Bear Market

U.S. caught China buying more debt than disclosed

June 30, 2011 by · Leave a Comment 

“By the beginning of 2009, China, which uses multiple firms to buy U.S. Treasuries, was regularly doing deals that had the effect of hiding billions of dollars of purchases in each auction, according to interviews with traders at primary dealers and documents viewed by Reuters… The practice kept the true size of China’s holdings hidden from U.S. view, according to Treasury dealers interviewed, and may have allowed China at times to buy controlling stakes – more than 35 percent – in some of the securities the Treasury issued.”

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Mortgage Executive Receives 30-Year Sentence

June 30, 2011 by · Leave a Comment 

“A federal judge on Thursday sentenced Lee B. Farkas, a former mortgage industry executive accused of masterminding one of the largest bank fraud schemes in history, to 30 years in prison.”

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Geithner Staying (for Now)

June 30, 2011 by · Leave a Comment 

Treasury Secretary Timothy F. Geithner said Thursday that he planned to stay in his job “for the foreseeable future.” Normally, that would not qualify as news. But Mr. Geithner’s comments came in a frenzied afternoon of speculation after news reports that he was considering leaving the Obama administration in the coming months, after a deal is reached with Congress to reduce the budget deficit.

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UCLA Study Predicts Coastal Communities Will Benefit from Housing Slump

June 30, 2011 by · Leave a Comment 

“- UCLA’s most recent Anderson Forecast detailed the future of California’s real estate market. Based on 2010 U.S. Census results and Anderson research, UCLA’s Senior Economist, Jerry Nickelsburg, predicted that consumers would shift away from inland homes if their commutes required long-distance drives towards the coast. The study has wider implications for all U.S. regions where coastal communities remain desirable places to live.”

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Home Prices Up for Month but Down for Year

June 30, 2011 by · Leave a Comment 

“The CoreLogic Home Price Index for May increased 0.8% over April but declined by 7.4% when compared with May 2010. Take out distressed sales, and year-over-year prices declined by a mere 0.4% when compared with May 2010. That follows a 0.8% year-over-year decline when distressed sales were removed from the equation for April.”

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The Great Misdiagnosis

June 30, 2011 by · Leave a Comment 

By Jim Willie CB, Golden Jackass

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Imagine a doctor who administers an elaborate treatment for a man suffering from multiple broken bones, joint arthritis, and fallen foot arches. The quack doctor orders massive amounts of liquids as though he has a horrible case of dehydration. The inept doctor also permits unlimited freedom of movement around the hospital and its grounds to the patient, as part of the blunt treatment. The man still cannot walk right or breathe normally, has trouble lifting any significant weight with the arms, and stumbles around from shaky legs. But he has plenty of fluids and freedom to roam, urinating like a race horse. With the heavy mistreatment that is badly off the mark, he has a new problem, diarrhea and bloat together. His doctor is an idiot, incompetent, but still given respect. The doctor is the US Federal Reserve, led by the lousy economist who never ran a business, the mad professor from Princeton University. His claim to fame was revisionist history of the Great Depression. He was chosen to be the bagholder, to print money until no tomorrow. The USFed balance sheet is almost totally ruined, without hope of repair. The clumsy oaf professor posing as USFed Chairman actually admitted in public that he is confused why the USEconomy remains moribund, unresponsive to all the special treatment administered so thoroughly. Bernanke admits his incompetence. The national economy desperately requires a housing market revival that cannot come since banks are constipated with foreclosed homes in still rising inventory. The misguided licensed doctor continues to ply his trade, directing the wreckage, confused at the helm. Now the hospital is overrun by victims of the USEconomy, sinking under the weight of debt.

At least the health care sector is expanding as a business, the government sector too. Neither is productive. Meanwhile, the nation sinks into a depression, the debt approaches a default, and the USDollar faces extinction through revolt, rejection, and evasion. The nation suffers from lost direction, absent leadership, and unspeakable corruption from the climax of the Fascist Business Model introduced by the last administration with large doses of fear. The dominant themes in the USCongress and Executive branch are clearly paralyze, polarize, and partisan. Tainted money has been followed by tainted morality, policy, justice, and representation, enough to invite a public response. Let’s take a quick look at numerous pressure points, broken parts, and centers of ailment. The doctor is extremely busy in confusing both the patient and anxious family. They are repeatedly told the patient is on the mend, but he keeps falling down when attempting to move on his own power. The family has lost faith in the doctor, but no other medical professionals seem any more enlightened.


The national officials have grotesquely misdiagnosed the problem. It is not one of liquidity. Rather the problem is widespread systemic insolvency and absence of industry for legitimate income and high level bank corruption that has caused a national sclerosis. Inefficiency reigns supreme, like with any fascist business model climax. The corporate leaders and political leaders sold out two to three decades ago. As long as the national policy is off the mark on recognition of the ultimate problem, no solution will come. Jamming a solution after a wrong diagnosis leads to tragic results. All the problems in the USEconomy from summer 2008 are actually worse today. No solution is even attempted. Mountains of money have been wasted, undermining the USDollar. In my view, the diagnosis is intentionally made incorrect in order to continue the elite largesse. The blunt instruments of the USFed are obviously from the wrong toolbag.


The turning point was not breaking the Bretton Woods Accord in 1971, the movement off the gold standard. Obviously, that was an extremely significant event, but analysts miss the original wart that changed the financial complexion. My viewpoint is different from most within the gold community. The turning point was the Vietnam War, whose costs forced the federal deficits to an extreme, the first $1 trillion in the national debt. At the time, when the Jackass was in college chasing airborne frisbies and frolicking females, that first trillion was hugely important. The reaction was the broken Bretton Woods Accord in order to avoid a run on the national gold treasury held by the USGovt. The ultimate irony is that 20 years later, the Rubin Gang lowered the gold lease rate, enabled raids on Fort Knox for $trillion profit by the Wall Street gangsters in private gains. The USDollar has had no collateral ever since, the basis for a vaporous currency, and a grand setup for debt default. The emphasis on war remains a high priority, even a sacred topic not permitted in debate. The budget battle has effectively removed the military budget when making proposals for spending cuts, precisely as the Jackass forecasted two months ago.


With all the lousy USEconomic news (no need to provide ample detail), the obvious nature of continued fiscal and monetary stimulus has permeated into the financial markets. The most direct beneficiary has been the S&P500 stock index. Stocks have jumped off the double bottom tested low. The entire stock and commodity market can be appropriately described as a risk trade, as in risk of paper securities. The silly empty bluff by the USFed has been called. The USGovt debt limit will be raised, even if on a temporary basis by a small amount. The absurd gesture to release US Strategic Petroleum Reserve crude oil, coupled with a similar release of IEA European oil, has seen an effect come and gone. It was not exactly minimal, but surely fleeting and meaningless. They will replace those reserves with more costly oil, no doubt. No solution has come for the global monetary mess with fracturing sovereign debt. No lasting solution has come to Greece, although the bandaids and chewing gun and bailing wire will assure that another month of tranquility will come, except for minor events like street riots. No lasting solution will ever come to the USGovt budget, where spending cuts are obstructed and tax hikes are obstructed, and war spending will continue into oblivion.

Gold has benefited from the lost credibility of the global monetary system, from the loss of unquestioned faith in the central bank franchise system. Gold represents the mirror image of the crumbling monetary system and its soured debt foundation, managed by dubious central bankers. The system will perpetuate its ruinous debasement of money itself, since the power structure will struggle to preserve itself. It is that simple. In no way will JPMorgan or Citigroup or Bank of America voluntarily commit to bankruptcy and debt restructure, accompanied by impaired asset liquidation. They are the insolvent pillars of the US financial syndicate, firmly in power, never to release that power unless from cold dead fingers. The Gold & Silver prices will continue to make new highs in the second half of the year. We should look forward with juicy anticipation to all the back-peddling by countless analysts who claimed the anti-USDollar trade was over. It was just resting in consolidation. The battle cry remains INFLATE OR DIE!! The system will continue to seek vast resuscitation via harmful inflation, or implode. The latest lousy USTreasury auctions should be viewed as having great importance. The USFed will continue its debt monetization or face failed auctions. Notice the strong signal for continued debt coverage in the S&P500 stock index itself. Crude oil has recovered. Gold & Silver have bottomed. Onward and upward. The great spring shock was administered in empty threats.


In the last three years, at least 100 direct questions have come to my INBOX or telephone, asking what solution might come. My answer has been consistent, that no solution is even pursued. The objective is not remedy, but rather retained power by the banksters. Any meaningful remedy must begin with a foundation of liquidated failed insolvent big US banks. That will never happen, since they hold the power over the USGovt and control the USDollar printing press. We are witnessing moral hazard over the top, the acceptance of the most dangerous risk. The entire concept of Too Big To Fail for banks ensures no serious attempt to deal with the problems, no meaningful policy to encourage recovery, and a sinking toward systemic failure. The business model leads always to a climax of ruin.


The Rubin Doctrine has a more colloquial translation, of kicking the can down the road. Dullard Joe Kernan of CNBC fame coined the phrase of kicking the can into the cul-de-sac, a dead end. My preference is the jump shift in metaphor, where the can has gone nuclear. Those who kick it are infected. Whatever the can touches is infected. The air on the road is infected. The latest Greek example with austerity measures points out the futility. One year ago a bailout solution was handed to Greece. In no way did it resemble a solution It was a grand cover of big bank exposure, nothing more. The process will continue until the people interrupt the handouts to the bankers. If not added public debt, then added money supply has been abused to redeem Southern European debt held by the bankers. A great irony presents itself, since a Greek Govt debt default might trigger huge Credit Default Swap contract payouts by AIG, now obligated by the USGovt. Increasingly, but secretively, many deals have been cut to collateralize the Greek debt. In fact, a private source informs that in Greek dock warehouses, an estimated 200 to 400 billion Euros in shrink wrapped unopened cargo containers lies in limbo. The EuroNotes come in Greek denomination, but also German and other national markings. The pressure is strong to avoid a removal of the Euro currency, even though fully broken. The owners of the vast hoard of EuroNotes are scared witless and sweating profusely, fearful of loss from obsolescence or retirement. The funds were from secret payment to purchase stakes in major properties like telecom firms, shipping firms, media firms, commercial properties, and more. The owners struggle to put the funds into the system without detection.<


Despite the failure of the entire textbook theory of government stimulus through debt propagation, the policy continues without end. Extended to the Great American Politburo for administered price controls, it is failing in public view. It will continue until conclusion, a national debt default. The centers of cancerous thought continue to be the University Chicago, Harvard University, and lately Stanford University. The purveyors of failed economic and monetary policy typically come from these dens of heresy. They serve as Fed Governors and members of the White House Council of Economic Advisors. Hardly a one has any business experience, but they do have impressive credentials, complete with lofty theses about something equally abstruse as useless. Wall Street has colluded effectively with the titan schools, offering them decades of chaired posts, plenty of prestige, and recently some lush collusion like with the Enron project.


What a laughable concept that the Quantitative Easing was to stimulate the USEconomy!! Not even close. In fact, the Stimulus Bill had only a trifle stimulus inherent either. It was primarily about plugging the vast state budget shortfalls, which have reappeared in full force. Even the name Quantitative Easing is an insult to human sensibilities. It is hyper monetary inflation, which would sound bad. Heck, Neo-Conservative was another euphemism, a label that sounded better than Neo-Nazi. It also fooled the public, an easy task since dominated by simpletons. The actual beneficiaries of QE and QE2 were the big banks. They were given freshly printed electronic funds for their toxic bonds in a vast redemption process. They have been given nearly infinite credit lines to speculate in the easy USTreasury carry trade. They borrow at near 0% and invest in long-term bonds. In the process, low rates enable the big US banks to play the carry trade while their balance sheets fall backwards from the crippled housing and property credit asset. The practice keeps long-term rates down. The USGovt is hard pressed to find willing investors in USTreasurys. So QE and QE2 really helped to compensate for those scarce investors.


Anyone who truly believes that QE will stop is a verifiable moron. Already this week, three USTreasury auctions took place. All three were borderline dismal. The main advantage for the USGovt again was the slide deeper into recession for the USEconomy. The effect exposes the destructive inter-relationship, since the USGovt needs a miserable lifeless moribund USEconomy in order to sell its USTreasurys, the packaged USGovt debt. During the last several months, the USFed has been the buyer, directly or indirectly, for 70% of the USTreasury debt securities. Apply the indirect argument to include the inventory of bonds gobbled by obligation from Primary Bond Dealers. They typically have been recycling their USTBills and USTBonds back to the USFed during Permanent Open Market Operations in three weeks on average, an abomination. With foreign creditors backing away and the USFed supposedly buyers no more, a huge vacuum cometh. Again, anyone who truly believes that QE will stop is a verifiable moron.


The power harlots in WashingtonDC are playing a dangerous game. They have been attempting, much like the Europeans, to redefine what debt default means. The debt rating agencies have been rushing on stage to clarify the matter. The one party refuses to budge on tax hikes. The other party refuses to budge on spending cuts. Both sides obediently leave alone the sacred war so as not to anger the narco barons and fear merchants. The sad fact of life is that Wall Street banks would sink into a failure pit in three months time without the money laundering from the narco operations bound within the smokescreen of a spurious war on terrorism. A glimpse of what might happen with a closer flirtation on debt default has been seen with a quick move in the 10-year USTNote yield from 2.86% low last week to the 3.18% Thursday. It rises to give a quiet alarm.


The most basic reason why extreme monetary inflation will continue is the absent demand for USTreasurys. The most convincing practical argument down the road only a little in time is that the entire USGovt debt structure cannot afford higher borrowing costs. The Zero Interest Rate Policy has been blessed as near permanent. Debt Monetization as policy goes hand in hand with ZIRP. Since the US banking system died in September 2008, the USGovt deficits have exploded past $1.5 trillion annually. Most of the recently issued debt securities have been in the very short term maturities, a trend begun by the Clinton Admin. If QE is halted, then short-term yields would rise and long-term yields would rise. The result would be a doubled borrowing cost for the USGovt debt. Not gonna happen! Inflation as policy will rule!!


The national implosion, disintegration, and ruin of Greece is in full view. The plight of the United States debt situation is 100 times worse than Greece. The people of Athens are angry, with focus of their anger on the duplicitous and corrupted politicians who favor the bankers and yield to their demands. The people of the United States are angry but less perceptive. They still believe the mean nasty oil producers are lifting gasoline prices, still believe mean nasty speculators are lifting food prices, still believe mean nasty Chinese are lifting import prices, but have clearly come to believe that mean nasty bankers are illegally foreclosing on their homes. The intentional poor education on economic and financial matters has left the American public as mere cannon fodder on the financial battle field. The great advantage of the Printing Pre$$ has spared the American marketplace of much higher rates. Like Greece, the nation flirts with debt default. The artificially low interest rates, the result of dictated monetary policy with the fortification of Interest Rate Swaps, have conspired to avoid heavy borrowing costs for the USEconomy. The bond market gives a false signal. In Athens, the bond yields are out of sight high, from 20% to 30%, due to a broken insolvent wrecked system. In the United States, the bond yields are out of sight low, from 0% to 3%, due to a broken insolvent wrecked system. The paradox and irony are incredibly ugly, stark, and confusing. The US is Greece, and only the true experts are aware. Leaders in both nations are sweating profusely and quaking in their boots. They each march backwards into debt default.


If one were to be told in 1960 that the USEconomy would turn up or down depending upon the housing market, the reaction would be a conclusion of stupidity and break from reality. In 2004, when the Hat Trick Letter was hatched, my belief was firm that the dependence upon a string of asset bubbles for wealth creation in the USEconomy would end in a national catastrophe. My forecast was for a chronic housing decline to begin around 2007 or 2008, one to thrust the nation into an endless recession and lethal insolvent condition. It is happening precisely as expected in broad strokes, and much as imagined in the details. The nation exchanged legitimate factory income for home equity sources of funds after the great Chinese industrial buildup. The corporate feudalists in the United States betrayed the American workers and invested in China. They began that process in the 1980 decade with the PacRim investment that was triggered by Intel, the semiconductor chip maker. So here we stand with housing firmly lodged in the septic field of lost dreams. The national USEconomy cannot recover unless the housing market rebounds and revives. It will not, at least it will not until home prices fall to 30% below construction costs. What a travesty awaits this market in climax!!


Supposed experts actually discuss early signs of a housing market recovery, but they sound like idiots. They overlook the ugly shadow inventory held by banks. Almost never does the financial press touch the ugly factor of bank owned home inventory. Imagine over a million homes held on bank balance sheets, an extra inventory held in secondary fashion. It will be years before the inventory clears, and when it does, the home prices will be 20% lower. Analysts spout their nonsensical perspectives not worth squat. Even Shiller during interviews avoids the topic of the enormous bank inventory acquired from foreclosures, some perhaps illegally. Like with many other statistics, the analysts focus on the headline news and avoid the meat of the story. The meat is often rancid. The housing market cannot rebound. It cannot revive. It is a wrecked market. It is weighing down the already insolvent big US banks. It is dragging down the USEconomy. Housing is actually the key factor that will assure a USGovt debt default, since it replaced industry in function. The system has forfeited and abandoned its industrial base. The nation must be re-industrialized, a process not even begun.


A little known fact by the investment community and public at large is that the USGovt taxes the business sector at a higher rate than any other of the top 18 industrial nations. Yet one corrupted administration after another talks about growing the USEconomy and enabling the creation of new jobs. They are hypocrites and fools. The tax policy along with oppressive regulations are the main problem, not even addressed. The recent folly of the Obama Health Care program has actually exacerbated the problem. The great economic policy failures of the last four decades feature one case after another of raising tax rates and realizing lower tax income. The economic corps has no brain in trust. They learn nothing. They push the nation into the abyss.


The Clinton Admin started the process, with sage counsel provided by Robert Rubin. They deceive with statistics. Substitution, hedonics on value, curious adjustments, bogus models, bias galore, they all contribute to corrupted statistics. Imagine a patient in a hospital whose temperature cannot be properly measured, whose blood pressure cannot be properly measured, whose blood sugar cannot be properly measured, whose heart rate cannot be properly measured, whose brain waves cannot be properly measured, whose blood gases cannot be properly measured, whose antigens cannot be properly measured, whose organ function cannot be properly measured. The patient surely could not be given proper treatment. The attendant staff would have no clue of what medication or therapy to offer. That is the USEconomy.


A very heavy added burden has been put upon the USEconomy ever since March 2002 when the war machine was set into motion. It is above debate or dispute. Patriotism is questioned when objections are made. The budget battle has removed the wars from consideration in spending cuts. The American worker is asked to wear a mountain climber’s 50-lb pack when heading to the office. The USEconomy wagon train must tow a 2-ton set of bricks as it moves along the Valley of Tears. The USGovt must ingest a potion of toxin each month as it sells its debt in a beauty contest, often conducted with coercion. The war just happens to alienate our allies, enrage our enemies, and tip those on the fence away from us. See Pakistan, the latest nation to make distance from the United States. The drone aircraft are largely to blame, the newest video game.


The story of the Libyan War is typical. The American public is told of murder of US civilians by the hands of Qaddafi. Sure, he is a vile specimen. Whether or not he was in the midst of launching a Petro Dinar with gold backing is possible. Not in debate though is the $90 billion in Qaddafi funds located in European and US banks that have been frozen. The word frozen always sounds better than seized or stolen. It is motive for war. Wealth is transferred. The story of the Libyan War dominated the news in April. The heist is complete. Move on, nothing to see. The destabilization of the entire Middle East and North African theater is well along. Their oil production might be the secondary target. The oil barons might want a much higher crude oil price, and curtailment of global oil supply. Their sprawling corporations and vast properties might include numerous locations where development awaits, if only the crude oil price would climb above the $150 level. If it does, the blame can be put squarely on Libya. The shutdown of the Gulf of Mexico could have been part of the plan.


After years of mis-education, the American people are not prepared to defend themselves. They have seen their home equity vanish. Over 28% of US households live under the oppressive stench of negative equity, which puts them in a consumer straitjacket. They have seen their pension funds damaged, if not from direct value then in purchase power value. They have been subjected to non-stop propaganda that gold offers no yield, is a dead asset, and cannot aid an economy. Yet gold was the best performing asset in the 2000 decade. Amazingly, after a near COMEX default event, amidst global sovereign debt crisis, as government debt threatens default in numerous trouble spots, at a time when all major currencies are being debased in unspeakable fashion, the US press media networks have succeeded in some part in convincing the US public even since May 1st that gold is not the place to find refuge and security. They sell the USTreasury bond as safe haven still. Less than 2% of the American public owns gold in any way. Less than 2% of US managed mutual funds or pension funds have any significant gold ownership. Yet the babbling US press talks about the gold market being a bubble. The actual asset bubble is the USTreasury Bond market. Unlike housing, the bond sucks capital out of the system as part of its Black Hole function. It slows the USEconomy from its small yield offered to savers and pensioners. The speculation it encourages does greater damage to the USEconomy, inducing investors to search for the next asset bubble instead of rebuilding the industrial base. Only those Americans who leave behind the financial markets dominated by paper values will survive to thrive in the next chapter.

Jim Willie CB

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How Much Would It Cost To Buy Congress Back From Special Interests?

June 30, 2011 by · Leave a Comment 

By Charles Hugh Smith, OFTWOMINDS
Here’s a thought: let’s buy our Congress back from the special interests who now own it.

We all know special interests own the U.S. Congress and the Federal machinery of governance (i.e. regulatory capture). How much would it cost the American citizenry to buy back their Congress? The goal in buying our Congress back from the banking cartel et al. would not be to compete with the special interests for congressional favors–it would be to elect a Congress which would eradicate their power and influence altogether.

A tall order, perhaps, but certainly not impossible, if we’re willing to spend the money to not just match special interest contributions to campaigns but steamroll them.

A seat in the U.S. Senate is a pricey little lever of power, so we better be ready to spend $50 million per seat. Seats in smaller states will be less, but seats in the big states will cost more, but this is a pretty good average.

That’s $5 billion to buy the Senate.

A seat in the House of Representatives is a lot cheaper to buy: $10 million is still considered a lot of money in this playground of power. But the special interests– you know the usual suspects, the banks, Wall Street, Big Pharma, Big Insurance, Big Tobacco, the military-industrial complex, Big Ag, public unions, the educrat complex, trial lawyers, foreign governments, and so on–will fight tooth and nail to maintain their control of the Federal machinery, so we better double that to $20 million per seat. Let’s see, $20 million times 435….

That’s $8.7 billion to buy the House of Representatives.

It seems we’re stuck with the corporate toadies on the Supreme Court, but the President could scotch the people’s plans to regain control of their government, so we better buy the office of the President, too.

It seems Obama’s purchase price was about $100 million, but the special interests will be desperate to have “their man or woman” with the veto power, so we better triple this to $300 million.

Add these up and it looks like we could buy back our government for the paltry sum of $14 billion. This is roughly .0037% of the Federal budget of $3.8 trillion, i.e. one-third of one percent. That is incredible leverage: $1 in campaign bribes controls $300 in annual spending–and a global empire.

Once we bought back our government, what would be the first items on the agenda? The first item would be to eradicate private bribes, a.k.a. private campaign contributions and lobbying.

If you allow $1 in campaign contributions, then you also allow $10 million. There is no way to finesse bribery, so it has to be cut and dried: no member of Congress can accept any gift or contribution of any nature, monetary or otherwise, and all campaigns will be publicly financed.

Is this system perfect? Of course not. There is no perfect system. But the point here is that a system which allows even a $1 private contribution to a campaign cannot be restricted; after the courts have their say, then all attempted limitations prove worthless.

So it’s really all or nothing: either we put our government up for auction to the highest bribe, or we ban all gifts and private campaign financing and go with public financing of all elections in the nation.

That is the only practical and sane solution. Any proposal that seeks to finesse bribery will fail, just like all previous attempts at campaign finance reform.

Any member of Congress who accepts a gift, trinket, meal, cash in an envelope, etc. will lose their seat upon conviction of accepting the gift. Once again, you can’t finesse bribery. It has to be all or nothing, and the only way to control bribery is to ban it outright.

As for lobbying, thanks to a Supreme Court dominated by corporate toadies, it will be difficult to ban lobbying outright. However, that doesn’t mean Congress shouldn’t try to force the toadies on the Supreme Court to make a distinction between a corporation with $100 billion in assets and billions to spend on bribes and a penniless citizen.

(Those two are not coincidental; in a nation run by and for corporations, the citizens all end up penniless unless they own or manage said corporations, or work for a Federal fiefdom which can stripmine the nation at will.)

Congress should pass a law banning paid-for lobbying. If a citizen wants to go to Congress and advocate a position, they are free to do so–but they can’t accept money to do so. If they receive any compensation from any agency, enterprise, foreign government, other citizen, you name it, from any source, then they will be sentenced to 10 years of fulltime community service in Washington D.C., picking up trash, etc.

If the Supreme Court toadies strike down that law, then here’s another approach:

Require all paid lobbyists to wear clown suits during their paid hours of work.

In addition, all lobbyists are required to wear three placards, each with text of at least two inches in height.

The first placard lists their total annual compensation as a lobbyist.

The second lists the special interest they work for.

The third lists the total amount of money that special interest spent the previous year on lobbying, regulatory capture, bribes to politicos and political parties, etc.

Every piece of paper issued by lobbyists must be stamped in large red letters, “This lobbying paid for by (special interest)”, and every video, Powerpoint presentation, etc. must also be stamped with the same message on every frame.

The second item on the agenda is a one-page tax form. The form looks like the current 1040 form except it stops at line 22: TOTAL INCOME. A progressive flat tax is then calculated from that line. Once again, you cannot finesse bribery or exemptions, exclusions, loopholes and exceptions. Once you allow exemptions, exclusions, loopholes and exceptions, then you’ve opened Pandora’s Box of gaming the system, and the financial Elites will soon plow holes in the tax code large enough to drive trucks through while John Q. Citizen will be paying full pop, just like now.

The entire charade of punishing and rewarding certain behaviors to pursue some policy has to end. Any deduction, such as interest on mortgages, ends up creating perverse incentives which can and will be gamed. It’s really that simple: you cannot finesse bribery or exemptions, exclusions and loopholes, because these are two sides of the same coin.

The tremendous inequality in income, wealth, power and opportunity which is distorting and destroying our nation all flow from the inequalities enabled by bribery and tax avoidance. The only way to fix the nation is to eliminate bribery (campaign contributions and lobbying) entirely, and eliminate tax avoidance entirely by eliminating all deductions, exemptions, loopholes, etc. State total income from all sources everywhere on the planet, calculate tax, done.

When you think about how tiny $14 billion is compared to the $3.8 trillion Federal budget and the $14.5 trillion U.S. economy, it makes you want to weep; how cheaply we have sold our government, and how much we suffer under the whip of those who bought it for a pittance.

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The Money of Greeks

June 30, 2011 by · Leave a Comment 

The Daily Reckoning

“Gold is the money of kings; silver is the money of gentlemen; barter is the money of peasants; but debt is the money of slaves.”

So wrote Norm Franz in Money and Wealth in the New Millennium, written in 2001.

On this definition, the Greek population are now slaves…at least for the time being. Democracy and the demands of the people are taking a back seat to the demands of creditors, who are playing hardball.

The Greek parliament was last night spooked into passing a new round of austerity measures to secure emergency financing of around 12 billion euros. Various eurocrats and other vested interests spent the lead-up to the vote warning of economic ‘catastrophe’, ‘suicide’ and other such hyperbole to strong arm Greek pollies into voting for the bankers, rather than the people.

The additional austerity measures involve tax increases and spending cuts totalling 28 billion euros. Given the paper-thin tax base in Greece, we’re not sure who is going to be shouldering the burden of the tax increases. Whoever it is, they won’t be happy about it.

But when you’re a debt slave you don’t have much choice. According to the Wall Street Journal, Greece’s debt-to-GDP ratio is at 155 per cent and forecast to peak at 170 per cent next year. The plan is to get Greece to grow out of the problem. How that is going to happen with higher taxes and a populace unwilling to make sacrifices (to pay the bankers) is anyone’s guess.

Of course the simple and easy solution would be to combine these measures with a debt restructuring. Greece’s debts are not that big in a relative sense. Even the French banks could handle it.

Sounds good in theory, doesn’t it? But this is where the 40-year build-up of debt comes back to bite. You see the Greeks aren’t the only slaves in Europe. There’s the Irish and the Portuguese…and the Spanish aren’t too far away from indenture either. If Greece gets to lower its debt burden, others will put their hand up too. That’s what frightens the banks and all the others that benefit from a (broken) system of perpetual debt.

As the old saying goes, ‘you reap what you sow’. And after sowing ever-growing fields of debt – made possible once the US severed the tie between paper money and gold in 1971 – the reaping started in 2008. Ever since, the harvests have been poor. Excessive debt has drained the soil of its nutrients. It will take many years to recover.

Instead of facing up to this reality, the world plunges further into debt. We woke up this morning to the sounds of Barrack Obama saying that failure to lift the US debt ceiling would have ‘significant and unpredictable’ effects on markets.

The IMF chimed in saying world markets would be in for a ‘severe shock’ if the debt ceiling were not lifted.

This is straight out of the playbook for the power mongers and financial elite – vote for perpetual debt or you will be responsible for the ensuing catastrophe.

It worked for the Europeans, and it will work in the US too. The problem is that it will slowly impoverish us all…

If things go according to plan in Europe, Greece will receive another 120 billion euros, which will ensure the Greeks can pay back maturing debt and continue to run a semi-functioning economy for a few years at least. The idea is that after this period, they’ll be in better shape and will be able to return to the private debt markets.

In the meantime though, European taxpayers – and the IMF – will keep coughing up bailout funds. Private investors get reimbursed while anonymous taxpayers get coerced into becoming creditors. What a system!

It’s strengthening the periphery to weaken the core. Even Ricky Stuart, coach of the NSW Blues, wouldn’t do such a thing. Juggling a number of injury concerns and yet to name a team, he said he had options but would not weaken one position to strengthen another. But Ricky doesn’t have the luxury of kicking the can down the road…it’s game on next week!

The Europeans and the Yanks, on the other hand, can keep kicking. By failing to address the real issues though – excessive debt in the financial system – such a policy just delays the day of reckoning.

So we’re in the clear for the moment. Now we can go back to worrying about the slowdown in China, the end of QEII (and what it means) and how all this impacts you now that Greece is on the sidelines for a month or two.

More on this tomorrow…

Greg Canavan
Daily Reckoning Australia

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Bear Traps in the Bond Market

June 30, 2011 by · Leave a Comment 

The Daily Reckoning

Fat guys can surprise you. They don’t move very fast. But they can be very agile intellectually.

That was how G.K. Chesterton was. Laurence Lindsay, former assistant to George W. Bush for economic policy, seems to be the same way. Slow on his feet, perhaps. But quick in his mind.

Writing in The Wall Street Journal, Lindsey delivers thoughts that might have come from The Daily Reckoning. First, he notes that the budget problems faced by Washington are larger than generally reported. Growth rates have been overestimated, he says, while interest costs and deficits have been grossly underestimated. When more realistic assumptions are plugged in to the numbers it adds more than $4 trillion in ‘budget costs’ over the next four years. He concludes:

Underestimating the long-term budget situation is an old game in Washington. But never have the numbers been this large.

There is no way to raise taxes enough to cover these problems. The tax- the-rich proposals of the Obama administration raise about $700 billion, less than a fifth of the budgetary consequences of the excess economic growth projected in their forecast. The whole $700 billion collected over 10 years would not even cover the difference in interest costs in any one year at the end of the decade between current rates and the average cost of Treasury borrowing over the last 20 years.

Only serious long-term spending reduction in the entitlement area can begin to address the nation’s deficit and debt problems. It should no longer be credible for our elected officials to hide the need for entitlement reforms behind rosy economic and budgetary assumptions. And while we should all hope for a deal that cuts spending and raises the debt ceiling to avoid a possible default, bondholders should be under no illusions.

Under current government policies and economic projections, they should be far more concerned about a return of their principal in 10 years than about any short-term delay in a coupon payment in August.

Yesterday, stocks rose. The Dow was up 145 points. Oil increased a little too. Gold stayed at $1,500.

Still no clear direction.

But the direction of the bond market for the last few months has been up. This appears to contradict Mr. Lindsey. QE2 is ending. Everybody knows it. The Fed was the world’s biggest customer for US debt – in some months buying two times as much debt as the US government issued. Now that the Fed’s buying program is coming to an end, shouldn’t bonds go down?

If the economy sinks the way we expect, Lindsey will appear to be a fool – for a while. That is, the Great Correction will intensify rather than go away. Bond yields will fall, not rise. Lenders will make money as bond prices go up, while stocks, employment, commodities, houses and almost all other assets go down.

People will say:

“See, everybody wants the US dollar. Everybody wants to buy US Treasury debt. It’s the only thing you can trust. Debt is not the problem. The problem is growth. That’s why we need QE3.”

This is probably the trap Mr. Market is setting. The Great Correction will prove to be more bad news for investors – except for those who have put their money in ‘safe’ US dollars…and US treasury debt. Gradually, investors will move more and more of their money out of ‘risky’ assets and into bonds. Then, Mr. Market can spring his trap. As Lindsey warns, that is when they will stop worrying about debt ceilings and Congressional budget talks. That is when they will realize that it is too late. That is when bond yields shoot up and bond prices fall. That is when investors regret having lent money to Washington.

How far ahead will that be? We wish we knew. But Bill Gross, who famously sold US bonds, could turn out to be years early.

Then, Mr. Market – the joker – will have such a laugh. All those people who tried to get away from risk…by moving to the dollar and US Treasury bonds…will get whacked.

And more thoughts…

Most of the Bonner clan is shy. Has been for generations. When visitors would drive up to the family farm in the ’20s or ’30s, for example, they would find an empty front porch…but a rocking chair still in motion.

Whoever was on the porch had beaten a retreat…trying to avoid company.

“The rocking chair syndrome,” the family called it.

An uncle, a local farmer, went to church regularly. But he snuck into the assembly by a side door at the last minute…so as to avoid the usual pleasantries. Then, he left the same way…

Shy people are usually considered to have a problem. They are ‘socially dysfunctional,’ widely believed to lead lonely, barren lives, trapped in their own prisons.

Various remedies have been proposed. Alcohol is an ancient elixir, prized by shy people. More recently, they are given drugs to loosen them up.

But maybe shyness isn’t such a bad thing, after all. Maybe we’re not sick. Maybe we’re ‘normal’ after all. Here’s The New York Times on the subject:

BEAUTIFUL woman lowers her eyes demurely beneath a hat. In an earlier era, her gaze might have signaled a mysterious allure. But this is a 2003 advertisement for Zoloft, a selective serotonin reuptake inhibitor (S.S.R.I.) approved by the F.D.A. to treat social anxiety disorder. “Is she just shy? Or is it Social Anxiety Disorder?”

It is possible that the lovely young woman has a life-wrecking form of social anxiety. There are people too afraid of disapproval to venture out for a job interview, a date or even a meal in public. Despite the risk of serious side effects – nausea, loss of sex drive, seizures – drugs like Zoloft can be a godsend for this group.

But the ad’s insinuation aside, it’s also possible the young woman is “just shy,” or introverted – traits our society disfavors. One way we manifest this bias is by encouraging perfectly healthy shy people to see themselves as ill.

This does us all a grave disservice, because shyness and introversion – or more precisely, the careful, sensitive temperament from which both often spring – are not just normal. They are valuable. And they may be essential to the survival of our species.

Theoretically, shyness and social anxiety disorder are easily distinguishable. But a blurry line divides the two. Imagine that the woman in the ad enjoys a steady paycheck, a strong marriage and a small circle of close friends – a good life by most measures – except that she avoids a needed promotion because she’s nervous about leading meetings. She often criticizes herself for feeling too shy to speak up.

Before 1980, this would have seemed a strange question. Social anxiety disorder did not officially exist until it appeared in that year’s Diagnostic and Statistical Manual, the DSM-III, the psychiatrist’s bible of mental disorders, under the name “social phobia.” It was not widely known until the 1990s, when pharmaceutical companies received F.D.A. approval to treat social anxiety with S.S.R.I.’s and poured tens of millions of dollars into advertising its existence. The current version of the Diagnostic and Statistical Manual, the DSM-IV, acknowledges that stage fright (and shyness in social situations) is common and not necessarily a sign of illness. But it also says that diagnosis is warranted when anxiety “interferes significantly” with work performance or if the sufferer shows “marked distress” about it. According to this definition, the answer to our question is clear: the young woman in the ad is indeed sick.

But shyness and introversion share an undervalued status in a world that prizes extroversion. Children’s classroom desks are now often arranged in pods, because group participation supposedly leads to better learning; in one school I visited, a sign announcing “Rules for Group Work” included, “You can’t ask a teacher for help unless everyone in your group has the same question.” Many adults work for organizations that now assign work in teams, in offices without walls, for supervisors who value “people skills” above all. As a society, we prefer action to contemplation, risk-taking to heed-taking, certainty to doubt. Studies show that we rank fast and frequent talkers as more competent, likable and even smarter than slow ones. As the psychologists William Hart and Dolores Albarracin point out, phrases like “get active,” “get moving,” “do something” and similar calls to action surface repeatedly in recent books.

Yet shy and introverted people have been part of our species for a very long time, often in leadership positions. We find them in the Bible (“Who am I, that I should go unto Pharaoh?” asked Moses, whom the Book of Numbers describes as “very meek, above all the men which were upon the face of the earth.”) We find them in recent history, in figures like Charles Darwin, Marcel Proust and Albert Einstein, and, in contemporary times: think of Google’s Larry Page, or Harry Potter’s creator, J. K. Rowling.

In the science journalist Winifred Gallagher’s words: “The glory of the disposition that stops to consider stimuli rather than rushing to engage with them is its long association with intellectual and artistic achievement. Neither E=mc2 nor ‘Paradise Lost’ was dashed off by a party animal.”


Bill Bonner
For Daily Reckoning Australia

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Governments are the Primary Creators of Systemic Risk

June 30, 2011 by · Leave a Comment 

The Daily Reckoning

The greatest lesson of the still young 21st century is proving to be that governments are the primary source of systemic risk to the economy, our standard of living, and our liberty.

The latest case in point is the European government debt crisis, with Greece once again running out of money and threatening to trigger yet another financial crisis. The government’s debt now totals more than 150% of its GDP, and continues to grow. Last year’s bailout by other European governments was supposed to give it the time needed to reduce its budget deficits so that next year Greece could roll over its maturing debts, as well as finance additional deficits at interest rates under 6%. However, the government’s austerity plan of tax increases and budget cuts has not reduced current or projected government deficits because the economy in 2010 contracted by 4.5% and the unemployment rate jumped to 15%.

The combination of a contracting economy and rising debt levels has driven the market yield on Greek two-year notes to near 25% and on its 10-year debt to around 15%. Since these loans are in euros, rates this high reflect the growing risk the people of Greece will not be able to make good on their collective debts. They also effectively shut the government out of the capital markets. Last week, S&P downgraded its rating on Greek debt to B from BB-, well into junk bond territory.

The downgrade reflects the increasing possibility that Greece will restructure its debt by forcing current debt holders to accept longer maturities, or do what demonstrators in the streets of Athens are demanding, which is to force its creditors to take a loss on their loans.

Normally, this would be a matter between a debtor and its creditors. However, European Central Bank (ECB) Executive Board Member Juergen Stark warns that the effects of restructuring “could overshadow the effects of the Lehman bankruptcy,” which is associated with the beginning of the 2008 financial crisis.

At the heart of that financial crisis were government policies including Federal Reserve efforts to manipulate the economy by keeping interest rates artificially low and a weak dollar policy that fueled the housing bubble, federal government rules and regulations that de facto required banks to make loans to high risk borrowers, and two government sponsored enterprises, Fannie Mae and Freddie Mac, who stood ready to purchase hundreds of billions of dollars of sub-prime mortgages if only Wall Street could figure out how to turn them into high grade bonds.

In the case of Greece, government actions and regulations also lie at the heart of what threatens to be a European financial crisis.

Greek social security funds hold nearly two-thirds of their liquid assets in government bonds. Thus, any default would undermine these funds’ ability to meet their obligations to pay promised health and pension benefits. Such an outcome understandably would create massive political unrest that could reduce government revenues and the government’s ability to make good on its debts.

This risk is amplified by special rules created by politicians that encourage banks to lend freely to governments.

Here’s how it works. Governments require banks to hold capital against the loans that they make, anticipating that in the normal course of business, some of the loans will not be repaid. The riskier the loan, the more capital that needs to be held in reserve.

However, under international rules negotiated by government representatives through the Bank for International Settlements (BIS), government loans fit into a special category that has a 0% risk requirement. That means European banks do not have to hold any reserves against loans they make to European governments. That’s right, politicians implicitly promised banks that governments would never default. And, given the opportunity to make “risk free” loans that require no capital commitment, bankers purchased mountains of government debt.

According to Reuters, Greek banks own nearly 60 billion euros ($84 billion) of Greek government debt, and would almost certainly need additional capital and potentially a government bailout in the event of a government default.

In addition, the European Central Bank has increased the risk of systemic failure by becoming one of Greece’s largest creditors. As reported by The New York Times, J. P. Morgan estimates that the ECB owns 40 billion euros of Greek debt. In addition, it has lent 91 billion euros to Greek banks, with much of that backed by Greek government bonds.

That means any Greek default would cost the ECB billions of euros in losses and potentially impact the value of the euro, disrupting European and international financial markets, and the conduct of European monetary policy.

In a television interview last Friday, ECB Vice President Lucas Papademos warned: “…the adverse consequences both on the banking system in Greece as well as on financial stability in the euro area as a whole can be far reaching and undesirable. So all in all, I think that Greek debt restructuring should not be on the agenda.”

One possible “far reaching and undesirable” consequence of such a disruption to European financial markets would be follow-on defaults by Ireland, Portugal, Spain and Italy. According to AEI Scholar Desmond Lachman, the combined debt of the first four countries alone is about $2 trillion, a large portion of which is held by European banks. As a consequence, a write-down of 30% of that debt could lead to a European financial crisis not unlike that which struck the US banks from subprime mortgages.

Thus, the systemic risk created by the political class has put the citizens of Europe on the hook for irresponsible levels of government spending. Wealth producers are faced with the lose-lose choices of bailing out governments, bailing out bankers who were induced into buying government debt, or suffering the economic consequences and losses associated with widespread bank failures.

The brewing European debt crisis demonstrates again that the greatest source of systemic risk is believing politicians when they promise government guarantees are costless, and that elite public servants are capable of protecting us from systemic risks in the first place. The lesson is that giving governments more power over the economy and financial system is itself a source of potentially catastrophic financial and economic instability.


Charles Kadlec
For Daily Reckoning Australia

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