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    Say Goodbye to the Purchasing Power of the Dollar

    Mr. Bernanke goes to Crazytown
    by Adam Taggart

    Monday, March 25, 2013, 3:29 AM

On a long solo car trip last week, I listened to several podcasts to pass the time. One was a classic: The Invention of Money, originally released by NPR's Planet Money team back in January of 2011. I highly recommend listening (or re-listening) to it in full.

The podcast is an effective reminder of how any currency in a monetary system is a fabricated construct. A simpler way to explain this is to say it has value simply because we believe it does.

Through the centuries in historic cultures like that of Yap Island who used giant, immovable stone disks for commerce, to today's United States, whose Dollar fiat currency exists primarily in digital form "money" is able to be exchanged for goods and services because society agrees to accept it (at a certain rate of exchange).

But what happens when a society starts doubting the value of its money?

Fed, the Great & Powerful

The podcast goes into the mind-blowingly simple process by which new money is created in America by the Federal Reserve (or the "Fed"). That is to say:

  1. The Fed holds a meeting
  2. Those in the room decide how many more dollars they think the world needs
  3. Someone walks over to a computer and adds that many dollars to the banks, with a few clicks of the keyboard

The banks then, if they want to, lend this new money out into the economy on a fractional basis, adding even more "thin air" dollars to the nation's money supply.

This unique ability in America lends the Fed enormous power. The power to create new money from nothing. With no limit.

And with that power, the Fed can control and/or influence economies and markets the world over.

Should such power exist? And if so, should a single private entity owned by the major players in the banking system be allowed to wield it?

Such power certainly has its dangers.

Back in 2011, the Planet Money team described the normally staid Fed as having "gone to central-bank Crazytown". Panicked by the global credit contraction, the Fed began a series of programs intent on combating the deflationary force of credit defaults. It essentially force-fed liquidity (a.k.a. freshly-printed dollars) to the world, using ham-fisted tactics that it had fastidiously eschewed over the previous century:

As the financial crisis unfolded, the Fed created…trillion[s of] dollars, which it lent out as emergency loans to all the big names on Wall Street: Goldman Sachs, Morgan Stanley, huge banks like Citigroup and Bank of America. The Fed lent money to private equity firms, hedge funds, and even regular companies like Verizon, GE, and Harley Davidson.

And it wasn't just the recipients of that cash that were new. It was also what the Fed was requiring in return: the collateral.

In the past, in the rare instances that the Fed used its powers to serve as the lender of last resort, it demanded the highest quality collateral in return. Assets that were safe and would hold their value.

But in 2008, the Fed started accepting all sorts of…collateral that just months ago it never would have touched.

The sheer amount of new money that the Fed created was unprecedented. From the time we went off the gold standard of 1933 until 2008, the Fed had created a net total of $800 billion. In the months after the financial crisis, that number nearly tripled to almost $2.4 trillion.

[The Fed was] spending more newly created money in just 15 months than [it] had created in its entire history up until 2008.

And what effect did this fast-and-loose money-printing bonanza have? The big banks were able to recapitalize their damaged balance sheets while continuing to pay themselves record bonuses. Commodities, priced around the globe in U.S. dollars, became much more costly as many more dollars competed for the same amount of real assets. And financial assets, like stocks and bonds, marched upwards, raised by the unrelenting rising tide of Fed liquidity.

Notice however, that the economy itself did not fundamentally improve in the way the Fed had hoped it would. While a collapse of the system was averted (delayed?), economic growth has remained sluggish, unemployment high, and real wages stagnant or worse.

Of course, the reason for this is simple. Money is not wealth. It is merely a claim on wealth.

You can't print your way to prosperity. History is abundantly clear on that. 

With the clarity of hindsight, it's now obvious how the Fed has now painted itself into a corner. Here's how the stock market has fared during the Fed's rescue efforts:

They say a picture is worth a thousand words. In this case, the picture above is worth several trillion dollars (some would argue as much as $9 trillion).

The financial markets have become dependent on new Fed dollars. If you look at the few gray segments of the chart, the stock market swoons nearly immediately once the Fed halts its balance-sheet expansion.

For whatever reason (perhaps because it's owned by banks?), the Federal Reserve has chosen to use the price of financial securities as the signaling device that its efforts are yielding results. But the markets, like any junkie, demand greater and more frequent infusions to reach new highs. Note how the trend of successive Fed programs yields smaller and shorter-lived boosts.

The Fed lives in fear of re-entering recession while unemployment and wealth inequality remain stubbornly elevated. With so many families teetering at the edge, things could get ugly very quickly if a fall in asset prices were to create a "reverse wealth effect" that triggered another recessionary slowdown. So as long as low single-digit GDP growth persists, the Fed's hands are tied. It must continue to print.

No matter that the rising price of financial assets grossly benefits the top classes namely the 1% who own 40% of the entire nation's wealth. In stark contrast, the bottom 80% of Americans own only 7%.

No matter that the Fed's money tsunami is creating asset bubbles (again) in stocks, bonds, college tuition, housing, commodities, etc. further eroding that bottom eighty percent's ability to form capital to fund its future.

The Fed has gone "all in" here. There is no Plan B.

Should We Place Our Faith in the Fed?

Perhaps I'm being overly pessimistic.

Perhaps the Fed has just the right talent and tools we need to finesse our way out of the challenges we face.

Unlikely.

As for the talent, the key body that makes decisions on the money supply is the Federal Open Market Committee (FOMC). Many of its members have only had academic and/or government positions throughout their working careers. Voting members with actual business operating expertise, or experience running a commercial bank, for that matter, are rare.

And as for tools, the Fed only really has one: the interest rate. It can move it up or down. But the effects take time to be felt in the markets. And it is a blunt, imprecise tool, at best. Again from the Planet Money podcast, where interviewer Alex Blumberg is talking with Gerald O'Driscoll, former vice president of the Dallas Regional Federal Reserve:

Alex Blumberg: I sort of think of it like a joystick. You move it too far in one direction, you get out-of-control inflation. You move it too far in the other direction and then you can really sort of put the brakes on the economy. Is that too simplistic a way of thinking about it or is that?

Gerald O'Driscoll: I mean, it's okay to think about it that way. I winced a little when you said that, because the joystick presumes a very precise control, which is exactly what they don't have.

Alex Blumberg: Right.

Gerald O'Driscoll: It's more like you're moving a super tanker and you start moving the wheel and there's no effect that you can see for quite a while.

In fact, the inner sanctum itself, where the all-important FOMC meetings takes place, seems much less like the rarified Olympian god-chamber we'd expect, and more like the conference room from Office Space:

Whatever you imagine the room looks like where you can create one and a quarter trillion dollars, this is not it. It is not grand. It is not ornate. It is not ceremonial. It has four grey cubicles, it has computer screens, and there's no other way to say this: It's a mess. There are papers and notes scattered around. There is a yoga ball someone has been sitting on. And there is a basketball net, possibly Nerf brand. This is where the magic happens.

The reality is, the Federal Reserve is like any other organization. Human. And fallible.

And like any other organization, it makes its best assessment of what the future holds and places its bets accordingly.

For those who want to argue that the Fed, with its cadre of hyper-degreed academics and its insider access, has superior information and thus the ability to predict the future with unparalleled accuracy; I humbly ask you to watch the following:

Cyprus: Are Things Different This Time?

In Hollywood, they say you're only as good as your last movie. By that metric, the Fed's latest sanguine prognostications should be taken with a huge amount of salt(ed popcorn):

Cyprus does not pose a threat to the U.S. economy or financial system and there are no signs of stock market bubble, Fed Chairman Ben Bernanke said on Tuesday.

The Fed chief told reporters that the central bank was monitoring the situation in Cyprus. "At this point, we're not seeing a major risk to the U.S. financial system or the U.S. economy," he said.

And while the cheap money supplied by the Fed has pushed up stock prices, Bernanke said the central bank isn't measuring the success of its policies against moves in stocks.

He also said the recent advance was not out of line with historical patterns. "I don't think it's all that surprising that the stock market would rise given that there has been increased optimism about the economy and…profit increases have been substantial," he said.

Sound familiar? Are you feeling comforted yet?

So, how much confidence can we really have in the Fed to navigate these yet uncharted monetary waters, with so many variables and unknowns, and its less-than-spot-on record? Honestly, we'd be fools to assume much.

Cyprus has awakened the world to the reality that central planners can appropriate their money with the bang of a gavel. And while we don't yet know with certainty how things will unfold in Cyprus, we can project that events there have shaken society's confidence in the soundness of fiat currency in general. If we know it can be confiscated or devalued overnight, we are less likely to unquestioningly accept its stated value. This doubt that strikes at the very foundation of modern monetary systems.

Cyprus is meaningful in the way that it shines a light on both the importance of hard assets and the risk it poses to market stability. It certainly increases the risk of our prediction of a 40%+ stock-market correction by Fall, as investors begin to realize that current high values are simply the ephemeral effect of too much money, instead of a sign of true value.

At this point, prudence suggests we prepare for the worst (by parking capital on the sidelines, investing in our personal resilience, etc.) and add to our hard asset holdings (like precious metals bullion, productive real estate, etc.) as insurance to protect our purchasing power. The dollar may strengthen for a bit versus other currencies and perhaps the financial markets, but the long-term trend is a safer and surer bet: Dollars will be inflated. There will be more of them in the future than there are today. So, while our dollars still have the purchasing power they do, we should use the window of time we have now to exchange paper money for tangible wealth at today's prices.

Those with a shorter time horizon, higher risk tolerance, and capital to spare may want to start considering a strategy for going short the financial markets.

Next stop: Crazytown!

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108 Comments

  • Mon, Mar 25, 2013 - 7:19am

    #1

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    56 trillion - a big denominator

    From a monetary standpoint, all that Fed Crazytown money printing (2.37 trillion) hasn't really moved the needle compared to the 56 trillion TCMDO (total credit outstanding).  That is a massive denominator – it would take 5.6 trillion in printing to increase total US money & credit by 10%, and we're not even halfway way there.

    Don't get me wrong, I'm not in favor of printing money – I'm just trying to put it in context.  All Fed money printing has done is offset the deflationary impulse from all those debt bubble writeoffs.  Perhaps its a wash, from a monetary perspective.

    And all those food price increases you see at the grocery store now actually happened prior to the 2008 crash when every commodity spiked up right along with oil.  All commodities dropped after the crash, and then food products hit new highs in 2011, only to back off to below-2008 level prices today.  If you look at my Food/Oil price chart (food prices supplied by the FAO), you will see what I'm talking about.

    http://mdbriefing.com/food.shtml

    Why did food and so many other commodities rise so dramatically in 2006-2008?  My bet is, the commodity spike had a bunch of fathers – China & India's economic success, the delayed effects from 10 years of property bubble "money printing" in the Eurozone and US, and peaking of oil production. 

    Wait, property bubble money printing?

    Little known fact: in only the LAST year of the bubble – 2007 – borrowers "printed" 4.7 trillion dollars, which is  twice as much money as the Fed has done in the 4.5 years since the 2008 crash.  Eurozone printing (via borrowing) was about 3 trillion euros during that same period.  And thats in ONE YEAR.  If you think 2.3 Trillion in Fed money printing over 4.5 years is crazytown, how do you define 9 trillion US in just ONE year?

    Regular people and businesses borrowing money is THE WAY money gets printed in a normal economy.  That's what the Fed and the ECB tried to do by lowering rates to 0% – get normal people to do their printing work for them.  The abject failure of these super-low rates both here, and in the eurozone to spur borrowing underlines the severity of the debt bubble bust.  In aggregate, normal people really aren't interested in borrowing anymore, no matter how low rates go, because their incomes just won't support it.  So the Fed is stepping in to do the printing, but there are political limitations on just how egregiously the Fed can print, so we end up with an economy that ends up saying: "is that all you got?"

    I'm going against the trend here at this site, and against most other places that I know.  But I'm doing my own homework, and following the numbers.  2.37 trillion over 4.5 years isn't that big, especially when you have perhaps 30 trillion in slowly deflating credit (TCMDO in 2000 = 25 trillion) from the bust.  I'm not saying that money printing is a good thing, I'm not defending the Fed, but if we follow the numbers honestly and try to understand their implications, perhaps we'll end up with some valuable insight that is different than the mainstream perceptions.

    One last point.  If and when the eurozone debt deflation finally resolves in the way it is starting to do in Cyprus, the move in the dollar in the UP direction will, most likely, blow your socks off.  I'm not saying it will last, but best not be shorting the buck today.  The eurozone banking system is massive.  Total deposits are about 200% of total eurozone GDP, while US total deposits are around 60% of US GDP.  Their banks with deposits of that size are in aggregate unrescuable – just like the ones in Cyprus.  Uninsured depositors in many places have a high risk of taking losses – just like they just did in Cyprus.  And can anyone guess whether uninsured depositors taking losses is inflationary or deflationary?

    What's more, overall, the eurozone is in monetary deflation (defined as shrinking of money & credit) today.  That's because unlike the US, the ECB is not monetizing national deficits.  Left to their own devices, economies drop into debt deflation after a bubble pop.  Unsustainable debts have to be defaulted on.  And that's what we're seeing right now.

    http://mdbriefing.com/eurozone-credit.shtml

    The ECB *could* print, and still might, but in order to make an impact, the size of the printing effort would have to be in the trillions, because the debt growth in europe during their 2000-2008 bubble is about 17 trillion euros.  Just in Spain, I estimate the deflation (losses) to come to be about 500 billion euros.  Overall, call it perhaps, a 6 trillion printing effort.  Do you imagine Germany and the northern-euro nations will stick around for that sort of fireworks?

     

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  • Mon, Mar 25, 2013 - 11:45am

    Reply to #1

    Oliveoilguy

    Status Silver Member (Offline)

    Joined: Jun 29 2012

    Posts: 520

    Impact of EU Deflation

    [quote=davefairtex]  The eurozone banking system is massive.  Total deposits are about 200% of total eurozone GDP, while US total deposits are around 60% of US GDP.  Their banks with deposits of that size are in aggregate unrescuable – just like the ones in Cyprus.  Uninsured depositors in many places have a high risk of taking losses – just like they just did in Cyprus.  And can anyone guess whether uninsured depositors taking losses is inflationary or deflationary?
     
    [/quote]
    Great perspective on Euro Banks. Would a deflationary event in Europe be worldwide in your view? I can see the strong dollar as money flees Europe. Would that not boost the Equity markets in the US? 

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  • Mon, Mar 25, 2013 - 12:51pm

    #2

    LesPhelps

    Status Silver Member (Online)

    Joined: Apr 30 2009

    Posts: 472

    Inflation vs Deflation

    At this point, talking about inflation or deflation as a simple phenomenon is inadequate.  The way we are headed, we are seeing and are likely to continue to see both inflation and deflation within each economy.  The most obvious example is comparing food, energy and health care prices to home prices.

    Going forward, it would perhaps be better to discuss inflation by spending category, abandoning aggregate inflation as a meaningful measure of anything.

    Regardless of other categories, in 2013, I anticipate food commodity inflation to be above normal.  Inflation in many other categories will be held back by at best flat wage rates.

    There are so many game changers coming into play now, it's difficult to keep them all in mind when considering global trends and forecasts.  Retiring baby boomers alone is a game changer, but it's only one of many issues.  How do you rank them or consider them in aggregate.

    Perhaps a model similar to World3 (Limits to Growth), but incorporating all of todays constraints would be useful or at least entertaining. 

    Les

     

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  • Mon, Mar 25, 2013 - 1:32pm

    #3

    Jim H

    Status Diamond Member (Offline)

    Joined: Jun 08 2009

    Posts: 1798

    Davefairtex - a smaller reference denominator

    Dave,  I really don't disagree with any of your numbers… what you have done though is omit any mention of the elephant in the room, which is the US debt.  The printed money, while it might seem small compared to all debt that exists… certainly looks like a much bigger number when we view it in light of the national debt, and especially our tax roll, which in 2012 was $2.47T.  Not only has the FED printed more than a years worth of US total tax revenue in the last few years… all of that has been tacked on to the long term US debt.  Are you a closet MMT guy who believes that Gov't debt doesn't count somehow?   

    Have we forgotten the lessons of Rogoff and Reinhart?  Debt to GDP of over 90% being a tipping point?  From a more recent piece by them;

    We find that growth effects are significant even in the many episodes where debtor countries were able to secure continual access to capital markets at relatively low real interest rates. That is, growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest rates

     
     
    The printing looks more meaningful and susbstantial in the light of US debt, which was a mere $10T in 2008.  Compared to $10T, the FED has printed up a 25% increase in the US debt relative to what existed before the crisis.  As well, the FED printing has enabled the continued profligate spending of our elected officials, which is another thing you missed mentioning.  We are going to blow up eventually… your "alternative analysis" notwithstanding.  Yes, we are behind Japan on the debt front, and our banks are healthier than those of Europe… but we are all on the same path to hell.   
     
     

        

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  • Mon, Mar 25, 2013 - 2:23pm

    Reply to #1

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    Impact of EU Deflation

    OliveOilGuy-I think monetary deflation in europe will end up affecting the US through CDS depending on what happens where.  If its the slow grinding monetary deflation with occasional bank failures like we have seen to date, it will likely be controllable and won't be a major impact.  If its a major sovereign default or a nationwide bank run, well, all bets are off.
    My guess is that US markets both have, and will continue to benefit from capital flight from Europe.  The fact that we're able to print & spend puts off our bubble pop somewhere into the future, and this means means the party can continue a bit longer here.  Our companies can still make money, issue dividends, the bonds still get paid, the system still clicks along – which looks like Nirvana compared to Spanish Austerity (26% unemployment), the 4-year (and counting) Greek Depression, and the brand new Cyprus Uninsured Depositor Party (30% haircut at least, but we'll only know for sure once the bad assets are run off a few years down the road).
    One assumes the buyers of the US assets imagine they can always sell if things start to look shaky here, but in the meantime collecting dividends & bond payments seems like a fine idea.  I don't have any data to back this up though, its just my own opinion.  However, the US market does seem to be floating upwards, immune to currency moves, and pretty much every other issue we've seen.  We can either credit "Mysterious Intervention Forces" – or money flows from overseas.  I pick money flows, just because it seems like less of a cop-out and it does make sense.  Money managers everywhere are starved for yield right now – in some sense, they are forced to buy.  After all, they don't get paid their bonus by sitting in 3 month US Treasury bills, or the euro-alternative: negative-yield swiss 2-year bonds.
    One advantage we have over the street is that we CAN sit on the sidelines in cash.  We aren't forced to chase the market higher.  We won't get fired from our jobs if we don't beat the S&P 500's performance.
    Martin Armstrong is always pointing out that US-centric analysts miss the effects of international capital flows on markets, and I think he has a point.  I have a bit of data to back it up, but its a bit tenuous.  I have more research to do before I can say anything definitive.
    Les –
    I try and be careful to talk about "monetary deflation", which I see as a pressure on the ability to get credit, describes an overall environment where more defaults & debt paydowns are happening rather than borrowings, which tends to pressure prices downward.  But since we live in a world where a lot of stuff we buy have global prices, and since other nations are doing well and they are big players these days, they get to affect the prices of our stuff, regardless of whether or not we have monetary inflation or deflation pressures.  Additionally, the government supports some sectors through spending which appears to be largely immune to change – education, medicine, and defense are three that come immediately to mind.
    So price inflation of stuff China (& the emerging world) wants and can have transported to them, price inflation of government-supported medicine, defense products, and education.  Price deflation in more local stuff, like housing, local wages, and even rents.
    So to summarize – if it can be shipped overseas, it is subject to international pricing pressures that ignore our monetary situation.  If it can't be shipped overseas, then it is subject to that deflationary monetary pressure.
     

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  • Mon, Mar 25, 2013 - 3:14pm

    Reply to #3

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    purchasing power of the dollar

    Jim H -I agree completely with what you are saying about the US sovereign debt, where we're going, how unsustainable it is, R&R's tipping points, and all of that.  I didn't speak about the sovereign debt issue because – well, it wasn't the subject of the original post!
    If you recall, the post was entitled, "Say Goodbye to the Purchasing Power of the Dollar."  When the subject is dollar purchasing power, then the discussion must center around exactly that – what things cause purchasing power to shrink.  And in my worldview,
    purchasing power = stuff out there to buy / total money and credit
    Holding constant the velocity of money, if you create money & credit at a faster rate than you create stuff to buy, that's inflationary.  So that's why I picked that big denominator.  Its not because I was trying to minimize money printing's impact.  It is only because total money & credit is my definition of money.
    Of course, everyone can choose their own definition of money.  Just which one makes sense?

    M1: currency + demand deposits; 2.4T
    M2: M1 + time deposits + savings accounts + retail money market accounts; 10.4T
    Total US marketable sovereign debt; 11.6T 
    Total Credit: all credit money, all bonds; 56.3T

    Its clear to me we have to include M2.  But that's not all.  I feel we should also add mortgage debt in the definition of "money" – all those home prices went up precisely because of a whole lot of new mortgage debt was borrowed.  That's about 10T, give or take.  And its also clear we have to include government borrowing.  That's sure inflationary.  Just look at medicare.  That's another 11.6T.  And presumably, if we include mortgage debt we should also include consumer debt – when people buy stuff with credit cards, that moves prices.  And corporations too – they drive prices higher when they borrow money and spend it on stuff.  Add it all up – that's TCMDO.
    So that's why I picked TCMDO as my denominator.  All that debt represents money borrowed and then spent right into the economy.  And that drives prices higher.  We saw how that worked in the housing bubble.  More borrowed money = higher home prices (and mortgage equity withdrawls, and private schools, and hummers for everyone, etc, etc).
    So in my world its the growth in TCMDO that drives monetary inflation.  Or put more simply, "how much new money was borrowed and spent into the economy on an annual basis."  And change in TCMDO over the bubble years was between 7-11% every year.  And the Fed sure wasn't doing any money printing back then.  
    What's the change in TCMDO today?  About 3%.  And that's about 60% because of new US government borrowing, monetized by the Fed's money printing operations.
    So having said all that, please remember I am not talking about the health of the overall economy, how happy the citizens are, whether the debt burden is sustainable, or even whether or not money printing is an excellent idea – I'm only talking about the purchasing power of the dollar.  And that is really only a discussion of supply and demand, in this case, supply of dollars.
    So given all that explanation, what would you pick for your denominator in our discussion on the impact the Fed's money printing has had on the purchasing power of the dollar?  Would you still go for Total US sovereign markeable debt?  If so – could you explain your rationale?

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  • Mon, Mar 25, 2013 - 3:18pm

    #4

    LogansRun

    Status Silver Member (Offline)

    Joined: Mar 18 2009

    Posts: 304

    While I agree with your conclusion

    I heartily Disagree with your assessment that the Fed doesn't have control and/or full knowledge of what their movements will create!

    you use the video of Bernanke stating that there is no bubble, but as we all know……they LIE.  They have to continue to lie in order to keep the curtains from being pulled open.

    i've said this before, and I'll say it again:  What would be the best way to bring about a new monetary system, in which the control of the world would be the end game? 

    Answer:  destroy the current World Currency (which btw has run its course and is dying anyway), then bring about their solution.

    Problem. –  Reaction – Solution

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  • Mon, Mar 25, 2013 - 3:45pm

    Reply to #1

    Chris Martenson

    Status Platinum Member (Online)

    Joined: Jun 07 2007

    Posts: 4539

    Money is growing exponentially, deflation or not

    [quote=davefairtex]So to summarize – if it can be shipped overseas, it is subject to international pricing pressures that ignore our monetary situation.  If it can't be shipped overseas, then it is subject to that deflationary monetary pressure.
    [/quote]
    I come to an almost opposite conclusion here.  The things that can be shipped overseas are cheap and likely to become even cheaper as excess capacity and chasing the lowest cost labor markets assure rock bottom pricing.
    The things that cannot be shipped, college education and medical care to name two, inflate at rates that reveal the true amount of domestic inflation.  
    While aware that credit becomes a form of money creation, I note that in aggregate, credit is again reaching new highs… Although this the distribution of the borrowing has shifted from private (mainly shadow banking) to public, I will also note that money supply is growing, growing some more, and continually growing in an exponential fashion.
    From a recent Alasdair Macleod piece:

    The monthly figures for the US dollar components of Austrian, or True Money Supply, for February are now in. TMS plus excess reserves amount to the quantity of money that can be drawn down without notice, including time deposits that in practice can be instantly drawn down, only foregoing interest. This is shown in the long-term chart below.

    The black dotted line is the exponential track, which it followed closely until the US government abandoned all gold convertibility in 1971, and continued to do so with a few wobbles until 2008, when TMS took off and became hyperbolic; that is to say it began expanding at a greater rate than exponential. This chart is the clearest way to illustrate the accelerating debasement of the dollar.
    It serves as proxy for the yen, pound and euro, which are also being issued at ever-increasing rates. The move into hyper-drive was sparked by the central banks responding to the banking crisis, but today there are four reasons why money issuance will probably continue on this hyperbolic path.
    • The US economy is in a slump. The statistics suggesting it is stable are misleading, because the deflator severely understates inflation. A more correct assessment, in line with the inflation figures calculated by Shadowstats.com, is that the economy is contracting by perhaps 5% annually. The imperative for central banks to continue to pump new money into the economy is therefore strong.
    • While the hoped-for economic recovery remains in abeyance the commercial banks will pile up bad debts. The Fed will have to create new money in increasing quantities to keep them in business and to keep loan collateral values from falling and making the situation worse. For this reason alone, interest rates cannot be permitted to rise.
    • The government’s deficit will continue to increase because tax revenues, which depend on economic recovery, will fail to keep up with government spending. Furthermore, quantitative easing is required to keep the interest cost of government borrowing down, and to enable the Fed to fund the deficit through purchases of Treasury bonds.
    • Mandated welfare spending, including pensions, healthcare and unemployment benefits are accelerating. This will ensure US government spending continues to increase, dashing any hopes that eventually economic recovery will allow the government to balance its books. Put another way, these future liabilities can only be met by monetary creation.

    Squint as I might, I cannot locate any monetary deflation in that chart from 2008 to present.
    The whole world is doing the same thing, and while we might marvel at the temporary resilience of the heavily manipulated financial markets, there has to be some sort of balance on a long-term basis between the real economy consisting of real things and the money/debt levels.
    That reckoning is just underway, and since there are far too many claims on the future, whether our POV is the US or elsewhere, the only question is who will the winners and losers be?  Whose claims will not be honored either by outright theft (Cyprus) or the twin processes of deflation and inflation running concurrently nipping and thieving with every passing day?

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  • Mon, Mar 25, 2013 - 4:53pm

    #5

    Jim H

    Status Diamond Member (Offline)

    Joined: Jun 08 2009

    Posts: 1798

    Davefairtex.. thanks for the detailed answer

    I see what you are saying… but indeed so many of the deflationary forces are being warehoused in places like the FED's "bad bank" balance sheet.  My own tendency is to look out beyond what's happening today and see where the system is going.  While a savvy currency trader might be able to make some short terms plays in the dollar vs. the yen, or vs. the Euro.. I see this all as noise in the more PP-inspired perspective .. which is to acknowledge and prepare for an eventual, inflationary endgame.  Japan is just beginning to really rev up their printing press… 

    Chris,  I really appreciate this statement from your comment;

    The things that can be shipped overseas are cheaper and likely to become even cheaper as excess capacity and chasing the lowest cost labor markets assure rock bottom pricing.

    The things that cannot be shipped, college education and medical care to name two, inflate at rates that reveal the true amount of domestic inflation.

     

      This is one of those insights that is both very deep, and very simple and elegant at the same time.  Smaller packages, higher medical costs.. the same wages.  Greece.         

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  • Mon, Mar 25, 2013 - 5:53pm

    Reply to #1

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    monetary deflation

     Chris –

    The things that can be shipped overseas are cheaper and likely to become even cheaper as excess capacity and chasing the lowest cost labor markets assure rock bottom pricing.

    I wasn't clear in my original post.  I was referring to commodities, not finished goods.  I agree with you completely about finished products.  But commodities that can be shipped overseas end up going up in price here in the US when other people around the world demand more of them.  When this occurs, we get commodity price driven inflation.  This has happened with oil, with food, with copper especially.  If you look at food, the food price inflation was particularly vicious from 2006-2008, and a lot of "inflation" that people complain about these days had its roots back in that 2006-2008 commodity price jump.  I don't think that price move was monetary – unless it was linked to the housing bubble – but there's no neat correlation.

    The things that cannot be shipped, college education and medical care to name two, inflate at rates that reveal the true amount of domestic inflation.

    I have a competing explanation.  Both college education and medical care are supported by the government.  In the case of college, it's government-supported debt.  In the case of medicine, it's medicare/medicaid.  I'll add defense as a third area.  Government support insulates these areas from normal market pricing and monetary pressures.  CHS makes a similar point about government-protected cartels actually causing the price inflation rather than it being a monetary phenomenon.  I find that argument compelling – more compelling that the monetary argument – because medicine and education have both increased at quite different rates.  If they both represented "true inflation" then they should have increased at roughly the same rate.
    http://www.oftwominds.com/blogmar13/inflation3-13.html
    Now then, about squinting, monetary deflation, and this "Modified Austrian TMS" chart.
    Why is it you feel that Austrian TMS is a good measure of monetary inflation?  Certainly I can't see monetary deflation in that chart either – but that presupposes its a decent measure – that it has valid explanatory power for price movements of stuff we care about over the time period we're looking at.
    A 100-year price chart isn't ideal for examining the impact of the Fed's policies over the past 4 years.  At a minimum I'd like to request a chart on TMS that zoomes us in closer to our discussion period today – 2000 – 2013.  My goal is not to be nit-picky, I want to understand how TMS moved during the housing bubble, how it moved during the crash, and what its doing today.  I want to understand the set of real-life price movements that TMS explains.  [Just FYI, TMS looks a bit like M2 – but my squinter isn't that good, I'd need a zoomed-in version to be sure]
    If that doesn't work for you, I'd be happy with pretty much any analysis you have that correlates TMS with price movements of interesting and relevant items we all care about, like maybe oil, or inflation during the 70s, or home prices, or something like that.   Preferably with net-change or percent-change y/o/y on both timeseries.  And raw data would be even more awesome.  None of my sources have "Austrian TMS" or else I'd have downloaded it and done all this on my own by now!
    You've been an inspiration to me for 5 years – the single most important thing I've learned from you is to trust myself, and to do my own homework.  I've done a great deal of my own homework on this issue.  I'm asking is for you to help me see your work a bit more clearly with the TMS indicator.
    Last point.  I couldn't agree more with your last two paragraphs.  Too many claims, too much debt, reckoning just starting, and who the winners and losers will be – as of yet unknown.

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  • Mon, Mar 25, 2013 - 6:26pm

    Reply to #1
    dryam2000

    dryam2000

    Status Bronze Member (Offline)

    Joined: Sep 06 2009

    Posts: 241

    Inflation of Healthcare & Education

    [quote=cmartenson]The things that cannot be shipped, college education and medical care to name two, inflate at rates that reveal the true amount of domestic inflation.  
    [/quote]
    Maybe I'm missing the point, but I could not disagree more with this statement as far as the two examples you site:  college education & medical care.  I am a hospital-based physician & see first hand how healthcare prices have no correlation with what medical care should cost.  Healthcare inflation has everything to do with government involvement as well as the legal system, and nothing with the true underlying costs.  The inflation of college education is a direct result of the government providing essentially unlimited credit to unworthy students.  One example would be my niece & her husband who use their college loans for their living expenses, and I can guarantee they will never repay a dime.  They have been fired from multiple jobs, have GPA's less than 2, and are pretty much delinquints all the way around…..and they qualify for huge government loans.  Sound familiar?
     
    I *know* without any shadow of a doubt that our current healthcare system is going to come crumbing down.  It's only a matter of time.  Things that can not be sustained, will not be sustained.  The same goes with the student loan bubble.
    The Fed is like the Wizard of Oz, and is pulling & manipulating 1000 levers all at once.  Being too logical & rational oftentimes leads to incorrect conclusions when it comes to predicting outcomes when dealing with very complex systems. 
    My humble recommendations are to stay very diversified in regards to own's wealth.  There are sure to be some huge surprises when the category 5 storm hits shore.

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  • Mon, Mar 25, 2013 - 7:01pm

    Reply to #5

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    warehoused deflation

    Jim H-I agree with you about "warehoused deflation".  Its tough to measure, and its something I keep in mind when looking at these overall numbers.  That's why I think my deflation claims for the eurozone are pretty easy to make – because they're conservative, since I'm using ECB numbers which are at least some part lies.  But even with those optimistic assements of the value of the loans outstanding, the eurozone is deflating.  And no surprise, eurozone GDP is dropping.  The correlation is pretty accurate.  That's why I care – I can predict GDP by watching change in total credit.  How cool is that!
    I did this study on Spain and their property bubble – I'm willing to bet big money that Spain is lying big time about the losses on the banks.  Its just what they do – its what happened in Ireland, until after their "bad bank" formed, at which point they had to take the losses and presto, deflation magically was recorded by the stats trackers at the ECB.  My conclusion in one line: until those losses get resolved, Spain is screwed, and their GDP will continue to shrink until the uncertainty is over.  Again, that's how Ireland went, and their bubbles are quite similar.  And its gonna cost them 500B Euros.  If they go the "bondholder/depositor involvement/Cyprus" route, that's massively deflationary.  The right thing, at some level, but – massively deflationary.
    Here in the US, our data is a lot more granular.  If you look at the Z1 mortgage numbers (some percentage of which I'm sure are lies), there's currently deflation in the US mortgage loan market.  And that's the optimistic viewpoint!  That's why most of the buyer boom is about hedge funds and cash buyers coming in to get rental income.  No loans required – because nobody can qualify given their debt levels and incomes, even at 3.8% mortgage rates.  It is really hard to blow a bubble in the same place twice.
    Regarding the Fed-
    Having done a bit of study of the Fed's balance sheet, I can say (assuming they aren't committing deliberate organizational criminal fraud, which I doubt – I don't think the beancounters over there want to sign up for fraud on that scale) they aren't warehousing any crap that I can see.  The big numbers are in the Treasury bonds and the Fannie/Freddie insured MBS.  The bad loans they used to have were in the Maiden Lane portfolios (and likely some in TALF/TAF/etc), but those are all run off by now.
    The Fed might be at risk for losses due to lengthy duration of their portfolio if they need to suck money out of the economy quickly, but for the non-conspiracy-minded, they've just got relatively high grade stuff now.  Didn't used to be the case immediately after the crash, but it is the case today.
    Unrelated –
    Sometimes I get concerned that when people read articles entitled "The Dollar Will Die" they will take it literally and go short and expect the money to roll in.  I'm with Armstrong – I don't see the dollar dying until Japan, and then the Eurozone go under.  And between then and now, the buck has the possibility of rallying very, very strongly once the next crisis hits.  Heck, we're at 83 now, Spain hasn't resolved a thing.  I could see USD 90 without much difficulty if Spain has to "involve depositors" to any major extent.
    My suggestion: if you make a prediction about the buck, it should probably include timeframes, percent probabilities, and if-then statements, so readers have a sense of what sort of action they should take given the posting and over what timeframe.
    As a trader, I think this post is terrible trading advice for the next year or two.  My opinion is, risks of a dollar purchasing power collapse are smaller than what might happen to the Yen, or the Euro in the near future.  Now that you understand just how big that denominator is (representing money that wants a safe place to hide), perhaps you can see how Fed money printing will be totally swamped by safe haven moves from capital flight from Europe.  They have 17 trillion Euros in deposits that will be looking for a place to hide – and another 17 trillion in bond debt!  That's EUROS not dollars too!  How does 2.3 trillion USD in Fed printing over 4.5 years stand up?  Sand Castle vs Tsunami.
    And Japan, if inflation really does get started there, its instant bond market crash, which either leads to default, or to truly massive money printing – not the little piddly stuff we have going on today.  BOJ would have to buy huge quantities of debt, and that would kill the Yen.  Either way, even more people flee JPY for the US safe haven.  Once again, Fed printing will be overwhelmed, and the US Treasury will be able to borrow for free.
    Again, there are no certainties, but gun to my head: 10% US crisis, 30% Japan crisis, 50% Eurozone crisis within 1-2 years; 20% chance "something bad" [Spain] over the next 6 months.  Eurozone highest because Northern Eurozone doesn't care much for Southern Eurozone when push comes to shove, and it will – especially when France's property bubble pops.  (Did you know they had one?  I didn't, until I looked.  262% growth in prices since 1998.).  A few more quarters of bad French GDP numbers will definitely get everyone thinking.  I don't imagine Hollande will be the man to bring back confidence OR growth.  If anything, he's a one-man capital flight creator.
    It will be a wild ride all around.  God only knows what gold will do.  Right now its rallying on eurozone issues, something it never really did before.  All I can do is watch and try to understand.
    But really, I wouldn't short the buck.  Wait for the dust to settle over there first.  Again, my opinion,  not intended as investment advice, YMMV, etc.
     

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  • Mon, Mar 25, 2013 - 7:12pm

    #6

    Jim H

    Status Diamond Member (Offline)

    Joined: Jun 08 2009

    Posts: 1798

    Davefairtex and Dryam

    Great discussion here.  Dave and Dryam both said essentially the same thing.. here is what Dave said,

    I have a competing explanation.  Both college education and medical care are supported by the government.  In the case of college, it's government-supported debt.  In the case of medicine, it's medicare/medicaid.  I'll add defense as a third area.  Government support insulates these areas from normal market pricing and monetary pressures.  CHS makes a similar point about government-protected cartels actually causing the price inflation rather than it being a monetary phenomenon.  I find that argument compelling – more compelling that the monetary argument – because medicine and education have both increased at quite different rates.  If they both represented "true inflation" then they should have increased at roughly the same rate.

    And I thought the same thing when I saw Chris' post.. I agree with Dave and Dryam that the cost escalation in both areas is a result of the Gov't propping these areas with cheap money.  Is this not therefore just targeted inflation?  The cartel cannot, "cause" the inflation if the money is not available… the cartel needs the Gov't to either enforce the cartel's monopoly, provide easy money, or both.  When the government works with the banks to blow a bubble.. is that not inflation, especially if the bubble is primarily driven by cheap money credit creation like college loans?  

    Finally, Dryam… your post as one from inside the medical system is very impactful.  Just like I speak up, as one inside the semiconductor idustry about the way that Japan's leading edge fiscal imprudence is going to bring down the entire world's interconnected high tech manufacturing industry via their dominance of many material supply chains… your insights help paint the overall picture of where we are headed with more clarity.  Please keep posting!       

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  • Mon, Mar 25, 2013 - 7:41pm

    Reply to #5

    Jim H

    Status Diamond Member (Offline)

    Joined: Jun 08 2009

    Posts: 1798

    Davefairtex... excellent post re: trading

    Your points all make perfect sense now in this context.. thank you very much for explaining your thinking process in such detail.  I made a very similar point to yours (don't short bonds for now) in response to Chris' recent expose on the Bond bubble… ;https://www.peakprosperity.com/comment/150118#comment-150118
    I watch Japan with most fascination, since they spend 25% of their tax roll now on debt service, while having the lowest bond rates in the world.  Decidedly non-antifragile! 
     

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  • Mon, Mar 25, 2013 - 7:45pm

    Reply to #5

    Adam Taggart

    Status Platinum Member (Offline)

    Joined: May 25 2009

    Posts: 2548

    NOT short-term trading advice

    [quote=davefairtex]As a trader, I think this post is terrible trading advice for the next year or two.  
    [/quote]
    Glad you've provided me with this opportunity to clarify. This article is NOT intended as short-term trading advice for making bets against the dollar.
    Instead, it's an exercise in zooming way out and observing:

    how far the Fed has deviated from its traditional protocol
    how dependent the markets have become on ever-greater Fed liquidity
    how fallibly human the folks running the Fed are
    how Cyprus is giving us a great example of the extreme measures central planners will go to when things don't go as they planned

    As I admit in the original post:

    The dollar may strengthen for a bit versus other currencies and perhaps the financial markets

    The central point of the article is that the wide arc of history suggests that as this story fully unfolds, we can expect more dollars — and more fiat currency of all types — to be printed.
    Yes, the dollar may fare better relative to other paper currencies for much of that time as the proverbial "best-looking horse in the glue factory". A flight to safety as Japan, Europe, etc stumble will likely drive short-term demand for US dollars. And Charles Hugh Smith does his best to remind us not to ignore the influence of Triffin's Paradox on the situation. But the dollar's value relative to tangible assets has a high confidence level of dropping due to further money printing — possibly quite considerably as the endgame unfolds.
    That's why the article recommends parking your "safety" capital on the sidelines in the near-term (cash and other liquid assets), and then considering a program of exchanging your remaining paper-based capital for hard assets.
    To reiterate, this is a viewpoint on a macro trend expected to play out over the next several years (perhaps longer?), and not advice for those looking only to trade for a profit in the near-term.

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  • Mon, Mar 25, 2013 - 7:56pm

    #7

    JAG

    Status Silver Member (Offline)

    Joined: Oct 26 2008

    Posts: 240

    Glad to See That I Haven't Missed Anything

    I like to check in occasionally and see what's new….unfortunately it looks like this is the same dialouge from 5 years ago. At least, as non-member, there is something for me to read.

    It's good to see that Dr. M and Jim are still overreacting to the use of the D-word…LR is still here pontificating about the puppetmasters…and davefairtex is still making sense.

    John Hussman had something to say about the correlation of QE and the stock market a few weeks back:

     

    From an analytical perspective, it’s striking to me that even some thoughtful economists we know have been making assertions about Fed policy that have no basis in the data. For example, we heard last week that “The number of times we actually had a bear market on our hands with the Fed easing and the economy expanding by any amount is around zero.” Wow. That’s not even true in the “active Fed” period. Consider for example March-October 2002, when the market plunged 30% despite reductions in the Federal Funds rate and the discount rate, despite positive GDP growth – two quarters into an economic recovery, and despite a Purchasing Managers Index persistently above 50. Ditto for late-2007 when a bear market had already started, the Fed was already easing and the PMI was still above 50 (despite a recession that wouldn’t be recognized until several quarters later).

    Another assertion that makes me wince is the idea that “since 2009, there has been an 85% correlation between the monetary base and the S&P 500.” This is a distressing use of statistics, because two data series will always have an extremely high correlation if both series capture an uncorrected diagonal move. For example, it is equally true that since 2009, there has been a 94% correlation between beer prices in Iceland and the S&P 500. That’s not to dismiss the enormous effect that Fed policy has had on the markets in recent years, but the implication of an “85% correlation” is that if one increases, the other is sure to increase as well. There is little basis in the data for that belief. The exception is that when stocks are down significantly from their level of 6-months prior, monetary easing is often eventually capable of boosting confidence and reversing recent spikes in risk premiums.

    In case you’re wondering, since 2000 there has been only a 9% correlation between the monetary base and the S&P 500, but a 99% correlation between the monetary base and the price of beer in Iceland. Why? The S&P 500 has experienced massive up and down cycles, while the monetary base and beer prices have both trended higher over time.

    Link

    Looking back over the last 5 years, I think it's safe to say that the market is smarter than all of us, even Uncle Ben.

    See ya in September. Cheers with an Iceland Beer….Jeff

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  • Mon, Mar 25, 2013 - 8:04pm

    #8

    Jim H

    Status Diamond Member (Offline)

    Joined: Jun 08 2009

    Posts: 1798

    JAG

    Glad that I could play my small part of helping to make everything right in your world.  Here's a bit of what Kuntsler said today.. please tell me, in your own words, why you think our own monetary masters here in the US will never run out of pretense?  

     

    Of course, everybody should have been worried a lot sooner than last week because the basic operating system of global banking is accounting fraud, and has become that stealthily, insidiously, for about fifteen years now. Nothing is what it appears to be anymore. Compound interest has not really been working since 2008 because the world can't increase its energy production enough to generate the additional surplus wealth needed to cover the aggregate interest due all around the world. 

            What remains are games of musical chairs, Ponzi schemes, frauds, swindles, stonewalls, ruses, ploys, scams, dodges, bluffs, subterfuges, QE martingales, interventions, rehypothecations, pretenses and other modes of evading or disguising reality. The reality is that there is not enough real wealth to go around, certainly not enough to cover the giant web of obligations that masquerades as "money." So, now whenever somebody or some company or government or entity is called upon to put up or shut up, the danger arises that the whole web will disintegrate, since all the participants are broke. You want "your" money? Wait three days. Make that four days. Check that, let's say next week. How about two months from now? Oh, forget about it…. No wonder folks are spooked.

         This is really getting out of hand. That's why the ills of the poor, untoward, tiny crypto-nation of Cyprus have got everyone's knickers in a twist. Cyprus is everybody writ small. Cyprus ran out of pretense. It's banks are toast. It can't take care of itself. It is too poor to be a "modern" economy.

    http://kunstler.com/blog/2013/03/money-worries.html

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  • Mon, Mar 25, 2013 - 8:57pm

    Reply to #5

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    liked most of it

    Adam -I really did like most of what you said regarding your bullet point list.  Its a wide-ranging perspective, and one I largely agree with.  If the title had been something like "Central Banking: We're Not in Kansas Anymore, Toto" I wouldn't have had an issue.  But the title sets the whole tone, and points the mind at the conclusion of the piece, which was effectively Fed Printing Will Hammer The Buck: Next Stop Crazytown [*except it might strengthen "for a bit" somewhere along the way there].
    One thing you might consider is that different people interpret "short term" and "long term" differently.  I absolutely don't think 2 years is "short term", for instance.  Neither does the IRS!  Might I suggest – actual timeframe ranges rather than "near term" so people have a better idea of what you really are thinking, instead of having to guess "does he mean IRS capital gains long term, or my-plan-for-retirement long term?"
    One last point.  Currency movements are not simply about short term profits and/or trading.  I've lived in foreign countries for extended periods of time, and currency moves really do have impact.  When you arrive somewhere and the buck is $1=35 and two years later the buck is only $1=29 (a 17% move) and in between its bounced all around that area, that's Real Money.

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  • Mon, Mar 25, 2013 - 9:31pm

    Reply to #6

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    cost escalation in medical & education fields

    Jim -Agreed the money has to be available (borrowed/monetized, and spent) for the price inflation to take place in the area.  Currently all those government-guaranteed loans are being borrowed and spent by all those students.
    Thought experiment: can we predict what happens to education costs once the government stops guaranteeing all those student loans?  Education prices will either a) increase, b) stay the same, or c) decrease.  Any guesses as to which one happens?  Lets see, with less mortgage money being created, home prices fell.   So with fewer student loans…and the same number of schools…
    If the answer you picked is c) education prices will drop, then we agree – the ever-rising education costs do NOT represent the true level of overall monetary inflation pressure, but rather simply reflect the outsized contribution from money created by the government loan guarantees.  CHS has some great charts on administration:professor ratios and how they've continually bloated up over the years.  No pressure to cut = excessive overhead, admin bloat, and so on.
    Same thing for medicare.  My God, salaries of hospital administrators of mid-sized "nonprofit" hospitals up in the $3M range?
    I too enjoyed hearing from our friendly Doctor.  My older sister is a neurosurgeon, and she tells tales of unnecessary spinal fusion surgeries (paid for by insurance, or Medicare) that make lots of money for the surgeon but where the outcomes are really not great for the patient, but I don't feel I can speak with the same level of authority since I just hear them secondhand.
    Always ask what the outcomes are, that's what I learned from her.  But I digress.

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  • Mon, Mar 25, 2013 - 9:37pm

    #9

    charleshughsmith

    Status Bronze Member (Offline)

    Joined: Aug 15 2010

    Posts: 685

    USD as reserve currency

    Hi everyone:

    First I need to stipulate a few things:

    1. I am personal friends with Dave, Chris and Adam, and my views are well-known, being posted here on Peak Prosperity and on my blog oftwominds.com.

    2. If anything, my forecast of USD strength is out beyond Dave's–a move to 120 (from around 80 now) is baked in IMO, and 150 is definitely possible in a global credit-event.

    As I have shown here, gold and the USD do not correlate very well over time. Both can rise in tandem, as each serves different functions. If you need to settle accounts in international trade (say within corporate accounts), moving $5 billion around in USD is easy.  Ultimately, currencies act as bills of exchange (what were used in Renaissance trading fairs, because there wasn't enough gold/silver in circulation to facilitate trade) and as stores of value, i.e. claims on resources, goods and services.

    What few people appreciate is that the reserve currency (whatever it may be) has unique characteristics: the issuer has to run enormous trade deficits/print money to "export" enough currency to be useful to the global economy, and that currency becomes the "first claim" on goods, resources and services.  In very practical terms, when the non-reserve currencies melt down (a loss of faith occurs), the seller looks at the USD $100 bill and the alternative bills and takes the $100 bill, leaving the others essentially worthless. These characteristics have profound implications.  For one thing, export-based economies such as Russia, China, Japan and the EU cannot, by definition, issue the reserve currency because they aren't "exporting" any currency, they're importing it as trade surpluses.

    Secondly, there is a zero-sum-game aspect to currency "wars."  The "winner" takes all in terms of utility and purchasing power. This is why the unofficial currency of numerous nations is the USD (in cash).

    As a store of value, gold is king. But as a bill of exchange, it is not in the game.  Were a nation such as China to issue a gold-backed currency, whatever currency it "exported" would quickly disappear into savings accounts and central bank vaults as a store of value. There would not be enough floating to grease the enormous trade in the $160 trillion global economy. We still need a "bill of exchange" currency that is "exported" in size.  

    This is why I keep saying gold and the USD could rise in tandem, Gold could skyrocket priced in other currencies and actually decline priced in USD.

    There is much more to said about these USD issues, which are often non-inutitive and complex. As one last point, we should remember that the FX markets trade roughly $3 trillion a day, i.e. the entire balance sheet of the Federal Reserve trades every day.  The number of dollars needed to accomodate trade has risen dramatically, hence the huge trade deficits and money-printing.  

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  • Mon, Mar 25, 2013 - 10:10pm

    #10

    Jim H

    Status Diamond Member (Offline)

    Joined: Jun 08 2009

    Posts: 1798

    Adam got picked up by ZH again...

    http://www.zerohedge.com/news/2013-03-25/guest-post-say-goodbye-purchasing-power-dollar

    It will be interesting to see what comes out in their comment thread. 

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  • Mon, Mar 25, 2013 - 11:42pm

    #11

    Jim H

    Status Diamond Member (Offline)

    Joined: Jun 08 2009

    Posts: 1798

    CHS

    I feel like I am always the bad guy.. but I don't apologize.  I question things.  People like to make statements like they are some kind of immutable law.. and there are no immutable laws in economics.. not when the action is being played out by a collection of actors as fickle as human beings.

    In economics, hope and faith coexist with great scientific pretension and also a deep desire for respectability.
    John Kenneth Galbraith

    Charles said,

      What few people appreciate is that the reserve currency (whatever it may be) has unique characteristics: the issuer has to run enormous trade deficits/print money to "export" enough currency to be useful to the global economy, and that currency becomes the "first claim" on goods, resources and services.

    While this sounds reasonable on the surface.. It struck me that the US has not always been such an unbalanced consumer of the worlds goods..  weren't we the manufacturing powerhouse in the 1950's and 1960's?  I checked.. and although the data only goes back to 1960, it turns out that the US trade balance was never in deficit until 1971 (what else happened that year…. hmmmmm?).  Anyway… we were the worlds reserve currency since post WWII, right?  So how did that work?  How did we get from 1945 – 1971 as the reserve currency without a trade deficit?

    reference:  http://www.census.gov/foreign-trade/statistics/historical/

    Another thing….and this is my opinion, the dollar will never, ever, get to 150.  You don't think Big Ben, or whoever follows him, won't try to fight that tide?  Tiny Switzerland has been fighting the same battle..pegging the franc to the Euro..  and so far they have won.  You don't think the US can play the same game?  It's called the printing press…. and in the end, the FED can and will print to infinity.   

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  • Tue, Mar 26, 2013 - 12:52am

    Reply to #11
    jcat3022

    jcat3022

    Status Member (Offline)

    Joined: May 09 2012

    Posts: 58

    Jim H wrote:Another

    [quote=Jim H]
    Another thing….and this is my opinion, the dollar will never, ever, get to 150.  You don't think Big Ben, or whoever follows him, won't try to fight that tide?  Tiny Switzerland has been fighting the same battle..pegging the franc to the Euro..  and so far they have won.  You don't think the US can play the same game?  It's called the printing press…. and in the end, the FED can and will print to infinity.   
    [/quote]
    This is a good point.  A strong dollar would be a nightmare for Bernanke, Yellen & the rest of the Dove's at the Fed.  The way I see the game unfolding is that everyone debases and then last or close to last it's the Fed's turn.  That's when they really start printing.  There is just no way I see the politicians allowing a strong dollar to happen, especially when jobs are at the forefront of every voters mind.

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  • Tue, Mar 26, 2013 - 1:13am

    #12

    Greg Snedeker

    Status Silver Member (Offline)

    Joined: Oct 22 2012

    Posts: 380

    Reserve Currency and Galbraith

    I've just had a chance to catch up. Great article and posts.

    Jim wrote:

    People like to make statements like they are some kind of immutable law.. and there are no immutable laws in economics.. not when the action is being played out by a collection of actors as fickle as human beings.

     I'm starting to think you are coming around to the social part of economics being a social science:)…just a subtle jab…I learn a lot from you, I hope I return the favor…

    Jim wrote: Anyway… we were the worlds reserve currency since post WWII, right?  So how did that work?  How did we get from 1945 – 1971 as the reserve currency without a trade deficit?

    How do we maintain the reserve currency at all?…

    The sixties were particularly favorable to its exercise of inertial power. The prestige of the military and foreign policy establishment, following the successes of  World War II and the Marshal Plan, was high – far higher than now.

    JK Galbraith – from "Economics, Peace, and Laughter"

    Furthermore, why do you think the bitcoin was created in 2010? Why not earlier? They certainly had the technology to do it? These are the deeper social questions that need to be asked…

     

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  • Tue, Mar 26, 2013 - 2:17am

    Reply to #6
    ao

    ao

    Status Platinum Member (Offline)

    Joined: Feb 04 2009

    Posts: 882

    davefairtex wrote:Same thing

    [quote=davefairtex]
    Same thing for medicare.  My God, salaries of hospital administrators of mid-sized "nonprofit" hospitals up in the $3M range?
    I too enjoyed hearing from our friendly Doctor.  My older sister is a neurosurgeon, and she tells tales of unnecessary spinal fusion surgeries (paid for by insurance, or Medicare) that make lots of money for the surgeon but where the outcomes are really not great for the patient, but I don't feel I can speak with the same level of authority since I just hear them secondhand.
    Always ask what the outcomes are, that's what I learned from her.  But I digress.
    [/quote]
    See it all the time.  Head of nursing in our regional medical center in a small town in a low population density area getting just under 200K.  CEO here is getting 700+K … while the hospital was losing money.
    Spinal fusions are indeed a big bucks item.  Consider that the Scandinavian countries have one of the best systems of musculoskeletal care and they do ONE TENTH the number of spinal surgeries that we do in the US.
    And don't ask what outcomes are … check.  People have been known to lie.
     

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  • Tue, Mar 26, 2013 - 2:20am

    #13

    Jim H

    Status Diamond Member (Offline)

    Joined: Jun 08 2009

    Posts: 1798

    gillbilly

    I frankly don't see the significance of the date of Bitcoin's release into the wild, which actually dates back to January, 2009.  The real elegance is not the cryptography itself, but rather the overall design, which relies on a motivated network of "miners" to maintain the digital DNA blockchain record… they are motivated to mine by earning Bitcoins, and mine they must in order to allow the integrity of the blockchain to be maintained.  Elegant.  

    The original miners had no idea how valuable these would someday become.. they threw them around like monopoly money (see reference below).  

    This is open source software code.  There are lots of smart programmers out there… and they can all see all of the cards.   

    More here;   http://www.wired.com/magazine/2011/11/mf_bitcoin/all/

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  • Tue, Mar 26, 2013 - 2:30am

    Reply to #7
    ao

    ao

    Status Platinum Member (Offline)

    Joined: Feb 04 2009

    Posts: 882

    JAG wrote:I like to check in

    [quote=JAG]
    I like to check in occasionally and see what's new….unfortunately it looks like this is the same dialouge from 5 years ago. At least, as non-member, there is something for me to read.
    It's good to see that Dr. M and Jim are still overreacting to the use of the D-word…LR is still here pontificating about the puppetmasters…and davefairtex is still making sense.
    [/quote]
    Jeff,
    Nice to see you back but you sound a little grumpy.  Hope you unloaded AAPL … youch!
    http://finance.yahoo.com/echarts?s=AAPL+Interactive#symbol=aapl;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;
     

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  • Tue, Mar 26, 2013 - 6:29am

    Reply to #11

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    currency movements - USD to 150

    Jim H –

    Another thing….and this is my opinion, the dollar will never, ever, get to 150.  You don't think Big Ben, or whoever follows him, won't try to fight that tide?  Tiny Switzerland has been fighting the same battle..pegging the franc to the Euro..  and so far they have won.  You don't think the US can play the same game?  It's called the printing press…. and in the end, the FED can and will print to infinity.   

    Jim!  I like your questions!  It makes me think, and come up with new charts to explain the situation, if only to myself.  This whole dialog has been really helpful to me too.
    I am positive Ben will try to fight the tide.  So will the Swiss.  But let's be clear about something.  Nothing has really happened yet to scare depositors.  Its all been off in the periphery, carefully controlled by Brussels.  And still the Swiss have printed 471 billion dollars worth of CHF (76% of GDP) to keep the peg in place.  And this is before anything "real" comes down!  Can you imagine what happens when the eurozone gets *really* nervous?  Say when Spain's uninsured depositors get hit with losses because the Cyprus Template really is the template rather than just a one-off?  And then following that, France's property prices go into freefall, and regular people begin to figure out that when a bubble pops, bank failures and "depositor involvement" are not far behind?  And then at that point, the French want to print, the Germans don't, the French see it as a matter of national survival, and so POOF.  The eurozone explodes.
    I'll say it again, there are 17 trillion euros in deposits in the eurozone that will look for a place to hide once depositors in nations closer to the core realize they too are going to be "part of the solution" to banking issues in europe.  We've only seen the "early adopter"/'nervous nellie" move to date.  And that's cost the Swiss 76% of GDP to contain.
    Why will the Swiss stop printing?  If the threat to the eurozone becomes truly existential, its a really bad idea for the Swiss Central Bank to continue exchanging something of value (a CHF) for something that will vanish (a EUR).  At some point in this scenario, the Swiss central bank will come to the conclusion they've given away too much of their own currency in exchange for soon-to-be-confetti, and they will stop and impose capital controls instead.  But boy, will they have some big losses on the printing they've already done.
    During the 2008 crash, money market funds had 600 billion in redemptions in one day shortly after The Reserve fund broke the buck and froze redemptions.  Once confidence snaps, money moves in huge, uncontrollable size from places it perceives is dangerous.
    When that 17 trillion euros decides it wants to move, it will end up rocking the world, and central banks will, all on their own, decide that perhaps printing to maintain currency pegs isn't the best solution after all.  Why give away something of value in exchange for something that is going to turn to dust?  That just makes you the bagholder, with massive losses on the balance sheet.  And you for sure won't get that third term as head of the Central Bank.  And your legacy – shot to hell – "that guy who stupidly printed money and bought euros right before the eurozone died."
    This is the "USD goes to 150" scenario.  Its possible depending on how this scenario plays out, the "official" capital-controlled exchange rate will be different, so collecting on this bet might be difficult.
    This isn't my prediction of what WILL happen – its a scenario of what COULD happen wherein the USD could hit 150.  We can all estimate for ourselves what the odds of this coming to pass might be.
     

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  • Tue, Mar 26, 2013 - 11:58am

    #14

    Rector

    Status Bronze Member (Offline)

    Joined: Feb 07 2010

    Posts: 323

    Clarity from Complexity - My Take Away from this Thread

    All,

    I would like to thank you all for your well-reasoned and excellent observations about the state of the economy and our global financial system.  Like many of you I read this stuff constantly and have sought to pull the universal truths from the particulars – a philosophy of the economy if you will.

    It is a natural impulse to observe a group of particulars (the growth of the money supply for instance) and attempt to combine it with other observations and create a working hypothesis that will predict the outcome of this whole experiment.  We are interested in how this will turn out, and how it  will affect the things that matter to us as individuals – our future.

    The problem is – of course – that many of the particulars seem to be paradoxical such as the opposing forces of debt destruction and money printing.  My take aways from these collective observations are as follows:

    1.  Currency manipulation, debt destruction, trade deficits, financial engineering, interest rate manipulation, and other forms of economic "activity" have created a "strained web" of powerful and competing forces that are as complex as any natural system that exists in the universe.  This system is under unbelieveable pressure and is highly unstable due to its complexity.  Its laws are unknown and unknowable.

    2.  The system is influenced by the actions of flawed human beings who have competing interests and purposes which are not always clear to others.  There IS a component of conspiracy here that is undeniable, but no single "puppet master".  The Chinese, the Fed, the Banks, the government, are all simultaneously moving pieces around on the chessboard.  All of these actors are self-interested and some are actively hostile.  Some are malevolent, and some are incompetent.  Some operate under flawed theories and debunked economic models, and attempt to impose these upon the rest of us.

    3.  The system strains against real limits to growth, access to resources, population growth, and circumstances that change.  These global trends march forward relentlessly every hour of every day.

    4.  Exogenous shocks to other systems (North Korea, Iran, drought, Earthquakes) can dramatically destabilize or change the economic system in unpredictable ways.  These unpleasantries have a propensity to swoop in at the worst possible times.  Often they are catastrophes.

    5.  We are governed by fools and our population is at once uneducated (on these matters), deceived, plagued by entitlement, and unaware of the danger to their own well-being.  

    6.  Data is incomplete, manipulated, and difficult to interpret.  Interpreters are of varying quality and intent.

    7.  Thermodynamics demonstrates that ultimately complexity breaks down, and sometimes it does so very dramatically.

    As a result of these observations, I have stopped attempting to predict an inflationary or deflationary outcome, the rise of totaltarianism or the resurgence of liberty, social chaos or devolution into a simpler lifestyle.  All I know is that something wicked this way comes – to repeat Dr. Martenson's original thesis – we are headed for a huge change in the way things are.  

    Don't get too worried about the what or when – it is unknowable.  Just know that a big change is upon us and it is inevitable.  I will survive by being aware and resilient.

    Rector

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  • Tue, Mar 26, 2013 - 12:51pm

    Reply to #14

    Quercus bicolor

    Status Bronze Member (Offline)

    Joined: Mar 19 2008

    Posts: 190

    Great Summary Rector

    I believe you truly captured the big picture and gave some clarity on what is knowable, what is not, and, given that, how to prepare.  The system is so complex, the data so incomplete, and our models imperfect enough that none of us can accurately predict the details or even the general shape of the outcome. Still, it's useful to consider the 5-10 most likely scenarios, consider their similarities and differences, what preparations are most likely to be useful in most or all of them, which in only a few, and which preparations are likely to be helpful in some scenarios, but detrimental in others.
    Given all of the pontificators out there whose level of certainty about the outcome is unjustified by the data and models they use, we need to be constantly vigilant about maintaining the big picture and preparing for any number of possibilities.
    Finally, once the first set of big changes are in motion (and many would argue with some justification that they are already) they may set off a second set of large and unpredictable forces that are much more likely to lead us into scenarios that have been considered by few if any of both the folks who have gone on the record with their predictions and those who have kept their predictions or hunches private.

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  • Tue, Mar 26, 2013 - 1:27pm

    Reply to #4

    Bankers Slave

    Status Silver Member (Offline)

    Joined: Jul 26 2012

    Posts: 513

    Unfortunately

    that is the way I also see it. Can you trust an organisation that imposes its authority through coecion and violence, hypocrisy, lies and deceit? Certainly not on my planet. The future has already been written and its not good for us folks.

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  • Tue, Mar 26, 2013 - 1:28pm

    Reply to #13

    Greg Snedeker

    Status Silver Member (Offline)

    Joined: Oct 22 2012

    Posts: 380

    Context, time, and space matter

    Jim, I understand the concept and framework, but timing within the context of human experience is crucial. I bring it up because the thread is discussing currency and bitcoin is an alternative. 

    Wired: Bitcoin required no faith in the politicians or financiers who had wrecked the economy—just in Nakamoto’s elegant algorithms.

    My point is that the concept was created and could only take hold after the faith had been shaken significantly by the events of the "great recession." In the end the bitcoin is an illusion. You can't subtract out the polititicians and financiers in a time when their power reigns supreme. It's amazing that they have let it go on for as long they have, but it makes me wonder if it didn't come from them in the first place?…could be a possibility. Regardless, in some ways I'm paying you a compliment. The concept  is elegant, but like all technology, the first manifestation is most often not the one that survives. The faith being shaken may make it possible for something "like bitcoin" to emerge.

    Jim wrote: This is open source software code.  There are lots of smart programmers out there… and they can all see all of the cards.   

    Hardly. I've worked with lots of programmers and their strengths more often than not lie in their ability to work from the bottom up. They overwhelmingly do not see all the cards. They often lack creativity and need a goal given to them. Once given the goal, then they are amazingly good at reaching it through writing code. Mind you I'm writing from my limited experience as we all do, there are always exceptions. I guess what I'm saying is what you have said to me (and I take to heart)… don't fall in love with your own theories, you may wind up like Kevin Kelly. The guy literally thinks he is a church of one (I'm rolling my eyes right now). Don't get me wrong the guy is really smart in his field, but when he starts crossing over into religion and philosophy, his ideas are pretty unsophisticated and have big gaping holes. 
    As far as the dollar? I think CHS's argument is just as valid as yours. We are all just speculating, and don't forget when things begin to get really desperate, the war machine revs up and changes everything. 
    Rector,
    Right on!

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  • Tue, Mar 26, 2013 - 3:05pm

    Reply to #14
    earthwise

    earthwise

    Status Silver Member (Offline)

    Joined: Aug 10 2009

    Posts: 277

    Bull's eye!!!

    Rector,That has got to be one of the most astute observations I've come across yet, and with the talent weighing in here (and elsewhere) that's quite an accomplishment. 
    Congrats and thank you.

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  • Tue, Mar 26, 2013 - 5:35pm

    Reply to #11

    charleshughsmith

    Status Bronze Member (Offline)

    Joined: Aug 15 2010

    Posts: 685

    immutability

    Hi JIm:Skepticism and discussion are the foundations of advancement, so I welcome your critique–it's how I learn.
    You raise an interesting point.  The US trade surplus post WW2 was starving Europe of the dollars needed to fund reconstruction, so the Marshall Plan was launched as the solution.  The Marshall Plan was basically printing up a ton of dollars and shipping them to Europe under the guise of low-interest loans. The US can either run a trade deficit or disburse dollars as loans.
    While everything is contingent and unpredictable, that shouldn't be confused with mathematical relationships. For example, if the euro and yen depreciate, the DXY index will rise. That is as immutable as math.
    As for the point that the chessboard is constantly full of moving pieces pursuing their own agendas, this is true but it can lead to the idea that it's all a jumble, i.e. chaos.  Beneath the apparent chaos, however, there may lurk powerful dynamics that limit the movements and effectiveness of various chess pieces. This is one reason why the Bilderburg Group etc. have such appeal–the idea that a few hands control the board satisfies our desire for agency. 
    Chess is a good analogy because during the game there are many potential moves, but only a handful of moves lead to winning.  It is also an apt analogy because there are only 3 outcomes despite the endless possibilities along the way: winning, losing, or stalemate/draw.
    The winning strategy, IMO, was perfectly summed up by Rector: resiliency.  It is unwise to place huge bets on any asset or financial instrument making a winner-take-all move. Ideally, we will be able to watch the gameboard without being too much at risk ourselves however the pieces move.

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  • Tue, Mar 26, 2013 - 5:37pm

    Reply to #11

    Jim H

    Status Diamond Member (Offline)

    Joined: Jun 08 2009

    Posts: 1798

    Thank you Charles...

    Maybe the FED swap lines that seem to favor European banks so much are the new Marshall plan. 

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  • Tue, Mar 26, 2013 - 6:12pm

    Reply to #11

    charleshughsmith

    Status Bronze Member (Offline)

    Joined: Aug 15 2010

    Posts: 685

    makes sense

    Hi Jim:That makes excellent sense.  This is a devious (and totally speculative)  thought, but if (say) $10 trillion in euros wanted to shift into dollars, that move would require deep, liquid markets to avoid destabilizing markets. The swap lines may also be facilitating the liquidity necessary for the transfer of financial assets out of euros into dollars.
    This chart (from Dave's site) suggests the move out of euros is already well underway:
    http://mdbriefing.com/peak-euro.shtml

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  • Tue, Mar 26, 2013 - 9:10pm

    Reply to #14

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    summary of the summary

    So Rector, if I can summarize your summary:
    We're in deep doodoo
    Our leaders are weasels
    I've tried figuring out what will happen
    It's too complicated
    I've decided to await the logic of events, while remaining alert.

    If you have a real life, I think that's an excellent plan.  However I have too much time on my hands, and a boundless curiosity, so my plan is a bit different.
    I'm always looking for correlations between things.  I've found a number that seem to work, and more that I'm experimenting with.  My goal is to amass a set of these that taken together, gives me a sense of where the various parts of the world are currently heading – a sort of DEW Line that lets me peek over the horizon at threats that haven't made the news yet.  And it will (theoretically anyway) let me spot turning points while most are still focused on the current trend.  Back a few months ago my charts suggested the eurozone was heading into deflation while the MSM was focused on how Draghi had saved the system.  Deflation leads to GDP drops, and that's exactly what played out.  And my charts show, its not getting better.  [reporting lag is 45 days]
    The new eurozone policy of bail-ins will only exacerbate this deflation – fair though that policy is.  I'll be able to watch this in – well, with that 45 day lag.  A month and a half from now I can tell you the impact of the Cyprus event, and possibly use that to predict what might happen the next time around.
    I can explain (at least to my own satisfaction) why the US equity market continues to move up, and I don't need to add mysterious manipulators into my model to do it.  I can't predict how long it will continue – but I can definitely explain it.
    I can rapidly fact-check news stories (usually takes less than 30 seconds) and (perhaps less usefully) blog comments I read.  I get ideas from everywhere.  People make hare-brained claims all the time, some of which I run down and find to be true, or they give me an idea and I run with it and something interesting comes from it.
    Data is my best friend.  I know Fred, and the SDW, and the EIA, IMF, BIS, SSA, FAO, WEO, the CIA WFB, the BLS, freedom.org, and Quandl.  BLS has a lot of really good stuff – you can't take U-3 seriously, but you can repurpose their data to get at the truth.  One of my favorite metrics is the full-time-employment/population ratio – constructed thanks to BLS data.  It shows a very different picture of the "recovery" we're having.  Big surprise, right?
    Not all data is created equal, but it can still be useful if you understand its limitations.  For instance, Spanish residential property prices and mortage loans outstanding are probably correctly accounted for on the up-slope, but almost certainly not on the way down.  Spanish authorities are lying about both.  But you can still use the size of the mountain created by the bubble to estimate how much the resulting explosion will be when the banks finally do blow up – and by looking at where the lies currently are, what progress has been made to date and how much remains undone.
    A lot of Spanish depositors are going to be bailed-in.  Assuming they don't flee elsewhere.
    So unlike your philosophy, mine is probably best summarized by the old TV Show, X-Files.
    The Truth Is Out There! *
    * it just takes some effort to find

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  • Tue, Mar 26, 2013 - 9:35pm

    Reply to #14

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 691

    Is it really fair?

    [quote=davefairtex]The new eurozone policy of bail-ins will only exacerbate this deflation – fair though that policy is.  I'll be able to watch this in – well, with that 45 day lag.  A month and a half from now I can tell you the impact of the Cyprus event, and possibly use that to predict what might happen the next time around.
    [/quote]
    Dave,
    I enjoy reading your comments and gather quite a few nuggets by doing so. I've heard others indicate that the bail-in is a "fair" way to handle the insolvency crisis. Could you explain how the folks who were smart enough to save should be penalized so the bankers will be made whole? Shouldn't the bank bond holders get the haircut?
    You like to look over the horizon to see things before they're coming. Can you see anything good coming of the Cyprus bail-in?
    Grover

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  • Tue, Mar 26, 2013 - 10:05pm

    #15

    Rector

    Status Bronze Member (Offline)

    Joined: Feb 07 2010

    Posts: 323

    You are correct sir. . .

     

    I envy you having the time to work this thing out.  Truly I do.

    I too love to find the truth in the data – that's how I know we are in "deep doodoo" as you put it.  What I have observed is that – as you stated – my time available and analytical skills are limited and therefore my predictive power is likewise limited.  (That's why I pay for PP.com BTW)

    I sometimes chuckle when I get to the end of Chris's articles.  We end up in the same place, regardless of how we get there with regards to the "what should I do" question.  How many times I have climbed the mountain of data only to arrive at the conclusion(s) that a. the situation is hopeless and cannot continue b. an exogenous shock to the system can destablilize it at any time c. my data is incomplete and d. others are actively working to prevent or change the outcome.  This is the unpredictable part – i.e. who could have predicted the Japanese earthquake, tsunami, and meltdown?  More incredibly, who foresaw that they would just keep on truckin' afterwards!?  I usually end up shrugging my shoulders and buying more gold.

    When I was in my MBA program I soon realized that I wasn't a "quant", there were lots of people in my class with superior analytical and mathematical skills.  I could not contribute meaningfully in their world (it was embarrassing sometimes).  What I could do was take their product and weave it into a COA (course of action as we used to say in the Army).  There is a great need for direction, purpose, and motivation when ambiguity and the stakes are so high.  We called the phenomenon "analysis paralysis" and I am not suggesting you have it.  I am sure you are working towards an action you will benefit from in the future.

    I don't think its "too complicated", I just understand that the system is complex and unpredictable. Will terrorists hit the Saudi Oil fields tomorrow morning?  What will the Fed do? Anyone who can answer those two questions correctly is divinely inspired.

    Your posts were impressive because they were thorough and went against the grain a bit.  I will have to ride your data analysis coat tails.  The beauty of this website is that it allows me to have a conversation with people like you.  Thank you.

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  • Tue, Mar 26, 2013 - 11:58pm

    #16

    Jim H

    Status Diamond Member (Offline)

    Joined: Jun 08 2009

    Posts: 1798

    What is fair?

    For what it's worth, Detlev Schlicter, an economist I read regularly and have great respect for, agrees with Davefairtex;

      http://detlevschlichter.com/2013/03/cyprus-and-the-reality-of-banking-deposit-haircuts-are-both-inevitable-and-the-right-thing-to-do/

    Banking is a risky business because banks are highly leveraged enterprises. (Sorry to break that news to you.) In a fractional-reserve banking system ‘deposits’ are not deposits (i.e. contracts for safe-keeping) but loans to banks and thus loans to highly leveraged businesses.

    I don't pretend to know what is fair.. I only know that the fuse has been lit. 

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  • Wed, Mar 27, 2013 - 12:26am

    #17

    Oliveoilguy

    Status Silver Member (Offline)

    Joined: Jun 29 2012

    Posts: 520

    Amazing Thread

    Thank you all for your Candor, Courage and Civility. This is beyond brilliant.

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  • Wed, Mar 27, 2013 - 1:03am

    Reply to #16

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 691

    Gambler's Anonymous

    Jim,I agree that banking is a risky business. But, that's not what the interest rate that I'm receiving from my "deposits" tell me. Everything is all mixed up. Nothing gives the right signals. It hasn't always been this way, but it certainly is now. The corrupt get richer and the honest pick up the tab. I can almost hear them say that we deserve the fleecing since we were gullible enough to believe their lies.
    I couldn't agree more with your last line:

    I don't pretend to know what is fair.. I only know that the fuse has been lit. 

    I keep a couple months of expenses lent to the bank and a few weeks worth of small denomination bills on hand. The rest has all been lost to "gambling debts."

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  • Wed, Mar 27, 2013 - 1:44am

    #18

    thc0655

    Status Platinum Member (Offline)

    Joined: Apr 27 2010

    Posts: 1445

    I'm with Rector

    I too get overwhelmed with the details and conflicting data, and don't have the time to master it for myself anyway.  

    But this much I know too:  "Something evil this way comes."

    And since I like to use humor to cope with the tension, I'll quote from "The Hunger Games": 

    "MAY THE ODDS BE EVER IN YOUR FAVOR!"

    (The Hunger Games book and movie were aimed at a teenage female audience, but whether the author intended to do so or not she drew out some interesting parallels to the predicament in which we find ourselves.  Everything in the book can be looked at on at least two different levels.  Revolutionary material on one of those levels.  If you haven't read it, you might try it.)

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  • Wed, Mar 27, 2013 - 5:29am

    Reply to #14

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    bail-ins - are they really fair

    Grover-In a word, yes – because that's how capitalism and banking works.
    You don't realize it, but you and every other depositor are lending money to your bank.  Banks don't generally advertise this (I guess it might scare the horses) but that's what is going on.
    In our blessed system, the only thing that restrains banks from making infinite loans to anyone is the rules under which they operate.  The rules state, if liabilities exceed the assets, the bank must be wound down, and the creditors to the bank paid off with a sale of the assets.  This restrains the banks so they (theoretically anyway) are careful with the things they buy, and to whom they loan money.
    Bank assets: loans to other people, bonds it owns, initial investment cash, retained earnings
    Bank liabilities: deposits, money borrowed from other banks, bonds it has issued
    Being on that "liability" line means, if the bank can't pay back your loan because it is bankrupt, some amount of your loan-to-the-bank goes to money-heaven during the bankruptcy.  FDIC will write checks to protect small depositors here in the US – backed allegedly by the full faith & credit of the US Treasury, but in that case, its FDIC that ends up taking the loss instead of you.  Regardless, a loss is taken during the "resolution" process.
    When a bank takes losses on its loans or owned bonds, and at Bank Popular apparently they bought a whole bunch of Greek bonds that took a 70% haircut a year or so ago, the regulator goes in and looks at the books and notices that with all those losses, the bank liabilities exceed assets.  By the rules of banking, that bank must be wound down, and these losses must be imposed on the creditors to the bank – the guys on the "bank liabilities" line, which includes you, the depositor.
    [Note: if the bank can find some kind soul who will buy shares in the bank – enough to cover the losses – it can avoid wind-down and keep operating.  Executives keep their jobs!  TARP 2008!  Thanks Taxpayers for your 600 billion dollar investment!]
    Didn't know you were a creditor to the bank?  Welcome to the club.  Most people don't.  They imagine "their account" means the money inside the bank is theirs.  It isn't.  It is just a loan to the bank that you can demand payment on at any time.  Thats why checking accounts are actually called Demand Deposit Accounts.
    I'm simplifying things a bit.  I'm not a bank regulator so I don't know the full ins and outs of when resolution happens, etc.  But the main bits are true:

    assets must exceed liabilities
    depositors are creditors to the bank, not "owners" of their deposit accounts

    A friend of mine and I had a discussion on what we'd like to see – a real savings bank.  One that didn't lend money, only stored your cash for you.  Effectively, 100% of all deposits are placed on reserve at the Fed, and only fees are taken out of your account.  But it could pay no interest.  The advantage is, you would not be creditor to the bank, you would actually own your own account.  Problem is, most people don't realize they don't own their accounts, they don't understand they've lent money to their bank, and most of the time, the magic of fractional reserve lending actually works out.
    Right up until it doesn't.

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  • Wed, Mar 27, 2013 - 6:08am

    Reply to #15

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    too kind

    Rector, you are too kind.I realize my summary of your summary was a tad reductive.  πŸ˜‰  I confess, I did it for comic effect.  Its clear to me that you are a sharp cookie.
    If I had a full time job, there's no way I could put this level of effort in.  People with real lives have a tough time figuring out what is going on.  It is a very complicated place, and it almost seems like they don't really want you to know what's happening.  Imagine that.
    As to why I do this?  It fascinates me.  I think its fun.  I started out long ago by watching the crash course, and ever since my interest in the subject/puzzle grew and grew and…well there you go.  It helps that I know how to write code, to retrieve, manage, and update my different data sets.  And tools these days are pretty powerful, so I can usually find a good chunk of what I need somewhere online.  If I couldn't write code, the whole thing would have been much harder.
    As for analysis – my current thought is, the eurozone is going down into deflation.  The bail-in policy, if that's what they're really going with, will accentuate this.  Bail-ins sure beat debt-funded taxpayer capital injections and overpaying for bad loans, and so they likely "the right thing", but it will end up destroying a great deal of money.  Or really, merely recording the money that has already been destroyed by malinvestment.  Just – I'd prefer that it not be MY money that ends up being destroyed, thanks anyway.
    One thing about deflation is, it won't treat PM very kindly.  My observation of the marketplace: PM tends to do poorly during bouts of deflation.  I don't have charts to demonstrate this, but that's what I've noticed.  Those who say "gold did well during the 1930s deflation" miss the fact that the US Treasury put a floor on gold prices through the gold standard – a standing offer to buy an unlimited number of ounces of gold for $35/ounce.  Look at silver's behavior during the 1930s if you want a model for how things are today.  Silver got hammered, because we were not on a silver standard, and so there was no price support.
    Oof, that last paragraph will get the goldbugs upset.  Why do I write such things?
     

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  • Wed, Mar 27, 2013 - 11:01am

    #19
    FreeNL

    FreeNL

    Status Bronze Member (Offline)

    Joined: Mar 27 2013

    Posts: 90

    The value of U.S money is

    The value of U.S money is completely and utterly reliant on its reserve currency status.

    The US has been so heavily looted by the money powers that thats all thats left. The last light bulb if you will.

    I would expect a new unified gold based currency from the BRICS countries (which will expands into all of Asia, all of Africa, and all of South America), many of of whom have been buying gold like crazy, in addition to their own currencies, and that will be the death knell for the US and europe, who are already dead and zombie like and are awaiting that last nail in the coffin…so to speak. Hard to give a timeline, but it must be pretty soon, so they can take advantage of europes "no faith" banking barber shop runners club, and the U.S's " propaganda and money printing based stock market". Both ready to implode and you have to go somewhere dont you.

    Say goodbye Us dominance, world bank and the IMF. You wont be missed.

    The BRICS cant possibly do a worse job, and lets hope the new management (if there is such a thing) has some new ideas for the world.

     

     

     

     

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  • Wed, Mar 27, 2013 - 11:12am

    Reply to #15
    ao

    ao

    Status Platinum Member (Offline)

    Joined: Feb 04 2009

    Posts: 882

    fair or unfair

    [quote=davefairtex]Rector, you are too kind.
    I realize my summary of your summary was a tad reductive.  πŸ˜‰  I confess, I did it for comic effect.  Its clear to me that you are a sharp cookie.
    If I had a full time job, there's no way I could put this level of effort in.  People with real lives have a tough time figuring out what is going on.  It is a very complicated place, and it almost seems like they don't really want you to know what's happening.  Imagine that.
    As to why I do this?  It fascinates me.  I think its fun.  I started out long ago by watching the crash course, and ever since my interest in the subject/puzzle grew and grew and…well there you go.  It helps that I know how to write code, to retrieve, manage, and update my different data sets.  And tools these days are pretty powerful, so I can usually find a good chunk of what I need somewhere online.  If I couldn't write code, the whole thing would have been much harder.
    As for analysis – my current thought is, the eurozone is going down into deflation.  The bail-in policy, if that's what they're really going with, will accentuate this.  Bail-ins sure beat debt-funded taxpayer capital injections and overpaying for bad loans, and so they likely "the right thing", but it will end up destroying a great deal of money.  Or really, merely recording the money that has already been destroyed by malinvestment.  Just – I'd prefer that it not be MY money that ends up being destroyed, thanks anyway.
    One thing about deflation is, it won't treat PM very kindly.  My observation of the marketplace: PM tends to do poorly during bouts of deflation.  I don't have charts to demonstrate this, but that's what I've noticed.  Those who say "gold did well during the 1930s deflation" miss the fact that the US Treasury put a floor on gold prices through the gold standard – a standing offer to buy an unlimited number of ounces of gold for $35/ounce.  Look at silver's behavior during the 1930s if you want a model for how things are today.  Silver got hammered, because we were not on a silver standard, and so there was no price support.
    Oof, that last paragraph will get the goldbugs upset.  Why do I write such things?
     
    [/quote]
    davefairtex,
    How do you feel about "bail-ins" from the personal assets of banking executives and officials who irresponsibly or perhaps corruptly allowed these situations to develop or even shareholders who knew they were taking on investment risk as opposed to "bail-ins" from unwitting depositors who simply wanted a safe place to keep their money and had no idea that they may be parties to risk?

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  • Wed, Mar 27, 2013 - 11:31am

    Reply to #15

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    unfair bail-ins

    Ao –

    How do you feel about "bail-ins" from the personal assets of banking executives and officials who irresponsibly or perhaps corruptly allowed these situations to develop or even shareholders who knew they were taking on investment risk as opposed to "bail-ins" from unwitting depositors who simply wanted a safe place to keep their money and had no idea that they may be parties to risk?

    Fraud needs to be punished, the way we did during the S&L crisis.  Bill Black style.  1000 banking executives were prosecuted back then.  I'm all for it.
    It used to be that the officers & directors of a bank were personally liable for losses when a bank went down.  I'd be happy to go back to those days.
    Shareholders always get zeroed out in these bail-ins.
    Usually, "unwitting depositors" pick the bank with the largest interest rate without regard to bank safety, until its too late.  "Let me see – there's a CD with a huge yield, let me go pick that one."  Did you ever hear anyone say that?  I have.
    All of this needs to be fixed.  Depositors need to be more concerned with safety and they should understand, yield comes with risk.  Fraud needs punishing.  And the taxpayers do NOT need to foot the bill, as they did in Ireland.  There, senior bondholders were untouched, as were depositors, and bankers kept their jobs, while the Irish taxpayers went deeply into debt to the EU and forked over 70% of GDP over two years to plug the hole.
    If I were a bondholder, I'd sure like that plan.  I collect my coupons, get my principle back, and the taxpayers are stuck with the bill.
    If banks are going to pay interest, they have to lend the money out, and take risk.  If you don't mind foregoing interest (not that there is much these days) and you just want that "safe place to keep your money", get cash.  Seriously.  Don't put it in the banking system.
    It appears that each new generation gets to learn this lesson anew.  The hard way.

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  • Wed, Mar 27, 2013 - 12:24pm

    #20
    robie robinson

    robie robinson

    Status Gold Member (Offline)

    Joined: Aug 25 2009

    Posts: 864

    Summa Econimica

    Let us have the candor to acknowledge that what we call "the economy" or "the free market" is less and less distinguishable from warfare.”
    ― Wendell Berry

    gotta love this guy, Robie

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  • Wed, Mar 27, 2013 - 2:37pm

    Reply to #20

    Jim H

    Status Diamond Member (Offline)

    Joined: Jun 08 2009

    Posts: 1798

    Yes Robie..

    The freemarket is hard to find these days… I maintain that there is one out there.  There is one signalling mechanism that can be viewed as an unadulterated signal of the free world's true disgust with the nature of fiat currencies everywhere, and the treatment of the common man by bankers everywhere.  I said it a few years ago when interest rates dropped to near zero; your fiat money is now worthless to the very bankers that want you to believe it is the most desireable thing there is.  They defend the value of their paper vs. Gold and Silver by brutally manipulating them down with every trick in the book.. and yet they will pay you nothing.. in fact they will guarantee that you will lose money over time (negative real rate of return) if you loan (deposit) the money back with them..  They don't want it (it's a liability on their books) and they don't need it to make loans anymore.  Not only that, but they will short their own currencies, right in your face, by buying Gold (not the US mind you, but most other central banks in the world).. and then suggest that you don't need or want any.  The joke is on you sheeple!http://etfdailynews.com/2013/03/25/central-banks-buying-gold-for-no-reason/
    The canary in the coal mine.. the marker for the worlds desire for an alternative currency that is NOT of the central banker matrix.. is Bitcoin.  I know there are many naysayers here.. and I am not arguing that anyone should invest in Bitcoin.  What I am saying is that the ever escalating Bitcoin price is a signal that is pure and coherent.  It is not a bunch of greater fools.. though I am sure there are some momentum-based speculators playing along (and one hedge fund).  A Bitcoin will cost you $87 today.  It was $12 at the beginning of the year.  It will be worth a lot more than $87 a year from today barring a Bitcoin black swan.
       
     

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  • Wed, Mar 27, 2013 - 5:37pm

    #21

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 691

    Insurance - what good is it?

    Dave,

    Actually, I was aware that "deposits" at the bank are loans to the bank. (It was a shock when I first learned this fact.) These loans have special provisions – I can demand payment at any time and "my" funds are insured to an (overly) generous limit. Those are the rules. I didn't make them, but I'm forced to abide by them. I expect the bank to follow the same set of rules. (Call me naïve.)

    I don't know the particulars of the Cypriot version of FDIC, but I assume that it is similar to our system. Doesn't the insurance protect depositors in case of bank insolvency? So … if my deposits are actually the bank's funds and the bank is insolvent, shouldn't the insurance kick in and make me whole (up to whatever limit was set)?

    I read Detlev Schlicter's article (thanks for the link, Jim) where he was in close alignment with your view. In the comment section, he was responding to a question and essentially said that the shareholders should be first in line to pay out, followed by the bondholders, and finally the depositors. Did that occur in Cyprus? In your opinion, how should the liabilities be unwound?

    Finally, how do you see this progressing from here? Which country is the next likely contestant? Assuming it will spread, what can we do to avoid these problems?

    Grover

    PS – I'm not a fan of insurance or regulation – simply because they both fail when needed the most. I am a fan of transparent contracts and parties adhering to the provisions. I see the Cyprus situation as a breach of contract. At this point, it doesn't matter that the contract shouldn't have been made.

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  • Thu, Mar 28, 2013 - 11:27am

    #22
    treebeard

    treebeard

    Status Bronze Member (Offline)

    Joined: Apr 18 2010

    Posts: 551

    Dreamers

    The countervailing force of enthalpy is complexity and conciousness, as less resources are available more complex systems evolve to more efficiently utilize and recirculate the energy and nutrients that are available in the system.  Intelligence and conciousness has increased over time as energy has decreased (very big picture).  The ecological systems that currently exist on the planet that are under threat are the most complex and diverse systems yet to evolve.

    The recent industrial and informaiton age revolutions are the launching pad for a dynamic shift in human conciousness.  The real perils that we face are catalysts that will initiate this change.  The level of communication and awareness around the planet today exists at an unprecidented level.  The brief injection fossil fuel energy has taught us both the limitations of material growth and has at the same time created information systems and networks that allow instantaneous communication around the globe we to often taken for granted, but are truely amazing.  The pain has come with a gift.

    Appernt complexity that we see today is a combination increased awareness of an emergant new planetary paradigm and the necessary destruction of the limiting industrial one.  Cyprus is a perfect example, we have information almost instantaneously of events happening in financial systems nearly half way around the world, but at the same time the information is less than transparent because of the criminal, destructive and violent forces at play.  These are related but tangetital forces that are moving in opposite directions.

    The complexity and unpredictability of financial markets are not the intricate complexites of dynamic, diverse conciously evolving emergent ecosystem, but the violent disolution of a dying human system and it is important not to conflate the two together that does not make sense.  Energy intensive industrial systems have their dark side that is now perishing and with it the Cartisian mind set.  Much of what is negative in the world is the result of lots of energy driving unprocutive activities based on an outmoded understanding of the world.  The warfare mode of industrial agriculture is failing because of the kill or be killed primitive dynamic of consciouness behind it, even if it is using complex methods to manipulate the plant genome.

    Fragments of the new emerging localized economies based on intimate relationships with natural and human communites are just becoming visible.  Young farmers are moving back to the land with a new and deeper understanding with what it means to be in relationship with the planet that sustains us. We now understand that there is no place that is "away" to throw things any more.  We now understand the destructive nature of competitive relationships that nonsensically create "winners" and "losers" are a projection of our on dark side and are not intrinsic to natural systems.  If you are competing with another person for anything then you become lost because your own path is unique as are your gifts.

    The destructiveness of the current paradigm is it simplicity, it is voraciously destroying diversity culturally and ecologically creating the sameness of death.  Things will fracture and diversfy in a way that creates the resiliency of a diverse and dynamically evolving community.  Change is stressful, particularly at this scale, but it carries with it a grounding and centering dynamic that connects us again with what is important and meaningful in life.  I think the sentiment expressed of waiting expectantly and consciously captures the depth of what is happening.

    We are the dreamers that are collectively dreaming this reality,  and we as the dreamers are about to wake up.

     

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  • Thu, Mar 28, 2013 - 5:47pm

    Reply to #21

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    cyprus insurance

    Grover -Very good, sorry for explaining something you already know!
    The original plan was a "tax on savings" so theoretically the deposit insurance scheme wasn't at issue.  Under that plan the tax money was used to recap the banks – they never failed, so no "deposit insurance" was called into question.  Everyone just paid 7% or 10% or whatever the tax was – from every account in Cyprus, regardless of the condition of the bank they were in.  Seemed unfortunate if you'd picked a good bank but had to pay this "tax" regardless.  Unfortunately for this plan, the Cypriot Parliament had to pass a law to make it happen – and they balked.  So – plan B was a normal resolution of the banks, and that's where we are today.
    According to what I read, shareholders were wiped out, the CEO and board were fired, checks were written to the insured accounts (although capital controls are in place to prevent them from sucking all the money out tomorrow – probably because that money isn't really there yet), and the rest of the creditors will have to wait until the assets get run off.  I'm not sure where the uninsured depositors end up being placed.
    Insofar as who takes losses in the bankruptcy, it depends on the laws of the country.  Some places say depositors rank above senior debt (the US does that – called Depositor Preference, passed in the early 90s), while most other places plop them in as general creditors so they're mixed in with the junior debt and everyone else with a claim against the bank.  The assets are slowly sold off, and then the creditors get paid – eventually.  Lehman Brothers is an example.  They're STILL selling stuff.  Being paid well to do it, too, I understand.  Here a recent Lehman article: senior unsecured creditors will eventually get 21 cents on the dollar.  And apparently they're getting a payment soon.
    http://www.reuters.com/article/2013/03/27/us-lehman-bankruptcy-idUSBRE92Q0HV20130327
    And yes, the government deposit insurance (basically a promise, like social security, since there are not actual funds in place to back it up) means the government writes you a check for the limit (100k euros).  But without funds in place, it has to go borrow the money from the bond market to write you that check.  So when the banking system is monstrous compared to the GDP of the nation involved, self-insuring that 100k euro per account for such a massive banking system stretches the realm of what's possible for the country.
    As for who is the next on the hit parade – in terms of bubble poppings and banks-in-trouble, Spain is the next on the list.  If I could upload images, I'd show you a raft of charts.  Basically there are hundreds of billions in bad debt there, and very little has been written down.  Massive property bubble, they're lying about property values, and about how much bad debt the banks have.  And they haven't written down much at all, their sovereign debt is 83% of GDP, unemployment 26%, government deficit -7% GDP, and their GDP is contracting -2% per year.  Basically, all that means is, they can't sell bonds and rescue their own banks themselves without eurozone aid.  So unless someone writes them a 500 billion euro check to recap their banking system, they'll have to figure out where to find that money somehow.  They are a perfect candidate for a bail-in.
    There are two types of problems in the eurozone.  Countries with sovereign debt problems + GDP contraction, and countries with popping property bubbles whose banks now have a bunch of bad assets.  Greece, Italy, Portugal: sovereign debt + contraction.  Spain, Ireland: popping/popped property bubble.  And Greece now has bad banks too, since their banks bought a bunch of Greek sovereign debt that was defaulted on!  And Cyprus bank problems were also fallout from Greece's sovereign debt default.  Whenever a sovereign defaults, it causes banking system problems because the banks buy a crapload of sovereign debt – with a zero risk weighting!
    You might also scan news articles to get a list of finance ministers who have said "<my country>  is NOT the same as Cyprus."  So far I've seen Portugal, Spain, Slovenia, Malta … and one other, I forget where.  It's only time to worry once you've seen an official denial!
    What can we do?  Have no deposits whatsoever in Spain.  I wouldn't be in the euro either.  And don't go short the buck, not yet anyway.
    One last point: I heard from a broadcast Marc Faber did that Cypriot banks were paying 6% on their deposits.  This in a climate when *MY* bank pays me 0.1%.  I'm not feeling super sorry for the foreigners who came in looking for "the sure thing good deal" and ended up taking a haircut.  High reward probably means high risk.  Perhaps – don't go for the highest yielding CD you can find?

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  • Fri, Mar 29, 2013 - 1:34am

    Reply to #15

    Nervous Nelly

    Status Bronze Member (Offline)

    Joined: Nov 24 2011

    Posts: 179

    Most enlightening thread!!

     Davefairtex 
    One thing about deflation is, it won't treat PM very kindly.  My observation of the marketplace: PM tends to do poorly during bouts of deflation.  I don't have charts to demonstrate this, but that's what I've noticed.  Those who say "gold did well during the 1930s deflation" miss the fact that the US Treasury put a floor on gold prices through the gold standard – a standing offer to buy an unlimited number of ounces of gold for $35/ounce.  Look at silver's behavior during the 1930s if you want a model for how things are today.  Silver got hammered, because we were not on a silver standard, and so there was no price support.

    Oof, that last paragraph will get the goldbugs upset.  Why do I write such things?

    I'm no expert, far from it but I've observed the same trend that deflation isn't kind to gold. That didn't keep me from buying it cause the risk is too high either way. 
    The global financial problem is so complex that I have diffcultly wraping my head around the whole thing. It's  constantly shifting. The hours spent trying to have a heads up on what's going on is sometimes exhausting. I've decided to spread my risk and wait for signals if a change of action is needed. 
    As for Europe's deflation. Well it's forcing it's spendthrift members to shape up or ship out. Forcing deflation. The Euro currency acts as a gold standard for the european union members in the same way gold did before 1971 for the world. That's how I see it. I might be missing something. 
    Thanks to all!!  PP needs all of you.
    Sonya 
     

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  • Fri, Mar 29, 2013 - 6:01am

    Reply to #21

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 691

    Laws make it legal, not moral

    Dave,Thanks for the answer and insights, but I'm bothered by your glibness concerning Cyprus. I understand that Cyprus had lax banking standards that attracted foreign money, but would you still have the same response if it were your money on the line? Were it to happen here, would you throw up your hands and say that it is legal because our lawmakers say it is? I don't know about you, but I'd be angry and feel that I'd been betrayed. Given the opportunity, I'd act accordingly.
    Even 3 weeks ago, would you have thought that the events that have transpired were more than a remote possibility? Something is seriously wrong when these desperate acts are contrived … let alone, executed. And, yet they were. The State acted like burglars in the calm of night when nobody expected it.
    I felt the same feeling in October, 2008 with all the bailouts here. The general populace was dumbfounded, not understanding the ramifications, but the feeling was that the alternative was worse and we had to bail out the big banks. The bailouts resolved nothing. Now, our condition is much worse as a result.
    I see trust being destroyed. Very few can truly forgive (and forget the actions of) a cheating spouse. The people in Cyprus will rightly act as if the State will do something else heinous. That alone will change communal behaviors sufficiently to escalate the game. Where will that go? Wait until push turns to shove.
    As bad as the outcome would have been, they would have been better off to exit the european union under their own terms. Spain, Italy, Portugal, and Greece will suffer the same fate in time. Why any of their citizens has more than a token amount of money in the banking system is beyond me. Perhaps they believe the line that Cyprus was unique. Perhaps they see the insescapable clutches of a State gone wild. After all, if monetary property in the bank can be confiscated, why can't the State simply attach real estate or stocks or whatever else is available?
    Grover

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  • Fri, Mar 29, 2013 - 4:37pm

    Reply to #15

    Jim H

    Status Diamond Member (Offline)

    Joined: Jun 08 2009

    Posts: 1798

    Deflation and Gold - misinformation from Davefairtex

    Davefairtex and Nelly,  First off, we were in a totally different monetary regime in the 1930's since we were still on at least a nominal Gold standard during the depression… and of course, we are not today.   If you think you are going to take lessons from the 1930's and extend them, in some linear (chartwise) fashion to today… I really have to question that. If I look at how Gold behaved in 1933.. what I see is the Gov't confiscating, and then repricing Gold in dollars from $20.67 —> $35.  Exactly where is the poor Gold performance here in dollars?  To use a Martensonism;  I am having some trouble seeing that even squinting really hard.  
    link:   http://en.wikipedia.org/wiki/Executive_Order_6102
    Today Gold trades as a parallel, alternative form of money.  Regardless of whether there is deflation happening in pockets here or there (and there certainly is, and will continue to be) there will be more and more demand to trade the relatively small amount of non-infinitely printable forms of money that go by the names Gold and Silver for these infinitely printable money tokens called dollars, euros, pounds, and yen.  In case you can't read the tea leaves yourself, I will give you the color-by-numbers on the game that is being played out now so as to try to keep up the appearances of adequate supply in a system that is reaching it's limits;
    1)  Keep coin store shelves from getting empty so that the sheeple don't wake up.  See – you can get as much Gold and Silver as you want!  But who would want it anyway, since the price can go down.. see all those steep drops in price (precipitated by dropping loads of naked short Comex paper contracts all at once)!  Yuck..scary!  Note that US pre-1964 90% is in very short supply now and premiums have been on the rise.. can't print that, right?.  ref:  http://www.tfmetalsreport.com/comment/287717#comment-287717
    2)  Satisy the middle market .. the low tonnage sales in the London OTC market with Western leased, rehypothecated Gold, so that exchanges don't break.. no commercial signal failures.  The big picture view of this operation, which has been described by many commentators as the movement of the West's Gold to the Eastern nations… was outlined recently by Sprott using US trade records as the smoking gun.  His conclusion;

       Over the span of 22 years, the total amount of gold that the US has exported – above and beyond its supply capability – is almost 4,500 tonnes! A truly stunning figure.
    ref:  http://www.zerohedge.com/news/2013-03-19/sprott-do-western-central-banks-have-any-gold-left-part-ii

    3)  When the real whales want to move Gold.. don't let them.. stifle them.  Germany wanted to repatriate their Gold from the US.. how did that go?

    http://www.zerohedge.com/news/2013-01-16/it-will-take-fed-seven-years-deliver-300-tons-german-gold

    India represents a big chunk of physical demand.. we can't have that, right?

    http://www.zerohedge.com/news/2013-01-22/india-scrambles-make-gold-purchases-ever-more-difficult-hikes-import-tax-and-duties-

    Recently the Dutch bank Amro told clients that their Gold was fine.. now worries.. but sorry, you can't take it out of the banking system anymore;

    http://www.zerohedge.com/news/2013-03-24/another-gold-shortage-abn-halt-physical-gold-delivery

    So go ahead folks.. take Davefairtex' word for it… you don't want any of that stinkin Gold because it's just no good for what is to come.  RIIIIIIIIIIIIIIIIIIIIIIIIGGGGGHHHHHHHHHHHHHHHHT.   
     
     

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  • Fri, Mar 29, 2013 - 4:49pm

    #23
    robie robinson

    robie robinson

    Status Gold Member (Offline)

    Joined: Aug 25 2009

    Posts: 864

    We'll farm

    for gold and silver, it'll keep you fed. but don't bring your American Express.

     

    robie

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  • Sat, Mar 30, 2013 - 2:32pm

    #24

    Nervous Nelly

    Status Bronze Member (Offline)

    Joined: Nov 24 2011

    Posts: 179

    A little over reactive.

    Jim"s Quote:

    So go ahead folks.. take Davefairtex' word for it… you don't want any of that stinkin Gold because it's just no good for what is to come.  RIIIIIIIIIIIIIIIIIIIIIIIIGGGGGHHHHHHHHHHHHHHHHT.

    Sorry still don't know how to block quotes.

    I'm not taking sides just voicing an opinion that during deflation it can be unkind to gold. I feel I've been thrown in the lion's pit.

    I own the stuff and I will ride the ups and downs because in the long run I'm protecting myself and my family. 

    Sonya

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  • Sat, Mar 30, 2013 - 3:45pm

    Reply to #24

    westcoastjan

    Status Bronze Member (Offline)

    Joined: Jun 04 2012

    Posts: 177

    deflation or inflation who cares, it's a hedge

    Nelly, you are right that to use PM as a hedge to protect you and yours in the long run.This is what it is all about for me. Given the complexity of the world economy, no one can predict whether we are going to have inflation or deflation. Knowing that, prudent people, such as those who follow this site, hedge their bets by owning some PM.
    The point can be argued forever about the validity of holding PM. There definitely seem to be the believers and non-believers, which is good and right, for the arguments help me to decide what to believe myself. The conclusion I have come to is just don't be so wedded to any position that you fail to remember the rule to diversify. So there is room for holding some PM as part of a resilient portfolio. How much one holds then becomes a matter of how much one is wedded to their particular belief system.
    With each news article of yet another financial swindle, which are occuring far too often these days, my level of trust in the "status quo system" is further eroded. If a person holds monetary assets, then that "trust" has to be put somewhere. PM and gold in particular have been viewed as a store of wealth forever. You cannot change such a mentality, although lord  knows they have tried with fiat money. But the fiat game is nearing the end as more and more average, everyday people like me are waking up to the fact that there trust has been misplaced, and they need to place it elsewhere. That will be the moment when PM will stand out as the only alternative. It is likely that by the time they realize this, there will be little if any available to them.
    Jan

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  • Sat, Mar 30, 2013 - 4:14pm

    Reply to #24

    Jim H

    Status Diamond Member (Offline)

    Joined: Jun 08 2009

    Posts: 1798

    Nelly

    I am maybe too blunt sometimes.. true.  Seeking the truth is not always pretty business.  If someone new to the debate reads Dave's comment.. they might be scared away from diversifying their assets into Gold (and Silver)… should they be?  We can't predict the future with certainty, but we sure can view the past with a high degree of certainty.. and that's all I am asking here.  Davefairtex said;

     Those who say "gold did well during the 1930s deflation" miss the fact that the US Treasury put a floor on gold prices through the gold standard – a standing offer to buy an unlimited number of ounces of gold for $35/ounce.

    This is factually untrue.  What the Gov't did was to buy up your Gold, under order of law, at $20.67 per ounce.  Only after they had the Gold did they revalue it at $35 per ounce.  The Gov't didn't put a floor under Gold… the floor was dropping out from under the dollar due to expanding the system beyond the bounds that Gold backing would allow, hence they needed to devalue the dollar.  If you had held onto your Gold (against the law).. you won.  If you had taken the dollars in exchange.. you lost.  Gold protected you. 
     

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  • Sat, Mar 30, 2013 - 4:33pm

    Reply to #24
    Hrunner

    Hrunner

    Status Bronze Member (Offline)

    Joined: Dec 28 2010

    Posts: 209

    @Nelly, Jim is Correct

    Another way to say it, is that the government tried to get suckers to sell it their gold at a sucker's price ($20) and use to shore up the U.S. reserves.  If you sold at $20, you were a sucker.  The government did a very corrupt thing (but it was in the government's best interest- not the citizen), to immediately revalue it at $35.Yes, there was a transition period before you could reclaim your USD for your oz of gold, but, assuming you could hold on to buy food, shelter, etc, your gold represented a sound store of your wealth, despite the propaganda and corruption coming from the government.
    It is no different today, people and institutions do not fundamentally change-  1) Corruption, Propaganda, Misdirection in markets, followed by 2) Transition (how long, how bad, what form?), 3) store of wealth repriced and represents sound savings.
    H
     

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  • Sat, Mar 30, 2013 - 5:18pm

    #25

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 691

    Canadian Bail-Ins

    Sonya, Jan,

    I read an article that Canada put language in the 2013 budget that would allow "bail-ins" for the too big to fail banks. Apparently, it was crafted before the Cyprus event. What is your take on this? Given Cyprus, how real does it feel? Are you changing any banking behavior as a result? Is it common knowledge amongst the populace (and discussed) or something beyond the comprehension of the "little people"?

    Grover

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  • Sat, Mar 30, 2013 - 6:52pm

    Reply to #25

    westcoastjan

    Status Bronze Member (Offline)

    Joined: Jun 04 2012

    Posts: 177

    sadly no one is paying attention

    Hey Grover,I have to say that the bail in issue as outlined in our federal budget is no where near the radar screen of the "little people" as you call them. Most people remain completely oblivious to all things economic, with little to no comprehension of how inter-connected the financial world is, and how a little country like Cyprus could impact us. I wish it were not so. I am alarmed by this to the point that I have forwarded the link on this info to the editor of the Financial Post, asking him to investigate further and then to write an op-ed it in the paper so that the information reaches a wider audience. I will also be writing to my MP (like your Congressmen) to ask them for clarification of what the heck is going on.
    I have forwarded the link to people I know, and by an large I get the impression that I am thought to be over-reacting. I do not think I am. This feels very real to me. The Harper govt is anything but transparent, and given his track record, this move does not surprise me. The statement about planning for a bail-in is buried in a large (+440 pages) budget document that your average person would not even consider reading, and the MSM would never zero in on anything like that.
    If this was in fact conceived before the actual Cyprus event, then that tells me that this plan was likely discussed discreetly at the G7 (or is that G8?) level. Perhaps Cyprus really was a test run to see how it would go down. That would not surprise me at all either. There has to be some level of collusion at the most senior of govt levels to deal with this mess. I can't see any one govt operating in a vaccuum, making decisions of this magnitude, knowing the far reaching implications. Does anyone really thing the troika did this without the US or other countries knowing about it? So the way I see it, they were all aware of it, and were/are watching closely to see how it all unfolds. It scares me that if the sheeple do not react with sufficient alarm that TPTB will see this as a green light for further bail-ins.
    Our banking system is completely different from that in the US. The big six operate nationally, in every province. Each has 1000's of branches, but an individual branch could not "fail". Therefore we do not have to deal with the issue of an individual bank going belly up, such as what Americans do – at least that is my understanding of your system. So I suppose one could call it safety in numbers, to the degree that the branches are backstopped by "headquarters".
    Has it changed how I do my banking? Well, I made some changes a while back when I first became "enlightened", largely from the Crash Course, and from following all the great discussions here. I have not made big changes, but I have contingency plans, setting myself up so that I can react quickly if I need to. I am increasing my search for local investments that are outside of the banking system, as I think that there are acute risks in the current system. As CM has said, the next 20 years will look nothing like the past 20 years.
    It remains difficult to have a level of awareness that is largely absent in the general population. I watch people go about their lives with total amazement at the level of obliviousness. At times I wonder if ignorance really is bliss, but then reality wakes me up, and I am thankful that I have the level of awareness that I do, and I have my plans in place. I just hope I never have to use them.
    Happy Easter!
    Jan

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  • Sat, Mar 30, 2013 - 8:31pm

    Reply to #25

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 691

    Interesting times

    Jan,Thanks for the informative post. I'm dumbfounded about the general lack of knowledge amongst my friends. I mentioned Cyprus to a friend who I consider enlightened and he asked me if I was referring to the trees. He had no clue about what has happened these last 2 weeks in southern Europe. I spent 5 minutes or so briefly explaining the series of events and his response: "It can't happen here." We discussed it for more than an hour. At the end of the conversation, he was stunned.
    [quote=westcoastjan]
    If this was in fact conceived before the actual Cyprus event, then that tells me that this plan was likely discussed discreetly at the G7 (or is that G8?) level. Perhaps Cyprus really was a test run to see how it would go down. That would not surprise me at all either. There has to be some level of collusion at the most senior of govt levels to deal with this mess. I can't see any one govt operating in a vaccuum, making decisions of this magnitude, knowing the far reaching implications. Does anyone really thing the troika did this without the US or other countries knowing about it? So the way I see it, they were all aware of it, and were/are watching closely to see how it all unfolds. It scares me that if the sheeple do not react with sufficient alarm that TPTB will see this as a green light for further bail-ins.
    [/quote]
    At first, I thought that the whole bail-in was a hare brained scheme concocted during a late night brainstorming session. Since it was discussed (and included in Canada's budget documents prior to Cyprus) it is obvious that there is more thought and coordination behind the idea. It is looking like Cyprus was a test run. That scares me!
    If a rational person feared an imminent bail-in, wouldn't they wish to remove their "deposits" from the bank? If enough people did, wouldn't the bank fail … thus setting the stage for the bail-in? It is a self fulfilling prophecy. If it were to be used more than 1 time, trust in the system would vanish. Corrupt insiders would have superior knowledge and be able to protect their money entirely. The trusting souls who believed the lies would be transformed into poor bag holders. How will Joe Six Pack respond when his money has been "taxed" and he can't buy more beer? The statists will have millions of reasons to confiscate citizen guns.
    Is that the ultimate plan (or am I just overly paranoid?) I read about homeland security buying 1.6 billion rounds of ammunition and wonder why. Do TPTB want to incite violence and then be "forced" to deal with the threat? Who would have thought a mere 3 weeks ago that the theft tax imposed on savers was even a remote possibility?
    Grover

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  • Sat, Mar 30, 2013 - 9:17pm

    #26
    therooster

    therooster

    Status Member (Offline)

    Joined: Oct 03 2011

    Posts: 18

    A suggestion. A shift in paradigms.

     

    A practical suggestion.  Rather than looking at the USD exclusively as a debt currency, it may be be better to look upon it as a real-time measure for gold-as-money. Real-time gold is an "offshoot" from the severing of the FUXED gold peg back in 1971 with the closure of Bretton Woods. The dollar is only a currency within the debt paradigm. Within the parallel (and very current) real-time gold-as-currency paradigm, the USD still has a very useful and powerful purpose, not as a currency but as a real-time measure for bullion based weight and as a bridge from the debt paradigm to the asset paradigm. I've reverse engineered real-time gold-as-money (whose weight can be digitized) and I see the FED's footprints all over it. Anyone else ?

     

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  • Sat, Mar 30, 2013 - 9:41pm

    Reply to #25
    Nate

    Nate

    Status Silver Member (Offline)

    Joined: May 05 2009

    Posts: 318

    depressing times

    [quote=Grover]Who would have thought a mere 3 weeks ago that the theft tax imposed on savers was even a remote possibility?
    Grover
    [/quote]
    We are in the middle of our own 'Cypress-theft' type of event in central California.  Our water district has an agreement with San Francisco to share water from our watershed.  It has worked well for many, many years.  Due to Dianne Feinstein's common sense and influence, she has kept all of Southern California interests at bay and preserved both the farmers and peoples water.  I give her an A+.
    Last week the 'environmentalists' made a case for between 35 to 98% of our (surface) irrigation water.  The watershed they defined excludes San Francisco (Hetch Hetchy) and keeps it off the radar for Feinstein (at least for now).  The arguement on the surface is 'it's for the salmon'.  The science does not support their argument.  Our irrigation district had determined about 220,000 of (prime) farmland would be idled.  Many jobs would be lost.  The local dairy industry simply can not survive this.  And real estate values would plummet.
    At the same time Governor Brown has proposed a multibillion $ delta tunnel from near Sacramento to – you guessed it – export pumps to Southern California. So run the water down the river, pick it up with the delta tunnels, and ship it to Southern California so we can sustain lawns and swimming pools.  Brilliant!
    Courts will not allow this to happen.  But if you appoint a water board and enlist the pro-salmon crowd, you bypass lots of sticky issues.  Eminent domain?  Forget about it – just steel it.
    We are in the early stages of this, and it may all blow over.  But as Chris said, they will simply change the rules to suit their needs.
    I picked up some more firewood today and drove by a prime 20 acre almond orchard for sale.  Can't help but think someone wants to cash out while property still has some value.
     
     

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  • Sat, Mar 30, 2013 - 9:54pm

    Reply to #26

    Jim H

    Status Diamond Member (Offline)

    Joined: Jun 08 2009

    Posts: 1798

    Rooster

    I love talking about debt money and Gold, debt money vs Gold, etc.  I have to admit though, I have no idea what you are talking about.  Define your terms please;1)  What is "real time Gold" and how is this different than the price of Gold, at any time, in dollars?
    2)  What does it mean to, "digitize" weight? 
    3)  What is, "bullion based weight"?
    4)  What is the, "Gold as currency paradigm" and how is this different than the price of Gold, at any time, in dollars?
    Thank you, Jim
     

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  • Sat, Mar 30, 2013 - 10:23pm

    Reply to #25

    Nervous Nelly

    Status Bronze Member (Offline)

    Joined: Nov 24 2011

    Posts: 179

    Bail In

    I agree with what you wrote Jan, but let's not forget that the Canadian Banks were also bailed out  by the taxpayers and it was kept as much as possible under the radar. The Canadian banking system has a reputation around the world that the government will try to protect at all costs. Even if our system is more conservative than US , it's not infallible. The fact they wrote that "Bail In" paragraph in the 2013 budget sends a red flag in my book!!  Something's going on. The world banking system is collapsing and all these measures to contain this mess is being set up.  We have Cyprus , New Zealand , the whole of EU and now Canada with these " Bail In" measures.  Who else? No where to run.  http://www.huffingtonpost.ca/2012/04/30/canada-bank-bailout_n_1466219.html 
    I'm aware of what's going on and the dangers of losing a portion of my life savings is real. What really gets me raging mad is that we the responsible citzens that worked to pay our debts, taxes and saved our money are being cornered like rats at a time where we can't afford to lose.  What consoles me is I'm not part  of  sleepwalkers who will be taken by surprise. Have you ever tried waking some up ?  You're no longer fun or party material.
    I don't have the energy I had when I was 25 to pick myself up and start over again.  I had already removed a good chunk of my money out of the bank to gold and cash. Now with this, everything seems even more urgent.
    Sonya
     

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  • Sat, Mar 30, 2013 - 10:41pm

    #27

    Greg Snedeker

    Status Silver Member (Offline)

    Joined: Oct 22 2012

    Posts: 380

    Rooster...Paradigm shift

    I agree with Jim, can you explain further. I think I get what you're saying but I don't get the "Fed footprint all over it" part.

    My understanding of what you're saing is…Turn USD into a corresponding fractional/digital representation of the bullion weight (literally how much it weighs) …i.e. similar to the past, but the dollar isn't pegged to a "dollar" amount of  gold, but rather corresponds to a digital weight and it floats in real-time with demand. This would shift the dollar to a unit of measurement that has an asset value that floats with demand (not pegged), and no longer holds a fictitious fiat value.

    Does this mean the Fed still prints or retracts money in accordance with the demand to inflate or deflate the price of the actual value of the weight?

    Interesting concept

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  • Sat, Mar 30, 2013 - 10:41pm

    Reply to #26

    Nervous Nelly

    Status Bronze Member (Offline)

    Joined: Nov 24 2011

    Posts: 179

    MMMMmmm ?

    I'm in Jim's camp on the one can you explain?
     

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  • Sun, Mar 31, 2013 - 12:02am

    #28

    Greg Snedeker

    Status Silver Member (Offline)

    Joined: Oct 22 2012

    Posts: 380

    Correction

    I was in hurry writing the last post. What I meant to say:

    .i.e. similar to the past, but gold (oz) isn't pegged to a "dollar" amount, but rather the dollar (money) supply corresponds to a digital weight value (oz/fractional) that floats in real-time with demand.

    Thank you

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  • Sun, Mar 31, 2013 - 1:15am

    Reply to #25

    westcoastjan

    Status Bronze Member (Offline)

    Joined: Jun 04 2012

    Posts: 177

    to Sonya and Jim and Gillbilly

    Nice post Sonya, and I concur 100%. It sure is getting interesting… I am thinking this is a good time to invest in companies that make home safes. Lots of people are going to be looking for places to stash cash.I also agree with the three of you asking for explanation from therooster. That was way too technical for my simple mind, so if you folks are wondering too, well, then I don't feel so badly
    But in the meantime, while we wait for the reply, I could not help but smile at the acromym he/she used in the following sentence:

    Real-time gold is an "offshoot" from the severing of the FUXED gold peg back in 1971 with the closure of Bretton Woods.

    The bold is my emphasis. I have no idea what the acronym means, but I am going to steal it, and I hearby declared that this is the new term to be used when we describe bail-ins and other covert financial shenanigans e.g. we are "fuxed".
    Sorry, I could not help myself
    Cheers gang!
    Jan

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  • Sun, Mar 31, 2013 - 1:55am

    Reply to #25
    ao

    ao

    Status Platinum Member (Offline)

    Joined: Feb 04 2009

    Posts: 882

    yes we are

    [quote=westcoastjan]But in the meantime, while we wait for the reply, I could not help but smile at the acromym he/she used in the following sentence:

    Real-time gold is an "offshoot" from the severing of the FUXED gold peg back in 1971 with the closure of Bretton Woods.

    The bold is my emphasis. I have no idea what the acronym means, but I am going to steal it, and I hearby declared that this is the new term to be used when we describe bail-ins and other covert financial shenanigans e.g. we are "fuxed".
    Sorry, I could not help myself
    Cheers gang!
    Jan
    [/quote]
    Jan,
    The term is an old one that's been around for a while … fuxored.  Which is what we all are, lol.
     
     

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  • Sun, Mar 31, 2013 - 2:00am

    #29
    ao

    ao

    Status Platinum Member (Offline)

    Joined: Feb 04 2009

    Posts: 882

    FDIC, BOE, and Fed sanctioned haircuts - coming to a bank near u

    What we've suspected all along is spelled out in clearer terms.

    http://silverdoctors.com/fdic-bank-of-england-create-resolution-authority-for-unlimited-cyprus-style-bail-ins-for-tbtf

    Just another reason why, yes Jan, we are fuxored.

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  • Sun, Mar 31, 2013 - 3:09am

    #30

    Greg Snedeker

    Status Silver Member (Offline)

    Joined: Oct 22 2012

    Posts: 380

    Real time gold currency

    I think (and I stress think) that what Rooster is saying is that gold as currency is coming back into fashion (Arizona being one state), but not like before because it's value fluctuates in real-time. Gold used to be pegged at $35/oz before we went off the gold standard in 71, but we now have the current gold market which acts in real-time and as a viable alternate currency (but not the main currency). People are used to the dollar as being the means of exchange (for better or worse), but instead of using it as a fiat currency, we use it as a way to measure the weight of bullion (being the type of gold). I think this is what he's proposing as a bridge.

    It's kind of an interesting reversal of the gold standard before 71. This way the gold market could continue to trade in real-time and you could have those changes reflected in the money supply according to fractional weights determined by the market. It's an interesting concept if I'm right in my interpretation (of course, I could be completely wrong:-). Since the Fed pushes new money into the market via the typing of a few computer keys, why not have a network system that systematically tracks gold exchange in real-time and adjusts the money supply. That way you could keep using the greenbacks, they would be backed by gold, but there would be no peg.

    I shall wait for the rooster to answer (cry) in the morning. Just don't cry three times, it's Easter tomorrow.

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  • Sun, Mar 31, 2013 - 11:06am

    Reply to #15

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    take my word for it? you didn't even QUOTE me!


    So go ahead folks.. take Davefairtex' word for it… you don't want any of that stinkin Gold because it's just no good for what is to come.  RIIIIIIIIIIIIIIIIIIIIIIIIGGGGGHHHHHHHHHHHHHHHHT.

    Wait.  Take my word for it?  I said you don't want any gold?  When did I say that?
    I find it unfortunate that Jim used my name in his title, but decided not to quote anything I said.  He just wrote his post in response to something he imagined I said – or perhaps he imagined he was reading my mind.  How else could he possibly know what my word was – or what I might recommend.
    So Jim, can you please go back to my actual writings and quote me, and THEN respond.  Is that too much to ask?
    Now then, at the risk of being accused of attempting to read Jim's mind, there is one area I can address – about gold price supports during the Depression.  Treasury stood ready to buy any amount of gold (printing new dollars in exchange) for the price of $20, and then $35.  The price of gold COULD NOT DROP BELOW $20 because of this policy.  That's good, because in severe deflations, the price of almost all "stuff" drops as the supply of dollars gets destroyed.
    That's what I mean about price supports.  Its GOOD to own gold during a severe depression – but only if you are on the gold standard!
    So today some people imagine that "silver is money."  But Treasury didn't buy silver during the depression.  What did the price of silver do?
    Silver went from 58 cents in 1928 to 25 cents in 1932.  Must have been a fun 3 years for holders of silver.  It rebounded by 1936 to 58 cents after the reflation – back to flat again – only to drop back down to 35 cents by 1940.  It was only after 1945 that the price of silver moved higher than its pre-1929 price.  That's 17 years of fun for anyone who bought in 1928.
    That's the "downside" risk to holders of gold if we have a deflationary rerun of the Great Depression.
    So if gold dropped back down to 800, would you be having a fun time?  For four years?  Certainly if and when a reflation event happens, life will suddenly look better.  But if we imagine gold is a Miracle Metal that always does great during deflation – and it suddenly drops to $800/ounce, you will feel – what exactly?  Sanguine?
    I have gold assets.  I don't hate gold!  But I like to think I'm not blind to what could happen – in both directions.  I try to be informed both on the risks AND the rewards to each strategy.
    Deflation will cause the price of gold in any currency NOT in a gold standard to drop, most likely.  It will likely rebound on a reflation.  But that stuff may take years to play out.
    Now deflation isn't a given, its just one possible outcome.  But I believe its a risk to owning gold.  You ignore this risk at your peril.

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  • Sun, Mar 31, 2013 - 11:22am

    Reply to #24

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    deflations and prices

    Jim –"the floor was dropping out from under the dollar due to expanding the system beyond the bounds that Gold backing would allow, hence they needed to devalue the dollar."
    I'm not sure what this even means!  You think dollars were declining in value?  Or were they increasing?
    It is common knowledge that deflations cause the price of "stuff" to drop.  Stuff includes pretty much everything – food, land, stocks, and commodities.  That's because in a deflation, dollars are destroyed through bank defaults, bond defaults, and depositors going through a Cyprus-like experience.  Defaults destroy credit money (deflation), while borrowing creates credit money (inflation).
    From the early 1900s through 1933, Treasury bought gold for $20 per ounce.  That meant, even though all other items were dropping in price due to dollar destruction from 1929-1932, gold was the single thing that held its value, because of the fixed conversion rate.  Of course gold did well!  But it was the Treasury's fixed exchange rate that caused it, not some magical intrinsic property of the metal itself.  And then due to some more Treasury magic, gold's price went to $35/ounce in 1933.  Gold did even better!  But not through some magic that only gold has.  It was Treasury action that gave gold its anti-deflationary powers.
    Had we been on a silver standard, the same thing would have occurred to silver.  Instead of losing 60% of its value from 1928-1933 along with the rest of the commodities (which is what actually happened) silver would have held its value too.
    Commodities get hammered during deflation.  Gold no longer has a fixed rate of exchange with the dollar.  Logic suggests, then, that gold will also be hammered IF we go through a similarly severe deflationary period.
     

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  • Sun, Mar 31, 2013 - 3:30pm

    Reply to #1

    darbikrash

    Status Gold Member (Offline)

    Joined: Aug 25 2009

    Posts: 297

    davefairtex wrote:Regular

    [quote=davefairtex]
     
    Regular people and businesses borrowing money is THE WAY money gets printed in a normal economy.  That's what the Fed and the ECB tried to do by lowering rates to 0% – get normal people to do their printing work for them.  The abject failure of these super-low rates both here, and in the eurozone to spur borrowing underlines the severity of the debt bubble bust.  In aggregate, normal people really aren't interested in borrowing anymore, no matter how low rates go, because their incomes just won't support it.  So the Fed is stepping in to do the printing, but there are political limitations on just how egregiously the Fed can print, so we end up with an economy that ends up saying: "is that all you got?"
    I'm going against the trend here at this site, and against most other places that I know. 
     
    [/quote]
     
    I find davefairtex's posts to very enlightening. He has managed to drill into the very essence of the problem by illustrating the dominant method by which money gets into the economy- and it's not the government. He uses the term "printing" to describe the consumer and business demand that actually puts money into the economy.  

    This is a very good choice of words, and an apt illustration.

    He also notes that consumers and businesses are not terribly interested in borrowing money these days- at least not at previous pre-recession rates.

    There is just an enormity of value and information in these simple statements.

    What then, are the implications of his remarks? 

    As for my interpretation, I believe these two concepts define an enlightened perspective of our current predicament, and contradict much of the group think evident in this thread. The proportion of debt money issued by the private sector vs. the proportion issued by the Federal Reserve is a good analog as to where the blame lies. And this implication does not sit well with the small government folks.
     
    Although not explicitly stated, a reasonable person might well conclude that in several of the examples in davefairtex’s’ posts, not only is a “free market solution” not likely to provide any benefit, a substantial argument exists that it (“the free market”) is in fact the problem, and the Federal Reserve is simply trying to correct an internal antagonism.
     
    Now, I am in not in any way defending the money printing the Fed is doing, but I believe this perspective is a much more realistic (and frankly, from what I can tell, is permeating a growing national narrative) point of view.
     
    This conclusion, right or wrong, is an existential threat to libertarians, small government aficionados, and gold bugs alike. On the front of large multinational businesses, the billions of dollars in corporate surplus cash sidelined for the last several years is a telling indicator that something is seriously broken- and it is not currency or government related. The reticence of small business and the consumer sector to reignite borrowing amplifies the same symptoms.
     
    In the financial sector, the appearance of $600 trillion derivative markets adds more contradiction to the notion that currency alternatives and inapproriate government intervention are meaningful explanations for what we observe.
     
    In the real world, outside the domain of the armchair currency inventors, discussion of these matters centers around factions that cite under-consumption as primary cause, countered by a rising tide of voices that would disagree and reclaim the notion of the tendency of the rate of profit to fall as causality. Both have elements of credibility, currency failures and big government overreach in my opinion, no longer hold sway.
     
    The alternate currency scheme arguments all seem to overlook some key facts of the monetary economy- namely the dynamic flow of money, and the absolute requirement in a capitalist economy that no external limits are allowable- of any kind- on the supply of currency. The stability of currency is subservient to the supply of currency- supply must be unimpeded.
     
    As such, the notions that artificially constricting the supply of money and changing the value when more is needed overlook a key functional requirement- you simply cannot do this. Capitalist production has an organic need for growth, for many reasons the details of which we can save for another thread, but in short when we have a growing population we have to provide (nearly) full employment for a very good reason- the capitalist mode of production requires all participants to exchange their labor power for wages in order to acquire survival commodities, such as food, clothing and housing. Without the “opportunity” to garner wages, a lot of people starve. It is this stark reality that drives the political economy, not some ideological notion of currency stability.
     
    This means jobs, and lots of them. And jobs means businesses, and business need ready access to unlimited capital for startups and expansions alike.
     
    If you couple this reality with the need for dynamic systems analysis to “see” what money is doing in a capitalist economy with respect to circuit flows, you will find that a constrained supply of money capital such as proposed by the gold bugs and Bitcoin crowd, will force a situation wherein capitalists are competing for a finite supply of money capital in an expansionist world, and cannot fund enterprise that results in the required job creation- with catastrophic results.
     
    Adjusting numerators, revaluing money, subdividing value to an external reference, etc, all miss the point, the name of the game is not so much currency stability (although this is certainly needed) as it is providing ready and reproducible currency to feed a exponentially expanding beast that tolerates and abides no limits.
     
    In my view, these alternative currency schemes really miss the mark, although in fairness I should say that I applaud the interest and discovery of these topics, as I think it is perhaps the only accessible way of wresting power from the monopoly of force within the capitalist superstructure, but as it is presented here it is a classic example of the right thing for the wrong reasons.

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  • Sun, Mar 31, 2013 - 4:10pm

    #31

    Jim H

    Status Diamond Member (Offline)

    Joined: Jun 08 2009

    Posts: 1798

    Darbikrash

    Your conclusions make no sense and are counter to the primary explanations for the trouble we now find ourselves in as proposed by Chris, guests like David Stockman, and silly internet posters like myself.  The problems are not Gov't that is too small, or too little currency being created… the problem is debt saturation and growing resource scarcity.  In your post above, you never mention the national debt, nor the point that growth can be and is being limited by forces external to the monetary or polical system, e.g. growing energy and resource scarcity.      

    You said,

    Although not explicitly stated, a reasonable person might well conclude that in several of the examples in davefairtex’s’ posts, not only is a “free market solution” not likely to provide any benefit, a substantial argument exists that it (“the free market”) is in fact the problem, and the Federal Reserve is simply trying to correct an internal antagonism.

    As discussed by Dave Stockman, James Grant, and others, the main non-free market solution being tried since the crisis hit (and even before) is below market interest rates that punish savers, aka financial repression.  Allowing the market to set interest rates instead of the FED is the free market solution to our problems.  It would be painful for sure as the Gov't stopped spending above our means and a huge depression hit.. but it would allow us to avoid the total destruction of our monetary system and the (probable) dictator that would come.    

    You said,

    The stability of currency is subservient to the supply of currency- supply must be unimpeded.

    How did that work out for Zimbabwe?

     

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  • Sun, Mar 31, 2013 - 5:11pm

    Reply to #1

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    we agree - right up until you say...

    darbikrash-

    …And jobs means businesses, and business need ready access to unlimited capital for startups and expansions alike.

    Unlimited capital?  For any idea?  Even the really stupid ones?  I've done startups – a number of them.  There are a lot of really stupid ideas out there.  How do we differentiate between the good ideas and the bad ones, if "businesses had ready access to unlimited capital"?  What criteria should we use to weed out those ideas that have an extremely low likelihood of panning out?  Currently, loans can't be created unless they have a reasonable hope of being paid back.  Are you suggesting we don't use this criteria anymore?
     
    That capital for expansion actually comes from somewhere; it comes, by devaluing everyone else's savings!  In our system, taking out a loan is in a real sense diluting the value of every other dollar in the planet, because new money is created when the loan is issued.  To my mind, the loan should be providing something of real value to society in return for the devaluation – and that does not include providing free fuel for the next stupid startup concept.  Those VC on Sand Hill Road have a purpose in our economy.  They prevent a vast number of stupid ideas from wasting our money!
     
    I am more in the camp of the Hayek video, that points the finger on the 30 years of lax credit expansion that happened previously.  By controlling interest rates, the Fed makes credit easier, or harder to get.  In the early to middle stages, the Fed facilitates private "money printing" by dropping rates.  But by making rates too low for too long, at some point, debt saturation is reached, lax credit standards have allowed every stupid idea to be funded, we get Webvan at $60 a share, janitors taking out loans for $600,000 houses at subprime rates, and there's a blow-off top when the last idiot takes out the last loan and there is nobody left to carry on the ponzi.
     
    Those blow-off tops cause a great deal of damage to the vast bulk of innocent participants who are just trying to do the right thing, and the blow-off tops don't create anything of lasting value for the economy.  Vast amounts of irreplaceable natural resources are wasted on dumb ideas during those phases, and the contraction phase that comes after hurts a large number of people.
     
    I think its far better to limit the availablilty of money in the first case – to use an ounce of prevention at the start – rather than apply a metric ton of cure at the point where we are now.
     
    I stand by everything I said about the mechanism – and going further I'll add that businesses can't or won't borrow in aggregate because of debt saturation.  Available credit must be based on our reasonable ability to pay it back.  And we've maxed that out.
     
    I'm not a huge fan of fractional reserve lending.  It seems fraudulent at its core to me.  As for what should replace it – I don't know.  I just know I don't want to put MY savings in a bank that is unstable by design.  And I'd prefer not to have my savings slowly evaporate just so some stupid business owner with a lame idea (in aggregate) creates the next webvan and we get another bubble that pops and destroys a bunch of people's savings.
     
    Is gold the answer?  I don't know that either.  I'll let smarter people than me figure that one out.  I content myself with analyzing what is going on today.
     

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  • Sun, Mar 31, 2013 - 5:19pm

    #32

    Wendy S. Delmater

    Status Diamond Member (Offline)

    Joined: Dec 13 2009

    Posts: 1418

    inflation/deflation, and hijacking

    I continue to believe that we will see deflation in uncessary items, and inflation in necessities.

    Overbuilt housing, luxury items? I am of the opinion that luxuries will experience defaltion and cease to be made once the demand dries up.

    Food, energy, clean water, textiles? I think things like this will experience inflation. There will be transitional inflation in things that the old paradigm uses to get necessities, like pertoleum-powered food-producing tools; but as oil gets more expensive they will become less and less in demand until they no longer exist.

    Not everything fits into this neat little system (yet), but we will drift that way to to the sheer number of people on the planet, and finite resources. If I had extra resources I would put them into PMs but only AFTER basic ongoing needs could be assured for myself and those I love. For now, I'm investing in food, shelter, clothing, energy and skills.

    And a word to all you folks who think that this site has been "hijacked" by goldbugs. Get over it. I say this as someone who has no gold at all, mind you, but would no object if I was in a potition to hold some physical coins or bullion. Be grateful that those who have some resources are willing to try and save some of those resources for after a currency crash. If they are on this site, they probably "get it" and will try to help rebuild things after a crash. You want people who "get it" to have resources.

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  • Sun, Mar 31, 2013 - 8:56pm

    Reply to #1

    darbikrash

    Status Gold Member (Offline)

    Joined: Aug 25 2009

    Posts: 297

    Good discussion

    Davefairtex, I was not clear in the description of my meaning of unlimited access to capital. My point is that access to capital cannot be constrained by artificial ceilings, such as linking it to gold or other externalities. The words “unlimited access” apply to unconstrained supply. This does not in any way supersede basic lending and repayment criteria for loans- these of course still apply. 
    Bad business plans are not funded because lenders are fearful of non payment, nothing new here. Occasionally, bad business plans are funded, and indeed, these failures result in the destruction of capital and dilution of savings for the rest of us. If however, these loans are for productive use of capital, and the use of this new capital is used to hire employees whose labor adds value to commodities, then these transactions are said to be expansionary and no savings are diluted.
     
    I am not making the point here that capital controls and lending criteria are in any way to be relaxed.
     
    [quote=davefairtex]
     By controlling interest rates, the Fed makes credit easier, or harder to get.  In the early to middle stages, the Fed facilitates private "money printing" by dropping rates.  But by making rates too low for too long, at some point, debt saturation is reached, lax credit standards have allowed every stupid idea to be funded, we get Webvan at $60 a share, janitors taking out loans for $600,000 houses at subprime rates, and there's a blow-off top when the last idiot takes out the last loan and there is nobody left to carry on the ponzi.
    Those blow-off tops cause a great deal of damage to the vast bulk of innocent participants who are just trying to do the right thing, and the blow-off tops don't create anything of lasting value for the economy.  Vast amounts of irreplaceable natural resources are wasted on dumb ideas during those phases, and the contraction phase that comes after hurts a large number of people.
     
    [/quote]
     
    Yes, and to take this further, Minsky’s Instability Theory suggest that even in absence of manufactured incentives by the Fed or anyone else, that in and of itself, free market forces will gravitate toward ever risky investments chasing ever higher returns until the system blows up and damages everyone-including non market participants. So with respect to Fed manipulation, damned if you do, damned if you don’t- the take away is that some type of managed economy is absolutely necessary, and to be sure managing it badly is just as deleterious as not managing it at all- contrary to free market evangelism which says the opposite.
     
    [quote=davefairtex]
     
    I think its far better to limit the availablilty of money in the first case – to use an ounce of prevention at the start – rather than apply a metric ton of cure at the point where we are now.
     
    [/quote]
    Depends how you limit it. If (as proposed in this thread by others) that you attempt to limit it with unrelated externalities such as gold or Bitcoin, than I disagree as these schemes have no coupling to the realities of captial's expansion needs. They are in fact decoupled from the capitalist means of production, and because of this there is the very real possibity (and history proves this with gold) of this external relationship providing inadeqaute currency supply. Again, this is my central point, regarding the need for (agressive) a priori regulatory oversight, we would likely completely agree. However, this is not free market doctrine, and runs sustantively counter to these notions. In fact, Steve Keen calls the embodiement of these principles "regulatory socialism", his somewhat tongue in cheek term for allowing the private sector ownership of the means of production, but regulatory oversight is tightly state controlled, specifically to address the isues that you raise.
    [quote=davefairtex]
     
     I stand by everything I said about the mechanism – and going further I'll add that businesses can't or won't borrow in aggregate because of debt saturation.  Available credit must be based on our reasonable ability to pay it back.  And we've maxed that out.
     
    [/quote]
    Agreed, but is this symptom or cause? The very essence of capitalism is the necessity to reinvest profits to keep the machine going, debt saturation (as you suggest) in concert with billions of dollars in undeployed capital on the sidelines points to more than just a problem with too many loans or inability to repay said loans, the undeployed surplus capital says something else, even if you don’t have to borrow it there is nothing (productive) to do with it. I think this is pretty important……
     
     
     

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  • Sun, Mar 31, 2013 - 8:58pm

    Reply to #1
    S Anthony

    S Anthony

    Status Member (Offline)

    Joined: Aug 22 2012

    Posts: 7

    Darbikrash,are you saying

    Darbikrash,
    are you saying that, in essence, the efficient-market hypothesis (EMH) is a western form of cultural lobotomy when accounting for purchasing power parity (PPP) and price elasticity of demand (PED) i.e. – the real world income earned by an individual affects his or her demand for goods and response to changes in price?
    Thankyou in advance
     

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  • Sun, Mar 31, 2013 - 10:46pm

    #33

    Greg Snedeker

    Status Silver Member (Offline)

    Joined: Oct 22 2012

    Posts: 380

    Constraints of growth

    I tried to post this but I'm hitting a limit. Lol I think the thread is going to move to a page 3 after this so I will post it in two parts:

    If I'm off base Darbikrash please correct me, I was trying to reply to Jim and Dave…Darbikrash is not making conclusions as to what is wrong, but rather is merely stating that in capitalism's superstructure is the narrative (which converts into reality whether you like it or not) of unlimited growth. This is not born out of some hypothetical, but out of the history of capitalism. Keynes, Hansen, and Hayek all discussed this very topic during and after the depression, so this is nothing new. The only thing I see missing in his post is reference to Berle and Means (The Modern Corporation and Private Property)… and the continuing concentration of wealth in a small corporate capitalist elite. I happen to agree with him that the narrative and therefore the reality of capitalism is founded on expanding growth.

    Darbikrash's statement of stability being subserviant to supply is not a judgement but an observation of what has been the inevitable course of capitalism – moving to neocapitalism in the past 100+ years. Is it not happening now? Stability of currency is being thrown under the bus of monetary printing. And with that inherent superstructure imbedded into the structure of how people labor and see their relations within the labor market, I would have to agree with him that a constricted alternative money supply will not match the superstructure as it exists now.

    He's not arguing against a change to something different, he is pointing out that trying to impose these alternate currencies on labor as it exists now will cause things to fail anyway, because the capitalist models have ever-expanding growth built into them. Can someone here point to an economic model where population is increasing and the market is constrained?

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  • Sun, Mar 31, 2013 - 10:52pm

    Reply to #33

    Greg Snedeker

    Status Silver Member (Offline)

    Joined: Oct 22 2012

    Posts: 380

    Constraints of growth p.2

    Hayek was against an ever-expanding government because he thought it would take on a life of its own and eventually turn into fascism. Keynes agreed with him but also acknowledged that capitalism would not work without a government to keep it functioning. In my opinion both were correct, but the problem is that there is a paradox that exists within those competing ideas. How do you keep a necessary government from expanding in a market that continues to expand? Hansen thought ever-expanding population growth would solve the problem (with Malthus rolling over in his grave:-).Now we are hitting real limits and we are trying to say we need to return to a currency that has limits, but we'll turn a blind eye to the fact that population continues to rise, not to mention those people in developing countries still want their piece of the pie. This issue is way beyond the U.S. borders and it is not just about debt and currencies, it's how we view the world, our relationships, our work, who owns what, who plans what, and the list goes on.
    By becoming resillient you are making steps to not participate in this commoditized market (or at least limit yourself) so that makes a difference. It's a small step, but billions (people) of small steps make one big one.
    Sorry about the two posts. I'm not sure why the site wouldn't accept it as one post.

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  • Mon, Apr 01, 2013 - 5:16pm

    Reply to #1

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    oh, THAT unlimited access to capital!

    Davefairtex, I was not clear in the description of my meaning of unlimited access to capital. My point is that access to capital cannot be constrained by artificial ceilings, such as linking it to gold or other externalities. The words “unlimited access” apply to unconstrained supply.

    Aha.  Well that's different.  Never mind!  πŸ™‚
    I'm definitely in agreement with the need for strong regulation.  But regulation needs to be simple, not complicated.  And organizations need to become simple, and small, so they are easy to regulate.  And so they don't buy off the regulators, or the politicians.  Its much harder for many small banks to buy Washington than for three large ones to do so.
    That implies glass-stegall, limiting banking to no more than 5% of national deposits, and splitting gambling from the banking utility.
    All of the "pure capitalists" aren't so good with understanding the vastly increased likelihood of corruption and fraud with concentration of wealth and power.  So we have to keep the power diluted, spread among many organizations, so true competition can survive.
    Now then, about the money system – gold backed vs non gold-backed, I really don't have any clear thing to say.  On one hand, with peak everything, the ability to grow the money supply isn't quite as critical as it once might have been.  On the other, its unlikely that gold will provide more than a bump in the road vs the power of the TBTF banks today.
    And as David Stockman said, should the Fed even be in the business of setting rates – of causing the very boom and bust cycles through doing a really good job of central planning?
    And the supply of gold does grow – about 2% per year, as gold is mined.
    So at the end of the day, I'm ambivalent about that part.
    As for your contention that all this cash lying around signifies something, I have to agree with you.  I think it does too.  My guess: corporations were terrified by what happened in 2008, and they want to operate with a lot more of a cushion "just in case" it happens again.  It might be a more complex picture than that, but I think that's the big piece of it.
    All those CFOs are probably privately appalled Bernanke is printing 80 billion a month, and that makes them very cautious about having their own safety net in place.  Paradoxically, if the Fed stopped printing, that in and of itself might bring back a certain amount of confidence.  "I think the economy is doing so well, we can stop our printing efforts!"
    All clear, everyone back into the water!
    Its a thought anyway.
     

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  • Tue, Apr 02, 2013 - 4:06am

    #34

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 691

    Regulation

    Dave and Darbi,

    As long as we're baking pies in the sky, could you give me an example of a regulating agency that is working well? This is a regulator that keeps the regulated in check, without too much cost to any party, and always produces satisfactory results. As I stated in Post #51:

    [quote=Grover]

    PS – I'm not a fan of insurance or regulation – simply because they both fail when needed the most. I am a fan of transparent contracts and parties adhering to the provisions.

    [/quote]

    As an example of regulation that was an utter failure, I submit the financial debacle that resulted in the 2008 meltdown and subsequent bail-out of the "too big to fail" corporations. If I remember correctly, all of these financial corporations were regulated by at least one regulator. πŸ˜‰ All of these corporations were able to work enough within the regulatory bounds to avoid detection before it was simply too late. Were it not for the bail-outs, the whole system would have imploded. (Is that too much dramatic hyperbole?)

    Meanwhile, we little people have a false sense of security because we think the regulators are keeping us safe. We boldly park our money in the bank that offers the highest FDIC insured interest rate. FDIC has a stake to make sure the banks are operating within certain bounds, right?

    The FDIC has less than 1% of the insured deposits in reserve. How far out the Bell Curve do we need to go before a "lilly white swan" event wipes out the entire reserve of the FDIC? It doesn't matter, though. Whatever the FDIC needs to make the populace whole will be delivered by hook or by crook.

    Regulations can never bar the barn door before the horses escape. Any a priori regulation attempts will be met by screams from those being regulated. They will rightly accuse the regulator of trying to bankrupt them for no apparent reason. That gives the corporate creative genii an unfair advantage. Regulation can only hope to keep even.

    Why not work for a system that has a chance of succeeding?

    • History has made it abundantly clear that governments are bound to exist.
    • Governments need to take part of the productive pie from the producers in order to fund its activity.
    • Corporations will do whatever they deem to be in the best interest of their stockholders.
    • Stockholders want their corporations to produce maximum profits at minimum costs.

    Why not tax the externalities generated by corporations? As an example, tax rather than regulate pollution and you've got corporations limiting their pollution (on their own) because it is in the stockholder's best interest to do so. If too much pollution is being generated, government set the cost too low. If corporations are closing shop and leaving, government set the cost too high. Either way, government needs to adjust the pollution unit cost.

    If you think this won't work, look at coal fired electricity generators. These plants are allowed to emit so many tons per day of different pollutants. The plants use expensive scrubbers to remove whatever pollutant is being regulated. The scrubbers are sized to keep pollutants within regulated limits on the highest expected demand day. If the expected electrical demand is reduced (mild day, more hydro, wind, etc.) the plants limit the amount of scrubbing so they continue to emit the same tonnage of pollutants per day. Is that what we really want?

    Grover

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  • Tue, Apr 02, 2013 - 6:21am

    Reply to #34

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    regulation works fine - its corruption that is the problem

    Grover -First of all, your examples of "free-market-style" regulations working in the power industry only function because the power industry hasn't gone and rewritten the laws.  If they had done so, they'd have lax pollution standards and then they'd grudgingly meet them.  Companies are, almost by definition, sociopathic, for exactly the reasons you lay out: shareholders want max profits, and min costs – and if the CEO can get the regs changed, or bribe the regulators with a great job, they'll do it.
    So the problem is not regulation, its corruption by the sociopaths.  But corruption is not inevitable.  If you set up the structure properly, corruption will become much more difficult to effect.
    1) Breaking the link between being a regulator, and getting rich after your regulatory career after being lenient on your regulatees during your career.  To do this, we establish a rule – once a regulator, you can never work in the industry you regulated.  Same for managers of defense contracts – they are not allowed to work in the defense manufacturing industry after they are out of government service.  Same for the bureau of land management, the FDA, etc.
    2) Campaigns funded by public finance.  Neutralizing campaign funding (i.e. bribery) by corporations breaks their control over politicians.  Ultimately its cheaper to have the taxpayer pay, since if you don't, the corporations own the government.  At what price actual democracy?  Money allocated to political bribery has an excellent ROI – of course companies do it, its money well spent for them.
    3) Retaining competition in the industry by limiting market size of any one company.  This also reduces TBTF, and political influence.  20 big banks are less likely to effective collude than 2.  And FDIC will happily resolve a small bank – it does a very good job of that.
    4) Simplifying regulation.  Complex rules benefit the big companies, and put smaller companies at a disadvantage.  It also allows more opportunity for industry-written loopholes, since nobody reads the full bills anyway.  Glass-Stegall was 32 pages.  Dodd Frank was 1700.
    Regulation works fine.  Corrupt regulation works badly, and has the very effects you describe.  Its the corruption we must address – its not regulation that is the problem.  One would not advocate "deregulating crime" by making murderers simply subject to a large fine because the police department was bought off by the mob.  One would, instead, focus on cleaning up the police department.
     

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  • Tue, Apr 02, 2013 - 4:32pm

    #35
    sharonsj

    sharonsj

    Status Member (Offline)

    Joined: Apr 02 2013

    Posts: 6

    price inflation

    I disagree that most price inflation occured before the 2008 crash.  In 2009 and 2010, I saw the prices of pet food go up 50-100% and all packaging for all people foods shrink by 25-33% (while prices remained the same).  And as sugar eventually went up by 50%–and corn went for ethanol–the cost of everything using sugar or fructose shot up.  It's estimated that true inflation has been running about 10% a year and not the 1.5% the government admits to.

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  • Tue, Apr 02, 2013 - 4:38pm

    #36

    darbikrash

    Status Gold Member (Offline)

    Joined: Aug 25 2009

    Posts: 297

    Grover, I think your

    Grover, I think your suggestion to tax corporate externalities is entirely sensible. In fact, I believe this is one of the most underrepresented factors in our current predicament that readily comes to mind.

     

    If you look at a chart of (US) corporate taxation as a ratio to GDP (as well as several other measures) you’ll see a precipitously steep decline over the last 30 years. You can also see individual taxation going the other direction (rising) at the same time, almost in lock step. What the data shows is burden of taxation (as a ratio) shifting from corporations to individuals.

     

    I read a Pew report some time ago that posited if corporations were charged for their externalities that somewhere between 1/3 and ½  of all global profits would be wiped out. Ouch.

     

    While the types of externalities that come to mind initially may include pollution and other such things, it does not stop there. It includes push back for infrastructure (roads, bridges, etc. as well as the cost for social reproduction. (education, training, social safety nets etc.)

     

    As the global economy gets bigger, and as more businesses enter the competitive space, the slice of pie for available surplus value gets smaller. This can mean declining profit margins even in the best of conditions, and one of the most cost effective ways to counter these tendencies is to externalize as many costs as possible, through lobbyists and social marketing campaigns to demonize proponents of these measures and to infiltrate and thwart government regulatory agencies.

     

     

    Corporations have been hugely successful not only in externalizing these costs, but in creating social marketing campaigns demonizing any who might stray so far as to point out that this is occurring. The hue and cry they generate is usually centered around the extravagant costs that capture of these externalities would entail, and this often manifests as propaganda attacks on environmentalists as well as others who might propose regulations to try and stem the tide of abuse that spawns from these attempts.

     

    You mention regulation in your post, and I gather you’re proposing that taxation be used to replace regulation. Although novel, I think this notion does not hold up very well. Regulation and taxation as disincentive are very different issues.

     

     

    Regarding regulation, you said something in your post that rings true “without too much cost to any party, and always produces satisfactory results.”

     

    Unfortunately, this is impossible, and this goes to the crux of the issue. If you adequately disincentivize damaging externalities, you will destroy profit margins and effectively kill capitalism. If there are inadequate potential profits, then corporations will cease to invest, jobs will disappear, and as people have no other way to sustain themselves without exchanging labor power for wages to buy sustenance commodities, we have a problem. A big problem.

     

    So the dirty little secret is that this contradiction is no secret, governments are in fact arbiters of dispensing regulations and taxation schedules to (ostensibly)  try and manage a semblance of balance between egregious externalization on the one hand, and capitalism killing taxes and regulations on the other.

     

    Our system of governance is supposed to favor the interests of the people in this balance. It does not- for obvious reasons. He who has the gold makes the rules.

     

    In a world of declining profits and diminishing investment opportunities, the corporate tendency to externalize more and more costs will rise. At the expense of the rest of us. This will manifest as degradation and eventual destruction of the environment, exhaustion of energy resources, and continued maldistribtuion of profits in the form of accumulated wealth among fewer and fewer people.

     

    If you analyze the capitalist means of production in depth, you will find that at its very core it requires exploitation and externalization of costs to function. This reality is masked in the vernacular of the “free market” ideology, e.g. focusing on the means of exchange (market) and denying or ignoring there is some pretty rotten sausage making going on in the production side of capitalism. Said another way, we find in our grocery stores we can buy 19 different kinds of breakfast cereal, 11 kinds of hand soap, and an enormous variety of insignificant product choices, but yet we have sections of the population breathing coal dust 10 miles away from a mine- with no recourse.

     

    How’s that for freedom and liberty.

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  • Fri, Apr 05, 2013 - 4:15am

    #37

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 691

    Corruption

    Dave,

    Sorry for not responding earlier. I've been away for a few days and just got back. I haven't read this much passion in your words. That is a good thing. I feel like I'm pinging on some core beliefs.

    [quote=davefairtex]

    First of all, your examples of "free-market-style" regulations working in the power industry only function because the power industry hasn't gone and rewritten the laws.  If they had done so, they'd have lax pollution standards and then they'd grudgingly meet them.  Companies are, almost by definition, sociopathic, for exactly the reasons you lay out: shareholders want max profits, and min costs – and if the CEO can get the regs changed, or bribe the regulators with a great job, they'll do it.

    [/quote]

    You are missing the point. If governments get primary funding from charging for externalities, they cut their own throats by mispricing them. Now, the government cash cow is the income earner. Large corporations pay almost nothing and the government has huge disincentives to change that – corporations have huge lobbying efforts (campaign contributions) and the individual voters aren't cohesive enough to force change. A few slick campaign ads (paid by corporations) are enough to sway an election.

    [quote=davefairtex]

    So the problem is not regulation, its corruption by the sociopaths.  But corruption is not inevitable.  If you set up the structure properly, corruption will become much more difficult to effect.

    [/quote]

    Corruption has always existed and likely always will. There is huge profit incentive to find and exploit whatever is the weakest link in the regulatory chain. As long as regulation stands between them and their profits, they will find the cheapest alternative (minimize costs.) Why not make the cheapest alternative to align with government's wishes and limit the externality?

    [quote=davefairtex]

    1) Breaking the link between being a regulator, and getting rich after your regulatory career after being lenient on your regulatees during your career.  To do this, we establish a rule – once a regulator, you can never work in the industry you regulated.  Same for managers of defense contracts – they are not allowed to work in the defense manufacturing industry after they are out of government service.  Same for the bureau of land management, the FDA, etc.

    [/quote]

    This is a good suggestion, but it isn't sufficient. If I were CEO of a big company and wanted to circumvent this rule, I'd work a deal with a subsidiary company to hire the regulator … or, I'd offer them "stock tips" that would net them enough. Given a few more beers, I could probably think of dozens of ways around this "silly" rule.

    [quote=davefairtex]

    2) Campaigns funded by public finance.  Neutralizing campaign funding (i.e. bribery) by corporations breaks their control over politicians.  Ultimately its cheaper to have the taxpayer pay, since if you don't, the corporations own the government.  At what price actual democracy?  Money allocated to political bribery has an excellent ROI – of course companies do it, its money well spent for them.

    [/quote]

    Agreed. Why are our campaigns so incredibly long lasting? Most people vote based on a hot button issue anyway – abortion, political party, gender, religious preference, speaking ability, handouts, etc. The long campaigns cost enormous amounts of money and require constant campaigning. A few months should be adequate.

    Also, corporations should be banned from making political contributions. I'll agree with the Supreme Court's decision to grant free speech (campaign contributions) to corporations when Texas hangs one.

    [quote=davefairtex]

    3) Retaining competition in the industry by limiting market size of any one company.  This also reduces TBTF, and political influence.  20 big banks are less likely to effective collude than 2.  And FDIC will happily resolve a small bank – it does a very good job of that.

    [/quote]

    This idea has promise. What did Teddy Roosevelt use to bust Trusts?

    [quote=davefairtex]

    4) Simplifying regulation.  Complex rules benefit the big companies, and put smaller companies at a disadvantage.  It also allows more opportunity for industry-written loopholes, since nobody reads the full bills anyway.  Glass-Stegall was 32 pages.  Dodd Frank was 1700.

    [/quote]

    I'll agree that industry inserts loopholes for their own interests, but I'm not sure how regulations can be simplified and be any more than pure friction to all those regulated.

    [quote=davefairtex]

    Regulation works fine.  Corrupt regulation works badly, and has the very effects you describe.  Its the corruption we must address – its not regulation that is the problem.  One would not advocate "deregulating crime" by making murderers simply subject to a large fine because the police department was bought off by the mob.  One would, instead, focus on cleaning up the police department.

    [/quote]

    I disagree with your first sentence above. Who regulates the regulators who regulate the regulators? (Read this last question again  S L O W L Y.) Corruption has always been an issue. With regulation, you are going against corporation's prime directive. Isn't it insanity to keep pursuing the same tack and expecting a different result?

    [quote=Grover}

    As an example of regulation that was an utter failure, I submit the financial debacle that resulted in the 2008 meltdown and subsequent bail-out of the "too big to fail" corporations. If I remember correctly, all of these financial corporations were regulated by at least one regulator. πŸ˜‰ All of these corporations were able to work enough within the regulatory bounds to avoid detection before it was simply too late. Were it not for the bail-outs, the whole system would have imploded. (Is that too much dramatic hyperbole?)

    [/quote]

    I'd really like to hear how corruption of the regulators caused the financial meltdown of 2008. Perhaps, there is another explanation??? (Hint: regulation is a political bandage on a perceived problem that eventually results in catastrophic failures.)

    Grover

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  • Fri, Apr 05, 2013 - 5:50am

    #38

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 691

    No Free Lunch

    [quote=darbikrash]

    Grover, I think your suggestion to tax corporate externalities is entirely sensible. In fact, I believe this is one of the most underrepresented factors in our current predicament that readily comes to mind.

    If you look at a chart of (US) corporate taxation as a ratio to GDP (as well as several other measures) you’ll see a precipitously steep decline over the last 30 years. You can also see individual taxation going the other direction (rising) at the same time, almost in lock step. What the data shows is burden of taxation (as a ratio) shifting from corporations to individuals.

    I read a Pew report some time ago that posited if corporations were charged for their externalities that somewhere between 1/3 and ½  of all global profits would be wiped out. Ouch.

    While the types of externalities that come to mind initially may include pollution and other such things, it does not stop there. It includes push back for infrastructure (roads, bridges, etc. as well as the cost for social reproduction. (education, training, social safety nets etc.)

    [/quote]

    I'm glad it sounds at least a bit sensible. Let's discuss it further and try to work out the contentious portions.

    Why do governments tax a person's income? Simply because it is identifiable and the grumbling associated with income tax rarely results in lost elections. If a person approached income taxes as a corporation would, the wear and tear on the body would likely exceed the total income earned. No net profit means no taxes to pay.

    I prefer to think of the costs of externalities as fees rather than taxes. Only humans who have the opportunity to vote for or against a tax should be liable for that tax. Corporations are soulless vassals specifically created to accomplish business. They have no vote and therefore should not be subject to taxes.

    The buildings of a corporation occupy a footprint, need local services, and produce outputs (some of which aren't pleasant.) It is up to the voters to choose a government that is accountable to their collective wishes. It is up to that elected government to decide how much to charge for services (traffic, water, sewer, etc.) that the corporation consumes and the emitted externalities produced. If the charges are too high, the corporation will leave or go bankrupt – resulting in reduced economic conditions for the humans. If the charges are too low, the corporation will not have an incentive to reduce the externalities.

    It is a tight rope that has consequences on either side. There is no free lunch.

    [quote=darbikrash]

    As the global economy gets bigger, and as more businesses enter the competitive space, the slice of pie for available surplus value gets smaller. This can mean declining profit margins even in the best of conditions, and one of the most cost effective ways to counter these tendencies is to externalize as many costs as possible, through lobbyists and social marketing campaigns to demonize proponents of these measures and to infiltrate and thwart government regulatory agencies.

    Corporations have been hugely successful not only in externalizing these costs, but in creating social marketing campaigns demonizing any who might stray so far as to point out that this is occurring. The hue and cry they generate is usually centered around the extravagant costs that capture of these externalities would entail, and this often manifests as propaganda attacks on environmentalists as well as others who might propose regulations to try and stem the tide of abuse that spawns from these attempts.

    [/quote]

    I agree. They focus on the weakest link to break the regulatory chains.

    [quote=darbikrash]

    You mention regulation in your post, and I gather you’re proposing that taxation be used to replace regulation. Although novel, I think this notion does not hold up very well. Regulation and taxation as disincentive are very different issues.

    Regarding regulation, you said something in your post that rings true “without too much cost to any party, and always produces satisfactory results.”

    [/quote]

    Actually, I was trying to be open minded. I wanted an example (from you or Dave) of a regulation that works well and tried to define what "well" meant.

    [quote=darbikrash]

    Unfortunately, this is impossible, and this goes to the crux of the issue. If you adequately disincentivize damaging externalities, you will destroy profit margins and effectively kill capitalism. If there are inadequate potential profits, then corporations will cease to invest, jobs will disappear, and as people have no other way to sustain themselves without exchanging labor power for wages to buy sustenance commodities, we have a problem. A big problem.

    So the dirty little secret is that this contradiction is no secret, governments are in fact arbiters of dispensing regulations and taxation schedules to (ostensibly)  try and manage a semblance of balance between egregious externalization on the one hand, and capitalism killing taxes and regulations on the other.

    [/quote]

    Impossible to find a well functioning regulation? I can't disagree! Actually, I think you understand the conundrum quite well.

    [quote=darbikrash]

    Our system of governance is supposed to favor the interests of the people in this balance. It does not- for obvious reasons. He who has the gold makes the rules.

    In a world of declining profits and diminishing investment opportunities, the corporate tendency to externalize more and more costs will rise. At the expense of the rest of us. This will manifest as degradation and eventual destruction of the environment, exhaustion of energy resources, and continued maldistribtuion of profits in the form of accumulated wealth among fewer and fewer people.

    [/quote]

    As long as we accept it, the expense will be paid by the rest of us. Degradation and exhaustion of resources are a function of population. Profits accumulate to the wealthy until they have it all. At that point, those with nothing have nothing to lose. It has happened before and will likely happen again.

    [quote=darbikrash]

    If you analyze the capitalist means of production in depth, you will find that at its very core it requires exploitation and externalization of costs to function. This reality is masked in the vernacular of the “free market” ideology, e.g. focusing on the means of exchange (market) and denying or ignoring there is some pretty rotten sausage making going on in the production side of capitalism. Said another way, we find in our grocery stores we can buy 19 different kinds of breakfast cereal, 11 kinds of hand soap, and an enormous variety of insignificant product choices, but yet we have sections of the population breathing coal dust 10 miles away from a mine- with no recourse.

    How’s that for freedom and liberty.

    [/quote]

    I disagree (with the bold portion.) If exploitation and externalization of costs results in the lowest cost option, why would they pursue other options? They are looking for the least cost alternative to produce the most profit. There isn't anything inherently sinister going on. The people in the market demand those products and the producers are supplying them.

    Coal dust is being breathed despite all the regulations that are installed to prevent it. <sarc>Regulation has been such a booming success that we should reward the regulators and step up their reach and responsibilities.</sarc> Will more of the same fix this problem? Shouldn't we investigate and discuss alternatives?  Meanwhile, we are surveilled and controlled by the very government that we elected to represent us. Why am I the only one who thinks this is wrong?

    Grover

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  • Fri, Apr 05, 2013 - 7:37am

    Reply to #37

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    currently - no penalty for systemic corruption

    Grover -Right now, there's not even a penalty for the sort of regulator revolving-door corruption, so there is zero incentive for participants to avoid it.  Our society has said "this is OK" so everyone feels free to do it.  If we passed a regulator anti-corruption law, the 80/20 rule says that the vast majority of people would end up following the rule, seriously reducing the corruption we have.
    There will always be a battle between the minority who want to bend or break the rules, and those whose job it is to enforce it.  Because of this, does this mean we should simply give up?  Laws can never prevent actions – laws against murder will never prevent someone seriously set on killing someone.  It does not therefore follow that it is insane to pass and attempt to enforce laws against behavior society finds objectionable.
    As for a regulation that worked – Glass-Stegall.  It worked for 70 years.  A 32 page document that split up banking and gambling.  That's the sort of regulation I want.
    As for the failure of regulation in 2008 – I totally agree, that's exactly what happened.  An analogy is, there was a wave of mafia execution-style murders in the city, and the systemically corrupt police force looked the other way, because as it turns out, it's quite legal – even expected – for all retired police officers to get well-paid jobs with the Mafia upon retirement.
    That's where we are today.  I just want laws passed saying that our police officers will face criminal penalties if they are caught working for the mafia upon retirement.
    Clean up the systemic corruption – right now we don't even acknowledge it as corruption – and you solve most of the problem.
    As for the "quis custodiet ipsos custodes" problem – that's true with all enforcement efforts everywhere.  You simply do the best you can to eliminate systemic corruption issues, and have several organizations none of which do you assign ultimate power.
    Legislative – Executive – Judicial.  Its not perfect, but that's life on earth.
    Things go in cycles.  We're in the middle of one of those "heavy corruption" cycles.  We'll have a cleaning, soon enough, and then that cycle will end.  Its just how stuff goes.  Same thing happened during the 30s.
    Last point.  Greenspan was certain that banks would never engage in wholesale fraud, because organizationally they would never want to risk their reputations or survival on such activity. Logically this made sense.  And yet, it happened anyway.  In the real world, individuals end up acting on ways that don't benefit the entity they work for, to maximize their own personal gain.  Aligning government revs with corporation expenses sounds great in theory – just like Greenspan's theory about prudent bank behavior – but it will fail because individuals within both organizations will seek to maximize their own gains.  Greenspan's model didn't account for fraud, and neither does yours!
    I acknowledge that this battle will go on forever.  Like Jefferson, I say that the price of liberty is eternal vigilence!  He wasn't proposing insanity, and neither am I – we're simply acknowledging the reality of the human condition.
     

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  • Sat, Apr 06, 2013 - 6:30am

    Reply to #37

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 691

    My hope

    Dave,I know this sounds hokey, but it comes from my central core. Around the turn of the century, I started waking up from the trance. I used to believe that government had our (the public's) best interest at heart. I believed that we needed to give "the fighters" more resources so they could right the wrongs. I got involved in the process to elect the "right" folks who could overcome the repressive evil doers.
    It never materialized. There was always a reason why and the standard response revolved around needing more power and more influence so they could finally overcome. More power was never enough. NEVER!
    I still vote, but feel that action is the second most useless thing that can be done. The most useless action is not voting. Once elected, the pressure to get reelected consumes the office holder. They start out honest and forthright, but need to sell favors to get the money to continue the fight. Where do they get the money? From the industries that they fought to contain. In order to fight the problem, they need to align with the problem's money.
    As the Rothchild family a century ago, industry cares not who is in power. They know that money is the blood of politics and they control the money. They corrupt and control the innocent and naïve while marginalizing those who can't be corrupted. It is the least cost alternative to maximizing profits – their holy grail.
    It gathered steam after WWII. When Eisenhower exited office, he warned us of the military-industrial complex. We ignored his advice. Other industries saw the M-I success and emulated it (the sincerest form of flattery.) Why else would lobbying be so pervasive?
    As long as money and power are in politics, elected leaders will have conflicting motives to resolve. They will talk the talk (to get elected) but walk the walk (to get reelected.) The talk and the walk are in orthogonal directions.
    To boil down my philosophy on regulation to its essence, I believe that industry will do whatever it can to minimize costs. They've found that manipulating those in charge of regulation is one of the most effective tools to minimizing costs. They will therefore appear to fight regulation on the surface … while accepting the concept and neutering its effects below the surface.
    There is no way we can win as long as we try to beat them into submission. As long as we try to regulate industry, they have huge incentives to minimize the costs. As soon as we think as they do, we can align their forces to accomplish all of our goals.
    Isn't that a beautiful solution?
    Grover

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  • Sat, Apr 06, 2013 - 11:24am

    #39
    S Anthony

    S Anthony

    Status Member (Offline)

    Joined: Aug 22 2012

    Posts: 7

    Talk and Walk in Orthogonal Directions

    Grover,

    I couldn't agree with you more.

    First there is the promoted, positive, altruistic assumption of economic certainty, and then there is the arbitrage of the actual underlying reality; the assumption, and then the indefensible proof otherwise.

    An externality can never leave an equation, even if a public relations promotion of simplification, annexation and omission is applied. The key to understanding this can be described by applying thermodynamics to such values. Values for which even Maslow would blush.

    The Dominican Republic of the 1970's is a fair example of what I wish to describe – as much as to say there have been many other countries before or since – right upto and including the present day. Below is an extract from the book The Washington Connection, published in 1979. The main author of this particular piece is Edward S. Herman, American economist, media analyst with a speciality in corporate and regulatory issues, as well as political economy and the media. He is Professor Emeritus of Finance at the Wharton School of the University of Pennsylvania:

    The Dominican Republic: U.S Model for Third World Development

    In his Stages of Economic Growth, Walt W. Rostow describes a development process for Third World countries that come into our orbit: they become gradually like us, with advanced industrial technologies and democratic institutions. The Dominican Republic offers an earthy illustration of the reality of development processes under U.S. auspices. It is an especially apt and relevant case for this reason: with and after the invasion of 1965 the U.S. reasserted effective control over that small country and has thoroughly dominated its politics and economics. Given the absence of any threatening counter forces, we can say that in the Dominican Republic the flow of events surely must have been in conformity with the desires of the U.S. foreign policy leadership.
    It will be recalled that the U.S. invaded the Dominican Republic in 1965 to prevent the displacement of the relatively benign fascist regime of Donald Reid Cabral by the Constitutionalist regime of Juan Bosch, who had been overthrown by a military coup in 1963-without eliciting any U.S. intervention to save him and his brief experiment in democratic government. The rationalization by Lyndon Johnson and his spokesmen, alleging an imminent threat of Communism, were convincingly shown by Theodore Draper and others to have been a hypocritical cover for a positive preference for fascism over a less reliable and less controllable democratic reformist government. The invasion of 1965 reestablished a firm U.S. grip on the island. As Bosch put it in June, 1975, "This country is not pro-American, it is United States property." What then have been the main characteristics of the Dominican model of Third World development, as seen in a country under close U.S. surveillance and control?
    The first characteristic has been extensive and systematic terror. In the Dominican Republic, Guatemala, and Brazil, three client fascist systems that came into being with explicit U.S. connivance, by a strange coincidence pare-military "death squads" quickly made their appearance and went on a rampage against political dissenters, petty criminals, and sometimes purely arbitrary victims. Amnesty International called special attention to "the numerous political assassinations carried out by Death Squads (such as the notorious La Banda) that have been openly tolerated and supported by the National Police. In 1970 it was alleged that there was one death or 'disappearance' every 34 hours. In July, 1971, Norman Gall alleged that in the post-1965 era, the number of political murders in the Dominican Republic exceeded that of any comparable period under the monstrous Trujillo. Gall noted further that
    The Santo Domingo newspaper El Nacional last December. 30 filled a page and a half of newsprint with the details of 186 political murders and thirty disappearances during 1970. The Dominican terror resembles the current wave of political killings in Guatemala…in that the paramilitary death squads are organized by the armed forces and police, which in both cases over the years have been given heavy U.S. material and advisory support.
    Gall went on to note that the essential function of political terror in the Dominican Republic has been to control the slum population, "which was the main force that defeated the Dominican military in the 1965 revolution." The Wall Street Journal reported on September 9, 1971 that "the conservative Catholic Church hierarchy has condemned the 'institutionalization' of terror." The Journal also claimed that the opinion was widespread in the Dominican Republic that the United States was behind the paramilitary death squads. Whether or not this specific allegation was true, the Journal observed that "the embassy has done nothing publicly to dissociate itself from the terror. The U.S. continues to provide substantial aid, training, equipment, and arms, to the Dominican police and army."
    Since 1971 the rate of killing has slackened, but political assassinations continue and the incarceration and torture of political prisoners still plays a key role in maintaining stability. Amnesty International recently stated that "precise, detailed and consistent information…indicates that practices amounting to serious violations of human rights are still going on: the arbitrary arrest, kidnapping, and assassination of the regime's political opponents; the removal of certain political prisoners to isolation in provincial jails and military forts; deplorable prison conditions, ill-treatment and police brutality inflicted on many detainees…and the continued detention of prisoners once their sentences expire.
    The U.S. State Department, on the other hand, in its 1978 Human Rights Report to Congress, finds a "substantial reduction in incidents of military and police repression," a working "constitutional democracy," and "over a dozen political parties…officially recognized and freely active although the 1974 elections were marred by some incidents of military intervention on behalf of the President's reelection." On this last point, the Washington Office of Latin America notes that "the State Department demolishes its own argument. Official recognition means little and political parties are not really free if the military acts against them during an election. Harassment of opposition forces has not ceased, despite Balaguer's claim to have ordered the military to remain neutral. In the fall of 1977, as pre-election campaigning for 1978 was beginning, a local headquarters of the social democratic opposition party PRD was burned to the ground and a PRD official, Samuelo Santan Melo, was murdered. Subsequently, of course, the military intervened more comprehensively to avert Balaguer's defeat in May, 1978, seizing the ballot boxes and arresting or driving underground many leaders of the PRD, before pressure from both the Dominican elite and the Carter administration eventually forced the military and Balaguer to allow a transfer of the presidency to Guzman. A wealthy landowner himself, Guzman would not have been running at all, and would not have been allowed to take office, if he had posed a threat of serious reform. The military and its external sponsor assure that the new PRD operates within a very narrow boundary of policy actions. ~ 56 All the more reason then for the State Department to be pleased with the progress of the Dominican Republic, to be reassured by the promises of its leaders, and to find that this client state deserves the funds still allocated to it for military assistance.
    A second characteristic of the Dominican Republic model is widespread venality. Alan Riding wrote in 1975 that "the blatant corruption of military and civilian sectors of the government is spreading bitterness among the urban masses, whose wages have been held down despite high inflation rates since 1960. The military and police in this client state are numerous and well taken care of. According to Riding, one method whereby Balaguer retained control was "by openly allowing senior officials to enrich themselves. With official salaries of $700 a month, for example, most of the country's 37 generals live in huge modern houses, drive limousines, and own cattle ranches."
    More recently, Jon Nordheimer wrote that
    "Corruption among the generals is almost as legendary as is their ineptitude. In the first place there are about twice as many generals-around 40-as there should be for the size of the military forces. Generals are promoted on the basis of family, friendship and business connections…It is common knowledge that Lieut. Gen. Juan Beauchamps Javier, Secretary of State for the Armed Forces, owns a $300,000 yacht in partnership with a Dominican businessman and that Maj. Gen. Neit Nivar Siejas, the commander of the national police, is part owner of a major Santo Domingo hotel and gambling casino."
    A recent report to the Securities and Exchange Commission by Philip Morris showed: (1) a $16,000 payment to a Dominican tax official for a favorable tax ruling; (2) the payment of $ 120,000 to various Dominican legislators for passage of a law that would give Philip Morris a privileged position in the Virginia tobacco line; and (3) monthly payments of $ I ,000 by Philip Morris to Juan Balaguer himself. The president of a presumably independent state taking payoffs from a private foreign business firm would seem rather sensational, but this passed off virtually unnoticed in the United States. Gulf & Western made $ 146,000 in "questionable" payments through foreign subsidiaries in 1976, and although the distribution of those payments was not revealed by the SEC, the usefulness of such a lubricant in the Dominican Republic and G & W's large place there rouses plausible suspicions.
    U.S. firms get business done in the Dominican Republic not only by payoffs but by putting important people on their payrolls and by building both personal and financial ties to the local elite. Thus in the mid-1970s the brother of the important Director of Tourism was a vice president of G & W's sugar-producing subsidiary in the Dominican Republic. G & W is also reported to have established "cordial relations" with General of the Police Tadeo Guerrero, who was active in the destruction of the last strong independent union in the sugar business.
    Gulf & Western is the largest private landowner and employer in the country, with some 8% of all arable land, mainly in sugar, owner of a large resort complex, and with investments in some 90 Dominican businesses. G & W's annual sales are larger than the GNP of the Dominican Republic, and while it does not by itself control the country, its size, internal connections, and the background support of the external sponsor of Dominican subfascism, give the company a great deal of leverage and might even justify the designation of the Dominican Republic as a "company country. Its rapid expansion within the Dominican Republic since 1967 has been a result, in part, of the great profitability of its sugar operations and an 18% ceiling on profit repatriation.
    A potential competitor to Gulf & Western's large seaside resort at La Romana, M. Wayne Fuller, ran into a steady series of obstacles in the early 1970s from the Tourism Office in importing supplies and obtaining tax concessions supposedly available to foreign enterprises. In April, 1975, a government decree was signed expropriating Fuller's beach-land property-for use as a public park-helped along possibly by the fact that the president of another G & W subsidiary was an advisor to the Dominican Republic Park Commission. This decree was rescinded when Fuller mobilized his forces, including various army officers and Balaguer himself. In brief, foreign interests are exceedingly powerful as they curry and buy favor and mobilize their elite cadres, with whom they jointly dominate and loot this small dependency.
    A third characteristic of the Dominican model has been a radical sweetening of conditions for foreign business and a strong reliance on foreign investment for national development. As in Greece under the Colonels' regime of 1967-1973, great stress has been placed on tourism and investments related to tourism (resort hotels, airport development). An Investment Incentives Law of 1968 removed any restrictions on foreign ownership, extended generous tax and duty exemptions to new investments, and guaranteed capital and profit repatriation. U.S. companies have swarmed into agriculture, food processing, mining, banking and hotel and resort complexes. In 1969 G & W became manager of a large tax-free zone adjacent to G & W's Cajuiles golf course. One of the many Dominican Republic ads in the New York Times- funded in good part by "contributions" from foreign companies in the country-notes that companies settling within the G & W free zone "are given special duty free import and export privileges. They are granted a 10-year tax-free status." The reporter Michael
    Flannery describes the G & W "free zone" in the following language:
    "Shotgun-toting customs agents and national police man check points at entrances to the free zone, which is surrounded by a high chain-link fence topped with multiple strands of barbed wire…CNTD [National Confederation of Dominican Workers] and visiting officials of the AFL-CIO charged that the zone had the air of a "modern slave-labor camp." They said the carefully controlled access was designed not only to prevent smuggling, but to thwart efforts to organize the workers into unions that would force an improvement in conditions."
    A fourth characteristic of the Dominican Republic model, related to the preceding, is effective government pacification of the labor force, a crucial requirement for an appropriate "climate of investment." As noted above, the systematic police terror since 1965 has returned the large urban proletariat and sub-proletariat to the desired state of passivity, and the countryside has been more easily kept in line by periodic violence and threats. The Dominican Republic advertisement section in the New York Times of January 28, 1973, has a heading entitled "Industrialists Dream of Chances Like These," featuring the low, low wage rates, running between 25 and 50 cents an hour. The ad stresses the role of the law in fixing hours and wages and allowing the free import of foreign technicians. There is no mention of any trade unions, but employers will properly read between the lines that unions have been broken and pacified (with the assistance of George Meany and the AFL-CIO). Of special interest is the regular use of government troops and police to break up independent unions. The agricultural union Sindicato Unido, which operated the fields now owned by G & W was broken by police action in 1966 and 1967, and a number of its leaders, including the union lawyer Guido Gil were arrested and killed by the forces of law and order. Another major foreign enterprise, Falconbridge Nickel, also successfully broke a union with army and police assistance in 1970. A Wall Street Journal report of September 9, 1971 states that "when a union attempted to organize construction workers at a foreign-owned ferronickel mill project last year, Mr. Balaguer sent in the army to help straighten things out. While the soldiers kept order, the contractors fired 32 allegedly leftist leaders…The strike was broken in eight days." Matters had not changed much in the mid-70s. An ad hoc human rights group that visited the Dominican Republic in 1975 reported that "working people have been prevented by nearly every conceivable means from forming and joining trade union organizations." A union organizing effort in the G & W free trade zone in the mid-1970s was broken with the help of the police in arresting, jailing, and deporting labor organizers, and with the use of "troops in full combat gear armed with submachine guns" to break up organizing meetings. Flannery states that:
    "Officials of the Dominican labor ministry told organizers that-contrary to the paper guarantees of the republic's laws-workers would not be allowed to form a union in the industrial free zone."
    On the matter of labor unions, the 1977 State Department Human Rights Report has the following "information": "Labor unions are permitted to function and numerous labor unions exist including some associated with opposition parties, but under some government controls." That exhausts that topic.
    In containing unions and rendering them docile the Dominican elite has had the steadfast support of the top echelons of the AFL-CIO, which has long cooperated closely with the CIA and international business firms in this unsavory operation. Its arm CONATRAL actually helped destroy the pro-labor Bosch regime in 1963 and has steadily supported its totalitarian and anti-labor successors."' Presumably their blind hatred of Communism and radicalism in general has led Meany and his close followers to sell out systematically the interests of labor in the Dominican Republic and in other U. S. satellites. Meany and some other labor bosses actually have a more direct interest in the pacification of labor in the Dominican Republic. Meany, his number two man Lane Kirkland, Alexander Barkan, director of COPE, the AFL-CIO political arm, and Edward J. Carlough, president of the sheet metal workers, all are stockholders in the 15,000 acre Punta Cana resort and plantation in the Dominican Republic. In order to clear the ground for this enterprise designed for the Beautiful People a large numbers of squatters were evicted by the army.
    A fifth characteristic of the Dominican model, following naturally from the preceding, is the sharp deterioration in the well-being of the bulk of the population. In serving the interests of a traditional and expatriate elite, the Dominican Republic has been turned into a tourist and industrial paradise, with a "25-cent minimum wage rate and hard-working peaceful labor" [sic: translated, no threat of strikes from any independent unions], and with four tax free zones "filled with manufacturers of brushes, brassieres, batteries, electronic devices, wigs, undergarments, components and consumer goods." The effects of the 1965 counterrevolution and the installation of the Dominican Republic model on income distribution and welfare were summarized by the Wall Street Journal (9 September 1971) as follows:
    "The middle and upper classes are better off, as are the lower classes lucky enough to have jobs. But work is scarce; the poor are poorer and more numerous. "Per capita income is about the same as before 1965, but it's less equitably distributed," a foreign economic expert says. He estimates per capita income at $240-three times that of Haiti but half that of Cuba… Most of the 370 young women who work at La Romana earn 30 cents to 40 cents hour last year…Malnutrition is widespread. Says George B. Mathues, director of CARE in the Dominican Republic: "You see kids with swollen bellies all over the country, even here in Santo Domingo." Food production is hampered by semi-feudal land tenure. At last count, less than 1% of the farmers owned 47.5 % of the land, while 82% farmed fewer than 10 acres… Land reform has moved with glacial speed…Most Dominican children don't go beyond the third grade; only one in five reaches the sixth grade. "
    G & W acknowledged in 1978 that cane cutter money wages had not kept up with inflation in the years since 1966,'75 and there is other evidence to the same effect, which suggests a probable further absolute fall in the real income of the majority and a further shift toward inequality in income shares. There is also evidence that the nutritional deficit of the Dominican majority is huge. Michael Flannery cites a report which states that in 1972 "a mere 11 percent of Dominicans drink milk, 4 percent eat meat and 2 percent eat eggs. Fish are plentiful in the waters off the island, but draw better prices in other markets. So, few Dominicans include fish in their protein-poor diet."
    In the Dominican Republic we see the working out once again of the familiar repression-exploitation-trickle-down model of economic growth. The export-oriented agriculture is, as is common throughout the empire, displacing an already underemployed peasantry and rural work force, increasing the mass of dispossessed and malnourished. The unemployment rate has been extraordinarily high, on the order of 30%-40%.'79 The mass of the population has been entirely excluded from any opportunities for economic advancement, education, or political participation. The large majority as in Brazil, Indonesia, or the Philippines, is a cost to be minimized and a threat to be contained. The process of development observed here is acceptable on the assumption implicit throughout the empire-that only the welfare of the local and expatriate elites need be taken into account. The decline in the welfare of the majority, their exclusion from any power whatsoever, and the cultural degradation of the Dominican Republic, are obviously beside the point. "Stability" has been brought to the country, and from the perspective of U.S. investment opportunities, the Dominican Republic deserves the glowing description of a U.S. Embassy report describing it as a "little Brazil" and "one of the brightest spots in Latin America."

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  • Sat, Apr 06, 2013 - 6:23pm

    Reply to #37

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    broad sweep of history

    Grover -You want to ignore what I said and go "meta" on me?  I can do that too.  πŸ™‚
    Looking at things from where we are now, I agree with you, pretty much all of it except for your solution, and your hopelessness about the possibility for change.
    Change definitely won't come through the ballot box.  But if you zoom out a bit, look at things from the perspective of the broad sweep of history, you may notice that things move in cycles – there are times when corruption reigns supreme, and times where corrupt overreach results in a crash when there is a window that allows for change.
    For instance, how else do you explain the creation of the SEC, Federal Deposit Insurance, Glass-Stegall all in the early 1930s?  They all happened at the same time, they were all in response to the corruption of the 20s and the resulting crash of 1929. 
    At some point, we will see a similar period.  It hasn't happened yet.  Without the misery of the 1929 crash, there was no impetus to change.  From my perspective, I'm collecting my laundry list of things I want to fix about the status quo right now.  That way, when TSHTF which it must at some point – greed drives corruption to insane heights that eventually will destroy itself – there will finally be the will to act that motivates real change.
    The last time this happened, we created laws that "kept the peace" for 60 years.  I'd say that's pretty good.  Perhaps this time around if we are prepared, we can do even better.  In politics, as in everything, you sometimes just have to wait for the right time to strike your blow.  At the right moment timed properly, even a jab can become a knockout punch.
    I think everything is possible.  Just not at this moment in time.
    And when it happens, I prefer the direct approach.  Make anti-social activities illegal, and eliminate systemic corruption that society overall finds objectionable.  Nothing dissuades those white collar criminals like a televised perp walk, followed by a 5 year stretch in an orange jumpsuit at Club Fed.

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  • Mon, Apr 08, 2013 - 5:14am

    #40

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 691

    Need definitions

    Dave,

    When I read your missive of 4/5, I sensed an air of frustration. That's why I went "meta" on you. I opened a window into my thoughts. I wanted to explain that I've fought from the other side and stopped believing that their cause was just or even winnable.

    I got to thinking that you are describing a different aspect of regulation than I am. As a blunt analogy, I see regulation as a rape that is legally slowed down and required to be finished with a kiss. The rape still occurred, but the perpetrator had to follow guidelines to mitigate the damage. I'm thinking that you see regulation as setting up laws to prohibit the rape from occurring within certain business enterprises. At least we'll stop rape from occurring in these establishments. (I'm sure we both find rape to be repulsive and it is always dangerous to use imperfect analogies to identify positions.)

    As long as "banks" get special treatment from the law, I don't have a problem with legally limiting operations in ALL commercial banks/investment banks as the Glass-Steagall Act did. According to this wikipedia article, http://en.wikipedia.org/wiki/Glass-Steagall, most of the firewalls were eroded by legislation by the 1960s. By the end of the century, the big banks were already legally avoiding the prohibitions the Act instituted.

    Personally, I'd rather give bankers the freedom to declare what they would or wouldn't do with my "deposits" and allow me to choose who to invest with. If they say they're playing craps with my money and I decide to deposit the money, I'm responsible for the share of winnings or losses. If they say they will NOT use my money to play craps … and they do, they can make me whole with their personal funds. If the losses exceed their personal worth, I'd like the law to strip them of all their assets (the first time.) After that, I'd require them to inform future investors/depositors (forever) of their prior convictions, and if they didn't, they'd be incarcerated for life with a roommate named "Bubba." (Actually, I'd prefer that they would be publically hung with a thin wire rope.)

    You are correct that the risk of being caught and the consequences of "white collar" crime are minimal compared to the lucrative rewards that can be amassed by violating the laws. That's why we have retired cops joining the mafia. I'm sure there are already laws on the books against anyone joining organized crime. Would another specific law change that?

    Should regulators be allowed to waltz out the regulatory agency into the clutches of those they regulated? If the regulations are black and white, those being regulated wouldn't be able to bribe the regulators into looking at the events with a less jaundiced eye. When you say "regulation should be simple" then, it is easy to decide whether or not to allow an action. There is no need to worry about the revolving door. There wouldn't be any advantage.

    I agree that social cycles exist. History was only a series of "who, what, and where" until I read the Fourth Turning. I agree with their premise that every 80-100 years, major social upheavals occur. According to my interpretation of their theory, we're currently in the beginning of the 4th turning, but governments and the central banks around the world are trying to hold back the inevitable tide by printing more money. It is doing nothing but delaying the inevitable and making the consequences worse.

    As a result, I am hopeless that regulatory change will prevent the cataclysm that will render regulation moot. Once we've hit bottom and start rebuilding, I hope that we put the onus where it belongs. As I said, "I am a fan of transparent contracts and parties adhering to the provisions."

    Grover

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  • Mon, Apr 08, 2013 - 8:06am

    Reply to #40

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    regulations and metaphors

    Grover -I think we'll have to agree to disagree.
    To me, regulations are not rape.  I don't feel philosophicaly offended the way you do by regulation.  They are simply laws that companies must follow.  Some regulations are good and protect society, some are bad and effectively only benefit the cartel that had them written.  Regulations are only as powerful as the enforcement behind them, and only as sensible as the authors.  Given your extremely strong sense of moral violation at the mere thought of regulation, it is unlikely that we will have any sort of mutually satisfactory discussion about it.
    The story of retired policemen working for the Mob was a metaphor.  I probably wasn't as clear about that as I could have been.  I was using it to describe our current system where regulators leave the revolving door of government to make bucketloads of money in the industry they just finished regulating – an ex post facto bribe, but one that is totally legal.  If you "go along" as a regulator, you'll get a nice quid pro quo job when you're done with your service.  That's one of the two central points of corruption today.  And no, there are no laws against this behavior.  But there should be.  And yes, they would work just fine – my opinion.
    The other point of corruption, of course, is politicians who are corrupted in the first instance with corporate campaign money, and in the second instance by working for the industry they did favors for upon their retirement.
    Simply holding the principals personally liable for corporate damage is not enough.  Simply threatening to send them to live with Bubba is not enough.  [I also don't feel that is a reasonable punishment – I'm totally against "actual" rape under any circumstances.  Ow, I went there.]  There are people who are happy to take risks with society vastly in excess of their ability to compensate because they estimate the probability of failure much differently than we do – or they figure they can always flee the jurisdiction, they can talk their way out, it won't happen, or in the last instance, they can always negotiate with Bubba.  I've worked with people like that.  Not everyone is an entirely rational actor, and for some reason, some of the people that crawl to the top in our society tend to be…a bit sociopathic.  Or maybe they just sincerely believe in their ability to impose their will over facts on the ground and the laws of probability.  Who can really say?  For these types of people, severity of punishment does not deter.  This is who we need regulations for.
    I definitely believe that regulation, on its own, will do nothing.  They have to be written and then enforced after we have eliminated the systemic corruption, or there is absolutely no point.  Dodd-Frank is a sterling example of thoroughly corrupted regulation – a bureaucrat full employment act written by the cartel it seeks to control.
    And nothing will eliminate that systemic corruption until it has overreached itself, and caused our next financial disaster.

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  • Mon, Apr 08, 2013 - 12:24pm

    #41

    Greg Snedeker

    Status Silver Member (Offline)

    Joined: Oct 22 2012

    Posts: 380

    Dave, read it again

    Dave and Grover, 

    I've been enjoying the back and forth on this one. I hate to butt in, but Dave I think you misinterpreted his view on regulation. He wasn't calling regulation rape, he was saying it doesn't act as a stop-measure (using rape as the crime example), but rather as a poor mechanism of slowing guidelines and mitigation.

    I'm glad you brought up Dodd-Frank, I've been asking for opinions for awhile, and that is the way I see it as well.

    Okay, I'll go away now, and you guys can get back to your interesting conversation. smiley

    Thanks

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  • Mon, Apr 08, 2013 - 1:43pm

    Reply to #41

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    and again!

    Gill -Ha!  Right you are.  Grover isn't saying what I thought he was saying; something in my brain tripped when I saw his example, and I got over-focused on the metaphor.
    Thanks for explaining!
    I'll have to think more upon this.  At the core of the whole issue is, someone has to act as the adult saying "no" – either by levying a whopping fee for acting badly, or by prohibiting something entirely.   But any way you slice it, no matter what regime you put in place be it penalty-based or regulatory, a corrupt instrumentality will allow the company to minimize its costs through bribery.
    So corruption – especially the systemic kind – is the core issue.

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  • Mon, Apr 08, 2013 - 3:06pm

    Reply to #40

    westcoastjan

    Status Bronze Member (Offline)

    Joined: Jun 04 2012

    Posts: 177

    understatement of the year

    Dave wrote:

    "… Not everyone is an entirely rational actor, and for some reason, some of the people that crawl to the top in our society tend to be…a bit sociopathic…"

    My vote for understatement of the year.
    Jan
     
     

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  • Tue, Apr 09, 2013 - 7:02am

    #42

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 691

    Sorry folks

    I think that Dave and I have exhausted our review of this issue. We're on opposite banks of a deep and treacherous ravine. (Dave, please correct me if I'm wrong.) I think Dave believes the system is working but needs a few tweaks to function optimally. I think the whole system needs to be junked and replaced with something that allows industry to pay as they go.

    I used to believe something similar to Dave's position. I've been jilted and no longer believe that the status quo is possible … or even desirable. We can't switch paradigms until they fail. As such, my solution will seem extreme as long as there is hope that we can save our beliefs.

    I expect that the current system will fail miserably! If it fails soon enough, we'll have sufficient surplus energy to rebuild the systems upon which we rely. If so, consider my proposal as a stepping stone. If the current system outlives the energy surplus, hard decisions will need to be made. All communities will be localized. Your voice (or lack thereof) could propel or retard the success of your local community.

    Weigh your position carefully and continually. I wish you the best of luck.

    Grover

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  • Tue, Apr 09, 2013 - 12:23pm

    Reply to #42

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3125

    i believe the system is working?

    Grover -That's an interesting summary.  It tells me I'm not communicating effectively.
    If you could help me out, and point out where I gave you the impression that "the system just needs a few tweaks", it would be quite helpful…because I did NOT mean to leave you with that impression.
    Until we address the issues of systemic corruption, nothing will work.
     

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  • Tue, Apr 09, 2013 - 6:37pm

    #43

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 691

    Diminishing Returns

    Dave,

    Corruption was one of the issues I think you feel needs to be resolved. I agree to a point. I don't think it can be removed from the current system. There is just too much money at stake. I'm for severe criminal penalties for violating the law. Unfortunately, the perp needs to be caught, tried, convicted, sentenced, and run through all the appeals before justice can be carried out. These people have oodles of money and use it to game the system. That won't change.

    The reason I said "minor tweaks" was because I think you see the general fabric of the system working if we can only plug the holes. Some of the holes are considerably sized. Nonetheless, once plugged, the system won't be that different from what we see today – only functioning.

    I think the vast majority of the population generally sides with your view. It doesn't make it right, but it makes it politically probable. (The earth used to be the center of the universe, too.)

    About 40 years ago, I was at a carnival and got sucked into one of the games of skill – throwing darts at a grid of numbers. I wanted a new transistor radio (~$40) and there was a nice one available for someone who could get 100 points. Three darts cost $0.50 and had to be thrown with a single motion. The first throw was free. I got 40 points on the first throw. I plunked down a dollar and got 18 more points. With each dollar, the points awarded diminished. I spent more than $20 before I realized I never would get those last few points. I had been had!

    The Carney used my greed against me. It ended up costing me a couple of days of wages, but the bite that stung the most was realizing that I allowed myself to be suckered. It turned out to be one of the cheapest lessons I ever learned.

    Grover

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  • Thu, Apr 11, 2013 - 2:27pm

    Reply to #43
    S Anthony

    S Anthony

    Status Member (Offline)

    Joined: Aug 22 2012

    Posts: 7

    The Carnival "Sleight of Hand"

    [quote=Grover]About 40 years ago, I was at a carnival and got sucked into one of the games of skill – throwing darts at a grid of numbers. I wanted a new transistor radio (~$40) and there was a nice one available for someone who could get 100 points. Three darts cost $0.50 and had to be thrown with a single motion. The first throw was free. I got 40 points on the first throw. I plunked down a dollar and got 18 more points. With each dollar, the points awarded diminished. I spent more than $20 before I realized I never would get those last few points. I had been had!
    The Carney used my greed against me. It ended up costing me a couple of days of wages, but the bite that stung the most was realizing that I allowed myself to be suckered. It turned out to be one of the cheapest lessons I ever learned.
    [/quote]
    Grover (further to our private messages),
    do you really think you and Dave have a mastery in the divying out of the resource wealth of the world through some master plan of the saving grace to the pegged American dollar? Transplanting a billion+ people from land based food security, into insecurity and povery in such examples as the hovel's of Bhopal (Madhya Pradesh), the favelas of Brazilia, and East Timorese slums? Further, to the exemplory application of 1994's NAFTA, as a continuence to the forced migration, indirect (and direct) killing/maiming of 50 million people in just the last 60 years alone?
    Lets talk foreign aid – in the two broad categories of military and economic assistance (and by private organizations and individuals in the United States) – discounting the more obvious ones, such as Afghanistan, Israel, Iraq, Pakistan, Egypt, Kenya and Jordan – concentrate instead on Indonesia, Liberia, Somalia, Zambia, Mozambique, South Sudan, Congo (Kinshasa), Uganda, Nigeria, Sudan, Tanzania, Ethiopia, the Philippines, Columbia, and finally, and not least, Bolivia, Chile and Haiti, (among many more unmentioned in this list that still apply).
    Look into each one of those countries above, and you will find that they each had a massive rise in violence – with the instigation of a puppet regime – as each, over time, were given U.S. aid, while the meritorious profits of resource were/are shared among allies – and not just uncasually benefitting the extremely false, short-term, trickle-down economic effect, back home.
    Each one of these countries were seduced, then induced, with the multi-talisman effects of an inflation/deflation that countermanded any value within each local currency, forcing each to fall back on the pegged American dollar to strengthen export trade at "rape" values, equal to several cents on their original dollar revenue income.
    Hiding behind the juxtaposition of magnanimous aid, this is the backbone, meat and sinue, of the American Empire. These are the "Extrernalities" that I mentioned in an earlier post.
    I find it such a personal disapointment that if the American people knew the truth of how they are lied to – and the myths that they endorse – they would choose against it. But that would mean their chosen lifestyle would stop.
    I've learned something about our fellow citizens you won't like to hear:

    They hear it, they learn from it, they understand it, and they proceed to ignore it. 

    America is not a person to blindly defend, but a country that we live in. It's people are complicit – yet ignorant of the fact – while evil policies are enacted – and continue to be enacted – in our name.

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  • Thu, Apr 11, 2013 - 5:18pm

    Reply to #43

    Grover

    Status Gold Member (Offline)

    Joined: Feb 15 2011

    Posts: 691

    Birth isn't always wondrous

    S Anthony,I never read the entire book (just free excerpts) Confessions of an Economic Hitman He was describing the mechanism to accomplish what you've been saying. In essence, the hitmen would make loans to government leaders that were so big that the loans could never get paid back. Once the country (being targeted) "defaulted", the road to serfdom began. Forgiveness of portions of the loan was contingent on promises being delivered. The strings became firmly attached and a puppet government was born.
    Other than starving the beast, what options do you see to correct the situation. Remember that it takes two to tango. Also, remember that you can't con an honest person.
    Grover

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  • Fri, Sep 04, 2015 - 11:44pm

    Reply to #14

    Michael_Rudmin

    Status Gold Member (Offline)

    Joined: Jun 25 2014

    Posts: 844

    Rector, from your post I would posit...

    … that you would enjoy the card game “illuminati”
    https://en.m.wikipedia.org/wiki/Illuminati_(game)

    My brother added — to all the standard groups — a card representing the Vatican, with the goal that it needed to arrange cards representing one of each category of group (criminal, government, chaotic, free, etc) into the shape of a cross.

    Point being, not all of the goals of the chess players are going to make sense to you, but they may make sense to them.

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  • Sat, Sep 05, 2015 - 2:05am

    Reply to #14

    Rector

    Status Bronze Member (Offline)

    Joined: Feb 07 2010

    Posts: 323

    I would like to give it a try.

    This is the second time in a week this card game has entered my consciousness.  I'll look it up.  Thanks for digging up this old but good conversation.

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