Tuesday, November 22, 2011

Freedom: The New and Future Experiment

By Joel Bowman

This topic is particularly timely right now because, as you well know, a revolution of sorts is today under way in a place that used to be comfortable calling itself, proudly and with a straight face, “The Land of the Free, Home of the Brave.” Try asking any thinking individual who happened to be born within the United States borders today to claim that title without arousing a disquieting feeling of tragic irony. You might hear the words, but you’ll notice they are delivered with an empty conviction, with some embarrassment, a shame, almost, for remembering what was lost.

But before addressing the New and Future Experiment, let’s take a look at the Old and Moribund Experiment: Statism.

From the Pharaohs through to warlords, kings and queens, generalissimos, barbarians, emperors, chairmen, f├╝hrers, shoguns, sheiks, tsars, presidents, prime ministers and the rest of the dirty rotten scoundrels, nobody could say we humans didn’t give “The State” a fair go.
Statism exists in many forms. All, I will argue, are inherently evil. All end in eventual and painful demise.

Why do I say that all forms of Statism are evil? Surely there is an argument for some kind of “minarchist” arrangement of governmental oversight, the Praetorian guard, the night watchman, some kind of political structure to protect us against the aggressions of our neighbors who are always and forever waiting at our front gates, ever at the ready for the law to change or turn its back so they can come and pilfer our grains, raid our gold stockpiles and defile our daughters?

It is sometimes said that religion makes men do noble things. And that’s true. But religion also makes men do heinous, hellish things. Why else would anybody strap a bomb to themselves and run into a kindergarten, for example, if they didn’t think God was on their side?

I’m reminded here of that great skit from Scottish comedian, Billy Connelly.

“I want to go to one of these suicide bomber schools,” he says. “You can just imagine the instructor.
“Alright lads… I’m only going to show you this once…”

Statism is the new religion.

Men used to march off to war for “God, King and Country.” Now he marches off to war to “spread democracy” — the credo of the new religion.

How many people, we wonder, would feel compelled to battle on foreign lands, the whereabouts of which were heretofore unknown to them, to slay “the enemy,” to lay waste to husbands, fathers and brothers they have never before met, to Napalm fields, Agent Orange crops, to litter terrain afar with landmines, if they didn’t believe the patriotic claptrap with which their State ceaselessly indoctrinates them?

No. Statism, in any form, is wicked because it attacks us at our most basic human level. It undermines our dignity. It presupposes that we are incapable of caring for each other and ourselves without its continued and ever increasing invigilation. It tells us that we are not born free individuals, but servants of the State.

In this way, the State is not the preserver and protector of freedom, but anathema to it.
But perhaps most cruelly, most insidiously, the State tells us that we need it more than it needs us. Untrue. It is important here to remember that the State is nothing more than a collection of men and women who initiate force against everybody else, the very same citizens they purport to serve, to represent…and who (are forced to) pay their salaries.

I’m reminded of Doug Casey’s observation that during the Viet Nam War, peace protestors used to carry placards reading, “What if there was a war and nobody showed up?” to which Doug adds, “What if they levied a tax and nobody paid?”

Here we can see immediately that, contrary to what they would have us believe, it is the State that depends on our complicit support to exist at all, not the reverse. It is a form of mass, political Stockholm Syndrome, where the captors gradually come to accept the commands of their master as a demented kind of benevolence, eventually even feeling compassion for and allegiance to him.
That, in a nutshell, is the definition of patriotism: allegiance to one’s own gatekeeper, affection for one’s oppressor.

There are, of course, those who argue that without the State, we would be without the means to build and maintain roads and other critical infrastructure — that we would be without hospitals and schools, without the “safety net” the State is forever crowing about having provided for us.
But to hold this point, one must first admit that there exists, within society, the resources, the productive capacity to build and provide these goods and services in the first place. Those arguing for State intervention are merely saying that the State is the preferred method for delivery, for redistributing a wealth of resources that already exists, through its superior mode of governance.
A dear friend of mine shared with me recently a fantastic quote that addresses just this point. It comes from Allen Thornton’s excellent essay, Laws of the Jungle

“What do you think ‘govern’ means?” asks Thornton. “It doesn’t mean ‘suggest’ or ‘implore.’ It doesn’t mean two people sitting down, talking it over, and compromising. ‘Govern’ means ‘force’ and ‘force’ means ‘violence.’ When you advocate any government action, you must first believe that violence is the best answer to the question at hand.”

This is the Old Experiment.

Empires…their monies…their militaries and their promises. All these things eventually, invariably, die. You might even say it’s what they were born to do. Their death, in other words, is inevitable. Only the number of innocent individuals they take with them varies.

At this, we should not be surprised. But we should be prepared.

Ever since statists first cobbled together a collective of ruling people, the “rest” have been living under one form of tyranny or another. From tribal leadership structures to local council hierarchies, from Plato’s philosopher class to medieval monarchies through to the various “isms” of our modern times, there has existed one class of rulers — sometimes called guardians, other times tyrants — who have seen fit to exert their ways and rules on all others, usually, ultimately, on pain of death.
In the end, individual freedoms are surrendered to the precise degree that the State is permitted to exist at all.

Most people accept the State’s intrusions on their freedoms as minor grievances. They shrug and mutter something about the “best of a bad bunch” or the “lesser of two evils.” Nevertheless, for the vast majority of people, surrendering a little liberty (or a lot!) for a little safety or convenience is a pretty good deal. That, despite Benjamin Franklin’s famous call to caution that…
Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.

What if the "best of the States" is always on its way to becoming "the worst of States"?

It is true, of course, that certain forms of Statism are more overtly aggressive than others (though all seek to administer the ultimate punishment for political apostasy, one way or another). Some governments exercise control over their citizenry in subtle ways, like granting them the "privilege" of carrying an identifying document when said citizen chooses to exercise his natural right to travel freely.

Other regimes, however, are not so subtle in their use of coercion. They stone women to death for baring an inch of skin, force those of a certain race into internment camps, and/or execute political opponents at will...among many other atrocities.

This type of the State, according to most folks, constitutes the worst of all evils.
But what if the State, itself, is the "worst of all evils?" What if the State is genetically predisposed to malevolent mutations? What if even the "best State" -- the one that begins its life, nobly, as a constitutionally constrained republic, dedicated to protecting and promoting "life, liberty and justice for all" -- is really, at all times, on the road toward the most evil, militaristic expression possible?
What if force can only beget more force, in other words, coercion only more and greater coercion?
And, more importantly, where does that leave us, goose-stepping down the road to perdition?

Today, in the most powerful nation the planet has ever seen -- a mighty behemoth with military arsenal capable of exterminating the entire human population many, many times over -- more than 45 million of its own citizens live on food stamps, barely able to get by. That many again are supported directly by the State, that grand experiment we've devoted six thousand years to testing, but which we still don't quite understand.
And how is that experiment, however noble its genesis, working out? Well, take a look around.
I'd like to cite just a few troublesome data points that appeared as part of a much longer list in a recent Daily Reckoning.
  • According to the US Census Bureau, the percentage of "very poor" rose in 300 out of the 360 largest metropolitan areas during 2010.
  • Last year, 2.6 million more Americans descended into poverty. That was the largest increase yet seen since the US government began keeping such statistics on back in 1959.
  • Today, 15.1% of all Americans are living in poverty.
  • The poverty rate for children living in the United States increased to 22% in 2010.
  • There are 314 counties in the United States where at least 30% of the children are facing food insecurity.
  • In Washington DC, the "child food insecurity rate" is 32.3%.
  • It is being projected that approximately 50 percent of all US children will be on food stamps at some point in their lives before they reach the age of 18.



  • And the situation is worsening at the other end of the demographic chart, too. One out of every six elderly Americans now lives below the federal poverty line.
  • More than 50 million Americans are now on Medicaid. Back in 1965, only one out of every 50 Americans was on Medicaid. Today, approximately one out of every 6 Americans is on Medicaid.
  • One out of every six Americans is now enrolled in at least one government anti-poverty program.
  • The number of Americans that are going to food pantries and soup kitchens has increased by 46% since 2006.
  • The Old Experiment is faltering, even as we sit here today, surrounded by the picturesque landscape of "Doug's Gulch."                       
    I suspect it is for this very reason many of you are here today. You see the writing on the wall.
    So, where to from here? Can we discount the State entirely?

    There are, of course, those who argue that the solution rests in going back to a gold standard, or back to the constitution.
    What these people are really saying is that they want to start the Old Experiment over, an experiment that, demonstrably, has not only failed, but will end in absolute disaster for those who cling to its now baron promise of redemption.

    We had a gold standard. Did that stop the government from abandoning it the moment it needed to inflate the currency to pay for its military misadventures abroad?

    We had a Constitution. Did that stop the government from abandoning it, from circumventing the restrictions therein? Where is operation "Shock and Awe" in the Constitution? How about the authority to carry out programs like "universal medicine" or "cash for clunkers." Where is the amendment that empowers the Treasury Secretary to send billions of dollars to his former Wall Street employer?

    Do presidents consult their worn, dog-eared copy of the Constitution when they decide to march off to war or to effectively nationalize this or that sector of the economy?

    Of course not.
    Murray Rothbard, the man who coined the phrase "anarcho-capitalist," perhaps summed it up best in his work, For a New Liberty, when he wrote:
    "The idea of a strictly limited constitutional State was a noble experiment that failed, even under the most favorable and propitious circumstances." (And remember, this is from a book published back in 1973, almost forty years ago. Even then, the course of events was becoming obvious, if only to a few.)

    "If it failed then," he continues, "why should a similar experiment fare any better now? No, it is the conservative laissez-fairist, the man who puts all the guns and all the decision-making power into the hands of the central government and then says, 'Limit yourself'; it is he who is truly the impractical utopian."

    Meanwhile, back in impractical utopia...

    Protesters are arrested by the hundreds in New York and elsewhere across the country.
    Lemonade stands and bake sales across the nation are being shuttered and reams of rules and nosey-by-nature regulations are strangling small and medium businesses (and, along with them, any hope of genuine recovery).
    You're subject to indecent searches -- "gate rapes" -- at the airports and even now, I hear, on State highways and train systems.
    You are guilty until proven innocent. Due process be damned.
    The question, then, is how do we escape or avoid the State, this most vicious and insidious enemy to freedom?
    How do we begin the New Experiment?

    Well, first we must recognize that, like the monster under our beds when we're children, the State only exists to the extent that we permit it to.

    Without our continued support, both financially, through failing to protect our private property from expropriation at the hands of the State, the IRS, and politically, through our validating participation at the ballot box, the State ceases to exist.

    It NEEDS us.

    And it is up to us, therefore, to starve the monster, to take our own freedom back from the jaws of the beast.
    How best to do this?
    However tempting it might be to simply "lynch the bastards" (and, for the bloodthirsty among you, that might be coming anyway) we must realize that force and violence is not the answer, or at least not the best answer. You don't fight fire with fire, unless you want an inferno.
    In the same way, there's little point in fighting violence with violence. For one thing, it's stupid. It's a no-win game. Violence is the State's specialty. They have the guns, the jails, the cops, the first responders, the TSA goons, the DEA, SEC, FDA, EPA, IRS and all the rest.
    They have cornered the sociopath market, in other words.

    Fortunately, we can do much better than that. We can do better than to play right into their clenched fists.
    Revolution of the kind brewing amid the Occupy Wall Street camp and the Tea Party movement is probably not the answer either.
    What kind of freedom are we seeking if it may be only be granted by those who appoint themselves our masters? Are we really going to prostrate ourselves on the steps of Capitol Hill or in the foyer of Goldman Sachs like some servile zombie and beg for freedom? That kind of subservience only serves to strengthen and validate the perverse, master slave notion they want to perpetuate.

    Actually, revolution, in any form, is not the answer at all. We've tried that. We try it when any State begins to falter...then we go and erect another State to replace it.

    By definition, revolution simply means returning to the beginning, to the point of origin. No wonder they say history repeats itself, or that it at least rhymes...We've been running and re-running the same experiment over and over again, always expecting a different result -- the very definition of insanity.
    You'd think that, after 6,000 years -- and a body count in the hundreds of millions -- we'd give up on the State and try something different.
    We don't need to revolve, in other words, we need to evolve.

    But that takes courage. It's not easy to clap when everyone is booing. It's not easy to stand up when everyone around you seems content to live their lives on their knees.
    The good news is that the State is already falling apart. The bad news is that it will likely try to take you with it. That has been, and continues to be, the glaring lesson of history.
    In Europe and the United States, the people are beginning to see that their emperors -- and their empires -- have no clothes. The welfare/warfare State is broke, broken and fast running out of options.
    But these people, these occupiers and tea partiers, by and large, are not going after the State...they are going after each other! They are demanding more State power, not less.
    As such, you ought to expect higher taxes. Expect capital controls. Expect more and greater restrictions on the freedom of your movement.

    And expect riots, as we are already seeing, of growing intensity.

    It is not an exaggeration to say your window of opportunity is already closing. And one cannot stress that point enough.

    But there is a silver lining to this dark, statist cloud. And it comes, in large part, with the power of communication. It comes with the spread of ideas -- ideas of freedom and of ways to achieve it.

    In the same way that Gutenberg's printing press of the late 1400s acted as an "agent of change" in Europe, the Internet is today providing opportunities for the dissemination of ideas like we have never before seen.

    Love them or hate them, Internet-based, decentralized organizations like WikiLeaks and Anonymous are operating more and more brazenly by the day, exposing the lies and corruption of the State for millions to see.

    The idea, again, is not to overwhelm with force and violence, but to undermine with truth and ideas.
    It is true that the State has the guns, but we have the information and, with the advent of the Internet, the means to distribute it.
    We live in an age where a child in sub-Saharan Africa can access information published on the other side of the world almost instantaneously...where groups of likeminded individuals can coordinate and share ideas in real time across artificial borders erected by warring, small-minded politicians, where young entrepreneurs in South America can do business with start-up companies across the Pacific, trading cyber currencies well beyond the reach of their respective governments, thereby denying these criminal organizations the financial lifeblood they need to exist.

    Now, like perhaps no other time in history, we have a chance to spread the word of freedom quicker and further than any time before.
    And freedom, you'll notice by looking around the room, is a catchy tune. Once you've got that idea in your head, you can't shake it. And the world begins to look very different indeed.

    On a personal level then, what can you do, now...today.

    You should begin, immediately, diversifying yourself across borders. You should open a bank account in a foreign country. You should do that immediately. Uruguay, sometimes know as the "Switzerland of South America," is a reasonably good option that requires little paperwork. You can set up an account there in a few hours. Maybe that's not ideal for your own circumstances but, in any case, you should look into moving funds abroad quickly.
    You should also consider working towards obtaining a second passport.
    And obviously, you should be holding a significant portion of your portfolio in precious metals -- real money, in other words. They should be hard to get at. Not for you, but for anyone else, including, especially, anyone brandishing a government badge of some description.

    How much? That depends on your individual circumstances, but I'm inclined to agree with Byron King, who writes Outstanding Investments, when he says between 15-20% of your portfolio in precious metals, more if your individual circumstances warrant it.
    I'd also be looking at foreign real estate, mostly because it's difficult, if not impossible, for your government to get its hands on. Plus, it provides you with a "Plan B" if things really go awry...and I think there's a better-than-average chance they will, both in Europe and in the U.S.
    Other than that, you want some of what my friend and colleague, Chris Mayer, calls "dry powder." That's cash on the sidelines -- hedged across multiple currencies -- that you can liquidate quickly to take advantage of deep value, crisis investments. And I do believe there will be many such opportunities for geographically nimble investors in the next 3-5 years.

    And finally, a kind of quirky idea that I think is worth mentioning.

    Get some mates.

    I don't mean people you know from work or second cousins...I mean people who are similarly, independently minded, who are curious and who ask questions, who are not prone to imbibe the bread and circus sideshows they see on television.
    Get these people together and begin an informal meeting group where you can share ideas. They might be start up businesses ideas, investment opportunities or just good book recommendations. Doesn't matter. Find some kindred spirits. You'll see they are an invaluable resource during times of crisis.
    I'm part of such a group in Buenos Aires, founded, in large part, at Doug's suggestion and introductions.

    We have doctors, engineers, software technicians, artists, writers, energy consultants, entrepreneurs and a whole host of talented people all sharing ideas and trying to figure ways to live freer, better lives.

    You can do this at home, in your local communities, online, here in La Estancia, wherever...but I can't recommend the activity highly enough.

    It's sad to have to say that...but...
    In a world where violence is the norm, peaceful assembly and voluntarism have become extremist positions. I encourage you, in this respect, to become an extremist.
    In a world ruled by guns and brute force, ideas of liberty and freedom are indeed our greatest tools. It's time we started sharing them.

    Sunday, November 20, 2011

    Silly Life Lessons

    I love stuff like this:

    1 .It hurts to love someone and not be loved in return.
    But what is more painful is to love someone and never
    find the courage to let that person know how you feel.

    2.  A sad thing in life is when you meet someone who
    means a lot to you, only to find out in the end that it was
    never meant to be and you just have to let go.

    3. The best kind of friend is the kind you can sit on a
    porch swing with, never say a word, and then walk away
    feeling like it was the best conversation you've ever had.

    4. It's true that we don't know what we've got until we lose
    it, but it's also true that we don't know what we've been
    missing until it arrives.

    5. It takes only a minute to get a crush on someone, an
    hour to like someone, and a day to love someone-but it
    takes a lifetime to forget someone.

    6. Don't go for looks, they can deceive. Don't go for wealth,
    even that fades away. Go for someone who makes you
    smile because it takes only a smile to make a dark day
    seem bright.

    7. Dream what you want to dream, go where you want to go,
    be what you want to be. Because you have only one life and
    one chance to do all the things you want to do.

    8. Always put yourself in the other's shoes. If you feel that it
    hurts you, it probably hurts the person too.

    9. A careless word may kindle strife. A cruel word may wreck
    a life. A timely word may level stress. But a loving word may
    heal and bless.

    10. The happiest of people don't necessarily have the best
    of everything they just make the most of everything that comes
    along their way.

    11. Love begins with a smile, grows with a kiss, ends with
    a tear. When you were born, you were crying and everyone
    around you was smiling. Live your life so that when you die,
    you're the one smiling and everyone around you is crying.


    In the end, it's not going to matter how many breaths you took, but how many moments took your breath away
     

    Friday, November 18, 2011

    This Is How The Bankers Game Works

    1) Get the government to issue some currency (cash -- paper or reserves at the central bank -- reserves are government issued cash central bank deposits). Government issued cash is around 5% of the currency (money) supply. The government issued currency is put into circulation by the government simply spending it.


    2) The rest (95%) of the currency is issued by the private banks. Each customer loan is a new bank deposit (i.e., new currency) and increases the currency (money) supply of the economy. Note that this newly created money (currency) is put into circulation by the borrower spending it. Most currency (about 95% America's currency supply) has been borrowed into existence and when bank customer pays the loan back that amount of currency is removed from circulation. The banking system cannot go backwards (fewer net loans) as time moves on because fewer net loans means fewer currency in circulation in the economy.

    Accumulation of interest charges on outstanding loans means that the currency supply must constantly increase even if it means giving out lower quality loans. Think of it like a plane flying it must fly at some minimum speed or else the plane (the banking system) will crash (i.e., banking system collapse).


    3) The bankers make dam sure that the common public does not understand how the monetary system works meaning that the private banks issue 95% of the currency. This is whole another topic how they do this.


    4) The system works until real economic capacity of the economy grows and debts can be serviced and interest charges paid. Most of the time the economy oscillates between boom (growth) and bust (recession) because bust is needed to clear debts and start a new lending cycle.


    5) Eventually, one of these cycles goes so deep that currency supply (and demand) falls so low that too many debts become un-serviceable. The recession becomes a depression now.


    6) The bankers then have to decide how to "reset" the system. One way to reset the system is to let the depression takes its course. But of course this path is very chaotic because people lose jobs and may become violent. Once most debts are cleared lending can start again and the currency supply is replenished. Wars are a good way to get initial money (currency) into an economy after a depression to get demand going again. This is the great depression scenario.


    7) Another way to "reset" the system is to get the government to print too much money and spend and destroy the currency and blame it on the government. This justifies issuance of a totally new currency (note that hyperinflation clears debts) and the lending cycle can start again.


    8) The banking system (as is) is setup to maximize the power and influence of the global bankers and NOT for the maximum general well being of people. By the way this is a global game. This is the only system around no matter what country you are in. The global banking cartel makes sure that no competing systems are allowed to exist (so they might be copied and global bankers will lose power).


    We need a currency system where money is spent into existence and does not need to be lent into existence so the economy is never starved of currency in circulation.

    The US is Now a Corporate Monarchy

    By Barry Rithholtz

    I did an interview with a print reporter yesterday about what has been going on with lack of prosecutions, the banks, and Wall Street in general. We discussed the corrupt exchanges and HFT.
    I dropped lots of F-Bombs, called out cowards and crooks and held nothing back. (“That fucker belongs in prison; this son of a bitch should hang“)

    Afterwards, she commented that I seemed angry.


    I wrote back suggesting that I am a happy dude, and its not Anger — its closer to an ineffable sadness that comes once you realize you have lost something dear. I am old enough to have grown up when this nation was a Democracy, but that era has passed. We now live in a nation no longer run by the citizens — it is a Corporatocracy — and that makes me sadder than angry .
    . .
    She suggests perhaps a better word is outraged.

    I wonder: Why have the Europeans figured out they are getting screwed, and we haven’t? Why are they taking to the streets en masse, while we seem to be watching our own control over our own futures slip from our hands almost as if from afar?

    In America, we are too busy dropping the kids off at soccer, running around looking for sales and bargains, racing to keep our heads above water. We seem to forget to get outraged. Our control over our once Democracy — the one we had a revolution against a monarchy dictating decisions from afar — slips away from us. Not with a bang, not even with a whimper, but with a 1000s acts of gradual ceding of power to the new Monarch. We have given up hard won rights to a coordinated attack from all three branches of government; Our Congress has become the legislative branch of eBay — Congressmen are auctioned off to the highest bidder; they even have a Buy It Now button to get specific legislation passed. The executive branch has fallen under the sunk cost fallacy, afraid to prosecute banks because we spent so many billions bailing them out. It turns out that even our once venerable Supreme Court is just as corrupted, with lobbyists partying with Justices and backdooring ethics by hiring their wives.

    In short, our new overlords are enormously well funded, well connected, relentless and perhaps most of all, patient. This new King was not appointed by primogeniture, or even Divine Right, but by acquiring enough profits in the free market that they can buy control over society, even as they thwart that free market ideal for their own ends.

      We have become, in short, a Corporate Monarchy.

    The right question isn’t why am I angry, sad and outraged. The proper question is, why aren’t you?

    Wednesday, November 16, 2011

    Goldman to the Rescue!

    By Bill Bonner

    More pieces are coming together. Day by day, the puzzle takes shape. Not a pretty picture.

    An epic battle is taking place. Between the forces of...

    ..inflation and deflation

    ..growth and depression

    ..credit expansion and credit destruction

    ..centralization and de-centralization

    ..politics and markets

    ..managed paper money and gold

    ..managed capitalism and the real thing

    ..control and wealth

    ..bull and bear

    ..greed and fear

    ..zombies and real working people.

    Yes, dear reader, it’s quite a fight. Better than Frazier vs. Ali. And who’s gonna win?
    Europe faces its “toughest hour since WWII,” says Angela Merkel. What does she propose? More centralization. Centralization got Europe into this mess — harmonizing interest rates so that the Greeks and Italians could borrow more. And now, more centralization, she believes, will get it out.

    Europe is taking no chances. This debt problem is a slugger. What to do about it?

    Who knows more about debt problems than anyone else? The people who cause them, of course. So, under great pressure from the centralized European authorities, Greece got rid of its Papandreou, after the man had the gall to suggest letting democracy work. He wanted the people to vote on further austerity measures. It replaced him with Papademos...a guy who won’t make the mistake of deferring to the masses. After all, he was vice-president of the European Central Bank for years. And he taught at the Kennedy School of Government at Harvard.

    Meanwhile, Italy too has been forced to get rid of its popular, but difficult to control, elected leader — Silvio Berlusconi. It has put in a company man. Yes, a company man. What company? Goldman Sachs, of course. The new fellow, Mario Monti is an ex-Goldman guy. And so is the new fellow at the European Central Bank, Mario Draghi. Monti was also an EU commissioner. Draghi ran the Bank of Italy as the nation built up one of the world’s biggest piles of debt. Then, when Italy’s cost of borrowing shot over 7%, in came Monti and Draghi.

    It is almost as if they planned it that way. Who’s the biggest seller of debt on the planet? We don’t know...but Goldman Sachs has to be up in the rankings somewhere. You’ll recall it was Goldman that helped Greece structure its debt so that it could abide by the letter of its treaty engagements with Europe but totally thumb its nose at the spirit of it.

    And now the debt has blown up...and the Goldman boys are on the job, managing the mess they were so instrumental in creating.
    What’s their solution? Oh come on...dear reader, you should know how this works by now. They propose more centralization, more management, more paper money, more debt, more inflation, more of everything you see on the right hand of our column above.

    In other words, they believe that they know better than the people...or the market. They believe that their sanitized, homogenized, pasteurized Capitalism-in-a-Can works better than the real thing. Besides, they have a reason to believe it. This claptrap is the source of their power, status and money. Who knows, maybe their wives married them because of it.

    Rather than renounce the program on which their reputations, careers and fortunes depend, they try to shore it up. They open up the can and see what they can use. They promise to reform the system, not reject it.

    But every reform — unless it merely dismantles one of their previous reforms — is a manipulation...a price fix...and a scam. For example, they are proposing tax incentives to employers who hire youths and women. Good idea? Why not just drop some of the regulations and taxes that make it so expensive to hire youths and women in the first place? Nope. Then, they’d be giving up control. They’d be letting market forces decide who gets what.

    Here’s another proposed reform, as reported in The Financial Times: “Wider social safety net to help those made redundant (laid off) and encourage labor mobility.” Typical rubbish. Spread a wider safety net and you discourage people from doing the hard work of finding new careers. But here’s one that will be popular with the managers: a “crackdown on tax evasion.” Are you kidding? Tax evasion is the only thing that keeps these economies going. People prevent their government from squandering their money. They spend it themselves. But the new Goldman guys won’t like it. They’ll want to get their hands on as much of that ‘black money’ as possible.
    Meanwhile, what’s going on in the USA? Alas, the US economy is the hands of the same sort of people. The people who caused the mess...who did not see it coming...and who have not had a clue what to do about it. They’re still running US economic policy. These illustrious incompetents — such as Larry Summers of Obama’s National Economic Council and Tim Geithner, his Treasury Secretary — have proven that they wouldn’t know a Great Correction if it bit them on the behind...

    So, they just keep adding more debt, more spending, more management, more ‘reform’ measures, and more centralization.

    Ultimately, the elite managers of Europe and America all went to the same schools (Harvard, Yale, MIT...)...all read the same newspapers and magazines (The Financial Times and The Economist)...all worship the same gods (money and power)...all speak the same language (mid-Atlantic English)...and all want to control the world.

    So far, they seem to be making great progress towards their objectives. They stuff the world with debt. It blows up. Then, they push out democratically-elected leaders...gain new power and authority...and take charge of the rescue.

    Clinging to a Bankrupt Monetary System

    By Eric Fry

    “Europe is in one of its toughest — perhaps the toughest — hours since World War II,” German Chancellor, Angela Merkel declared yesterday.

    Who would argue with her?

    The Second World War crippled the European economy. The victors suffered almost as much as the vanquished. Nearly ten years after the war ended, the British were still rationing sugar and meat.

    Notwithstanding these hardships, however, the history of the post-WWII European economy is mostly a story of economic renaissance. From the rubble of war, the European Continent produced decades of economic growth.

    Attempting to perpetuate and enhance that growth trajectory, the leading economies of Europe thought it best to pool their resources. So they formed the “European Union” and abandoned their national currencies in favor of the euro.

    Nice idea. But the execution may have been flawed.

    Just like a “group project” in junior high school, there’s usually an A-student in the mix...as well as an F-student. So what happens? The A-student does all the work to make sure he gets his habitual A. The F-student does nothing, but still receives the “A” he never could have earned on his own.

    That’s the European Union.

    Unfortunately, the F-student is on his own most of the time. He still has to get passing grades in his other courses...like “Tax-Collecting I” and “Remedial Budget-Balancing.” When the F-student fails to get a passing grade, there’s very little anyone can do to change the transcript...other than writing over the F’s to make them look like “B’s.”
    That’s the European Union’s rescue plan. Every kid gets a passing grade, no matter how awful his homework may be.

    But out in the school of hard knocks, an “F” is an “F.” Greece has failed already...and several of the other “students” are close to failing as well. The leaders of the euro zone are trying to change the transcripts. But that gambit will likely fail. A curriculum without absolute standards is a curriculum of no value.

    The moment the EU began bailing out the Greeks, it abandoned the absolute standards that rendered the euro viable. If the EU had applied absolute standards and booted Greece out of the euro block, the euro’s credibility would have been validated. Without those standards, the euro’s value becomes as dubious as an online degree.

    That’s why the Greek crisis has become a euro crisis. In fact, the entire system of currencies-backed-by-nothing may be lurching toward a crisis.

    “If ideas could file for bankruptcy,” James Grant muses in the latest edition of Grant’s Interest Rate Observer, “the modern model of money and banking would have beaten MF Global Holdings to the courthouse. The concept of leveraged finance in a world of paper money and socialized risk deserves rehabilitation under an intellectual Chapter 11.”

    The world’s monetary model is bankrupt — both intellectually and in fact. But if ever there were an institution that was too-big-to-fail, it is the institution of paper currencies. It is too-enormous-to-fail, which is why the world’s central bankers will stop at nothing to rescue it.
    In general, the central banks are borrowing and/or printing money to buy “distressed assets.” By removing these distressed assets from the marketplace, the central banks hope to clear away some of the rot in order to “stabilize” the financial system and, by extension, the value of the currencies they print.

    But since central banks are functionally outlawing bankruptcy for every large institution and government in the Western world — along with a few of those in the Eastern world, the rot remains...and it’s spreading. The rot is not only undermining economic activity, it is also undermining the entire global monetary system.

    Throwing good money after bad — even newly printed, pretty good money — does not really clear away the rot; it merely smears it around...like a dry windshield-wiper smears bird-droppings.

    Bankruptcy clears the rot away. Nothing else will do.

    But since bankruptcy has become the ultimate non-option, the world’s largest central banks are all printing currency in the name of alleviating economic stresses. And they are swapping this currency for troubled assets.

    For example, here in the States during the 2008-9 crisis, the Federal Reserve purchased hundreds of billions of dollars’ worth of mortgage-backed securities. It still owns them. Today, the European Central Bank is busy buying up the dodgy debts of Greece and Portugal.

    Even the Chinese are in on the game. China’s sovereign wealth fund recently announced that it was “investing” in four of the largest state-owned banks in order to stabilize their share prices and support their operations.

    The central banks dress their brutish market manipulations and backdoor bailouts in the elegant vernacular of ivory tower economics. Thus, “counterfeiting” becomes “quantitative easing,” while “using my influence at the Treasury Department to bail out my buddies at Goldman Sachs” becomes a “Troubled Asset Relief Program.”

    But at the end of the day, the central bank manipulations are as clumsy, counter-productive and/or illegal as they appear at face value. And the worst of it is that these multi-trillion-dollar interventions do not remove the rot from the financial system; they merely relocate it from the private sector to the public sector.

    The European Central Bank (ECB), for example, holds sub-AAA assets equal to 14 times its equity. Large portions of those sub-AAA assets are the very sub-AAA government bonds of Greece, Portugal, Italy and Ireland. If these assets, in the aggregate, were to lose 7% of their value, the ECB’s equity would be zero. (For perspective, the government bonds of Greece, Portugal, Italy and Ireland have already lost 30% to 60% of their values).

    But don’t lose any sleep over the math; that’s what printing presses are for — to paper over the asset values the financial markets take away.

    Observing these phenomena, Grant concludes: “There are better ports in a monetary storm than government securities denominated in paper money.”

    Thursday, November 10, 2011

    Educated Guessing Game

    By Bill Bonner

    Yesterday, Silvio Berlusconi said he will leave government...once the legislature has agreed on an austerity program.

    Too bad. We’ll miss “The Cavalier.”

    Once, in Rome, we heard him speak to a crowd. We didn’t understand a word of what he was saying. But he said it well. He was at ease...friendly...joking...enjoying himself.

    And now what? The poor man will be out of politics. No more will he get to work with the great men of finance, trying to solve the historic problems of the day. He’ll have only his bunga-bunga parties with plenty of alcohol, music and beautiful young women. Poor fellow.

    Our guess is that the great men of finance won’t be able to solve Europe’s debt problems. At least, not without a few blow-ups. And the European Union will probably end up less united than ever. (Gold is trading over $1,800 this morning...looks like investors are worried too.)

    Until recently, both economics and politics argued in favor of a more centralized Europe. Now they are pulling it apart.

    But we’ve made so many guesses over the past few months and years...we’ve lost track of them. Herewith a review:

    First, back in the mid-’00s, we guessed that the housing market, stock market, and the financial industry would all blow up. They did.

    Then, we guessed that this would not be followed by the typical recession/recovery pattern of the post-war period. It wasn’t.

    Instead, we had a hunch that the economy had entered a Great Correction...from which it would not emerge for many years. So far, that appears to be what is happening.
    As to what gets corrected, when and how...we admit ignorance. But ignorance never stops us here at The Daily Reckoning; it is like red meat to a hungry dog. We thrive on it.

    We guessed that the main thing to be corrected was the credit bubble. Debt levels are too high. They need to be reduced. That’s why the feds have been unable to turn the situation around. In a recession, they can make credit cheaper and more abundant. That usually does the trick. At lower financing costs more projects make sense. People begin to invest and spend again. But it doesn’t work that way in a debt correction. It’s not a question of the price of credit...but of there being too much debt. Debt levels need to be reduced.

    The price of credit has been reduced to zero (the fed funds rate)...and the US government is running trillion-dollar deficits. Neither monetary nor fiscal stimulus has worked. Both add debt; instead, debt needs to disappear.

    We also guess that this correction will end with the end of the dollar-based monetary system that was set up in 1971. No paper money has ever survived a complete credit cycle. The dollar won’t be the first.

    De-leveraging will keep prices low while cutting profits and sales. As it develops, stocks, real estate and other assets will eventually be marked down to real bottom-of-the-bust levels. You should be able to get a 5% yield on your stocks...about twice what is available today. That will mean prices at about half what they are today.

    The slumpy economy...combined with periodic liquidity crises (such as is now happening in Europe)...along with falling asset prices will drive investors to the safety of US bonds. This will keep US government financing costs low — despite huge deficits. It will also convince the feds that they can pump large amounts of cash into the system without fear of inflation. This they will do...
    The price of gold may fall in the early de-leveraging phase. Then, it will rise as the late de-leveraging stage begins. This is when the feds’ money-printing will move into high gear. Sophisticated investors — including foreign central banks — will be wary. They will buy gold.

    The price of gold will rise. The Dow will fall. They will intersect at about $5,000.

    But our guesses don’t stop there. We also guess that...

    ..the developed countries will find it very difficult to grow. First, because of the weight of debt. Second, because much of their capital is “invested” in unproductive, zombie industries. Third, because their populations are stagnant. Fourth, because they have already gotten most of the above-trend growth resulting from increased use of cheap fossil fuels.

    ..since the developed economies cannot grow...and since they are up to their chins in debt...they cannot fulfill the promises made to their citizens. The grand bargain of the modern, social welfare state will begin to look more and more like a bad deal. Young, unemployed men will become increasingly fed up. They will look for radical solutions...and more radical leaders with jingo answers.

    ..governments, which are inherently reactionary even in the best of circumstances, will respond with repression. They will not adapt peaceably. They will not throw their zombie clients under the bus. Instead, like the Ancien Regime, they will dig in their heels and protect them. The defense industry, for example, will try — probably successfully — to direct the citizens’ rage against imaginary foreign enemies...and thereby increase its own power and wealth...

    ..the real economy will weaken. Revolution will begin...probably coincident with hyperinflation. Finally, the middle class will be broke (the poor are already broke) and the country will be ruined.
    There, that pretty much sums it up. Any more questions?