Thursday, July 21, 2011

A Few Years From Now You’re Going To Wake Up With A Bunch Of New Taxes

We’re coming down to the wire on the debt limit. “Hard” deals are now being put on the table. The Republicans have said all along they don’t want any new taxes. But only a fool could think this can be done without a significant amount of revenue increase. So if we’re to get a deal what has to give? Easy. Rather than increase taxes the government can phase out deductions.
This data looks at individual deductions. This come to a whopping $950 billion. You tell me, are you on this list? Have a mortgage? Pay state or property taxes? School debt? Health care costs? Charity? Kids? Veterans? At one point or another every American is on this hit list.
A Few Years From Now Youre Going To Wake Up With A Bunch Of New Taxes image
A Few Years From Now Youre Going To Wake Up With A Bunch Of New Taxes image
Consider the deductions at the corporate level in America. It’s only $65b. Peanuts compared to the tax breaks of individuals.
A Few Years From Now Youre Going To Wake Up With A Bunch Of New Taxes image
Now think of yourself in a room trying to negotiate this big deal. It’s all well and good to say that the end result will be more taxes for corporations. But at a ratio of 15 to 1 you have to hit individuals pretty hard in order to raise any serious money. At this point everyone understands that. Cutting personal deductions in a very big way is the only possible outcome where all sides can save some face.
The way that these cuts in deductions will be phased out will hit high incomes the hardest. But don’t kid yourself; this will end up in three to four years as a very middle class tax increase. Should something like this come about you have to look askance at owning real estate. You’ll get hit with a tax from employer 401 contributions. You might think twice about having a child. Those charitable deductions are just that, charity.
I guess this is what has to happen when you need to raise a trillion in revenue to sell a deal. We’re going to hate it a few years from now when all this kicks in.

20 Signs That The Fabric Of American Society Is Coming Apart At The Seams

20 Signs That The Fabric Of American Society Is Coming Apart At The Seams  20 Signs That The Fabric Of American Society Is Coming Apart At The Seams 250x187There is wild disagreement about what is causing it, but what most people can agree on is that there is something fundamentally wrong with America.  The fabric of American society just does not seem to be as strong as it used to.  In fact, many would argue that society is coming apart at the seams. Corruption and decay seem to be everywhere.  I spend a lot of time in my other articles blaming a lot of this corruption and decay on politicians, bureaucrats and business leaders, but the reality is that they are only part of the story.  The truth is that those who are leading us are a reflection of what we have become as a nation.  If you got rid of all of our corrupt leaders that would not suddenly “fix” this country.  Millions of ordinary Americans have become deeply corrupt as well.  The kinds of things that you are about to read about below were very rare in past generations.  Society is falling apart all around us and we haven’t even seen the complete collapse of the U.S. economy yet.
A lot of people like to blame the increasingly bizarre behavior of the American people on the economy, but the reality is that things are not nearly as bad as they are eventually going to be.  Yes, the U.S. “Misery Index” recently hit a 28 year high.  Tens of millions of American families are deeply suffering. Unemployment is rampant and unprecedented numbers of Americans have been getting kicked out of their homes.
But that is nothing compared to what is coming.
So what is America going to look like when true economic suffering comes along?
That is something to think about.
A lot of the items in the list below may seem easy to dismiss as “isolated incidents”.  But when you start examining patterns of behavior over an extended period of time, certain trends begin to emerge.  America is become a very cruel place.  The love of most people seems to be growing cold.  What some people are willing to do for a little bit of money or just because someone has “pissed them off” is absolutely stunning.  The America of today is fundamentally different from the America of past generations.
We have changed, and not for the better.
The following are 20 signs that the fabric of American society is coming apart at the seams…..
#1 A 17-year-old Florida teen is being accused of killing his parents with a hammer, hiding their bodies in the master bedroom, and then inviting dozens of people over for a massive house party.
#2 What is it with 17-year-olds?  Another 17-year-old has been charged with putting a plastic bag over the head of his mother and choking her to death with a belt.  His two brothers just stood by and watched while this happened.  Apparently the 17-year-old was infuriated because his mother wanted them to play a game of Yahtzee with her.
#3 The largest school cheating scandal in the history of the United States was recently uncovered in the Atlanta area.  Dozens of teachers and principles were involved according to a recently released 413 page report….
More than three quarters of the 56 schools investigated cheated on a 2009 standardized state test, with 178 educators implicated, including 38 principals. Eighty-two teachers confessed to erasing students’ answers and correcting tests. The report says widespread cheating has occurred since at least 2001 and that orders to cheat came from the top.
#4 A Vancouver, Washington woman has been charged with trying to sell her newborn baby in front of a Taco Bell.  Apparently she was hoping to get somewhere between $500 and $5000 for the baby.
#5 In the United States today, if you don’t show cops “proper respect” there is a good chance that you are going to get tazed.  Just check out this disturbing video of an incident that recently happened in Alabama.
#6 A 48-year-old woman in California was recently arrested after she drugged her husband, chopped off his manhood and threw it into the garbage disposal.
#7 In the Dallas area, five people (including a pregnant woman) were trampled while lying on the ground as thousands of desperate people madly dashed to get into line to get on a waiting list for rental assistance vouchers.
#8 A 35-year-old New York man that has been charged with “kidnapping, killing and dismembering an 8-year-old boy” says that he “hears voices” and he has been ordered to undergo a psychological evaluation.
#9 There has been a rash of car robberies in the Atlanta area recently.  Just a couple of nights ago, more than 30 cars were broken into in a single night in south Buckhead.
#10 All over the United States this summer, thieves are stealing just about anything they can get their hands on.  People are stealing air conditioners, copper wiring, restaurant furniture, metal drain covers and even hair extensions.
#11 In Woodstock, Georgia a 61-year-old man reportedly promised to give a 17-year-old boy money if he would do certain “things” for the man.  Well, it turns out that the 61-year-old man ended up setting the teen on fire….
A 61-year-old man has been arrested on charges of aggravated battery, cruelty to children, false imprisonment, and solicitation of sodomy after he set a 17-year-old boy on fire in Woodstock.
#12 In Washington state, a 23-year-old woman is accused of dumping her newborn baby into a trashcan at the hospital.  When a nurse finally found the plastic bag with the baby boy inside of it, the child was blue in the face from a lack of oxygen.  Fortunately, the baby survived the ordeal.
#13 In another story from Washington state, a man that is being charged with producing child porn is being allowed to watch that porn all he wants while he is in prison because he is acting as his own lawyer and needs to have “access to the evidence“….
So because he’s acting as his own lawyer, he gets full access to the evidence against him. Which means that as he prepares for trial, a private room has been set up in the jail where Gilbert can watch the full 30-hour archives of his own child porn collection.
#14 The National Retail Federation says that “inventory loss” for retail storeswas up 11% last year.  Most of the “inventory loss” is attributed to such things as shoplifting and employee theft.
#15 In Minnesota recently, a mob of teen girls brutally pummeled a mother and her two daughters until they were black and blue.  Apparently the mob of teen girls was enraged over a pair of missing sunglasses.
#16 One of the hot new trends for young males is to play the “knockout game“.  In this “game”, a group of young men picks out an innocent bystander and the first one to knock that person out is the “winner”.
#17 Prior to 2011, most Americans had never even heard of “mob robberies“.  Today, they have made headline news all over the nation.
#18 In the San Francisco area recently, fire crews and police just stood on the shore and watched as a suicidal 50-year-old man slowly drowned to death in the San Francisco Bay.
#19 Meanwhile, the federal government continues to waste money on some of the most bizarre things imaginable.  For example, the federal government actually gave money to the National Institutes of Health to study the effect that the size of “a certain part of the body” has on the sex lives of gay men.  Can anyone think of a reason why the federal government would want to throw money away on such frivolous studies when millions of Americans can’t even find jobs right now?
#20 Many believe that a big reason for all of this chaos in America today is the decline of the American family.  In 1960, married couples accounted for 75 percent of all households in America.  Today, they account for just 48 percentof all households.
Whatever your political or religious philosophy is, hopefully you can agree that America is in trouble.  Every single day, there are more shocking revelations about the corruption and the decay that are spreading throughout this nation.
Sadly, instead of coming together to work on some solutions to our growing problems, Americans are becoming more divided than ever.
The mainstream media teaches us that our “opponents” are those that belong to political, social or religious groups that are different from our own.  They love to divide us and play us off against each other.  Everywhere you look in America, hate is growing.
But hatred is never the answer.  Yes, we should always stand up for what we believe is right, but we can do that and still love one another at the same time.
Unfortunately, as America continues to come apart at the seams we are probably going to see this country become even more divided.
United we stand, divided we fall – you make the call America.

Ahead Of Time

A fertile imagination is usually the enemy of successful investing.
Imaginative investors tend to see their stocks as the “next Microsoft” or the “next Berkshire Hathaway,” even when the stocks they own are much closer to being the next Enron or WorldCom. That’s why successful investors are much more likely to possess a skeptical eye than a fertile imagination.
“But on the threshold of a crisis,” as we observed in yesterday’s Daily Reckoning, “a fertile imagination can be an investor’s most valuable asset. [During normal times], investors can focus only on buying quality stocks one-by-one from the bottom up, without also trying to envision what tragedies might befall them from the top down. But in the context of a euro crisis that could become a dollar crisis that could become a global monetary crisis, it may be time to begin imagining the unimaginable.”
It may be time, in other words, to begin considering that the next phase of the global monetary system might not include the US dollar as its reserve currency…or that the next two decades of life in America might not look anything like the last two decades.
Not just any sort of imagination will do. The wrong kind of imagination is already running rampant in the US economy. As Bill Bonner put it recently, “the dollar pretends to be real money. Debt pretends to be capital. And regulators pretend to be smarter than capitalists.”
This game of make-believe is not likely to end well.
Therefore, to prepare effectively for the end game of the world’s make-believe monetary “system” will require the imagination of a Sean Egan, at least, if not the imagination of a Vladimir Lenin.
Over the weekend, Egan-Jones Ratings Co., of which Sean Egan is president, cut its rating on US government debt from AAA to AA+, becoming the first of the four credit-rating agencies to do so. The downgrade will not likely cause any noticeable ripples in the financial markets because the financial establishment considers Egan-Jones to be an also-ran. It is not Moody’s or Standard & Poor’s which, from our perspective, is precisely the reason to pay attention to Egan-Jones’ assessment. This ratings agency has distinguished itself numerous times for being ahead of the curve.
But honestly, it doesn’t take much imagination to envision the United States as a AA+ credit instead of a AAA credit. Investors may need to think even farther outside the box than Egan, perhaps as far outside as Vladimir Lenin.
When most of us think of imaginative individuals, we might think first of J.R.R. Tolkien, and then maybe J.K. Rowling. Lenin would be third, at best. But way back in 1917, as Joel Bowman observed recently, Lenin offered some shockingly prescient predictions for the century ahead:
Germany will militarize herself out of existence,
England will expand herself out of existence,
and America will spend herself out of existence.

“Had he known the inherent shortcomings of his own political ideology,” Joel remarked, “Bolshevism’s bad boy might also have added, ‘And Russia will plan herself out of existence.

“As for the United States,” Joel continued, “it seems she is not content with simply spending more than she produces, foisting the unfunded obligations onto future generations; instead, she militarizes, expands, spends AND plans toward her own demise…as all once great empires eventually do.”
The process Joel described is the process Bill Bonner dubs, “Imperial Suicide” – the inevitable tendency of empires to implode upon themselves. Some form of this process appears to be underway in the “wealthy nations” of the West, not excluding the United States.
As empires implode, so do their national currencies. As some point, cause and effect become indistinguishable from one another. The economy and the currency of the imploding empire begin circling the drain together.
Imagination is the best protection. A fertile imagination will not prevent a euro crisis or dollar crisis, but it could protect an investor from the consequences of such a crisis.
To illustrate the destructive power of a currency crisis, let’s examine a few pages from recent history…
During the Argentine peso crisis of 2002, the shares of the Argentine oil giant, YPF, climbed more than 50% in five months, even while MERVAL Index of Argentine stocks fell. Unfortunately, YPF’s impressive, market-beating returns occurred in the context of a massive currency crisis, during which the Argentine peso lost about three quarters of its global purchasing power. In US dollar terms, therefore, YPF did not gain 53%, it fell 55%!
Argentine Oil Company YPF in Argentine Pesos and US Dollars During 2002 Crisis
An identical story played out in Brazil, as the real unraveled during the second half of 2002. Shares of the Brazilian mining company, “Vale,” climbed 40% between March and October of 2002, while the Bovespa Index of Brazilian stocks fell 40%. In dollar terms, however, Vale’s “strong” 40% gain was actually a 15% loss.
Four years earlier, the Russian ruble suffered an even more spectacular collapse than the Brazilian real. Amidst this harrowing currency crisis, Russian stocks soared nearly 300%… in ruble terms. But they went absolutely nowhere in US dollar terms.
Russian Stock Performance in Rubles and US Dollars During 1998-1999 Crisis
Just a wee bit of imagination enabled some investors to steer clear of these crises. But shockingly, the vast majority of professional investors failed to imagine these crises, even though Argentina, Brazil and Russia all possessed a rich history of monetary incompetence and chicanery.
In 1969, for example, the Argentine government trimmed two zeros off the existing Peso Moneda Nacional to create the new Peso Ley. In 1985, the government slashed four zeros off the Peso Ley to create the Peso. Then in 1992, the government cut three zeros off the Peso to create the Austral, simultaneously linking it to the US dollar, one-for-one. Ten years later, this peg to the dollar ruptured and the Argentine currency swiftly lost 75% of its purchasing power…again.
In other words, investors required almost no imagination to envision the Argentine currency crisis of 2002. Today, however, investors will require an imagination so vivid and wild that it would border on hallucinogenic. They must not merely imagine that an Argentina might have a currency crisis…again…they must try to imagine that the euro might splinter apart…or that the dollar might suffer a disastrous hyperinflation. Today, the looming potential crises are not unfolding in banana republics or in chronic economic basket cases, they are unfolding in the world’s strongest economies.
As your editor pens these words, he is sitting in a beach chair, digging his toes into the warm sand of one of Laguna’s nicest beaches. The sites before his eyes are beautiful, tranquil and comforting. The folks lounging in chairs nearby are playing cards, drinking beer and sharing laughs. A short distance away, others are a playing in the surf.
Life is good, even if the economy isn’t perfect. A true crisis seems unimaginable. After all, even the 2008 crisis wasn’t that bad. And today, the Apple store in the mall is always packed, most of the restaurants in town are full…and the dollar is still strong enough to buy a nice vacation almost anywhere in the world.
A currency crisis that triggers an economic crisis – or vice versa – just feels like a bunch of wacky, doom and gloom stuff. And it may well be. We hope it will be.
But what if it’s not? To prepare effectively for a large-scale currency crisis requires a lot of time and energy, as well as a dose of good luck. So a lack of imagination is no longer a viable luxury.
In the context of America’s legendary resilience and economic might, a catastrophic currency crisis seems almost unimaginable… But the time has arrived to begin imagining it…not because it is certain, but because it has become less unimaginable.
A Brazilian newspaper recently featured the following photo:
US Dollar as Toilet Paper
It’s just a joke, right?

Too Big To Fail?: 10 Banks Own 77 Percent Of All U.S. Banking Assets

Back during the financial crisis of 2008, the American people were told that the largest banks in the United States were "too big to fail" and that was why it was necessary for the federal government to step in and bail them out.  The idea was that if several of our biggest banks collapsed at the same time the financial system would not be strong enough to keep things going and economic activity all across America would simply come to a standstill.  Congress was told that if the "too big to fail" banks did not receive bailouts that there would be chaos in the streets and this country would plunge into another Great Depression.  Since that time, however, essentially no efforts have been made to decentralize the U.S. banking system.  Instead, the "too big to fail" banks just keep getting larger and larger and larger.  Back in 2002, the top 10 banks controlled 55 percent of all U.S. banking assets.  Today, the top 10 banks control 77 percent of all U.S. banking assets.  Unfortunately, these giant banks are also colossal mountains of risk, debt and leverage.  They are incredibly unstable and they could start coming apart again at any time.  None of the major problems that caused the crash of 2008 have been fixed.  In fact, the U.S. banking system is more centralized and more vulnerable today than it ever has been before.
It really is difficult for ordinary Americans to get a handle on just how large these financial institutions are.  For example, the "big six" U.S. banks (Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo) now possess assets equivalent to approximately 60 percent of America's gross national product.
These huge banks are giant financial vacuum cleaners.  Over the past couple of decades we have witnessed a financial consolidation in this country that is absolutely unprecedented.
This trend accelerated during the recent financial crisis.  While the big boys were receiving massive bailouts, the hundreds of small banks that were failing were either allowed to collapse or they were told that they should find a big bank that was willing to buy them.
As a group, Citigroup, JPMorgan Chase, Bank of America and Wells Fargo held approximately 22 percent of all banking deposits in FDIC-insured institutions back in 2000.
By the middle of 2009 that figure was up to 39 percent.
That is not just a trend - that is a landslide.
Sadly, smaller banks continue to fail in large numbers and the big banks just keep growing and getting more power.
Today, there are more than 1,000 U.S. banks that are on the "unofficial list" of problem banking institutions.
In the absence of fundamental changes, the consolidation of the banking industry is going to continue.
Meanwhile, the "too big to fail" banks are flush with cash and they are getting serious about expanding.  The Federal Reserve has been extremely good to the big boys and they are eager to grow.
For example, Citigroup is becoming extremely aggressive about expanding....
Citigroup has been hiring dozens of investment bankers, dialing up advertising and drawing up plans to add several hundred branches worldwide, including more than 200 in major cities across the United States.
Hopefully the big banks will start lending again.  The whole idea behind the bailouts and all of the "quantitative easing" that the Federal Reserve did was to get money into the hands of the big banks so that they would lend it out to ordinary Americans and get the economy rolling again.
Well, a funny thing happened.  The big banks just sat on a lot of that money.
In particular, what they did was they deposited much of it at the Fed and drew interest on it.
Since 2008, excess reserves parked at the Fed have grown by nearly 1.7 trillion dollars.  Just check out the chart posted below....
The American people were promised that TARP and all of the other bailouts would enable the big banks to lend out lots of money which would help get the economy going for ordinary Americans again.
Well, it turns out that in 2009 (the first full year after Congress passed the bailout legislation) U.S. banks posted their sharpest decline in lending since 1942.
Lending has never fully recovered since the crash of 2008.  The big financial institutions like Goldman Sachs, Morgan Stanley and JPMorgan Chase have been able to get all the cash that they need, but they have not passed that generosity along to ordinary Americans.
In fact, the biggest U.S. banks have actually reduced small business lending by about 50 percent since the crash of 2008.
That doesn't sound like what we were promised.
These "too big to fail" banks have been able to borrow gigantic amounts of money from the Fed for next to nothing and yet they still refuse to let credit flow to local communities.  Instead, the big banks have found other purposes for all of the super cheap money that they have been getting from the Fed as Ellen Brown recently explained....
It can be very profitable indeed for the big Wall Street banks, but the purpose of the near-zero interest rates was supposed to be to get banks to lend again. Instead, they are, indeed, paying “outrageous bonuses to their top executives;” using the money to engage in the same sort of unregulated speculation that nearly brought down the economy in 2008; buying up smaller banks; or investing this virtually interest-free money in risk-free government bonds, on which taxpayers are paying 2.5 percent interest (more for longer-term securities).
What makes things even worse is that these big banks often pay next to nothing in taxes.
For example, between 2008 and 2010, Wells Fargo made a total profit of 49.37 billion dollars.
Over that same time period, their tax bill was negative 681 million dollars.
Do you understand what that means?  Over that 3 year time period, Wells Fargo actually got 681 million dollars back from the U.S. government.
Isn't that just peachy?
Meanwhile, the big financial giants have not learned their lessons and they continue to do business pretty much as they did it prior to 2008.
The big banks continue to roll up massive amounts of risk, debt and leverage.
Today, Wall Street has become one giant financial casino.  More money is made on Wall Street by making side bets (commonly referred to as "derivatives") than on the investments themselves.
If the bets pay off for the big financial institutions, mind blowing profits can be made.  But if the bets go against the big financial institutions (as we saw in 2008), firms can collapse almost overnight.
In fact, it was derivatives that almost brought down AIG.  The biggest insurance company in the world almost folded in 2008 because of a whole bunch of really bad bets.
The danger from derivatives is so great that Warren Buffet once called them "financial weapons of mass destruction".  It has been estimated that the notional value of the worldwide derivatives market is somewhere in the neighborhood of a quadrillion dollars.
The largest banks have tens of trillions of dollars of exposure to derivatives.  When the next great financial collapse happens, derivatives will almost certainly be at the center of it once again.  These side bets do not create anything real for the economy - they just make and lose huge amounts of money.  We never know when the next great derivatives crisis will strike.  Derivatives are essentially like a "sword of Damocles" that perpetually hangs over the U.S. financial system.
When I start talking about derivatives I get a lot of people in the financial community mad at me.  On Wall Street today you can bet on just about anything you can imagine.  Almost everyone in the financial world has gotten so used to making wild bets that they couldn't even imagine a world without them.  If anyone even tried to put significant limits on futures, options and swaps it would cause Wall Street to throw a hissy fit.
But someday the dominoes are going to start to fall and the house of cards is going to come crashing down.  It is an open secret that our financial system is fundamentally unsound.  Even a lot of people working on Wall Street will admit that.  It is just that people are so busy making such big piles of money that nobody wants the party to stop.
It is only a matter of time until some of these big banks get into a huge amount of trouble again.  When that happens, we might really find out whether they are "too big to fail" or whether we could get along just fine without them.

The Collapse of Paper Money & the Vertical Move of Gold

Money in capitalist economies is an IOU, an IOU that can’t be repaid
Paper money, invented by the Chinese, first appeared in the West in the 13th century. Brought back from China by Marco Polo and his uncles, author Ralph Foster describes the West’s reaction to the hitherto unseen phenomena of money as a piece of paper.
Upon returning to Italy, Polo showed off some Chinese currency notes and explained how they were used… An article in the November 1995 issue of ‘The Bank Note Reporter’ describes the Venetian reaction:
The Emperor of China (who we call Kubalai Khan) gave the Polos a camel loaded with 1,000 cash paper notes as a gift from their sovereign. The doge (chief magistrate of Venice) and the cardinal (the Pope’s cousin) looked at these…notes in awe and dismay.
The hen-scratched writing was not in Latin or Greek but in a secret language, most likely the language of the Devil. They proceeded to burn these notes and accused Polo of heresy.- pg 38, Ralph Foster, Fiat Paper Money: the History and Evolution of our Currency, 2nd ed.
In retrospect, the disturbed reaction of the Venetians was not without cause. For when paper money was later issued in the West, it was to assume a far more sinister guise—no longer was money a savings-based instrument of exchange as it had been throughout human history. In the West, paper money was to become an integral part of a scheme to profit by the spread of debt, i.e. usury.
The human species, according to the best theory I can form of it, is composed of two distinct races, the men who borrow, and the men who lend.- Charles Lab, Essays of Elia, 1833
The above quote is from Will Slatyer’s The Debt Delusion, Evolution and Management of Financial Risk (2008). In his remarkable book, Slatyer traces the origins of debt to before the coinage of gold and silver.
Slatyer notes: In ancient times, interest was rarely charged on advances of precious metals … However, if one did not pay the loan back as agreed, interest was charged at very high rates …The word ‘interest’ refers to the compensation under Roman law which was due to the debtor who had defaulted, i.e. compensation. (pg 12)
Debt distinguished the West’s paper banknotes—issued from central banks in the form of loans—from China’s paper money issued by the state. In the West, however, debt was to replace savings as the basis of commerce.
Although it was two Scots, William Patterson and John Law, who introduced paper money to the West, paper money as debt, i.e. capitalism, can be traced to the Jews who had observed the earlier use of paper money and paper financial instruments in the East
Ralph Foster notes: Jews doing business in China observed and studied the use of promissory notes, vouchers, draft notes, and negotiable certificates of deposit. They saw how this paper circulated freely among the general population rather than only among merchants. Eventually, they adapted these financial instruments to their own use—long before the first Christian travelers had even heard of them.
Europe was thus an indirect beneficiary of eastern financial knowledge. Max Weber, the famous sociologist, recognized the importance of Jewish contributions to the development of capitalism and lectured on their common oriental origin. - pg. 34, Ralph Foster, Fiat Paper Money: the History and Evolution of our Currency, 2nd ed.
Ralph Fosters’ Fiat Paper Money: the History and Evolution of our Currency explains how China’s paper money came to the West: Those who benefit from fiat money’s devious gifts would rather its origins remain forgotten. Thanks to Ralph Foster’s scholarship, however, the history of fiat money is now known.
Note: To order Fiat Paper Money send check or money order for $29.95 to Foster Publishing, 2189 Bancroft Way, Berkeley, CA 94704, free shipping in USA, Global Priority mail outside USA $18.00, email:
When the Scot, William Patterson, proposed his idea of a central bank to King William III of England, banks and paper money were unknown, at least in the West. In the East, paper money had for 600 years led to reoccurring episodes of runaway inflation and the collapse of dynasties. Finally in 1661, China outlawed paper money; and thirty-three years later, in 1694, paper banknotes became accepted as money in England.
Patterson’s central bank combined paper money with usury, i.e. money-lending. In Patterson’s scheme, money would henceforth be issued as loans from banks, i.e. if all loans were repaid, all money would disappear. Earlier, the Venetians had feared China’s paper money was the work of the devil. They were wrong. Patterson’s money was.
The underlying purpose of Patterson’s central bank was not to replace gold and silver with paper money (although it eventually did) but to instead profit by the charging of interest on the loaning of paper banknotes as if they were gold or silver.
Debt-based money issued from central banks on which interest accrues is the basis of capitalist economies. In capitalist economies, central banks are engines of credit which emit debt just as internal combustion engines emit carbon dioxide.
Debt accruing from money issued by central banks constantly compounds and unless capitalist economies also constantly expand, constantly compounding debt eventually overwhelms all economic activity, resulting in ’parcus nex’, i.e.  economic death.
It is the charging of interest on money issued as loans from a central bank that is the foundation of capitalism. It should be noted that prior to capitalism, charging interest on money lending was considered immoral by Christians, Muslims and Jews alike.
Outlawed by Islam, considered by the Catholic Church to be a sin and contrary to the Law of Moses, because of William Patterson’s combination of money and debt, money lending is now the basis of all modern economies.
Jews, barred from all trade guilds in Medieval Europe, were allowed only two avocations in the Middle Ages, that of money lending and the selling of used clothing. It is not without irony that the once shunned practice of money lending has now catapulted Jewish bankers to their pre-eminent position of power and wealth in the world today.
The Catholic Church’s ban on usury, i.e. money lending, came originally from Talmudic law which banned Jews from lending money at interest to other Jews. Jews, however, interpreted this ban as still allowing them to lend money to non-Jews.
In Hebrew law, an indulgent perception of usury meant that one could loan at usury to a racial alien or one not of the Jewish faith…In early Palestine, loans with interest had been allowed to gentiles and Samaritans, and the practice had spread to Europe. - pg 17, Slatyer, The Debt Delusion, Evolution and Management of Financial Risk (2008).
Today, some three hundred years after William Patterson introduced central banking’s debt-based paper money in the West, the centuries-long prohibition against money lending is as long-forgotten as China’s 600 year history with paper money, hyperinflation and dynastic collapse.
Oh laddie of the highlands
What changes you have wrought
With your bubkes paper banknotes
Governments you have bought
You fueled a Tower of Babel
Where banks and bankers rule
With nations now the victims
Of your monetary tools

When capitalism—institutionalized money lending in debt-based economies—became the world’s predominant economy, bankers found themselves temporarily on top. The operant word is temporarily because where credit and debt is concerned, that which goes up always comes down.
In 1971, capitalism began to unravel when the US was forced to suspend the convertibility of the US dollar to gold. Without gold’s constraint on the money supply, governments—especially the US—began printing and borrowing money virtually without limit. Today, that limit has been reached.
William Patterson’s 300 year-old house of cards and credit is now collapsing as defaulting debt consumes what’s left of savings. Despite the efforts of governments to save the system that allows them to spend money they don’t have, the end of the banker’s reign is near.
Since the advent of paper money, bankers have tended to form an unholy alliance with elected governments to expand debt. Both prosper until the time when debt cannot be repaid. - pg. 32-33, Slatyer, The Debt Delusion, Evolution and Management of Financial Risk, 2008
The chartering of the Bank of England changed the course of history. Central banking allowed governments to go to war on credit, an advantage England parlayed into world dominion over the next 150 years. 
In Dollars & Sense show 8, I describe what happened when central banking transformed both England and the US. But the ability to arm the military on credit would ultimately indebt nations beyond their ability to repay and, in the end, would contribute to the end of capitalism itself, see here.
Since WWII, the US has maintained a costly war footing in peacetime and in so doing dissipated the greatest hoard of monetary gold in history. John Exter, a central banker, tells what happened when the US removed the gold-backing of the US dollar in 1971:
The final link between the dollar and gold was broken. The dollar became nothing more than a fiat currency and the Fed [and especially the banks] were then free to continue monetary expansion at will. The result... was a massive explosion of debt - p. 77, Ferdinand Lips, Gold Wars, 2001
Gold was the cotter pin that held capitalism’s scheme of debt and usury together for almost 300 years. In 1971, the removal of gold from paper money caused the rapid expansion of the money supply and debt, and ultimately, the end of capitalism itself
The collapse of Chinese dynasties caused by the excessive issuance of fiat money is about to be repeated, albeit in a modern iteration and on a much wider scale. The recent and unprecedented increase of credit in China and the negative interest rates in much of the world are no less consequential than the excessive printing of fiat money that caused the serial collapse of five Chinese dynasties.
The slowing of the global economy in 2008 was met with an immediate flood of fiat money from China hoping to reverse the severe economic contraction. It worked, albeit temporarily and at a perhaps fatal cost.
The flood of fiat money in 2008/2009 set in motion inflationary forces that will dwarf the inflation of the late 1970s that in the US sent gold surging almost 2300 % between 1971 and 1980 (9 years); shaming the Dow’s historic rally between 1982 and 2000, an increase of  1500 % over 18 years.
The rise in gold and silver prices has been underway since 2001. The process itself has been underway since 1971. There is further to go and the price rise will be steeper. In an interview with Ralph Foster, I discuss this process with the noted author and gold and silver dealer, see here.
China may well play the unfortunate role for the world economy that it did for its own for five successive dynasties.  China is once again issuing excessive amounts of fiat money. Then, governments fell. Today, they will fall again; and when they fall, the price of gold will rise vertically.
The study of capitalism is like the study of religion in a time of idolatry
 “You can’t eat gold” is a sophomoric assertion intended to dismiss the value of gold in times of severe economic crisis. Professor Antal Fekete who lived through such times, i.e. the post-WWII Hungarian inflation, simply dismisses this absurd statement by answering, “You can always eat what gold will buy”.
I was fortunate to learn much about the Austrian school of economics from Professor Fekete. The Austrian school holds that human choices and interaction play causal roles in economies, i.e. Human Action by Ludwig von Mises.
I recommend that for those interested in matters of economics, there is no better venue for discussion than with Professor Fekete, a man of towering intellect, humor, compassion and a concomitant love for discourse and argument.
From August 20-29 in Munich, Germany, Professor Fekete will lecture on The Austrian Theory of Interest and Discount. He will be joined by Sandeep Jaitly whose study of the gold and silver basis, an area first explored by Professor Fekete, has led to the basis as a strategy for profitably trading gold and silver.
Note: For inquiries about Professor Fekete’s seminar, email
The Austrian school of economics emerged at a time when communism and socialism were offered as alternatives to the capitalist model. Because of the central role of government inherent in communist and socialist models, the potential for tyranny was obvious.
That capitalism, however, offered the same potential is less obvious. The threat of capitalism to human freedom is even more insidious because of its covert agenda and global presence, an agenda described by Carroll Quigley in his seminal work, Tragedy and Hope (1975)
Quigley was a professor at Princeton and Harvard Universities, and later at the School of Foreign Service at Georgetown University where he was a mentor of Bill Clinton. Quigley’s observations are to be valued as they are an insider’s look at the activities of powerful elites who use government and commerce to accomplish their aims and disguise their activities.
Because of his position as an academic and scholar, Quigley had access to individuals and elite groups who influence events and activities far outside the purview of others; and, in Tragedy and Hope, he exposes the hidden agenda of these elites:
The powers of financial capitalism had another far reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements, arrived at in frequent private meetings and conferences. The apex of the system was the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the worlds' central banks which were themselves private corporations. The growth of financial capitalism made possible a centralization of world economic control and use of this power for the direct benefit of financiers and the indirect injury of all other economic groups.
The global economic collapse is perhaps humanity’s greatest hope for escaping the debt slavery the world’s financiers and bankers have planned for the world. However, to escape slavery one must first know he is a slave.

Debt is the slavery of the free -Publilius Syrus, Sententiae, c 50 BC

Man’s wisdom is most conspicuous where he is able to distinguish among dangers and make choice of the least. -Niccolò di Bernardo dei Machiavelli, The Prince, 1513

18 Signs That Global Financial Markets Smell Blood In The Water

Can you smell it?  There is blood in the water.  Global financial markets are in turmoil.  Banking stocks are getting slaughtered right now.  European bond yields are absolutely soaring.  Major corporations are announcing huge layoffs.  The entire global financial system appears to be racing toward another major crisis.  So could we potentially see a repeat of 2008?  Sadly, when the next big financial crisis happens it might be worse than 2008.  Back in the middle of 2008, the U.S. national debt was less than 10 trillion dollars.  Today it is over 14 trillion dollars. Back in 2008, none of the countries in the EU were on the verge of financial collapse.  Today, several of them are.  This time if the global financial system starts falling apart the big governments around the world are not going to be able to do nearly as much to support it.  That is why what is happening right now is so alarming.  As signs of weakness spread, the short sellers and the speculators are starting to circle.  They can smell the money.
Back in 2008, bank stocks led the decline.  Today, that appears to be happening again.  The “too big to fail” banks are getting absolutely pummeled right now.  Most people don’t have much sympathy for the banksters, but if we do see a repeat of 2008 they are going to be cutting off credit and begging for massive bailouts once again, and that would not be good news for the economy.
In Europe, the EU sovereign debt crisis just seems to get worse by the day.  Bond yields for the PIIGS are going haywire.  The higher the yields go, the worse the crisis is going to get.
Meanwhile, as I have written about previously, a bad mood has descended on world financial markets. Pessimism is everywhere and fear is spreading.  The short sellers and the speculators are eager to jump on any sign of weakness.  Investors all over the globe are extremely nervous right now.
So what happens next?
Well, nobody knows for sure.
But things certainly do not look good.
The following are 18 signs that global financial markets smell blood in the water….
#1 Banks stocks are absolutely getting hammered right now.  Bank of America hit a 52 week low on Monday.  Bank of America shares declined 4 percent to $9.61.
#2 So far this year, Bank of America stock is down about 27 percent.
#3 Bloomberg is reporting that Bank of America may be forced to increase its capital cushion by 50 billion dollars.
#4 Shares of Goldman Sachs and Morgan Stanley are near two year lows.
#5 Shares in Citigroup fell 2.5 percent on Monday.
#6 Moody’s recently warned that it may be forced to downgrade the debt ratings of Bank of America, Citigroup and Wells Fargo.
#7 Barclays Capital, Goldman Sachs, Bank of America, JPMorgan Chase and Morgan Stanley are all either considering staff cuts or are already laying workers off.
#8 The deputy European director of the International Monetary Fund says that the Greek debt crisis is “on a knife’s edge“.
#9 Moody’s has slashed Ireland’s bond rating all the way to junk status.
#10 The yield on 2 year Portuguese bonds is now over 20 percent, the yield on 2 year Irish bonds is now over 23 percent and the yield on 2 year Greek bonds is now over 35 percent.
#11 Shares of Italy’s largest bank dropped by a whopping 6.4% on Monday.
#12 On Monday, the yield on 10 year Italian bonds was the highest it has been since the euro was adopted.
#13 On Monday, the yield on 10 year Spanish bonds was also the highest it has been since the euro was adopted.
#14 Shares of Germany’s largest bank fell by a staggering 7% on Monday and are down a total of 22% so far this month.
#15 Citigroup’s chief economist, William Buiter, says that without direct intervention by the ECB there is going to be a wave of sovereign defaults across Europe….
“Nothing stands in the way of multiple sovereign defaults except the ECB: they are the only game in town, there is nothing else”
#16 Cisco has announced plans to axe 16 percent of its workers.
#17 Borders Group has announced that it will be liquidating all remaining assets.  That means that 399 stores will be closed and 10,700 workers will lose their jobs.
#18 During times of great crisis, many investors seek safe havens for their money.  On Monday, the price of gold shot past $1600 an ounce.
These are not normal financial times.  The worldwide debt bubble is starting to burst and nobody is quite sure what is going to happen next.  Certainly we are going to continue to see financial authorities all over the world do their best to keep the system going.  But as we saw in 2008, things can spiral out of control very quickly.
Just remember, back at the beginning of 2008 very few people would have ever imagined that the biggest financial institutions in America would be begging for hundreds of billions of dollars in bailouts by the end of that year.
When confidence disappears, the game can change very quickly.  To the vast majority of economists it would have been unimaginable that the yield on 2 year Greek bonds would be over 35 percent in mid-2011.
But here we are.
The entire global financial system is a house of cards built on a foundation of sand.  It is more vulnerable today than it has been at any other time since World War II.  When a couple of major dominoes fall, it is likely to set off a massive chain reaction.
The global financial system of today was not designed with safety and security in mind.  It was designed for greedy people to be able to make as much money as possible as quickly as possible.  The banksters don’t care about the greater good of mankind.  What they care about is making huge piles of cash.
There is way too much risk, way too much debt and way too much leverage in the global financial marketplace.  You would have thought that 2008 should have been a major wake up call for financial authorities around the world, but very few significant changes have been made since that time.
The financial news is just going to keep getting worse.  This financial system is simply unsustainable.  It is fundamentally unsound.  The reality is that financial bubbles cannot keep expanding forever.  Eventually they must burst.
Over the next few weeks, keep a close eye on banking stocks and keep a close eye on European bond yields.
Hopefully things will stabilize.
Hopefully the next wave of the financial collapse is not about to hit us.
Hopefully the entire global financial system is not on the verge of a major implosion.
But you might want to get prepared just in case.

Return of the Gold Standard as world order unravels

As the twin pillars of international monetary system threaten to come tumbling down in unison, gold has reclaimed its ancient status as the anchor of stability. The spot price surged to an all-time high of $1,594 an ounce in London, lifting silver to $39 in its train.

On one side o
f the Atlantic, the eurozone debt crisis has spread to the countries that may be too big to save - Spain and Italy - though RBS thinks a €3.5 trillion rescue fund would ensure survival of Europe's currency union.
On the other side, the recovery has sputtered out and the printing presses are being oiled again. Brinkmanship between the Congress and the White House over the US debt ceiling has compelled Moody's to warn of a "very small but rising risk" that the world's paramount power may default within two weeks. "The unthinkable is now thinkable," said Ross Norman, director of
Fed chair Ben Bernanke confessed to Congress that growth has failed to gain traction. "Deflationary risks might re-emerge, implying a need for additional policy support," he said.
The bar to QE3 - yet more bond purchases - is even lower than markets had thought. The new intake of hard-money men on the voting committee has not shifted Fed thinking, despite global anger at dollar debasement under QE2.
gold nuggets and barsFuelling the blaze, the emerging powers of Asia are almost all running uber-loose monetary policies. Most have negative real interest rates that push citizens out of bank accounts and into gold, or property. China is an arch-inflater. Prices are rising at 6.4pc, yet the one-year deposit rate is just 3.5pc. India's central bank is far behind the curve.
"It is very scary: the flight to gold is accelerating at a faster and faster speed," said Peter Hambro, chairman of Britain's biggest pure gold listing Petropavlovsk.
"One of the big US banks texted me today to say that if QE3 actually happens, we could see gold at $5,000 and silver at $1,000. I feel terribly sorry for anybody on fixed incomes tied to a fiat currency because they are not going to be able to buy things with that paper money."
China, Russia, Brazil, India, the Mid-East petro-powers have diversified their $7 trillion reserves into euros over the last decade to limit dollar exposure. As Europe's monetary union itself faces an existential crisis, there is no other safe-haven currency able to absorb the flows. The Swiss franc, Canada's loonie, the Aussie, and Korea's won are too small.
"There is no depth of market in these other currencies, so gold is the obvious play," said Neil Mellor from BNY Mellon. Western central banks (though not the US, Germany, or Italy) sold much of their gold at the depths of the bear market a decade ago. The Bank of England wins the booby prize for selling into the bottom at €254 an ounce on Gordon Brown's orders in 1999. But Russia, China, India, the Gulf states, the Philippines, and Kazakhstan have been buying.
China is coy, revealing purchases with a long delay. It has admitted to doubling its gold reserves to 1,054 tonnes or $54bn. This is just a tiny sliver of its $3.2 trillion reserves. China's Chamber of Commerce said this should be raised eightfold to 8,000 tonnes.
Xia Bin, an adviser to China's central bank, said in June that the country's reserve strategy needs an "urgent" overhaul. Instead of buying paper IOU's from a prostrate West, China should invest in strategic assets and accumulate gold by "buying the dips".
Step by step, the world is edging towards a revived Gold Standard as it becomes clearer that Japan and the West have reached debt saturation. World Bank chief Robert Zoellick said it was time to "consider employing gold as an international reference point." The Swiss parliament is to hold hearings on a parallel "Gold Franc". Utah has recognised gold as legal tender for tax payments.
A new Gold Standard would probably be based on a variant of the 'Bancor' proposed by Keynes in the late 1940s. This was a basket of 30 commodities intended to be less deflationary than pure gold, which had compounded in the Great Depression. The idea was revived by China's central bank chief Zhou Xiaochuan two years ago as a way of curbing the "credit-based" excess.
Mr Bernanke himself was grilled by Congress this week on the role of gold. Why do people by gold? "As protection against of what we call tail risks: really, really bad outcomes," he replied.

Paul Ryan Responds To "Gang Of Six" "Bipartisan" "Deficit-Cutting" "Plan"

When we presented the Gang of Six joke of a deficit-cutting "plan" we called it a "talking point bulletin full of ridiculous fluff with nothing substantial." It appears that at least Paul Ryan seems to agree: "The plan is not a budget.  It is a set of talking points and graphs that outlines an ambitious proposal that has serious flaws but also the potential for worthwhile budget and tax reforms." The Wisconsin Congressman has just released a much needed follow up to the 4 page chart book (disclosed previously here), which confirms that the "Compromise" plan is DOA in the Congress.... 48 hours away from D-Day: "The following analysis examines these problems, raises questions about the lack of detail in the plan, and notes the areas where there is potential to make progress on spending restraint and tax reform."
The Gang of Six Budget Effort
Problems, Questions and the Potential for Promising Reforms
Earlier today, a group of U.S. Senators (“Gang of Six”) released “A Bipartisan Plan to Reduce Our Nation’s Deficits.”  The plan is not a budget.  It is a set of talking points and graphs that outlines an ambitious proposal that has serious flaws but also the potential for worthwhile budget and tax reforms.  The following analysis examines these problems, raises questions about the lack of detail in the plan, and notes the areas where there is potential to make progress on spending restraint and tax reform.
Of note, in response to release of the Gang of Six plan, House Budget Committee Chairman Paul Ryan issued the following statement:
“The proposal put forward by a group of seven senators today is a useful addition to the budget debate.  I share the frustration that these senators appear to have with the U.S. Senate’s inability to pass a budget in over 800 days.  While the proposal lacks detail in many respects, it includes some reforms that could help put our country on a sounder fiscal footing.  Most importantly, it reflects a bipartisan recognition that lower tax rates are essential to help spur economic growth.  Unfortunately, it increases revenues while failing to seriously address exploding federal spending on health care, which is the primary driver of our debt.  There are also serious concerns that the proposal’s substance on spending falls far short of what is needed to achieve the savings it claims.  Nevertheless, this effort serves as a sign that we can work together on a bipartisan basis to make a serious down payment now to avert the debt-fueled economic crisis before us.”
Heavy Reliance on Revenues.  The plan claims to increase revenues by $1.2 trillion relative to a “plausible baseline.”   It also claims to provide $1.5 trillion in tax relief relative to the CBO March baseline.  The CBO baseline assumes the expiration of tax relief, resulting in a $3.5 trillion revenue increase.  As a result, the plan appears to include a $2 trillion revenue increase relative to a current policy baseline.  If the $800 billion in tax increases from the new health care law are included, the plan appears to increase revenues by $2.8 trillion, without addressing unsustainable health care spending that is driving our debt problems. 
Elusive Spending Restraint.  It is unclear how much the plan achieves in spending savings.  Based on released documents, it appears to primarily rely on cuts in the defense budget through $886 billion in reductions from the President’s budget for “security programs.”[1] 
Lack of Entitlement Reform.  The plan does not address the $1.4 trillion in spending expansions in the new health care law.  The health care law increases eligibility for the Medicaid program by one-third and creates a brand new health care entitlement.  It does not appear to include reforms to the Medicare program.  While it appears to pursue Social Security reform, it could end up creating barriers to enactment of these reforms.  
Unspecified Savings Relative to What?  The plan is described as savings relative to a “baseline.”  The plan appears to use three different baselines for showing savings:  1) CBO’s current law March baseline; 2) an undefined modification to that baseline (what it calls a “plausible baseline”); and 3) the Fiscal Commission’s baseline.  It does not provide annual spending and revenue totals by category, relying instead on savings relative to three different baselines.  So, it is unclear what exactly the spending and tax proposals are.
Where Does the Revenue Come From?  It sets a tall order for tax reform with what appear to be conflicting assumptions: 1) raise $1.2 trillion in revenue; 2) repeal the alternative minimum tax at a cost of $1.7 trillion; 3) lower tax rates to encourage economic growth (top rate of no higher than 29%); 4) do not eliminate tax expenditures for health care, charitable giving, homeownership, retirement, and low-income workers and families (the largest of the tax expenditures); 5) raise $133 billion in revenue by 2021 for the highway trust fund without raising gasoline taxes. 
Where Do Health Care Savings Come From?  It claims $117 billion in additional federal health care savings over 10 years by assuming that health care spending per capita grows no faster than economic growth (GDP) plus one percent.  The new health care law already requires the Independent Payment Advisory Board (IPAB) to cut Medicare spending growth per beneficiary to achieve this growth rate starting in 2020.  CBO currently projects that Medicare spending will stay within that growth rate through 2021.[2]  Therefore, it is unclear how the savings are derived. 
Also, if there are savings to be achieved, there is no enforcement mechanism for achieving them since the plan would “require action by Congress and the President” to limit growth to these levels.  Current law requires the President to submit a plan and Congress to enact legislation to make additional savings in Medicare that the President and Congress have ignored. 
Where are the Missing Mandatory Savings?  The plan lists $516 billion in mandatory savings for Committees to achieve (including program integrity savings and savings from modifying the CPI), but then claims $641 billion in mandatory savings, leaving $125 billion in missing savings.
Pathway or Roadblocks to Social Security Reform?  While the plan seems to be a well-intentioned effort to move Social Security reform forward, it sets out procedures that could derail both Social Security reform and additional spending savings called for in the plan.  First, it does not allow a Social Security reform bill to proceed until the Senate has gotten 60 votes to pass additional deficit reduction.  Second, it blocks the additional deficit reduction bill if the Senate does not get 60 votes to pass the Social Security bill.
Potential for Promising Reforms
Tax Reform.  It acknowledges the need for tax reform, proposes a top rate of not more than 29% and as low as 23%.  It calls for the reduction of the top corporate tax rate to at least 29% and as low as 23%.  It recognizes the current tax code’s complexity and high marginal tax rates hinders economic and job growth.  It calls for the tax code to be reformed to move to a territorial system.  It calls for any unanticipated additional revenues from economic growth to be used to lower tax rates or deficit reduction, and not used for higher spending.  While a laudable proposal, it appears to have no mechanism to ensure this result.   To achieve this objective would require, at a minimum, a cap on total spending and ideally a cap on revenues as well. 
Spending Caps.  It proposes to reinstate statutory caps on discretionary spending.  It also sets out a budget reconciliation process for committees to achieve mandatory spending savings and if those savings are not achieved, it calls for across-the-board spending reductions.
Threshold for Waivers of Spending Limits.  It increases the number of votes necessary to waive the budget from three-fifths to two-thirds in the Senate and appears to provide a new requirement that the House gain two-thirds margin to waive spending limits.
Other Positive Signs:
  • It repeals the CLASS Act, a misguided proposal included in the new health care law.
  • It calls for medical malpractice reform.
  • It calls for reforming the current process for “emergency spending” (though the reforms are unspecified).
View as a PDF here.

[1] In the security category the Gang of Six reduced the security category by $886 billion.  Department of Defense (DOD) spending comprises approximately 85% of the security category.  The Gang of Six also proposes a firewall that requires this $886 billion is cut from security spending. 
[2] In his April 13th budget framework, the President has proposed to require the IPAB to reduce per beneficiary growth to GDP plus 0.5% of GDP beginning in 2018.

The True Elephant In The Room Appears: Trillions In Commercial And Industrial Loans To Europe's Insolvent Countries

With the market's attention over the past year exclusively focused on bank holdings of insolvent European sovereign debt, which as is now well known had been declining for months, many if not all forgot that banks also have credit exposure via far simpler conduits: retail and commercial debt. And as an analysis of the full disclosure in the EBA's second stress test exposes, banks are on the hook for literally trillions in various plain-vanilla commercial and retail loans to individuals and businesses. WSJ's David Enrich summarizes it best: "Friday's test results shed light on another potential problem for Europe's banks: huge piles of residential mortgages, small-business loans, corporate debt and commercial real-estate loans to institutions and individuals from ailing countries. As those economies struggle, the odds of rising defaults grow." Oops.
From the WSJ:
Banks tend to be holding far greater quantities of those commercial and retail loans than they are of sovereign debt, according to a Wall Street Journal analysis of disclosures accompanying the stress tests.

This year's stress tests represent the first time there has been a uniform way to measure this exposure. Until now, banks have disclosed their portfolios of loans to customers in troubled countries on a piecemeal basis. That made it virtually impossible to aggregate data across the industry or to compare different institutions.

"The country-by-country exposure [data] is better than any data we've seen before," said Alastair Ryan, a London-based banking analyst with UBS AG. "It's giving me more things to be fearful of," Mr. Ryan added, referring to the disclosures of some banks' large holdings of loans to customers in troubled countries.

After Spanish and Italian banks, France's banks appear to be the most exposed. As of Dec. 31, its four largest banks—BNP Paribas SA, Crédit Agricole SA, BPCE Group and Société Générale SA—were holding a total of nearly €300 billion, or about $425 billion, in loans and other debt issued to institutions and individuals in Portugal, Ireland, Italy, Greece and Spain, the countries that are among Europe's most troubled. That is largely a result of some of the French banks having big retail- and commercial-banking operations in Greece, Italy and Spain.

The French banks' portfolios of commercial and retail loans in those countries dwarf their holdings of sovereign debt.

For example, the four banks have a total of about €51 billion of loans to Spanish customers, according to the Journal's analysis.
Here is how this latest elephant looks like in chart format:

Germany, so far represented as a stalwart of investment prudence (despite its Landsbanken being decimated and on a constant lifeline by the CDO scammery of our own investment banks back in 2005-2006), is among the most impaired:
The dozen German banks that disclosed their stress-test results were exposed to €174 billion of commercial and retail loans to Greek, Irish, Italian, Portuguese and Spanish borrowers as of Dec. 31. They are holding an additional €70 billion of sovereign debt issued by those countries, according to SNL.

More than half of the German banks' loan exposures are concentrated in the country's two biggest lenders, Deutsche Bank AG and Commerzbank AG. Deutsche Bank alone is holding nearly €80 billion of loans in those countries, including €7.5 billion of residential mortgages in Spain. Deutsche, which passed the stress tests with a 6.5% capital ratio under the EBA's worst-case scenario, said Friday that it "feels well prepared" to hit its capital targets.
Naturally, it is no secret that the second Stress Test was nothing but another attempt at redirection:
While the tests did consider the impact of an economic downturn on banks' portfolios of loans and nonsovereign debt in Portugal, Ireland, Italy, Greece and Spain, many critics complained that the tests were overly benign. For example, the EBA's worst-case scenario for Portugal envisioned an 11.6% unemployment rate this year, rising to 12.9% in 2011. The unemployment rate there is currently 12.4%.

The stress-test figures actually understate some banks' holdings of loans in certain troubled countries. That is because the European Banking Authority required banks to disclose their loan holdings in countries only if they represent more than 5% of the bank's total loan exposures.

As a result, some banks opted not to disclose details of their loan portfolios.
Once again, just like in the case of Spain's LaMancha region lying outright about its deficit, "out of left field" discoveries such as this will keep reappearing until the full kit and caboodle of tens of trillions in impaired exposure finally hits the market. Of course, at that point nothing, not even the Fed's unlimited FX swap lines will do much if anything to help.

“Livability” Means Sitting in Traffic

Via the anti-Planner, comes this amazing slide from a presentation by the city of Omaha on their new initiative for “Livable Transportation“ (ppt presentation).   Ray LaHood recently asked that all transportation authorities include “livability” in the next round of their 5-year transportation plans.
What does “Livability” even mean?  Well, I was not sure.  This is one of those vague happy-sounding words that give liberals a hard-on in the context of government programs but generally just end up being an excuse for the exercise of state power at the expense of individual choice.
But in this case we don’t have to guess, because in the presentation linked above we have the following as the first slide in the presentation, defining livability in this context:

I kid you not — the two key steps in livable transportation are apparently increasing delay in auto commutes and increasing the cost of auto commutes.   Wow, that certainly sounds like something that will make my life better  (on the bright side, it strikes me as a goal that the generally-incompetent government can actually achieve).
Of course, the issue is not really about livability, but about the imposition of a few intellectuals’ disdain for cars on the rest of us.
And if you want to look for the financial incentives, the size of government per passenger-mile of commute is maximized with rail mass transit.   First, this is because rail is simply more expensive than driving — way more expensive – - per passenger mile in any Western city like Omaha, even when all the costs of driving are considered.  Second, with rail, the government nationalizes things like driving and maintenance that you do yourself or are done by private actors, and brings them in-house to be performed by powerful government unions.
Postscript: Left unsaid in any of this presentation is how increasing commute delay leads to keeping  jobs and businesses in the lower left.  That strikes me as a non sequitur of epic proportions.

Recipe for Disaster

At a time when government finances are already overdrawn, let’s take the US industry with the fastest growing costs, where there is the least understanding or consensus how to control costs, and where the emotional price for cutting costs is the highest — and let’s nationalize it.
Remember that when you think about the current fiscal debate and mess — because the horrible current deficits that Congress is trying to address are pre-Obamacare.  It is only going to get a lot worse.

Nicely Said.........................

"In 1929 children had hope for the future. Today they are hopeless, helpless and clueless – an entire generation that only knows drugs, gangs, rappers, government handouts, teen pregnancy – and it goes downhill from there." - Wayne Allyn Root, "Why the Greatest Depression of All Time Has Begun"

Stimulating Waste

In his column today, Ezra Klein sums up Keynesian economics by saying that Keynes "taught us that although markets are usually self-correcting, they occasionally enter destructive feedback loops....In that situation, the role of the government is to break the cycle. Because businesses and consumers have stopped spending, the government breaks the cycle by spending."
His description of what Keynesians believe is correct. It's why Keynesians, including the President, thought that government spending would stimulate the economy. As Klein points out, "Obama didn't just have a team of Keynesians. He had the Keynesian all-star team."
Right, but then Klein gets it wrong: "The idea [behind Keynesian economics], in other words, is not about whether the government spends money better than individuals."
Yes it is! Obama and Klein think that during a recession, "the financial system scares business and consumers so badly that they hoard money, which worsens the damage to the system." Therefore, the government must take money away from individuals, and spend it elsewhere. Eric Cantor correctly pointed out that the theory is: "government can be counted on to spend more wisely than the people."
When government spends, politicians pick winners and losers. Government normally picks big, politically connected interest groups - like big banks (in the case of TARP) or big unions (in the case of the "Stimulus Package").
In one example from the stimulus package, the government wasted $10 million on renovating an abandoned train station that no one has used for 30 years. The private sector might have created prosperity with that money.
Keynesian economics fails becuase government misallocates resourses, and because government can't create wealth. It can only move it around. Spending isn't free. The stimulus may have created or saved some jobs, but they came at a high price -- the President's own study says $278,000 each. That price must be paid by individuals, either in the form of higher taxes or inflation.
Where is the FDA when we need it? Keynesians continue to sell very expensive medicine-despite having no good evidence that it works.

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