Insider

What Will Happen When We Hit the Cliff

Few places for financial assets to find shelter
Wednesday, December 26, 2012, 2:52 PM

Executive Summary

  • A rising dollar negatively impacts stock market profits and valuations
  • Interest rates ultimately will rise, and that will be a game-changer
  • Investors will eventually realize that "risk-free" assets (e.g., U.S. Treasurys) are NOT safe havens
  • Why there will be few places for financial capital to find shelter in 2013

If you have not yet read Part I: The Structural Endgame of the Fiscal Cliff, available free to all readers, please click here to read it first.

In Part I, we covered the basics of wealth and political power in the U.S. and found that the Fiscal Cliff is only a symptom of a structural endgame in which the imbalance between what has been promised and what can be collected in taxes will continue growing until it triggers a financially driven political crisis that I believe will inevitably become a full-blown Constitutional crisis.

Though there are many facets of this long-term political crisis that are worthy of further exploration, we will to start with three financial aspects that could start impacting households in 2013: a rise in interest rates and a resultant destruction of bond valuations, a rise in the U.S. dollar that negatively impacts U.S. corporate profits and thus stock market valuations, and a reduction in upper-income households’ spending as a result of higher taxes that depress discretionary consumer spending.

A Rising Dollar Negatively Impacts Stock Market Profits and Valuations

Let’s start with a topic that I have covered in depth over the past year, the structural reasons behind the rise of the U.S. dollar (USD).  The recurring fantasy that Europe’s fiscal and debt crises are “fixed” and the Federal Reserve’s money-printing/Treasury bond purchases have recently depressed the USD, but in the longer term, the USD has been tracing out an unmistakably bullish pattern of higher highs and higher lows since May 2011:

The key point here is the correlation between U.S. global corporate profits and the USD:  A weak dollar boosts corporate profits when stated in dollars, and a strong dollar depresses corporate profits earned overseas.  This matters because many global corporations get 40% to 60% of their total revenues overseas.

Thus any appreciation of the dollar versus the euro, yen, and other floating trading currencies will lower corporate profits.  Weakening profits will then weaken the bullish argument for high stock valuations.

This currency-valuation dynamic is rarely mentioned in standard-issue stock market analysis, even though it is obviously a key factor in U.S. corporate profits and thus stock valuations.

Why would the dollar strengthen against other currencies?  The reality that Japan and Europe’s fiscal and debt fundamentals are deteriorating, not improving, is gaining traction.  This alone is enough to push the dollar higher.  China’s growth rate has slowed, and this is impacting the Australian dollar and other commodity-based currencies.  Once again, the dollar will strengthen not so much on its merits as on the weaknesses of its rivals.

Lastly, the contraction of global trade (just look at the Baltic Dry Index for a reflection of this) will tend to push the dollar higher, as I explained in my recent piece on Triffin’s Paradox.

Interest Rates – Low Forever, or Set to Rise?

If there is any financial truism that is widely accepted, it is that interest rates will remain low for years to come as a result of the Fed’s purchases of Treasury bonds and money managers avoiding risk assets.  These are definitely low-interest-rate positive, but received wisdom may be overlooking two other forces.

The Fed has committed to buying about $500 billion of Treasury debt a year, but perhaps this bond purchasing is not quite as dominant as many seem to believe.  The 2012 Federal deficit is around $1.3 trillion, just like 2009-2011, and demographics and weak household income could drive this higher in short order as the fantasy that tax revenues will reduce the deficit run into the buzz saw of political/financial dysfunction described in Part I. 

In this context, the Fed purchases might cover about 35%-40% of debt issuance.  That could leave around $1 trillion in bonds dumped onto the private market.  The Fed’s Operation Twist has suppressed interest rates by selling longer-term bonds to buy 60% to 80% of short-term bond issuance, leaving the Fed’s program incapable of buying enough of both long-duration and short-duration bonds to suppress long-term rates.

We must keep in mind that billions of dollars of bonds mature every year and must be re-issued on top of newly issued bonds that fund current fiscal deficits.  This increase in the pool of issued bonds further reduces the influence of Fed bond buying.

I have made the case elsewhere that the Fed may face increasing political constraints as its policies fail to sustain growth in 2013.  Though some observers believe that the Fed has no choice but to expand its balance sheet to infinity in order to keep buying Treasury bonds, this view ignores the possibility of rising political resistance to Fed manipulation of interest rates and the economy.  At some point, policies that have failed so visibly will no longer attract automatic political support.

In effect, the Fed’s bond-buying programs have enabled fiscal recklessness.  As resistance to fiscal recklessness rises, so, too, will resistance rise to the Fed’s policies that enable the recklessness.

As the global recession causes phantom financial assets to vanish, the pool of money available to buy Treasurys will shrink.  Few seem to ponder what happens when trillions of dollars in phantom assets disappear as debt is written down and debt-based assets are exposed to market-price discovery.

The Failure of Counterfeiting Risk-Free Assets 

Stripped of public relations and economic voodoo-speak, the Fed’s policy of buying hundreds of billions of dollars in bonds is an attempt to counterfeit risk-free assets – that is, to manufacture the belief that Treasurys are risk-free.  The notion that Treasury bonds may carry risks that are not being priced into the current market price is suppressed by Fed buying.

Are Treasurys truly risk-free?  What matters isn’t the debate; it’s the recognition that there could be risk as Federal debt spirals up by $1 to $1.5 trillion a year.  That recognition will eventually push long-term rates higher as private buyers demand a risk premium.  With rates either near-zero or negative (depending on what rate of inflation is used), any recognition of risk will eventually push yields higher.

If the Fed’s programs run into political resistance, the recognition of risk could rise quickly as the market discovers that the Fed is not omnipotent and its bond buying has political limits.

What happens when yields on long-term bonds rise by a modest 10%?  The market value of all existing bonds of long duration will drop by an immodest 10%, as yields and market value are on a see-saw.

What happens if bond yields rise and corporate profits decline?  Those holding stocks and bonds will suffer losses.  This double-whammy would leave few places for financial assets to hide in 2013. 

Discretionary Spending and Recession

As taxes on the top 25% rise, those households will have less discretionary income to spend or save.  Since the top 10-15% earns roughly half of all household income, the economy is dependent on the consumer spending of the top earners.  As their income is diverted to taxes, consumer spending will suffer.  If Federal spending is trimmed, those receiving contracts, transfers, and benefits will also have less income to spend or save.  As spending declines, corporate revenues and profits will also fall – another bearish influence on stock valuations.

All in all, higher taxes are recessionary for the consumer-based economy.

~ Charles Hugh Smith

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30 Comments

bigelow's picture
bigelow
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Wishing you had gone East not West?

I am thinking that Japan or Europe is more likely to have a Soverign Bond crisis before the US has its. And if bond yields spike higher and values lower, then bonds will be sold to save the capital that is left. That capital will have choices: what buy into and where. Will it flee to the West or East? If you pick the dollar and it becomes temporarly more valuable and you try to buy financial assets to replace your Japanese government bonds or Euro equities, then dollar assets become more valuable --till confidence in US Government debt collapses too and capital wishes to exit dollars once again.  Enter currency and exchange controls, but only for little people not the elite... and then maybe you wish your money earning cash had gone East not West.

What is incorrect about any of this?

realitycheck's picture
realitycheck
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To modify your finale:  All

To modify your finale: 

All in all, BOTH higher taxes AND SPENDING CUTS are recessionary for the consumer-based economy. 

Which is why a very nasty and deep recession is inevitable, of course, because both of these are as well.  I wouldn't be surprised, however, if our central planners and their trillions were able to kick the can down the road and avoid this inevitability for another few years.  After all, it's easier to kick the can when the rest of the world is even worse off than you are.  US Treasuries will almost certainly continue to be the default safe haven, whether or not they deserve to be, as Europe and Japan unravel...

Of course we'll eventually get precisely what we need:  an extended deflationary recession with sufficient deleveraging to flush the considerable muck from our system.  It will be horrific and severely disruptive, but in all liklihood the US dollar will enter this dark period relatively strong, which may provide a silver lining for certain long term investors with sufficient cash reserves.  When the Dow sinks below 5000 and most of the world is bemoaning the end of days, the wealth of the next generation will very likely be purchased for mere pennies on the dollar.

Things or never as bleak, nor as rosy, as they seem.  Providing world war three is NOT the charm, I see an American economic and technological renaissance in the mid-2020s. Those who keep their heads in the next few years will be in a most enviable position then...

RJE's picture
RJE
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Charles, well, you know how I feel...Good stuff

CHS:

"I have made the case elsewhere that the Fed may face increasing political constraints as its policies fail to sustain growth in 2013.  Though some observers believe that the Fed has no choice but to expand its balance sheet to infinity in order to keep buying Treasury bonds, this view ignores the possibility of rising political resistance to Fed manipulation of interest rates and the economy.  At some point, policies that have failed so visibly will no longer attract automatic political support.

Charles, I certainly agree with this statement but then again the FED has the blessings of Schumer as he understands that Congress can't and won't do jack sh.t to raise a hand and take responsibility for fear of losing their easy, lining their pockets job. 

CHS:

"In effect, the Fed’s bond-buying programs have enabled fiscal recklessness.  As resistance to fiscal recklessness rises, so, too, will resistance rise to the Fed’s policies that enable the recklessness.

As the global recession causes phantom financial assets to vanish, the pool of money available to buy Treasurys will shrink.  Few seem to ponder what happens when trillions of dollars in phantom assets disappear as debt is written down and debt-based assets are exposed to market-price discovery."

Well, at least if their totally reckless, and get away with it then having physical Gold sure is a relief. Personally, I want the FED...

Well, you get my drift. I want the FED's powers greatly reduced, and I want the children to behave and actually become Men/Women, it's time.

Really, if I was over the top with my message above I really just want a good cleansing, wash out all the Debt and dirt and grime from the economy and start anew. Something like this perhaps: 

Then put all the criminal sons of a bitches behind bars.

Respectfully Given

BOB

RJE's picture
RJE
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realitycheck, welcome, and...

...from your lips to God's ears. God of course being whatever you imagine  him/her to be.

BOB

ftealjr's picture
ftealjr
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Twist is twisted?

Charles:

Under "Interest Rates - Low Forever or Set to Rise" you state:

"The Fed’s Operation Twist has suppressed interest rates by selling longer-term bonds to buy 60% to 80% of short-term bond issuance, leaving the Fed’s program incapable of buying enough of both long-duration and short-duration bonds to suppress long-term rates."

It is my understanding that Twist is just the opposite ..buying short term debt and purchasing longer term debt in its place.  Am I missing something?

I think I read recently that they had just about finished off all of the short term debt.

Jim H's picture
Jim H
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Dollar strong is only a short term play...if at all

The endgame is in sight...and it is Japan.  If you have not spent the hour with Kyle Bass.. you really must;

A ZH commenter today got it right;

source: http://www.zerohedge.com/news/2012-12-26/annotated-kyle-bass-short-japan...

The global fiat monolith has to start to disintegrate somewhere.  What better place than Japan where the combination of their demographic time bomb, their cultural xenophobia and their 30 year experiment with Keynesian/monetarist policies has set the stage for an economic cataclysm.  Regarding the last:  the Japanese have essentially been playing economic Russian roulette – and have now announced that, instead of spinning the cylinder again, they will chamber a round and commit outright suicide.

Japan will prove to be the example from which the rest of the world learns the fallacies of the Keynesian/monetarist practice of irredeemable currency and sovereign debt issuance without bounds.

Invest in hard assets while you can still get them.  This talk about dollar strong or weak, vs. other Fiat currencies.. is a side show.  I had been thinking about getting an AR to round out my arsenal all year long.. didn't act.. and may not be able to get one now  - store shelves are literally bare.  There will come a time when all available Gold and Silver coin is sold out... and you, dear reader, won't have the balls to buy at whatever price they are available for at that time.  This could happen in two months, or two years.. I really don't know.  Gold and Silver suppression could break in two months, or two years.. I really don't know.  What is clear is that the great Keynesian experiment will end with Japan..and the Fiat emperor will then have no clothes, for all to see.         

RJE's picture
RJE
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Jim...

I downloaded that same video a week or so ago, and it was chilling and exciting. We will witness a new world economy in short order, and I really have no issues with this. What I enjoy about Bass is he still has powder dry, his cash at work, and is not fully invested in precious metals, and this intrigues me a bit. Why didn't he go all physical Gold? The dollar is going up but will we lose the reserve currency status when everyone else has burned out, and started anew first, and I just don't see it based on what many of the Rich are doing.

Adam, I think, posted an article today where it shows that gold and silver restrictions on sales, on eBay is happening. That's a tell.

Selling physical Gold or Silver is a bad mistake in my opinion  (I understand better because of your work here Jim). When we get our next recession I do believe many will not have the stones or they will need to gather cash so will sell gold and not hold it. Buying opportunity then? 

Be Good Jim

BOB

RJE's picture
RJE
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Jim, I have been trying to

Jim, I have been trying to research Gold (physical) purchases of the Japanese and Europeans, and have had little success in getting anything current. I would like a month to month purchase record for the last 12 to 18 months, and my reason is to get a sense of how this will all play out. I am assuming that these citizens are thinking as we do, and that they are not complete fools.

Can you help? Anyone?

Regards

BOB

Nate's picture
Nate
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Great Post

Jim H wrote:

If you have not spent the hour with Kyle Bass.. you really must;

Invest in hard assets while you can still get them.   There will come a time when all available Gold and Silver coin is sold out... .  This could happen in two months, or two years.. I really don't know.          

Merry Christmas Jim,

Thanks for the great post.  Kyle Bass is one of the brightest lights around - this is well worth your time.  PM's will become as difficult as AR and rounds to find in the near future.   

cmartenson's picture
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ftealjr wrote: Charles: Under

ftealjr wrote:

Charles:

Under "Interest Rates - Low Forever or Set to Rise" you state:

"The Fed’s Operation Twist has suppressed interest rates by selling longer-term bonds to buy 60% to 80% of short-term bond issuance, leaving the Fed’s program incapable of buying enough of both long-duration and short-duration bonds to suppress long-term rates."

It is my understanding that Twist is just the opposite ..buying short term debt and purchasing longer term debt in its place.  Am I missing something?

I think I read recently that they had just about finished off all of the short term debt.

ftealjr, you have it right....Twist was selling short and buying long.  

Thanks for catching that!

Best,
Chris M.

charleshughsmith's picture
charleshughsmith
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thank you for the insightful (and corrective) comments

Yes, thanks for the correction re: twist--selling short-duration to buy long-duration. I apologize for the reversal. I guess the main point is whether the Fed can expand its balance sheet enough to suppress long-term rates and buy enough short-duration bonds to keep rates near-zero.

Bigelow, you present a compelling case for capital fleeing Europe and Japan for the US, a trend which is supported by Kyle Bass's thesis that the endgame is near for Japan.  The real power in this trend IMO is currency valuation: holding euro and yen bonds as those currencies slip will expose the owners to large losses. Alternatively, if the USD is rising, buying zero-yield Treasuries will reap major gains via appreciation.  If trillions of dollars currently invested in euroland and Japanese bonds move into Treasuries, clearly that will keep rates near-zero or negative until the endgame in those economies completes.

Nonetheless, the recognition that long-duration Treasuries are not risk-free will eventually push rates higher, especially if there are political limits on Fed buying. We can ask: what would rates be if the Fed did not buy any Treasuries? Few would claim rates would remain unchanged if the Fed ceased bond buying.

On the other side of the ledger, we have to recognize that trillions of dollars in phantom value will vanish as the debt crises in Japan, China and the EU play out.  The pool of global capital will contract, leaving less to shift elsewhere.  Cautious money managers may prefer to shift global capital to precious metals, real estate, timber, etc. rather than buy Treasuries.

Mish posted an excellent review from Michael Pettis today suggesting China's debt bubble is also in an endgame, which raises the question, how much unrecognized risk is in the East? It would seem the answer is "a lot." Once again, North America starts looking less risky simply because the risks are somewhat more transparent here than elsewhere.

Bob, I agree, the global economy desperately needs a debt/impaired collateral clearing, and it's something we all know will eventually occur, even though can-kicking can push it out for years.

RealityCheck, I agree with your general timing and renaissance thesis. This ties into the "stronger dollar" thesis in the sense that a rising dollar gives holders of dollars a bit of breathing room for the next few years, i.e. the option of holding dollars and buying hard assets on weakness/opportunity.

I also agree that spending cuts are equally recessionary.  We can anticipate that those getting unemployment or other government benefits are spending most or all of their benefits, so in that sense this spending is non-discretionary. In contrast, high-earner households have discretionary income that will contract as taxes rise. We should also note that tax rates don't have to rise for taxes to rise--there are many ways to limit deductions or close loopholes.

In the longer run, what we're seeing is the end of expanding government--what I've called Peak Government. What we need is a resurgent comunity-based economy based on self-reliance and local investing, not more government spending on malinvestment and misallocation of capital.

As always, I end up writing another essay to comment on your comments--please forgive my longwindedness. 

RJE's picture
RJE
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I like longwindedness, and the fact you politely answered...

...so many comments pointed at you. Nice frankly.

Here's Mish's thread Charles was talking about. It is quite excellent.

http://globaleconomicanalysis.blogspot.com/2012/12/michael-pettis-on-china-reforms-ponzi.html

Now, the Yen, destroyed, Euro, destroyed, China, mangled terribly, and we go where? How long? How and what will the future look like? The dollar will be reserve currency then, for how long? I have no idea but I would venture a guess: A really long time still.

People don't like change even if they say they do. China don't even want reserve currency status. China isn't even a developed economy with many years yet to go before she will even be considered a Developed country.

Europe blows apart and paper is a confidence game, and well they blew that.

The Yen, hell, Japan is a 9.0 on the Richter scale away from sinking into the ocean frankly. Bass explains Japan all to well, and their toast. We learn from them then. Perhaps we can tie our fate with theirs at a future date, and maybe, just maybe see that we must change our ways. Make some good decisions then. Wouldn't that be grand.

I absolutely, positively understand that as the LEADER of the free world, and Reserve Currency Holder that we will be looked at as the savior. That's how I see this. As always, I reserve the right to change my mind at a moments notice. Survival of the fittest then?

Regards

BOB

Jim H's picture
Jim H
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Thank you for commenting Charles

In your piece you said,

On the other side of the ledger, we have to recognize that trillions of dollars in phantom value will vanish as the debt crises in Japan, China and the EU play out.  The pool of global capital will contract, leaving less to shift elsewhere.  Cautious money managers may prefer to shift global capital to precious metals, real estate, timber, etc. rather than buy Treasuries.

I think sometimes it is imagined by some, espeically those folks over at TAE, that the forces of debt destruction will somehow impede the flow into Precious metals...or, that enough folks will be having to sell PM's to live off of that this will counteract any increased investment flows.  This is silly, and the proof is in the relative size of the markets.  The above from CHS gives the reader no sense of what this shift might mean for PM pricing;

WW Bond Market is estimated at 75% of total capital, or $157 Trillion.

source:  http://qvmgroup.com/invest/2012/04/02/world-capital-markets-size-of-glob...

WW Investible Precious Metals stores are estimated at about $30 Billion of Silver, $2.4 Trillion as Gold.

source:  http://www.exchangetradedgold.com/media/ETG/file/liquidity_in_the_global...

So what happens if Bond holders decide on a 10% exposure to Gold?  What happens when $15 Trillion, or even $10 Trillion, starts to chase $2.5 Trillion worth of assets, much of which may be in strong hands?  

When the bond bubble bursts.. lots of holders of bonds of all types are going to want out of the pool. There is no other big pool to get into.. only very small (relatively speaking) pools, other than stocks, and (uninsured) cash.  This is simple math.   

RJE's picture
RJE
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Yes Jim....

...this is why I requested your research or knowledge base when asking for what percentage of Gold has been purchased by the private sector in both Japan and Europe. It is not unreasonable to assume that 10% of the cash yet deployed as it flees for safe haven in these two countries chase after current PM's stock piles. Supply and Demand. 

I think you have a valid and straight forward concept here, and is why holders of the physical metals cannot possibly lose (well, always risk) as it is a certainty that some cash must chase these and other 'REAL" asset classes.

I am also anticipating great wealth (individual) flight, and from Japan and Europe for the U.S. to be a beneficiary to some of these wealthy Folks. The Chinese have already started their exedous for our country be it for political or financial reasons.

I would still like that information if you could help. I have tried all different combination of searches, and are not getting what I want.

Regards

BOB

Mark_BC's picture
Mark_BC
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In the longer run, what we're

In the longer run, what we're seeing is the end of expanding government--what I've called Peak Government. 

As I've pointed out multiple times before, government hasn't really been expanding. Total US government spending mantained 35% of GDP for 30 years up until the 2008 crash, then it jumped up to 43% as a response, to prevent the private sector from totally imploding. I would tend to agree, however, that the resulting Keynesian experiment up to 43% was not warranted and will of course end in catastrophe, but it cannot be argued that increased government spending caused the 2008 crash. In this respect, Mish's linked piece showing how much government spending has increased between 2000 to 2012 is quite misleading because 1) it doesn't adjust based on Shadowstats, (and he should have expressed it as a % of GDP, not as $), and 2) all that increased spending came post-2008, which disproves the assertion that increased government spending was the cause of the economic problems.

What we need is a resurgent comunity-based economy based on self-reliance and local investing, not more government spending on malinvestment and misallocation of capital.

What specifically does this entail? I hear lots of vague allusions to local investment and self-reliance, and it all sounds very nice, but I'm wondering how specifically will it work in the global economy, since if I interpret you correctly, you are a proponent of "free and fair" markets? Where will the energy and resources come from to provide jobs for people on a local level, that wouldn't be available at a national level? How do we prevent that local investment from concentrating power and wealth to once again become a national, then global, empire? How do we move to a local economy when the real productive assets of the country have largely been concentrated and are now owned by a very wealthy elite (eg, Cargill)? How do these productive assets get returned to the middle class, so that a "resurgent community-based economy" can actually emerge? Are you arguing that the middle class take these assets back by force?

How will these local jobs and investment be able to compete with $2 a day Chinese labour? What difference does it make if it's a local or national economy, if those jobs are competing in a global marketplace with $2 a day Chinese labour (or Bangladeshi labour, if the Yuan gets revalued). Are you arguing for international trade barriers to be established? How does that jive with "free and fair" markets?

How is local automatically so much better than a national scale? What would local economies use as a currency? Would there still be a central national currency? How would we prevent that from being taken over by private banking interests and once again being used to enslave the world? Since apparently we're being told that runaway government spending is responsible for all the economic problems we're seeing, then how low would government spending have to be cut in order to prevent the monetary system from being taken over by central banks again? Since the Fed took power when total government spending was about 15% of GDP (based on my best estimate), then according to this line of thought I'd presume government spending would have to be slashed even beyond this, maybe as low as 5% of GDP?

Who is going to take care of the elderly when total government spending has been presumably cut to 5% of GDP? What difference does it make if it's local or national? Why would local economies do a better job of providing pensions to the elderly than a national economy would, if government spending is only 5% of GDP?

If government spending constitutes "misallocation of capital", then I'm wondering what constitutes proper allocation of capital? A so-called "free and fair" market? What is that? Since this site is all about analyzing things "through the lens of energy", could you trace energy from sunshine --> ecosystems --> resources, and then --> our economies, and show how a so-called "free and fair" market represents the best allocation of capital? What exactly is "capital" anyways, as seen through the "lens of energy"? How specifically does a "free and fair" market prevent wealth and power concentration? What is "investment", from the perspective of the lens of energy?

Jim H's picture
Jim H
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Gold stats

Bob,  I agree that data on flows to specific countries, other than the usual suspect big Gold consumers like India, are hard to find.  Here is one set of charts published on KWN today;

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/12/27_3...

Otherwise you have anecdotal stuff, like this Ben Davies quote from November;  

Davies thinks Japan’s structural financial problems and debt burden are beyond recourse, and sees a “non-negligible risk of hyperinflation.”

In light of this, he says, Japanese investors are turning to gold:

I suspect that Japanese pension funds, insurance companies, banks, although they have to buy government bonds as almost a public edict because they can’t place the bonds, but talking to managers, there are switches going into the precious metals market.  They are definitely buying up gold.  Pension funds are doing that (buying gold). 

I personally am not that fixated on what the Japanese do... I am sure they have their own tiny Goldbug community now as well.  The question is; when does awareness of the need to protect one's saved wealth with PM's reach a critical mass?  It is clear to me that the increasingly blatant PM price suppression since QE3 infinity was announced is meant to keep PM's out of the news - to keep the idea of Gold and Silver from building mindshare among investors - to ward off the Giffen good price acceleration to the upside that will occur once the ball gets rolling.          
 
RJE's picture
RJE
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Thanks Jim,...

...I have read some reports and Ben Davies so I downloaded a hard copy and will outline it tomorrow, and then do further research.

Gold will have a fight on its hands for sure but so far so good.

Thank you

BOB

treebeard's picture
treebeard
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Industrial vs Ecological Economic models

Someone much smarter than me some 50 years ago predicted that ultimately societal conflict lines would divide along the industrial vs ecological economic models, which seems to be where we are ending up.  Economic discussions are ultimately reductionist in nature because of the necessity of its science tend to dwell on the quantative vs qualitative aspect of reality. So the reasons for local get missed in the machinations of the dark arts of economics.

Local is key to future survival for many reasons.  Local is not antithetical to national solutions in principal, but what is critical is that the details will vary based on bioregion and local culture.  The old "economics of scale" made sense only when energy was cheap and evironmental degredation had not advanced to the crisis level where it exists now.  Efficience is now measured in manhours, not in energy input.  But we now need to invent a paradigm where the reverse is true.  We had massive amounts of energy and not enough labor, we now have energy resources of diminishing quantity and quality and massive unemployment.

The most efficient system of production/creation exists where the mind and spirit of man/women is married to the hands engaged in an autonomous task.  Current energy intensive "efficencies" are based on the old dominate or be dominate mentality. More is better, faster, cheaper.  Where the "efficient" thing is to replace humans with machines, and we are constantly told that we need to expect this trend to extend into the future.  This is gas on the fire of the current global meltdown.

If I grow food in my backyard (or purchase for local "organic" grower) in accordance with a cooperative understand of natural systems, I am replacing energy entensive, polluting, violent, wasteful system with a healing, low energy, zero waste harmonious system. The industrial system is energy intensive, the local is knowledge intensive.  The industrial system concentrates control, wealth, autonomy, and power in the hands of very few people and most critically separates action from reaction, cause from effect.  Local systems connect cause and effect, brings consciousness into to daily living, and allows for rapid adaptation.

We hear from a variety of angles in increasing frequency and intensity of the certainty of economic collapse and ecological calamity, yet the discussion are still chained in great measure to the vocabulary and mindset of collapse.  The same consciousness that created the problem cannot solve it.

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Jim H
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Beautifully said Treebeard

Local is...among other things..antifragile. 

This reviewer on Amazon explains it better than I could;

source: http://www.amazon.com/review/R2DF8SDUSULXQW/ref=cm_cr_pr_perm?ie=UTF8&AS...

Antifragile complements The Black Swan by celebrating systems that gain from disorder, trading away short-term predictability and micro-rationality for long-term success exploiting macro-unpredictability. It's a bold attitude, amply supported by argument and example from many fields. If anything, it is more outrageous and iconoclastic than The Black Swan. It is Taleb's most important book to date, as it closes the circle. On one level, the universe (at least as perceived by humans) is ruled by disorder, but on another level, the crucial elements are those that gain from disorder as eventually these are fitter for survival than any element, however strong, that requires order.

One tiny little story that has meaning for me;  If I had not had the distinct pleasure of picking up produce from the (coop) farmer herself this summer - I would have never known that fresh beet greens are great sauteed.  I would have just thrown them away.       

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RJE
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treebeard, I am a fan...

...and this thread was flat out positive and well thought out. It really boils down to controlling that which we can personally, and by example hopefully change the world. Hell, I would settle for a community based economy where I am supplied only that which I require, food, clothing and sheltor. Then, move out from there as these necessities are achieved.

Respectfully Given

BOB

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gillbilly
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Well said Treebeard

I agree. I try to have these conversations among my colleagues and friends and they seem to have a lot of difficulty wrapping their minds around it. If you take technology/technique/effeciency to its logical end, then we end up with a quantitative sociopathic world where human qualitative value is irrelevant. I don't believe it will reach this logical end but rather there will be a shift in collective consciousness. People are waking up everyday and saying to themselves..."enough."  Below is a quote from Willem Vanderburg from the Bulletin of Science, Technology, and Society describing our technilogical order as being in the realm of non-sense (not to be confused with nonsense):

What this means is that modern societies increasingly organize and reorganize almost every sphere of their ways of life, not on the basis of experience and culture guided by human values, as all groups and societies did before them, but on the basis of the following process.

First, an area of human life is examined for the purpose of making it more effective. Next, the findings of this study are used to build a model that may range greatly in kind, from one that is formal and quantitative to one that is informal and may or may not include some statistical correlations between some of the parameters. Third, the model is examined to determine under which conditions a greater effectiveness can be achieved.

Finally, the findings are used to reorganize that part of human life originally examined. It is on the basis of this process that modern societies organize and reorganize almost everything, including work in factories or offices, the running of hospitals, classroom education, the performance of athletes, the content of advertisements, the layout of stores, the operations of a funeral business, and a great deal else.

This process belongs to the domain of non-sense (again, not to be confused with nonsense). Elsewhere I examined this at length and will therefore limit myself to a few details here. Effectiveness has come to be valued in terms of performance measures such as efficiency, productivity, profitability, cost-benefit ratios, and gross domestic product (GDP), which as input-output ratios provide no clue as to their meaning or value for human life.

Nevertheless, they are treated as technological values and imposed everywhere. Also, the structure of the aforementioned process for making human activities more effective is not based on experience or culture but on rationality. The focus is on effectiveness: Those elements or dimensions seen as contributing to it are placed in the foreground and incorporated into the model, whereas the remainder is put in the background, thus making the integrity of human life and society a mere externality to the process.

Worse, because performance measures give no indication of how this reorganization positively or negatively affects the integrity of the human activities being reorganized or how it may affect the integrity of the larger context of individual lives and society or the integrality of the biosphere, the result is almost without fail a growing incompatibility between what is made more effective and the context in which it occurs.

To sum up: The process rationally reconstructs the integrity of human life and society and the integrality of the biosphere and modifies parts of them, all on the basis of non-sense. The advent of a mass society and the environmental crisis are two obvious examples.

For this reason, modern civilization dazzles us with spectacular achievements in the domain of performance measures and equally dazzling failures to ensure that technicized activities are compatible with human life, society, and the biosphere. For example, the way we organize work and workplaces has become a principal cause of physical and mental illness (Karasek & Theorell, 1990).

In sum, technique is taking over much of the role that culture has played in human history thus far. For this as well as other reasons, translating the concept of technique as technology can lead to serious misunderstandings. I will further illustrate the aforementioned for a branch of technique that receives much attention and that I have examined in detail (Vanderburg, 2000).

The engineering, management, and regulation of modern technology involves countless practitioners. The consequences of their design and decision making fall mostly outside of their domain of competence, with the result that if required by laws or regulations, the undesired consequences are attended to by others inwhose domain of specialization they fall.

As a result, the system tends to first create problems and then address them in an end-of-pipe or after-the-fact manner by adding costly devices or services. For example, pollutants are first created, then removed from waste streams by control devices if required by law, and then land filled, which means that they have merely been transferred from one medium to another.

Similarly, health and social support services for employees proliferate (Blue Cross is one of GM’s largest suppliers) (Karasek&Theorell, 1990) without getting to the root of the problem: the way we design factory and office work. The system feeds on its own problems, which makes no sense. Even from an economic perspective, the situation is extremely serious. If the costs incurred in the production of wealth are subtracted from gross wealth production to arrive at net wealth creation, the results are completely opposite to what the GDP indicates.

Net wealth production has been shrinking sincethe late 1970s (Cobb, Halstead, & Rowe, 1995). In other words, what we have been doing during the past decades not only makes no sense in economic terms, we have nothing to show for the social and environmental crises. If this kind of technological and economic growth cannot make us wealthier, healthier, or add to the quality of individual and collective human life, it serves no human values of any kind.

Technique has its own internal logic or laws that clearly do not belong to the domain of sense as related to human experience and culture. The order established by technique is necessarily at the expense of the order of society and the biosphere.

Technique excludes all human meaning and value and thus human life itself. Never-theless, the order of technique is enfolded into that of society and the biosphere because without these, there would be no technique. Technique borrows all its flows of matter and energy from the biosphere and the sun. It is also so interconnected with society that if our civilization collapsed, technique would disappear with it.

Thank You

[note: above quote formatted by Admin for easier reading]

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RJE
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Fiscal Cliff thoughts...

If we go off the Cliff so that Congress can vote for a tax reduction instead of an increase, and the public buys this then we are really in trouble.

If they pass this last second deal then my guess is the tax will have to be $400,000 and not a dime higher. Can you imagine what the press and the Republicans will do to the President if Obama, who makes $400,000 isn't taxed at a higher rate? They would crucify him, because they just will.

It's all a farce anyways as we need to really do so much more, and do it while taking our place solidly into a world wide Recession with Japan imploding, and Europe imploding, and China in sorry shape as Pettis has indicated (I believe him) then ouch! Got Gold, Silver, physical? It makes perfect sense you know.

Regards

BOB

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treebeard
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Voices in the wilderness

Thanks for the affirmation and letting me know that I am not a lone voice in the wilderness.  I have a feeling that many more people may have an intuitive sense of what we have articulated, but have not had access to this line of thinking.  I was amazed when I heard how vehemently I guy like Joel Salatin is attacked, (who has successfully put this philosophical appraoch to life into practice) or hearing of police arresting someone selling raw milk in a church parking lot, or kids selling lemonaid without a license.  

The change cannot be stopped though, the foundation of the current system has shifted irrevocably. Fiscal cliff? Deck chairs on the titanic, no?  I don't have the wisdom to know whether driving good people out of the system faster is worse than prolonging the downward grind with these shenanigans.  I come back to the words, "if things could happen anyother way, they would" over and over again.

Marshall McLuhan's the medium is the message needs adaptation to our current predicament.  Economics is the art so void of the content of that which it studies that it sees only itself in the mirror. Each person can see whatever they like in it's reflections, it has become the art of self delusion, a medium without a message. In times of intense change, delusion seems to be the prefered reality.

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Jim H
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On delusional economics

Treebeard said,

Economics is the art so void of the content of that which it studies that it sees only itself in the mirror. Each person can see whatever they like in it's reflections, it has become the art of self delusion, a medium without a message. In times of intense change, delusion seems to be the prefered reality.

I find that hardly a week goes by where I do not find myself informed of some new, delusional, morally and intellectually bankrupt practice within our system... for me this latest realization came via way of Denninger just today.. he writes of the true reason why our congress does not bother to make permanent a fix to things like the AMT or the Medicare payment gap to Doctors.. things that get patched year after year.  It turns out, if they did, then they would have to honestly account for the spending in a transparent way.  Here is what Denninger says;

Why are both of those annual things?  Why have neither party fixed this permanently?  Why were the Bush "tax cuts" set to expire?  Why are the other "tax cuts" such as the Payroll tax cut automatically set to expire?

The answer is fraud.  Outrageous, criminal, seditious fraud.  Fraud upon the public.  Fraud upon ratings agencies.  Fraud upon bond-buyers.  Fraud upon the CBO.

Why do I level this charge?  Because it is irrefutably true.

The CBO along with all other official deficit, debt and budget estimates are based on current law.  They have to be, under the law.  Law that Congress passes.

This means that by having "current law" expire the AMT inflation index every year the CBO's budget deficit estimates, along with everyone else's including Lying Ryan's, are intentionally understated, as under "current law" those taxes are all computed as if the indexing and thus breaks expire at the end of the current year, and thus all forward years grossly and intentionally overstate revenue and grossly and intentionally understate expenditures.

source:  http://market-ticker.org/akcs-www?post=215399

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gillbilly
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Many thanks...

to the admin for the formatting. My apologies for not doing it myself. I ran out of time and did a blanket copy/paste. I appreciate you taking the time and will make sure that I do better in the future.

Thank You

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RJE
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All you would ever have to do is listen to Pon Paul...

...an isider who understands all too well what we should expect from our government and future. GOT GOLD/SILVER.

http://www.zerohedge.com/news/2012-12-29/ron-paul-fiscal-cliff-we-have-passed-point-no-return

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KugsCheese
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Many are now coming around to

Many are now coming around to the likelyhood of something akin to WW3.

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technet
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great article

yen is already on the march, big time... euro has clearly lost it's shine, struggling to break 1.33, recently visited below 1.20.... 1 to 1 is possible and more realistic, euro is over valued, things in europe are real expensive.....relative to US and USD.

2008 shows you where money goes in a panic... straight home to uncle sam...dollar went to the moon in 2008

there are 4 pillars to this castle aren't there...japan, europe, china and USA, with UK, Brazil and Russia as agro props on the sagging roof...

that jump in the yen just showed pillar no#1 that has been under strain for longer than the others, with a major structural crack.... once you have major fracture, shear... ie. failure becomes more likely...

Japan has a new administration that is not beholden to the goals and legacy of the old...2013 is a big year in europe...Merkel is out.... french have changed already... once you have new people in power that's when the political landscape can change...

so US can probably hang on until 2016, as the other pillars crumble.... even a guy with massive credit card debts can hang on for some months even years until total failure hits.... so US will sit for a while longer.... the world in general is a bigger mess than the US....

china has major problems on it's hands as the other pillars fail. China is the least civilized and will have total social unrest, plus has the system in place for a total clamp down on the population, flase flags, social distractors....you think the US is bad, China is already censoring google.... alot of young people and middle class people are going to feel robbed,and china is going to blow up...... probably start a war with Japan, who won;t mind to fight instead of admit the shame of their own bankrupcy.

Russia gets dragged in due to its geographical position and Europe follows..... it's like WW1/WW2 all over again....

the problem is, that one of the only assets the governments have is mindless obidient personel and lots of military hardware, so when things fall apart, the last resort is to hit the red button and let all the fireworks off....why waste the chance, when it's all just sitting there....about the only time this didn't happen was with the collapse of the soviet union, but that was exceptional, because those on the inside had been surpressed for so long from having any real wealth at all, that the grab for assets was more interesting than starting a war they'd probably lose and might go nuclear.... there only real option was to invade europe and after the failed attempt in afganistan, they were just fresh out of military possibilities,

so next few years.....while the world rips itself apart, the US sits pretty..... sell enough weapons maybe the US will come out on top....

or perhaps Russia with its own natural resources and more agressive government will beat the US at their own game... while US clamps down with Nazi style controls... Russia shows us who really won the cold war...

stand in line and get your microchip or face the secret police....

food shortages and military drones patrol every city, which all have curfews and you need a permit to travel anywhere outside your local area, a car is a luxury only for politically connected, fuel and food is scarce, internet and telecoms are patchy and unreliable, as personel and maintenence costs soar... same for power and heating.... anyone hoarding or with resources faces confiscations....

welcome to socialism... that's the world we all voted for..... every time we thought someone else should  wipe our butts, evertime we just wanted a boss and a job and a friendly government to take care of us, we voted for this world.....

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technet
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Posts: 16
babble

and after this academic babble, let's look at the real picture...

it's basic maths....

do the governments have enough resources and personel in place to start up major wars ?

yes they do...

do the elite have more interest in maintaining power, or grabbing wealth...

right now they want to maintain power.. ie. starting a war is a great way to maintain power.

what will stop them ?

1.) the financial markets going against them, thank god for wall street and government bonds... a crash in bonds just might save the free world from a massive socialst war.

2.) general resistance in the population, a smoldering iraq / afganistan is one thing, calling up troops to an all out blood bath is going to be a lot harder...

so it's all in the maths....

ps. what does Willem Vanderburg say about the 50% that don't really work much or the 20% to quote the rapper Nelly that "just smoke and f$$k all day"... how does he see the people punching cones and listening to hip hop and claiming welfare cheques becoming more efficient.. will they grow stronger weed and get better at cashing their food stamps ?

these intellectual types live in cloud and cookoo land....

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bigelow
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When I wrote earlier flight

When I wrote earlier flight to safety capital could go East or West, here is the East different than Mr. Pettis’ version:

"Those nations that depart from the entire USDollar system early will be the leading nations in the next chapter, with stronger foundations, richer solvency, emerging economies, healthier financial markets, efficient credit engines, growing wealth, stronger political helm activity, and better functioning systems generally. Imagine a contaminated blood system that infects, corrupts, and destroys all interior organs from the spread of the toxin. Those nations that stick with the crumbling USDollar system stubbornly will find a horrible fate with devastating effects, rampant economic damage, broken financial markets, sputtering credit engines, tremendous loss of wealth, wrecked supply lines, poverty spreading like wildfire, ruined political structures, social disorder, isolation from the rest of the world, and a fast ticket to the Third World. That is EXACTLY what is happening in the last several months. A division has begun, as the East has been busily installing the next generation platforms, as related to trade, banking, and commercial integration."
http://www.gold-eagle.com/editorials_12/willie123112.html

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