echelons of private and public power, and we are facing a serious threat to our well-being.

Predicting how this will play out is impossible. But ignoring the big issues is a mistake. At the very least, if you want to protect yourself and your community, you have to pay attention to what is happening in our macro-economy. And since no mortal with a job outside of finance can possibly stay on top of these issues, it is vital to find analysts who are not compromised.

Capitalism Without Failure

Chief executive officers from eight of the largest US banks receiving government aid testify at a House Financial Services Committee hearing in Washington, DC, 02/11/09 (photo: Brendan Smialowski/Bloomberg)

I’ll be damned.

As 2011 slithers to its end, none of the major problems that led to the crisis point three years ago have really been solved. Bank balance sheets still reek. Europe day by day becomes a financial black hole, with matter from the periphery being sucked toward the center until the vortex itself collapses. The Street and its ministries of propaganda have fallen back on a Big Lie as old as capitalism itself: that all that has gone wrong has been government’s fault. This time, however, I don’t think the argument that “Washington ate my homework” is going to work. This time, a firestorm is going to explode about the Street’s head – and about time, too.

….

Over the next year, I expect the “what” will give way to the “how” in the broad electorate’s comprehension of the financial situation. The 99 percent must learn to differentiate the bloodsuckers and rent-extractors from those in the 1 percent who make the world a better, more just place to live. Once people realize how Wall Street made its pile, understand how financiers get rich, what it is that they actually do, the time will become ripe for someone to gather the spreading ripples of anger and perplexity into a focused tsunami of retribution. To make the bastards pay, properly, for the grief and woe they have caused. Perhaps not to the extent proposed by H. L. Mencken, who wrote that when a bank fails, the first order of business should be to hang its board of directors, but in a manner in which the pain is proportionate to the collateral damage. Possibly an excess-profits tax retroactive to 2007, or some form of “Tobin tax” on transactions, or a wealth tax. The era of money for nothing will be over.

But it won’t just end with taxes. When the great day comes, Wall Street will pray for another Pecora, because compared with the rough beast now beginning to strain at the leash, Pecora will look like Phil Gramm. Humiliation and ridicule, even financial penalties, will be the least of the Street’s tribulations. There will be prosecutions and show trials. There will be violence, mark my words. Houses burnt, property defaced. I just hope that this time the mob targets the right people in Wall Street and in Washington. (How does a right-thinking Christian go about asking Santa for Mitch McConnell’s head under the Christmas tree?) There will be kleptocrats who threaten to take themselves elsewhere if their demands on jurisdictions and tax breaks aren’t met, and I say let ‘em go!

Hoh hoh hoh.

Michael Thomas is right, you know.  I’ve been trying to get purchase for draining the swamp and punishing the wrongdoers among the various political classes in DC and elsewhere for a long time, in some cases dating back to the 1990s.  My stock in trade is mathematics — that irrespective of the money flowing into the coffers of campaigns and lobbying offices what’s being attempted cannot work and as a consequence we are choosing between doing the right thing now and having it suck and doing it later by force and having it suck more.

Why appeal to people in this way?  Well, what else do you have when the base case — that you should do the right thing because it’s right — no longer has any currency?  In a city (DC) and nation (America) where bribery and corruption have become a way of life, where lies told to the electorate as a means of buying votes has become the degenerate set that’s left of what used to pass for law and order, you can no longer appeal to people’s “better virtues.”

All that’s left is trying to appeal to their desire to survive what’s coming, whether that survival is political or at rather-more-fundamental level.

This isn’t the sort of thing that anyone wants to talk of openly, of course, but we must, because just like mathematics it is inevitable on the path we are on.  The idea that one can “throw money from helicopters” as Bernanke has put forward is an intentional fraud.  Diluting the currency base of course simply makes everything more expensive you need while attempting to bail out those in debt at the same time.  For the common man in debt nothing happens.  For the poor who never had access to credit at a material level they literally starve and thus civil and political order is threatened.  The wealthy, for their part, simply skim off more and more to “protect” their capital.   That a man who runs this sort of crap manages to get reconfirmed after intentionally averting his eyes to the bubble being blown as a consequence of his policies is an outrage.  It speaks to the high corruption of public process and public life, but it is not an isolated incident or uncommon in the world of today.

The IMF’s Lagarde talks of Europe being “everyone’s problem”, as if Germany and France decided to con the world with hinky Greek derivative deals.  Perhaps some French or German banks did so (along with American ones), but France and Germany themselves?  No.  But now, having happened, it suddenly is someone else’s problem to bail out, and oh by the way, it’s not just Greece.

At its core the problem is both simpler and more complex than it first appears.  The complexity is intentionally used as a foil by various pundits and others who argue that we must support the “financial innovators” lest it all go somewhere else.  But Paul Volcker, hardly a dummy, has said in public that the only real “innovation” in the financial industry in the last 30 years was the ATM!

He’s right, you know.  Ginning up some debt deal and selling it to rubes, knowing full well that it was crap and destined to eventually blow up, is nothing new at all.  A column over at Interfluidity argues that the bankster model is not only old hat but has driven much of innovation through the ages.  To that argument I call bull.

Simply put the question being put forward in the latter article proceeds from a false premise.  The idea that we gain some sort of “societal benefit” from these misallocations of capital is trivially proved to be false using nothing more than basic analysis and mathematics.  All you have to do is look here:

Notice how the outstanding debt increase, quarter by quarter, exceeds that of output.  The premise run by Interfluidity is that the societal good in terms of Nash Equilibria is therefore false, as it is not adjusted for the claims made against the future.  This of course is exactly the sort of lie the banksters and politicians have run as their stock in trade for 30 years, and it is not surprising at all that Steve would fall into the trap.  After all most of us alive have spent the majority of our lives in this lie.

If I can falsify the premise from which you proceed then the remainder of your argument goes in the ashcan.  Sorry Steve.

The smartest guys in the room (that would be the banksters) always believe they can get away with it, of course.  Some of them are delusional, many for the same reasons.  A number of those who are considered “respectable” even subscribe to idiocies like “MMT”, believing that somehow the government causes economic growth through deficit spending.

But the graph above does not lie.  As I have repeatedly commented these beliefs are much like perpetual motion in its various forms; there is always someone who claims to have figured it out.  But the laws of thermodynamics say perpetual motion is impossible, and ultimately once again the person running the scheme is proved to be wrong — usually intentionally so when their hidden energy source is discovered.

The choice is not between a modern economic system that favors growth and living in caves.  It is between economic progress that is sustainable and funded from economic surplus and one that is built on debt bubbles, lies, and ultimately must and does collapse.

The former is an economy that grows through actual innovation and improvement in productivity, where debt is a tool to liquify transaction flow rather than pyramid upon the shoulders of the people.  The latter is the lie we’ve lived for 30 years, and which is now reaching its mathematical conclusion.

We face a time when in the present we have a choice of becoming adults and accepting what we’ve done, along with what we must do, or continuing to pound on the table like a petulant child demanding another bar of chocolate.  The latter path has been the road of the last 30 years, but now the supply of chocolate is exhausted.  There is food to be had outside in the form of strawberries, ears of corn and even a rabbit or three, but to obtain the latter we must get off our collective asses and pick the strawberries, cultivate the corn or shoot, skin and cook the rabbit.  We are choosing now between recognition and personal effort, along with acceptance of the harm we’ve done by eating all that chocolate (we’re all 100lbs overweight!) or literal starvation through laziness.

The old political and bankster ways are out of gas folks.  There is no path forward on the road we’ve been traveling — the bridge is out and our choice is to either stop before we reach the edge or take the plunge onto the rocky cliffs below.

Choose wisely.

A gentleman who has occasionally popped up on the forum unmasked himself the other day and was interviewed in the “mainstream media” — ABC News’ European desk.

ALBERICI: “How certain are you that UniCredit broke the law while you were there?”

JONATHAN SUGARMAN: “A hundred per cent certain and to use the Irish expression, ‘to be sure, to be sure’ that is why I brought in this London based IT company which had a very good reputation in Dublin and the result was pretty horrific because whereas the breach that I’d reported to the regulator was a breach of twenty per cent, whereas the permissible deviation was one per cent, they rang me up one evening soon after they tied into our systems, linked into our systems and said your breach is actually forty per cent”.

ALBERICI: When he raised the alarm with his chief executive, the response was dismissive. It was a systems error. The risk manager was instructed to continue approving the deals. Jonathan Sugarman was in the thick of a reckless banking culture that was on a collision course with disaster.

Everyone says that what is happening now in Italy with their banks, and with Irish Unicredit, was some sort of accident, just as the claim has been made that this was true in America.  But we have plenty of information that either is an admission or strongly suggests that there was nothing accidental about any of these events — that they were nothing more than a willingness by executives to overlook or even intentionally bury bad conduct simply to rob the taxpayer by taking risks they knew they could manage to foist off on everyone when — not if — their institutions blew up.

The worst of this is that it’s still going on!

JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS), among the world’s biggest traders of credit derivatives, disclosed to shareholders that they have sold protection on more than $5 trillion of debt globally.

Just don’t ask them how much of that was issued by Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS.

As concerns mount that those countries may not be creditworthy, investors are being kept in the dark about how much risk U.S. banks face from a default. Firms including Goldman Sachs and JPMorgan don’t provide a full picture of potential losses and gains in such a scenario, giving only net numbers or excluding some derivatives altogether.

Got that?  JP Morgan has a market cap of $124 billion while Goldman has a market cap of about $50 billion   Both have less than a trillion of balance sheet size.  Between them they have more than twice their balance sheet in credit exposure and well more than 20 times their market cap in written credit protection.

This is ridiculously dangerous and the obvious question is “how in the hell can you possibly do that?”

The answer is that we learned nothing and have refused to end “too big to fail”: As a consequence these institutions are still playing “heads we win and keep the money, tails the taxpayer loses.”

And lose we have.  We’ve lost jobs, we’ve got the government presenting roughly 10% of the economy in borrowed money and thus creating false demand that does not actually exist in the economy and our Congress continues to chug along trying to argue over whether they will increase spending by $200 or $500 billion a year.  There has been zero reckoning against the facts presented here:

This cannot work over the intermediate or longer term and yet this is what we’re continuing to try to do!

The entire world is caught up in a gigantic Ponzimania but the world’s demand for pretty colored candy-emitting unicorns will not make them appear as unicorns are mythical creatures.

Nobody — simply nobody — is dealing with this in an honest fashion.  Neither side of the aisle will put a stop to it, despite it being factually certain that it will blow up in our faces.  As nations in Europe teeter on the brink of disaster we find that once again our financial institutions have levered up and hidden their exposure — it is just a matter of time before we start hearing “nobody could have seen it coming” again.

We must stop this and start applying handcuffs to these people, not coddling them.

Then there’s Congress and the blatant insider trading that they engage in.  While it has been argued that this is technically legal there’s a new law review paper out that argues the opposite – that this practice is a black-letter criminal and civil violation of the law.  The argument is quite persuasive too — but who’s going to appoint the special prosecutor and start cuffing Congressmen and women (like, for example, Pelosi?)

Oh please.  That will happen only when “Occupy Wall Street”, The Tea Party or both together decide they’re going to “occupy” Washington DC and refuse to leave until the indictments issue.

For those on the right who say that “OWS” is wrong and a bunch of freeloaders while they’re the “rule of law” group: That above paper contains all you need to demand that every member of Congress involved in this practice go straight to prison and that an immediate felony investigation take place right now — and to find a lawful and peaceful means to force the investigation to take place.

Folks, it’s really quite simple: We’re to the point where either we, as a nation, stand up and insist that the raw corruption stop or we will not have an economic recovery, we will not have jobs, and we will not resolve the fact that we have a handful of financial institutions that four years on are still holding our nation (and the rest of the world) and every individual living on the planet hostage.

I see no evidence of a willingness to deal with the facts in DC, in Brussels or anywhere else.  At its most-basic level the underlying financial fact is this: You cannot spend more than you take in over the intermediate and longer term.  The mathematical fact of exponential growth makes attempting to do so impossible.

It is this attempt and the utter refusal to face that fact that has underlay all of the mess that we find ourselves in – both here in the United States and internationally.

There is only one question remaining: Will we cut it out before or after our entire economy collapses?

The recent implosion of MF Global has reignited the debate over Too Big to Fail (TBTF) and the adequacy of U.S. regulatory safeguards. It has also contributed to a broader decline in investor sentiment, many of whom believe the market structure does not afford them sufficient protection and fair competition. Many MF Global clients still have assets frozen and even if they ultimately recover the money, the short-term consequences can be devastating.

Historically, when firms fail to generate a profit or when one division damages the revenue stream of the whole firm the unprofitable assets are divested. Companies that can’t operate under the weight of their own size end up spinning off the parts that caused the pain. This is normal in the business cycle. The government has disrupted the business cycle of creative destruction by championing TBTF firms over a more competitive market.

The Final Four

Is concentrating this much risk the hands of so few banks good for the market?

At its root, TBTF is a triumph of lobbying over market structure. When Congress passed the No Child Left Behind Act in 2001, no one expected it would create a perfect safety net. Fast forward to 2011 and the legislation is intensely criticized for its design flaws and implementation. In short, the Act failed to live up to its lofty title. Too Big to Fail is a similar misnomer. TBTF is nothing but a marketing ploy masquerading as a market reality, a costly illusion expedited by bank lobbyists and political insiders. If anything was really too big to fail, there would be no need to label it as such because it would be self-evident. No firm was too big to fail, and no firm is too big to fail. The future will prove this out.

The official (and unofficial) recognition of TBTF firms has led to a number of unsavory and unsafe business practices. Businesses overvalued balance sheets, and engaged in questionable practices to grow even bigger and support non-profitable divisions. The Federal Reserve tacitly encouraged these maneuvers through its monetary policies. The end result was consolidation upstream and a loss of diversity in financial counterparties. In the end the Federal Reserve will be the only counterparty, backstopping one huge bank or an exchange that is partially owned by the banks. When 80% of a firm’s business comes from 20% of its clients the business is too dependent on too few counterparties. The financial industry has been consolidating for the last decade, and the systemic risk is larger than ever before.

As the market continues to trend towards a small number of large, homogenous counterparties we will see OTC and floor locals go out of business and mid-sized firms over-leverage and struggle. Clients without political connections have assets frozen and lost. Liquidity will suffer.

The decreased liquidity is notable already and the CME Group recently lowered margin requirements in an attempt to facilitate an improvement. This is the equivalent of a central bank lowering interest rates and will create more volatility in exchange for liquidity (but does not reduce risk). Similarly, much like the infamous liquidity trap, it will also face a point of diminishing returns.

We expect the consolidation upstream to continue as championed firms eat the client books of their smaller counterparts.

FMX Connect for ZeroHedge