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.”

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?

Where Are Your Papers?

By Wendy McElroy

“Your papers!” In old movies, the demand is barked at trembling travelers by a Nazi with a guttural accent. If the demand is made in the opening scene, then the audience knows immediately that they watching a totalitarian state in which travelers are in danger.

“Your papers!” now rings out at every American airport and border crossing. The accent is different but travelers need to recognize with equal immediacy that a totalitarian state is playing out in front of their eyes, and they must be careful.

A passport is where the security theater begins. Indeed, without a passport those who wish to fly or cross a border are not “allowed” to be scanned, searched, interrogated, or undergo a plethora of other indignities imposed by uniformed thugs. The hoops through which passport carriers jump are all prelude to “permitting” them to exercise a right belonging to every freeborn person: the right to travel.

Things were not always this way. It is important to remember that there once was a world in which people traveled freely across borders without paperwork to visit families, pursue education, conduct business, and mingle. Freedom worked once. It enriched the world economically, culturally, and psychologically.

European nations pioneered many if not most aspects of the modern passport. The passport as an official permission or protection, and not merely as identification, arose because of armed conflicts. In the 17th century, sea voyaging was key to trade, travel, and the maintenance of empire. With some frequency, war interrupted that flow. Therefore, neutral vessels were granted passports or “sea letters” from a port of departure, which permitted them to journey in safety.

By the mid-19th century, mandatory passports had largely disappeared from Europe and Asia, with Czarist Russia and the Ottoman Empire being prominent exceptions. The change was largely due to three factors. First, governments were pressured to open up borders so that goods and services could flow across an increasingly industrialized Europe. Second, the period between the last Napoleonic War (1815) and World War I was unusually peaceful. Third, railroads now dominated travel. Their speed and the sheer number of travelers made traditional methods of checking documents impractical.

Thus, with trade and peace, mandatory passports declined.

War brought them back to life. With World War I, European nations once more imposed requirements not only to identify “enemies of the state” (e.g., spies or the citizens of belligerents) but also to control the outward flow of skilled labor in order to maintain their own workforces. In short, passports once again became social controls and, like the United States, many European nations maintained their requirements after the War.

World War II made passports mandatory on a virtually worldwide basis. Although passport requirements loosened once more after the WWII, the war on terror in the wake of 9/11 has raised those requirements to unprecedented levels. The ebb and flow of passports is that of war itself.

The American passport was also rooted in war, specifically the American Revolution (1775-1783). The first one was issued in 1783; based on the French “passport,” it was designed and printed by Benjamin Franklin. It was a single page with a description of the bearer(s) and his or their signature(s). For example, when John Adams, Benjamin Franklin, and John Jay acted as ministers plenipotentiary in traveling to Great Britain to seal the terms of peace, all three names were on one passport. It was addressed “TO ALL Captains or Commanders of ships of war, privateers, or armed Vessels...”

During the Articles of Confederation period (1783-1789), passports were issued but not required. When the US Constitution was ratified, creating a new government, passports continued to be issued but not required. Many American states and cities also issued their own “voluntary” passports until 1856 when the Department of State exerted a federal monopoly, ostensibly to eliminate confusion.

Nevertheless, passports were not mandatory except for a period during the American Civil War (1861-1865) and during World War I (1914-1918). The latter can be seen as the beginning of the current American passport. On December 15, 1915, President Woodrow Wilson issued Executive Order No. 2285, “[r]equiring American citizens traveling abroad to procure passports.”

This was followed in 1918 by an act of Congress granting the president authority to require passports during time of war. Passports remained mandatory until early 1921.

Thereafter, the United States continued its “no-passport-required” travel policy until another war: World War II (1939-1945). In 1941, passports became mandatory for travel abroad and remain so to this day. (Travel to Canada used to be an exception; until recently, proof of citizenship was all that was required to cross the border.)

Passports clearly function as an essential and effective means through which a state can control the person and property of its residents. Consider the United States. No one can legally leave without one.

And yet passports can be denied for a myriad of reasons that have nothing to do with being “an enemy of the state” but rest strictly on statutory grounds. Common reasons for denial include owing money to the IRS, a federal arrest, a state-criminal court order existing, a drug arrest, being on parole or probation. Law-enforcement databases are routinely checked against both passports and applications to weed out those who have committed such offenses as being more than $2,500 behind on child-support payments. Passports can also be revoked for several reasons, although revocation is far less common.

Those who meet the legal requirements for a passport move on to the next stage of social control. After handing over documents, a traveler is questioned about the reasons for travel, how much money he carries, his occupation, and virtually any other question a border agent wishes to ask. The traveler’s person and property are “searched” in various ways, including a strip search at the agent’s discretion. If the traveler questions or evinces disapproval, then he could be denied the “right” to board a plane, thus wasting an expensive ticket. Or he may be pulled aside for special treatment, including fines or interrogation by the police.

Requiring a passport as the key to freedom of movement is akin to gagging someone while maintaining that he retains freedom of speech.

The passport has grown into what is arguably the single most powerful tool of totalitarian America, second only to law enforcement itself. It no longer pretends to protect individuals; not a single terrorist has been apprehended as a result of passport checks. But it does cement the totalitarian state. The mandatory passport should be reviled and rejected as an abuse of human rights and common decency. A nation that requires one cannot be free.

Wendy McElroy is a Canadian born individualist anarchist and individualist feminist. She was a co-founder along with Carl Watner and George H. Smith of The Voluntaryist in 1982. Her articles are widely published on libertarian websites. A version of this column originally appeared on mises.org on September 7, 2011

Printing Money to Combat a Global Depression

By Bill Bonner

Last week produced nothing but more disappointment. At the center of it was the Europeans’ inability to make their debt disappear. They had hoped that they could just announce a plan to take care of it...and that would be enough.

But then, the Greeks said they wanted to vote on it...and then, they didn’t. ‘Papandenomium,’ the papers called it. If the voters were allowed to give their opinions everybody knew what would happen; the whole fix would be unfixed quix. So, they all got together and twisted Papandreou’s arms...and his arms gave way.

And then, investors started getting nosey. They wanted details. They wanted to know how the French and the Germans could cover so many potential losses — from Spain, Portugal, Ireland, Greece, and Italy.

Italy is in the worst position. It has scarcely any more debt than the US, but it has an immediate problem. It has to turn over its debt...it has to borrow heavily just to keep the wheels turning. And it lacks America’s key advantage...it doesn’t have a printing press. It gave up the power to print money when it joined the EU. Only the European Central Bank can print money...and it’s controlled by the Germans!

What’s the matter with the Germans, anyway? Why don’t they get on-board with the Fed? Why don’t they want to print money? If they would just give the signal — ‘don’t worry, we’ll print the money’ — the whole crisis would be over. In Europe, as in America, bond investors would be reassured. They would know that they’d get their money. The ECB would buy Italy’s bonds, and Greece’s bonds, and Spain’s bonds... Heck, it would buy everyone’s bonds. Bond investors would get their money. They would stop hiking interest rates. Italy could cover its losses.

Everyone would be better off, no? Just like they are in the USA. Right?

It all seems so simple. Why don’t the Germans get it?

While US policy makers, official economists and jackdaw kibitzers are terrified of another Great Depression, Germany’s officialdom is afraid of hyperinflation. Hardly any Germans are still alive who remember it, but the experience of hyperinflation of the early ’20s is painted on the German character like graffiti on a national monument. They can’t ignore it. They can’t forget it. It will take generations for it to wear off. After the bitter experience of WWI, hyperinflation wiped out the German’s residual faith in their institutions. Working hard, saving your money, being a good citizen — none of it seemed to pay off. The ex-soldiers were bitterly disappointed. The ruling classes had let them down. The banks had betrayed them. The politicians had stabbed them in the back.

Even their money was worthless!

“How could 2,000 years of accumulated civilization have led to this...” (Or words to that effect) says the hero of Remarque’s famous All Quiet on the Western Front. Having no good answer, the Germans turned away from accumulated civilization, towards armed, mechanized zombieism.

In just a few years, Germany’s factories were working again — producing tanks and planes. It was a solution to the post-WWI unemployment and depression. Unfortunately, the solution was worse than the problem. The trains ran on time. But they were headed for disaster!

But that’s a long story.

Meanwhile, in the US, we have our race memories too. Few people alive today recall the Great Depression. But it still haunts economists’ sleep and troubles their vacations.

“Not on my watch,” says Ben Bernanke, or words to that effect.

And so, the Americans fight depression. The Europeans fight hyperinflation.

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And what will they get? Depression AND hyperinflation! Yes, dear reader, that was our forecast as few years ago. We stick with it. The world is entering a depression. Growth has stalled. Even the emerging markets are slowing down...suffering the consumer depression exported from Europe and America and trying to fight the inflation exported, by QE2, from the US. This depression isn’t going away anytime soon. It will take years to work through, write off, default and foreclose on the mountain of household, business, and financial debt built up over the last 60 years. At first, we thought it would take 7-10 years. We’re in year 5 already...and, at the present rate, it looks like it might take another 15 years! But the authorities aren’t going to take a depression sitting down. Even the Germans will probably decide that a little bit of printing press money is better than the defaults and bankruptcies that accompany a depression. They’ll all guarantee each other’s credits. The banks guarantee the debts of their big customers. The government guarantees the debt of its big banks. The central banks guarantee the debts of the governments...and all print money to cover them. What a great system. Yes, that’s our prediction. Depression will lead to money-printing...which will eventually lead to hyperinflation. But heck...the whole thing will take years to play out. By the time it finally comes to pass we’ll all probably have forgotten this forecast. We’ll be lucky if we can remember our names.

The Euro and You

By Frederick Sheehan

The Euro and You described a fundamental problem of world finance. The quantity of debt grows as the quality recedes. The problem of bad loans is no longer just the pre-2008 mortgages, CDOs, and LBOs. Debt issued after the bust is defaulting, such as Greek sovereign bonds, issued in June 2010. Some securities are born to part investors from their money, but it’s remarkable the extent and variety of such instruments issued in 2011. The world choked on similar bonds and derivatives only three years ago, many of which are still held at false prices on financial institutions’ books.

Of all the past century’s downgrades, none has been greater than the borrower’s promise that stands behind a “security,” a word that once credibly described a paper contract backed by appropriate collateral. In Debt and Delusion, Peter Warburtin wrote: “It is easy to forget that, as recently as in the 1960s, the government budgets of the OECD countries were in approximate balance and that net issues of debt were comparatively rare. The outstanding stock of debt in public hands was a meager $800 billion at the end of 1970. At that time debt issue was typically reserved for the financing of large construction projects or investment by power generation companies by publicly owned companies.” Today, PIMCO’s Bill Gross manages $244 billion in a single bond fund.

The starting pistol was sounded on August 15, 1971, 40 years ago. On that date, the United States broke its long-standing promise to pay one ounce of gold to a foreign government that redeemed $35 for the same. (The ability of American citizens to redeem dollars for gold with the U.S. government was modified during World War I and ceased after the War.) As a prelude to the loosy-goosy financial contracts today, it is worth reviewing the wording of the contractual relationship between the United States government and the holder of its currency before and after. (A book should be written on the parallels between the century-long degradation of language, the American legal system, money, credit, debt, and the American people.)

The face of a $20 bill, a gold certificate, issued in 1882, stated: “This certifies that there have been deposited in the Treasury of the United States, twenty dollars in gold coin, repayable to the bearer on demand.” The bearer of $20.67 received one ounce of gold in exchange. This is a simple legal contract. It is easy to understand. There was no theory. No economists were employed to interpret what did not require interpretation.

A 2011 Federal Reserve Note states: “This note is legal tender for all debts, public and private.” As contracts go, this makes no sense. Nor does it make sense to a three-year-old. My extensive survey of three-year-olds did not uncover a single child, who, in exchange for a $20 bill, preferred another $20 bill rather than receive a one-ounce gold coin. (The current value of the one-ounce coin versus that of the $20 bill is not germane to this survey.)

The abstraction of money is related to the manner in which securities today are often backed by abstract or non-existent collateral. Contradictory theories employ at least 100,000 economists (probably multiples of this figure), among whom, there may not be a handful who ever write or think about money. Read (if you must) the theoretical papers or newspaper columns of these imposters. They retreated into a soothing bubble bath of differential calculus generations ago.

Many of the malignant securities issued in 2010 and 2011 have fallen into disfavor. Credit markets have suffered loss of liquidity, momentary or protracted. These issues, collateralized by hope and imagination, are on the books though, often at institutions that already hold wads of securities still valued at wishful prices (for purposes of accounting, capital requirements, and falsifying the institutions’ dubious solvency). We should expect that when Federal Reserve Chairman Ben Bernanke revs up his money machine, more will flow.

It is a safe bet that Ben is preparing to welcome more unmentionable securities on the Fed’s balance sheet. (“Federal Reserve officials are starting to build a case for a new program of buying mortgage-backed securities to boost the ailing economy….” – Wall Street Journal, October 21, 2011.)

Guessing at why the Fed will splurge is a chicken-or-egg game. Is the Fed preparing for a downdraft in the stock market with its tried-and-false response: by creating more money? Or, is it preparing to transmit (by electronic keystroke) more dollars to absorb securities held at banks, insurance companies, money-market funds, and mutual funds that should be carried at a much lower value?

The Fed washed its hands of credit analysis on January 6, 2011, when it issued its weekly H.4.1 “Factors Affecting Reserve Balances.” The federal agency that vaunts its “transparency” (i.e.: the Fed) implanted a note that transferred all capital losses to the taxpayer. The January 6, 2011, “Factors Affecting Reserve Balances” stated that beginning on January 1, 2011, all capital losses in the Federal Reserve’s mangy and non-transparent portfolio would henceforth be transferred to the Treasury Department. In a sense, this is only an accounting frivolity, since the taxpayer ultimately pays for the New York Fed’s reckless mismanagement of its highly leveraged portfolio (103:1); that could soon, absent the January 6 sleight-of-hand, mirror Enron’s jambalaya.

After the 2008 credit meltdown, the Fed, led by Simple Ben, fought for greater regulatory control of the banking system. The cranks who warned against Federal Reserve regulatory authority have been vindicated, on a comically inflated scale.

Wild-and-wooly securities that cratered after the credit cycle turned (circa 2007) are back, for instance: low doc, cov lite, payment-in-kind toggle notes, the proceeds of which pay private-equity firms up-front dividends. Century bonds (Mexico, the University of Southern California) sold swiftly, never a good sign. “Synthetic junk bonds” warned the Financial Times that “resemble transactions linked to U.S. mortgages, which proliferated before the crisis” and “staple deals” counseled the Wall Street Journal that “came under sharp criticism during the buyout boom for causing a number of conflicts of interest” have been structured by the banks that Ben Bernanke regulates. This highlights the greatest conflict of interest: the false claim that the Federal Reserve regulates the banks.

One security in the pipeline (possibly on hold during the current market mayhem) is a “synthetic deutsche mark,” that would “create shadow trading in legacy currencies in a synthetic market.” Paul Volcker said somewhere the only financial advancement of the past 30 years is the ATM card. Comparing the collateral behind Peter Warburtin’s bond market to the absence of such behind the synthetic deutsche mark (a currency that ceased to exist over a decade ago) outlines the enormous waste of capital, human ingenuity, and savings over the past 40 years. With nothing learned, this will continue, until uncollateralized paper spawns a New Era in post-fiat origami.

Defeat the Corporatocracy

We Shall Over Come

The only way to overcome the power of money is regain our courage and solidarity. Here's how to do that.

Many Americans know that the United States is not a democracy but a "corporatocracy," in which we are ruled by a partnership of giant corporations, the extremely wealthy elite and corporate-collaborator government officials. However, the truth of such tyranny is not enough to set most of us free to take action. Too many of us have become pacified by corporatocracy-created institutions and culture.

Some activists insist that this political passivity problem is caused by Americans' ignorance due to corporate media propaganda, and others claim that political passivity is caused by the inability to organize due to a lack of money. However, polls show that on the important issues of our day - from senseless wars, to Wall Street bailouts, to corporate tax-dodging, to health insurance rip-offs - the majority of Americans are not ignorant to the reality that they are being screwed. And American history is replete with organizational examples - from the Underground Railroad, to the Great Populist Revolt, to the Flint sit-down strike, to large wildcat strikes a generation ago - of successful rebels who had little money but lots of guts and solidarity.

The elite spend their lives stockpiling money and have the financial clout to bribe, divide and conquer the rest of us. The only way to overcome the power of money is with the power of courage and solidarity. When we regain our guts and solidarity, we can then more wisely select from - and implement - time-honored strategies and tactics that oppressed peoples have long used to defeat the elite. So, how do we regain our guts and solidarity?

1. Create the Cultural and Psychological "Building Blocks" for Democratic Movements
 

Historian Lawrence Goodwyn has studied democratic movements such as Solidarity in Poland, and he has written extensively about the populist movement in the United States that occurred during the end of the 19th century (what he calls "the largest democratic mass movement in American history"). Goodwyn concludes that democratic movements are initiated by people who are neither resigned to the status quo nor intimidated by established powers. For Goodwyn, the cultural and psychological building blocks of democratic movements are individual self-respect and collective self-confidence. Without individual self-respect, we do not believe that we are worthy of power or capable of utilizing power wisely, and we accept as our role being a subject of power. Without collective self-confidence, we do not believe that we can succeed in wresting away power from our rulers.

Thus, it is the job of all of us - from parents, to students, to teachers, to journalists, to clergy, to psychologists, to artists and EVERYBODY who gives a damn about genuine democracy - to create individual self-respect and collective self-confidence.

2. Confront and Transform ALL Institutions that Have Destroyed Individual Self-Respect and Collective Self-Confidence

In "Get Up, Stand Up, " I detail 12 major institutional and cultural areas that have broken people's sprit of resistance, and all are "battlefields for democracy" in which we can fight to regain our individual self-respect and collective self confidence:

• Television
• Isolation and bureaucratization
• "Fundamentalist consumerism" and advertising/propaganda
• Student loan debt and indentured servitude
• Surveillance
• The decline of unions/solidarity among working people
• Greed and a "money-centric" culture
• Fear-based schools that teach obedience
• Psychopathologizing noncompliance
• Elitism via professional training
• The corporate media
• The US electoral system

As Ralph Waldo Emerson observed, "All our things are right and wrong together. The wave of evil washes all our institutions alike." 3. Side Each Day in Every Way With Anti-Authoritarians We can recover our self-respect and strength by regaining our integrity. This process requires a personal transformation to overcome our sense of powerlessness and fight for what we believe in. Integrity includes acts of courage resisting all illegitimate authorities. We must recognize that in virtually every aspect of our life in every day, we can either be on the side of authoritarianism and the corporatocracy or on the side of anti-authoritarianism and democracy. Specifically, we can question the legitimacy of government, media, religious, educational and other authorities in our lives, and if we establish that an authority is not legitimate, we can resist it. And we can support others who are resisting illegitimate authorities. A huge part of solidarity comes from supporting others who are resisting the illegitimate authorities in their lives. Walt Whitman had it right: "Resist much, obey little. Once unquestioning obedience, once fully enslaved." 4. Regain Morale by Thinking More Critically About Our Critical Thinking While we need critical thinking to effectively question and challenge illegitimate authority - and to wisely select the best strategies and tactics to defeat the elite - critical thinking can reveal some ugly truths about reality, which can result in defeatism. Thus, critical thinkers must also think critically about their defeatism, and realize that it can cripple the will and destroy motivation, thus perpetuating the status quo. William James (1842–1910), the psychologist, philosopher, and occasional political activist (member of the Anti-Imperialist League who, during the Spanish-American War, said, "God damn the US for its vile conduct in the Philippine Isles!") had a history of pessimism and severe depression, which helped fuel some of his greatest wisdom on how to overcome immobilization. James, a critical thinker, had little stomach for what we now call "positive thinking," but he also came to understand how losing belief in a possible outcome can guarantee its defeat. Antonio Gramsci (1891–1937), an Italian political theorist and Marxist activist who was imprisoned by Mussolini, came to the same conclusions. Gramsci's phrase "pessimism of the intellect, optimism of the will" has inspired many critical thinkers, including Noam Chomsky, to maintain their efforts in the face of difficult challenges. 5. Restore Courage in Young People The corporatocracy has not only decimated America's labor union movement, it has almost totally broken the spirit of resistance among young Americans - an even more frightening achievement. Historically, young people without family responsibilities have felt most freed up to challenge illegitimate authority. But America's education system creates fear, shame and debt - all killers of the spirit of resistance. No Child Left Behind, Race to the Top and standardized testing tyranny results in the kind of fear that crushes curiosity, critical thinking and the capacity to constructively resist illegitimate authority. Rebel teachers, parents, and students - in a variety of overt and covert ways - have already stopped complying with corporatocracy schooling. We must also stop shaming intelligent young people who reject college, and we must instead recreate an economy that respects all kinds of intelligence and education. While the corporatocracy exploits student loan debt to both rake in easy money and break young people's spirit of resistance, the rest of us need to rebel against student loan debt and indentured servitude. And parents and mental health professionals need to stop behavior-modifying and medicating young people who are resisting illegitimate authority. 6. Focus on Democracy Battlefields Where the Corporate Elite Don't Have Such a Large Financial Advantage The emphasis of many activists is on electoral politics, but the elite have a huge advantage in this battlefield, where money controls the US electoral process. By focusing exclusively on electoral politics at the expense of everything else, we: (1) give away power when we focus only on getting leaders elected and become dependent on them; (2) buy into the elite notion that democracy is all about elections; (3) lose sight of the fact that democracy means having influence over all aspects of our lives; and (4) forget that if we have no power in our workplace, in our education and in all our institutions, then there will never be democracy worthy of the name. Thus, we should focus our fight more on the daily institutions we experience. As Wendell Berry said, "If you can control a people's economy, you don't need to worry about its politics; its politics have become irrelevant." 7. Heal from "Corporatocracy Abuse" and "Battered People's Syndrome" to Gain Strength Activists routinely become frustrated when truths about lies, victimization and oppression don't set people free to take action. But when we human beings eat crap for too long, we gradually lose our self-respect to the point that we become psychologically too weak to take action. Many Americans are embarrassed to accept that, after years of corporatocracy subjugation, we have developed "battered people's syndrome" and what Bob Marley called "mental slavery." To emancipate ourselves and others, we must: • Move out of denial and accept that we are a subjugated people. • Admit that we have bought into many lies. There is a dignity, humility, and strength in facing the fact that, while we may have once bought into some lies, we no longer do so. • Forgive ourselves and others for accepting the abuser's lies. Remember the liars we face are often quite good at lying. • Maintain a sense of humor. Victims of horrific abuse, including those in concentration camps and slave plantations, have discovered that pain can either immobilize us or be transformed by humor into energy. • Stop beating ourselves up for having been in an abusive relationship. The energy we have is better spent on healing and then working to change the abusive system; this provides more energy, and when we use this energy to provide respect and confidence for others, everybody gets energized. 8. Unite Populists by Rejecting Corporate Media's Political Divisions The corporate media routinely divides Americans as "liberals," "conservatives" and "moderates," a useful division for the corporatocracy, because no matter which of these groups is the current electoral winner, the corporatocracy retains power. In order to defeat the corporatocracy, it's more useful to divide people in terms of authoritarians versus anti-authoritarians, elitists versus populists and corporatists versus anticorporatists. Both left anti-authoritarians and libertarian anti-authoritarians passionately oppose current US wars in Afghanistan and Iraq, the Wall Street bailout, the PATRIOT Act, the North American Free Trade Agreement (NAFTA), the so-called "war on drugs" and several other corporatocracy policies. There are differences between anti-authoritarians but, as Ralph Nader and Ron Paul have together recently publicly discussed, we can form coalitions and alliances on these important power-money issues. One example of an anti-authoritarian democratic movement (which I am involved in) is the mental health treatment reform movement, comprised of left anti-authoritarians and libertarians. We all share distrust of Big Pharma and contempt for pseudoscience, and we believe that people deserve truly informed choice regarding treatment. We respect Erich Fromm, the democratic-socialist psychoanalyst, along with Thomas Szasz, the libertarian psychiatrist, both passionate anti-authoritarians who have confronted mental health professionals for using dogma to coerce people. 9. Unite "Comfortable Anti-Authoritarians" and "Afflicted Anti-Authoritarians This "comfortable-afflicted" continuum is based on the magnitude of pain that one has simply getting through the day. The term comfortable anti-authoritarian is not a pejorative one, but refers to those anti-authoritarians lucky enough to have decent paying and maybe even meaningful jobs, or platforms through which their voices are heard or social supports in their lives. Many of these comfortable anti-authoritarians may know that there are millions of Americans working mindless jobs in order to hold on to their health insurance, or hustling two low-wage jobs to pay college loans, rent and a car payment, or who may be unable to find even a poorly paying, mindless job and are instead helplessly watching eviction or foreclosure and bankruptcy close in on them. However, unless these comfortable anti-authoritarians have once been part of that afflicted class - and remember what it feels like - they may not be able to fully respect the afflicted's emotional state. The afflicted need to recognize that human beings often become passive because they are overwhelmed by pain (not because they are ignorant, stupid, or lazy), and in order to function at all, they often shut down or distract themselves from this pain. Some comfortable anti-authoritarians assume that people's inactions are caused by ignorance. This not only sounds and smells like elitism, it creates resentment for many in the afflicted class who lack the energy to be engaged in any activism. Respect, resources and anything that concretely reduces their level of pain is likely to be far more energizing than a scolding lecture. That's the lesson of many democratic movements, including the Great Populist Revolt. 10. Do Not Let Debate Divide Anti-Authoritarians Spirited debate is what democracy is all about, but when debate turns to mutual antipathy and divides anti-authoritarians, it plays into the hands of the elite. One such divide among anti-elitists is over the magnitude of change that should be worked for and celebrated. On one extreme are people who think that anything is better than nothing at all. At the other extreme are people who reject any incremental change and hold out for total transformation. We can better unite by asking these questions: Does the change increase individual self-respect and collective self-confidence, and increase one's energy level to pursue even greater democracy? Or does it feel like a sellout that decreases individual self-respect and collective self-confidence, and de-energizes us? Utilizing the criteria of increased self-respect and collective self-confidence, those of us who believe in genuine democracy can more constructively debate whether the change is going to increase strength to gain democracy or is going to take the steam out of a democratic movement. Respecting both sides of this debate makes for greater solidarity and better decisions. To summarize, democracy will not be won without guts and solidarity. Risk-free green actions - such as shopping from independents, buying local, recycling, composting, consuming less, not watching television and so on - can certainly help counter a dehumanizing world. However, revolutions that truly transform fundamental power inequities and enable us to feel like men and women rather than children and slaves require risk, guts and solidarity.