My Expose on the Chicago Plan

I posted this in response to Karl Denningers postThe Red Pill On Banking .  Karl is what I consider to be an important mouthpiece of the Libertarian movement and operates the Market-Ticker website.  Due to the importance of this subject matter to our future prosperity, this appeared to be a valid topic to preserve on my site. 

Then, what this says is a bank would have to receive an actual deposit, unencumbered by debt to make a loan. If they were lending actual money they possessed, there would be no need for the Fed. I think the problem is a lot deeper than that, in that depositors couldn't have immediate access to their funds, because they were all loaned out. This would mean, as I believe I have seen Karl comment, there would have to be 2 type banks, one of which never loans money, but merely holds it for customers.

Here is the rub on money. You hear this nonsense that money is going into the stock market, like it disappears. Money only changes hands or is created out of debt or disappears in the payment of debt to banks. It also cycles through accounts. Clearly the lending bank would have to also have an account at the deposit bank, because this is where the money is. Thus a lending bank would have to borrow out of the accounts at the deposit bank and I believe it would work more like the money market accounts. They would have to bid for funds and what they borrowed or loaned would merely change accounts. Whomever loaned their money to a lending bank would no longer have it.

The effects? For one, as lending went up, interest rates would also have to float upward. A fixed amount of money against a growing amount of loans would imply a growing need to acquire money, either through selling something or through productive enterprise. This would restrict boom and bust and discourage marginal investments. The idea we would have a Fed fooling with the rate of interest would destroy the entire self regulation of the system. Inflation and low interest rates are counter to each other and I believe we would have to keep the government out of this as well, as it would only take a short while before they were back into cronyism and destructive inflation.

In America's Great Depression, book page 71-72, Rothbard makes this comment. This is an important feature of economics, banking and government in that depressions are caused in large part by continual efforts of government and central banks to prevent true price discovery. A prime example would be the government subsidy for Solara or whatever that outfit was. Most people can't comprehend their wages declining and their standard of living increasing, but this is the true nature of a limited money system. It probably beats hell out of a system, where $30,000 a year today barely supports what $3000 a year did 45 years ago. Quote follows:

Just as in the case of the acceleration principle, the fallacy of the
“investment opportunity” approach is revealed by its complete
neglect of the price system. Once again, price and cost have disappeared.
Actually, the trouble in a depression comes from costs being
greater than the prices obtained from sale of capital goods; with
costs greater than selling prices, businessmen are naturally reluctant
to invest in losing concerns. The problem, then, is the rigidity
of costs. In a free market, prices determine costs and not vice versa,
so that reduced final prices will also lower the prices of productive
factors—thereby lowering the costs of production. The failure of
“investment opportunity” in the crisis stems from the overbidding
of costs in the boom, now revealed in the crisis to be too high relative
to selling prices. This erroneous overbidding was generated
by the inflationary credit expansion of the boom period. The way
to retrieve investment opportunities in a depression, then, is to
permit costs—factor prices—to fall rapidly, thus reestablishing
profitable price-differentials, particularly in the capital goods
industries. In short, wage rates, which constitute the great bulk of
factor costs, should fall freely and rapidly to restore investment
opportunities. This is equivalent to the reestablishment of higher
price-differentials—higher natural interest rates—on the market.
Thus, the Austrian approach explains the problem of investment
opportunities, and other theories are fallacious or irrelevant.

http://mises.org/document/694/Americas-G....

There seems to be a belief that dollars have babies, but they don't. Reserve bank lending is based on the idea that there is more money available than has been created, as money originates with banks and interest is attached. The concept of an expanding money supply has little to do with the economy and a lot to do with keeping the loans on the bank ledger performing. Thus more and more collateral is needed to keep the system going and more money has to be created to pay the interest that is coming due. The public is faced with the dilemma of struggling to pay what they owe, file bankruptcy or borrow more and the banker is faced with the dilemma of either lending more or writing their loans down out of their capital reserves. Increasing bank capital is nothing more than accounting for money that never existed in the first place, through the addition of more money that never existed. Fed policy is based on buying assets bought with money that never existed with notes that can be exchanged between banks and other banks and between them and their customers. All compound debt.

Under a gold standard, there was always the gold. I find it highly doubtful that trade beyond borders could be established out of purely government issued money. The whole thing would be a farce. Gold was eliminated through debt and collateral, not because the government could print money. We are now totally in a legal tender for payment of debt and outside of this factor, the ink on a dollar is worth more than the paper. But our houses are valued, our businesses are valued, our cars are valued and through the income tax, the government establishes a bondage that demands this money. The basis of the dollar has little to do with its real worth, but in the structure of debts internationally. Should it fail, it would be necessary to go back to a gold standard to repeat the process, as this would imply the structure of international debt had come unwound and there would be no use for dollars. This is why the dollar is king and the yuan has little international value.

Where I carry this theory forward is that debt in the system is nothing but compound interest piled up as money. This probably leads into a gold bug idea that gold and silver were the base of the current system and are all that remain of the non compounded interest. Due to Breton Woods, the US has to produce all the debt to keep the world system afloat, thus we had $5 trillion a year in new debt coming into the system at the bubble peak and since then, much of the rest of the world has run into trouble. In the 1990 period, the US slowed down and there went Japan. Once the US began expanding again, the excess went to China, not Japan and the advent of the Euro gave the Southern European countries access to some of the credit. Bubbles appeared in these countries along with China, even though Japan continued to deflate. China continued the boom, attempting to use their own credit, but such an expansion cannot go on and wouldn't have made it this far if not for the rigged game the Chinese banking system is. There has been no price discovery allowed in China other than exports and as such all kinds of misallocations of capital have been allowed to go on.

Creating debts that involve the money supply and having more money due than is possible to pay back, as the banking system has been allowed to do through state and national charter, has to be changed. If this is changed, government interference in the price discovery mechanism also has to stop. Lending out of the money supply should be done at the risk of the indivdual depositor at market rates, set without any interference by the government. The idea we need more money by diluting the money is like deciding we need more whiskey and getting it by filling the half empty half gallon bottle with water. This might work if you drink your whiskey with water, but it would be wise not to add water when making a drink, at which pace you would run out the same time. This can be illustrated by the fact that $30K a year is about what $3000 a year was 45 years ago. 10 times as much liquid, but the same amount of booze.

Lastly, I have suspicion of any thing that comes out of Chicago. I would suspect the University of Chicago was behind this and the Rockefellers bankrolled that institution. The Rockefellers also were behind the creation of the Fed, Nelson Aldrich being one of John D's in laws. Rothbard's Origins of the Fed covers much of the 15 year smoke screen employed to sell the Fed to the government. Worth reading at the following link.

http://mises.org/document/6119/The-Origi....

So you want to be a Libertarian

This is a paragraph out of Paul's 1988 book, Freedom Under Seige, page 24 of the pdf. The book is free to read at Mises.org, linked below.

Today it is usual to assume that the government owns all that we
produce, and through government generosity we are permitted to retain a
certain portion. We routinely hear that if a particular tax is reduced, it will be
a "cost" to government. This concept must be changed if the idea of
individual liberty is to survive. There is no such thing as cost to government.
There is only cost to people. Government cannot grant to us our right to life
and liberty, it would mean that government controls all that we produce.
Sadly this is essentially the situation in which we find ourselves today.

http://library.mises.org/books/Ron%20Pau....

There is nothing more counter to this idea than the recent widely publicized speech of Barack Obama, chiding the small businessman for claiming success, as if the government produced, out of thin air all that went into his success. A slave holder might have bought and paid for his slave, but he had to take care of him and punish him if he stepped out of line. Is our government acting any differently toward the productive people of the US? Wasn't the slave conditioned to believe he was there for the master?

There are people that say we need to take our government back. I think it is more than that. We need to get rid of most of the government and what we keep largely needs to be in our own counties, home towns and states. What we need to do is get our shit back, get our individual rights back, including our rights to defend ourselves, rather than wait for the police to leave the donut shop to respond to a theft, mugging or murder that has already happened. We need to end this banker monopoly, the herding of all of us under regulation written to prefer a small group at our expense. This line of thought might be painted as wacko, but if it is wacko, so was the overturning of slavery in the 1800's, because this is what in essense it is.

The idea of Libertarianism isn't to get the government to do something, but to stop the govenment doing a lot of what it is already doing. There is no liberty in coercion and not only in coercion, but in taking actions to coerce others to do something. Stopping the looting of the productive forces, whether it be capital or labor, as capital comes from labor and little else has to be the force of government. Protecting the life, liberty and property of all. The problem is once we enter into the sphere of regulation, we are regulated, thus we face the broad swath of the commerce clause, well beyond where its lines were meant to be.

I, for one, have never read anything Paul wrote. I have been busy reading the modern libertarian thought of Rothbard, learning who is who in modern economic thought and finding if their public record is equal to their real record. Guys like Friedman are painted as free market, when in fact they are merely statists of another color, put there to aid and abet big government and bankers at the expense of individual creativity. Today, I decided to get in the Ron Paul section of the literature and picked the above book, as it was written on the 200th anniversary of the Constitution.

If any of us are going to get involved with the Libertarian movement, we need to learn what the whole philosophy is, not what we hear as lip service. A good place to start is probably Albert Jay Nocks, "Our Enemy the State" or the followup written by Frank Chodorov's "Rise and Fall of Society" to get a clear idea what statism of any philosophy is. Until it becomes plain what the state does, who it serves and how it works, there is little to do but join in on the circle of bullshit that plays out on the typical election cycle. In the meantime, the state shovels more of our production into the hands of bankers and other cronies, foreign and domestic. There needs to be a lot more negative action in government, that is, they shall not instead of we have to.

The USA is still the richest country on Earth. Otherwise it couldn't support so many leeches sucking blood from its core. The problem is the entire system is now based on more leeches sucking off the body and through continually weaking the body, it becomes more susceptible to a fatal disease. Ideas like we can gain by debasing our currency or they must be cheating because they are giving their stuff away defy plain old country logic. Poor countries can't get rich by giving their shit away any more than a country can prosper by destroying the value of its income. This is merely the philosophy that took Rome down the tubes over 1500 years ago.

Ideas like ending the Fed will never gain widespread support until the detriment to the average productive person through the Fed's actions is understood. When it becomes clear the purpose of the Fed is to allow the cartels, the banks and protected big business to gain possession of more of our future income and not for economic growth, to grease the skids of government to spend more of our future income to buy influence and our property in the present, what to do will become clear. Fortunes less than mid 8 figures are not in position to take advantage of these actions and only a few with skill and luck are going to join this group. It is class warfare of the state at its best. When people begin to realize the reason they can't get ahead is the government and the bankers have already spent our ahead, things will change.

This was posted on Karl Denningers Market-Ticker site, July 19th. 
http://market-ticker.org/akcs-www?post=208821

Employment reports and markets

This is a post I wrote on Karl Denningers Market-Ticker.  Thought it was time put something here.

 

http://market-ticker.org/akcs-www?post=206711&ord=2952845#2952845

 

The amazing thing about the decline into the close yesterday is it formed an almost perfect elliott wave on the prior decline. I don't question the decline, but the rally instead. News yesterday wasn't that good, unless one wants to buy into the nonsense rumors about fixing Europe. The exit out of the stock market is going to get narrower and narrower.

Every time something like this comes up, there is more talk about QE and stimulus. What the hell do you think we already have? The only difference between QE and t-bills is a fraction of a percent. In fact, German 2 years are trading at near zero. They don't print money and throw it in the street. It is more like selling your free and clear house. Someone else has your house, you have $100,000 or whatever the sales price was. In fact, Fed money is a debit entry, so instead of having bonds or bills, the banks have liquidity. If the Fed buys directly from the government, the cash does end up in accounts.

The big bullshit is the story of deleveraging. Deleveraging what? As long as the amount of debt in the system remains the same or grows, there isn't any deleveraging. I hear the delusional Richard Koo talk about the private sector in Japan deleveraging over the past 20 years, yet their private and public debt is now over 500% of GDP. Absolute bullshit when you look at the real figures.

What QE actually does is give banks more free liquidity to run corners in stock, bond and futures markets. A bank can be legitimately bankrupt, but if it has funds to exchange in the markets, it can appear as solvent as John D. Rockefeller. Drop the FDIC insurance back to $100,000 and see how solvent some of these TBTF banks are. I suspect banks like BAC, C and JPM are already short actual funds and still beholden to the bond and fed funds markets for their liquidity.

This brings up the reason for QE in the first place, to keep the TBTF banks solvent. These are the outfits that are fucked when the markets start coming apart. Wasn't LTRO in Europe a back door bank bailout? More money in the accounts to pretend their assets are good. The ECB is so full of crap and worthless IOU's that if any large group of speculators questioned the Euro, it would collapse in a pile of rubble. The quoted solution, eurobonds, would be the nail in the coffin, as a partially solvent Germany is the only pillar of any size standing in Europe. France could no more do what has been forced on Ireland, in regard to their banks, than Hollande could follow the cow over the moon. So, the only solution is to give the drunken sailors more money to finish their binge.

Then, we have stimulus. The idea of stimulus would be okay if they ever took the stimulus away. Fed spending never went down after the $700 billion plan. In fact, I think $700 billion turned into $1 trillion and has remained there. The fiscal condition of all countries involved has deteriorated greatly over the past 4 years. Instead of solutions, you get comments out of the President that a legitimate country pays its debts, so raise the debt ceiling so we can borrow more to pay. This idea and intelligent life don't fit in the same sentence, pure absurdity, but it sells to someone. Namely it sells to idiots like Nobel Economic Prize winners. Someone beat me in the head with a baseball bat, as I could stand to win that prize myself.

Fedup.org had a link yesterday to a Scribd presentation by an ex GS guy. What he brought up was the end of the road, which will begin with bank failures in Europe. Watch this Bankia situation. If not Bankia, it will be some other bank. It could be the big bank in Belgium (Dexia) that rolled over last year, that is being floated on fiction. The one thing floating the US right now isn't the wonderful economy. It is more like my girl friend has herpes, theirs has AIDS. Mine looks pretty good if you have to make a choice. Or, you can remain celebate and buy gold and put it in a hole in the ground. The Euro could vaporize over night.

The CNBS crowd always brings up buying stuff that isn't exposed to Europe. How has that worked in Europe for what wasn't exposed to US housing? What isn't exposed to Europe is exposed to what is exposed to Europe. What is going to be exposed to the world debt markets? The whole matter. When is Japan going to blow? It will and when it does, the world will look to the US and discount its debt as well. The attractiveness of 10 year treasuries and 10 year Japanese bonds at this time is you can get money from the Fed or the JCB on these items. There is a lot of stuff out there where there will be no market or only at a very deep discount.

Think interest rates are coming down? Ask Spain or Italy if they are headed down. The door on risk is about to close. QE will get a small blip on the radar at best. The floor before the market broke down in 2008 was 1200 SPX. We are a mere 7% above that level right now and below quite a bit of the trading during that sideways move. Hundreds of billions have been invested in the SPX to cover recapitaliation of banks and loss of bankrupts. There have been 2 rounds of QE, a bailout of the banks, $5 trillion or more in deficit spending and the market has gone nowhere. If you had stayed in 10 year treasuries from July 2008 to the present, you would have beaten the stock market by a good margin.

The one thing that amazes me is the move in gold on the employment news. Remember, the guy on the street can't rush in and buy or sell gold or the stock market on this news. Why the plunge in stocks and blow in gold? I have 2 words, Goldman Sachs. How many contracts does it take to move a gold market or a stock market? Not many when the world stops. When I say Goldman, it could be JPM or both or all of the above. Best guess is there were a lot of shorts in gold as a hedge, as gold and stocks have generally been moving the same direction for some time. If this is the case, they likely were blown out in both directions. Never forget, in markets the guys you are dealing with can see our cards.

The gig of returns on assets is up

I wrote this in response to a post on Karl Denningers Market Ticker.  Assets can only exist to the extent the profits can be transferred from one group to another.  When the pool of assets grows beyond the capacity of the economy to pay the required return, the expansion is over.  This is true whether we are talking capital investments or debt instruments.  The value of the capital instruments are merely lost.  The current rally in stocks has nothing to do with the capacity of these assets to produce a return, but instead the massive intervention of more government debt and the asset inflation policies of the various central banks around the world.  These profits are necessarily loaned to the consumers to support their consumption.  In the end the returns will be false.  We witnessed the asset inflation in Japan that hasn't been solved after 20 years.  Japan is currently trying to solve the problem by shrinking the yardstick from 36 inches to maybe 15. 

http://market-ticker.org/akcs-www?post=203102

I am going to nail this one on the head. It is called compound return. It doesn't make any difference what you call it, printing, savings, cash, stocks, houses. They all are bought to provide a return and a growth rate. Savings is debt. Stcok prices require a yield as do mortgages and free and clear real estate. When XYZ public employee, who in a lot of places is under paid and may not even have any benefits and in other parts of the country is paid like he does something besides drive around town with a gun on his hip and a ticket pad. I will bet driving a taxi is more dangerous than being a cop, though the cop likely has to be aware of potential danger all the time, but this is besides the point.

The point is the entire economy can only be carried by shrinking the package paid in return. Watch what Bernanke is really trying to do. Interest rates near zero. Bankers can't pay so we are now letting them pay nothing. Bankers customers can't pay, so Bennie is trying to put more money in the system, shrinking what the debtors have to pay. Business is on its ass, though you would think they were making money hands over feet. This is mere deception, funded by $2 trillion a year through the back door. Bernanke is funding their profits at the expense of our savings. It is an attempted back door bail out of the public pension funds, but in reality it is nothing more than a transfer of what we need today to an expense for tomorrow.

There is no such thing as a permanently funded pension fund where liabilities grow to the sky. The question that must be asked to start is why do we even need a fund, unless we are going to pay these benefits, then default? The value of assets is unstable as we reach the point where the return cannot be drawn from the economy on a compounded basis. What we really have is a pile of funds for Wall Street to manage and draw massive fees, dump over-valued assets and then demand more, because their phony models can't be satisfied.

In a pension plan, there are 2 expenses, what is coming out and what needs to go in to fund the future. The only real expense is what is coming out. What goes in doesn't count, because it is pure speculation. All we are really liable for is what comes out. What is piled up can never be large enough in sum, as it is a fiction and the failure of what is amassed can wipe out the entity liable to fund it.

I venture the funds have never been necessary, but are political plums for bankers and politians to play with. History has provided us with a stock market that has registered between 40% and 80% of GDP in value. Not this stock market, which has hit peaks of 200% of GDP in 2000 and bottomed at 100% in 2002 and likely in the 70% to 80% range in 2009. Stocks aren't cheap today and they haven't been cheap for nearly 2 decades now. To make 8% or 10% or whatever nonsense is spouted can only be done in stocks with inflation or low valuations. The rest of the story is fiction. How do you draw 8% out of 200% of the GDP and leave anything out there that doesn't have to be funded by debt? We are currently at over 100% of GDP and much less if you take out the government, which is nothing but an expense anyhow. 8% of 200% is 16%, which is the limit Karl has said the federal government can get out of the economy and we haven't even made it to the various debt instruments and free and clear real estate net of debt instruments out there. The concept of continuing returns on a growing amount of assets in a zero inflation environment is fantasy. Drawing a return off the pool of yield or profit making enterprises is limited to what those not engaged can pay. We are limited to the amount of bad debt the system is willing to extend and nothing else.

Here is the problem we face. If we are dealing with having to inflate, as Jim Grant said yesterday, we are merely shrinking the package, making smaller pounds and gallons. The numbers become meaningless. Also, pension expenses are figured on what size pool of money at the current interest rate over life expectancy. What is fundable at 6%, becomes impossible at 2%. To tell me the best way to do this is to amass a pool of money so large that all future costs can be paid out of it? Why the fuck give an insurance $2 million (an amazing number of these public pensions cost $2 million or more), when you can write the pensioner a check for $100K a year? 10 years ago, the same pension needed maybe $1 million to fund. It doesn't even make sense to pay for the management of money at 2%, much less treat as permanent what may be very temporary.

Remember this adjustment has to be made on the entire pool. Not only have the assets performed poorly, because it is a mathematical fact you can't get 8% exponential growth at top value against something that can only pay 4%. Not in real terms. Bernanke can fold the dollar in half and tell you to look at both sides of the bill and pretend you have 2, but this is a fiction and has nothing to do with real values.

My problem with public employees isn't so much the pensions and the compensation in general. Even though a million isn't what it used to be, a small minority of Americans have a million dollar net worth on hand and if you take out the value of their home, the list gets much smaller. The typical cop and firefighter in California gets a pension that costs upwards of $2 million or more. This is guaranteed, just stay on the job and do nothing stupid. That is unless they have bankrupted the system from which they draw.

There is a maximum for what level real values can be supported. The implied risk on the SPX is 6%, if you are going to get 9% returns at 3% inflation. I have done the numbers over history. The modern history of stock market returns(the last 30 years) have been supported only by inflation of the money supply to effect asset inflation. Jim Grant pretty much put this idea out in a way that probably went past the average person on CNBC yesterday. The game is up once gross net worth of an economy reads near zero relative to total assets, that is net of debt, which is owed on one side and owed to on the other. This idea includes equity in real estate and the stock market.

The question is, how do you get this 6% without stealth inflation, which is nothing more than the expansion of credit? I think you can only get it with very low valuations. The valuation model in pensions presents a paradox, in that existing assets have an inverse relationship to interest rates, which means that the model can't be fixed. The benefit of higher interest rates would assist the pension in its pay out expense, but it would deplete the value of the assets on hand significantly. We are seeing inflation today, but it isn't credit inflation so much as it is asset inflation, which includes storable commodities. The problem here is the credit inflation isn't making it to the end consumer, so the gap can't be supported for long.

If I was going to work out the public pension problem, I would move to a pay as you go system. I would fire my manager, bring in someone for an annual analysis and fund my costs on a pay as you go payout. Selling a fixed amount of assets and putting the rest on the current budget. The shortfall is impossible to fund and if it was attempted, would only serve to push up the prices over the short term of what I had to buy to fund the plan. This would get the money out of the hands of Wall Street and eliminate the uncertainty of asset value fluctuations. The same holds true for Social Security, which is an ongoing expense where a actuarial fund has no place, especially since it is only funds the government pretends to have that they don't have.

Around and Around and Around we go

I wrote this as a challenge on one of my favorite venues, Karl Denninger's market ticker.  Karl is right on, but off base, because these are surface issues.  The real issue is how can we fix what is broken?  In short, I describe why the fix won't be done, but will happen anyhow.  

http://market-ticker.org/akcs-www?post=199788&findnew#new

Why do you keep messing with a broken and non-fixable monetary model Karl? They are doing the only thing they can do without allowing it to blow up or blowing it up themselves. Debt has to be taken out of the system. There is over $50 trillion in debt in the US and a monetary base of under $3 trillion. It is the mouse screwing the elephant syndrome.

It isn't just the crap on the balance sheets is mismarked, what is on the other side of the balance sheet doesn't exist without it. The balance sheet is gridlock. Write off the debt, bankrupt the banks, where do the deposits go? Where does the insurance go? Well, the government bails it out? With what? More debt. Writing a check for a bad check that has already been cashed. You can't even spend this stuff. This is not back in the Ghetto financing, where adding and subtracting work. We are talking about what is supposed to equal what doesn't equal. Once in awhile, the call comes in and guys like Corzine are found with their pants down. Need some money? Get some that has already been borrowed 20 times and borrow it again. Then let someone else borrow it and again and again. The hypothecation did that and rehypothecation did it again and again. The money in the accounts had been hypothecated several times when it got there, unbeknownst to the depositor. The assets in the banking system bad? What do you think the deposits rest upon? MF Global over and over, but they never mark to market.

Irving Fishers Debt Deflation Theory was right, but off base. You can't recognize what Fisher wrote as valid if you are going to solve the problem, because the debt and the media that was created with the debt are one and the same. There isn't any fooling with the Federal budget going to fix this problem. At best they are going to pump enough air into it to keep it from collapsing for awhile. Then, someone with enough power is going to ask the system to mark to market. This is why money builds up in Central Banks, as the banks that get the money in the course of business damn sure aren't giving it back to somoene who can't mark their books to market. Bankers aren't stupid and I believe some of them are ecstatic they got what they had out there back in 08 and 09.

You have to remember the game works 2 ways. Not only has the world spent 3 or 4 years income, but someone has put up that much income as well. What isn't in bank capital resides in deposits. In the scheme of things, other than the fact the economies of the world need to produce the return to support this much debt and equity (equity value is also dependent on debt service, otherwise it too is worth scrap at best), what do these figures mean?

The question should be, how do we support this much debt/equity and maintain any kind of growth? This is an important question because the world is organized around a pension system idea. The question should be, if people need to save so much for retirement, how can these assets be accumulated in sufficient amount to produce sufficient life income for retirement. If we liquidate, this is where the money will disappear. It has to. Where else it going to come from? Do we have another skittles crapping unicorn that is going to replace what don't exist?

The Genie is out of the bottle Karl. All these fucks in DC we see on TV, the idiot in the Fed are all merely ants on the log on the Mississippi at flood stage. The ant thinks, my motor must really be running good for me to be driving this log this fast. Watching the stage show in Europe should give people some idea how fucked the system is. One side over there has to realize their retirement is gone if they bail out the other side. It all exists by virtue of the other side, which is the paradox, which is why depressions are so hard to solve and why they result in war. It is kind of like the parasites that ride around with sharks.

I'm working on a piece called The Great Reset. It may be more of talking about the problem, but the problem can't be solved if it isn't understood. What is being talked about in public shows no understanding of the problem. I do believe Bernanke has a clue, my main problem being they didn't clean out the banks before he fired his bullets. You can't solve insolvency when the money going in keeps going out the back door. I must add that a bank making loans with no capital is counterfeiting. All this stuff is mere entries on a balance sheet and a capital account that reads zero must be funded out of what is left on the credit side.

Point being, we don't have a political solution to this. This mess is going to work itself out on its own, whether we struggle with it for 1 year, 3 years or the next 100 years. As long as you are less broke than your next competitor, you are probably safe on a day to day basis. There isn't anyone going to be piling into the Euro any time soon, Japan is a ticking time bomb and the USA is being run by a bunch of idiots that can't agree on anything, including a narcissist Commander in Chief. Funding performance of bad assets won't do anything other than unjustly enrich those that control these assets.

The first thing that government needs to do is end the portions of debt that are out of control. Public pensions that would cost $1 to $3 million to fund need to be recast. There are many websites of insurance companies that have annuity calculators. Go to one and plug in $50,000 a year for a 55 year old female and see what that stream of income costs you. The only way to reduce this is to raise interest rates, but the Fed has little control over longer term interest rates. What percentage of the typical corporate employee population has $1 million? Bet it is a small percentage and I bet few of them were guaranteed to have that much at their disposal. On any account, those won't be paid, at least not in a few years, because they can't be paid.

I think we agree the compound factor can't go on to infinity. It can't be stopped either or it implodes. Paulson was probably sincere when he talked about tanks in the street. The fucker should have thought about that before he and his cronies created the doomsday machine, but they may have been late on the scene. What has transpired over the past 40 years may have been all that could be done to keep the game going. Would it have been easier to have changed course 20 or 30 years ago? Maybe, but look at how rough of shape the world was in back in 1990 after deflating the US for 10 years. Trend deficits for 1990 were over a trillion if you went back to 1975, so the $200 billion to $300 billion weren't that far out of bounds. We made it about 20 years late.

There is going to have to be a haircut and it is going to have to be well thought out. We can't continue to replace the credit entries with more debt, which is what governments are doing. In the capacity of banking, recapitalization can only be done from the credit side of the balance sheet, which means monetary base has to shrink in order to recapitalize or debt has to be maintained. This means the accounts have to be haircut to form the new capital, either voluntarily or through bankruptcy. There needs to be a great reset.

They Have All Been Sucked Dry Part 2

There are a few people out there, like Steve Keen, who appear to have a concept of what has occurred and where we stand as far as debt and the economy go.  I am educated in finance, my degree earned in the 1970's before they took to heart the various financing techniques, that brought us to where we stand.  But, in earning this degree, I also took a number of economics courses, none of which recognized the role debt played in modern economies.  I did take money and banking, which dealt in what quickly became the old way of banking, as very little of this actually played while the final phase of the bubble was being blown.  Banks went from reserves of Federal debt, recognized as capital, to trading their own credit between themselves.  The real reserves were gone, once the credit of the bankers broke down.  Bankers mistook accumulated interest as profits and paid themselves bonuses out of this fictional profit and used imaginary capital to repurchase stock, for a variety of reasons that I won't touch on here.  

In order to expand a debt bubble beyond reasonable bounds, lenders have to find more and more players and more and more collateral to lend against.  As the debt bubble progresses, the collateral creates itself, as accumulated balances against debt produce purchasing power to speculate on various assets.  Stocks and real estate are the backbone of any credit bubble, the perceived wealth from appreciation justifying more debt.  The bubble bursts when the money represented by the debt is no longer sufficient to pay debt with a positive cash flow.  

In truth, modern finance is nothing but a game on paper.  This is known in modern finance as a ledger or balance sheet.  In this kind of game, what is on one side of the equation is counter balanced with what is on the other side of the equation.  What is on one side is perceived assets, while the other side are what is represented as money and capital.  To the extent the real value of what is on the debt side exceeds the amounts of liabilities on the credit side is known as capital.  If a bank ledger was 100% capital, there would be no credits in existence to pay the debts owed the bank.  To the extent the stated value of the assets doesn't exist, neither does the capital.  Going forward, if the means of repayment of debts on the debt side of banks is insufficient, then the asset values have to be reduced, either in truth or fiction, as time shows who is naked in these matters.  This reduction comes directly out of the capital accounts of the banks, before any deposit balances are reduced, including bonds and preferred stock issued by the banks.  It is the capital position of banks that allow them to make loans, not the reserves that so many people seem to believe lead to money creation.  The money backed by the reserves is already universally owed by the banks to their existing depositors.  At best additional reserves grease the wheels of interbank exchanges and make the decision to lend easier.  Reserves are nothing more than cushions against withdrawals of funds or loan proceeds from one bank to pocket cash or to another bank and little else.  In these times, reserves are basically increased because bank credit is no longer sufficient to carry the amount of debt we have in the system.  

Everything on a bank ledger is reflected on a ledger somewhere in the non-bank world, on the other side of the ledger.  Thus the banks debits are someone's credits or liabilities and their credits are someone's debit or asset.  The capital position is recognized as an asset in someones stock portfolio.  I know stocks sell for more or less than book, so the private account would need to be adjusted for an entry on both sides of the ledger to recognize this excess value, sort of like a paid in excess of par account along with another account on the credit side to keep the transaction in balance.  Being the bank balance is supposed to represent what is really there, as it is a direct accounting of financial assets, what exists on the shareholders balance sheet should reflect book plus another account.  This only to clarify what I am describing.  Thus the loans of banks are the liabilities of borrowers and the deposits in banks are the cash and other balances of depositors and other creditors.  The entries on a bank ledger can be reflected contrarily on the balance sheets of thousands, millions and as to the TBTF banks, hundreds of millions of people and institutions.  

This balance sheet idea is important if one is to have any idea of where we stand and how insufficient the current solutions to the problem are to its solution.  The entire world is based on a modified version of vendor financing and there is one thing that isn't recognized.  That is every financial intermediary is liable for the performance of its assets.  The bank ledger is comprised of loan assets on one side balanced by deposits and other borrowings and liabilities of banks and the liability of the agent bank to its principal shareholders.  Nothing can exist on the credit side of the balance sheet that actually exceeds the value of its assets and the reduction in assets must be borne by the bank itself.  When the loan is made, the bank becomes liable for the proceeds of the asset it places on its balance sheet.  Thus it acts as surety for collection rather than lender and the process is called credit, for the entry on the credit side of the balance sheet.  Any failure to collect must come from the credit side of the balance sheet.  

Extend this around the world and you find the surplus exporters vendor finance the deficit importers.  To the extent the importers can't pay, the balance sheet of the exporter must be reduced.  Then there is capital investment, which is more like a non-recourse loan, where the investment itself determines repayment by performance.  The current situation in Europe is a illustration in miniature, as Greece's debts are in part the vendor financing of German and other exporters, which have merely changed collection agents.  If you stop the vendor financing, then you stop the flow of goods and you may stop the capacity to pay, as they were already borrowing to pay what they acquired.  This can be counter balanced by the foreign investment of Greek citizens into Germany, but this feature is much harder to tie down.  The same goes for the US and China and I would venture US citizens and institutions own a much larger share of the asset base in China than is represented by the debt of the US, but only if you can keep both economies inflated.  To a sizable extent, growth in China has been financed by foreign investment as much as trade.  

To take this idea further, in regard to banks, the only money there is to pay anything on the debit side of banks has to exist on the credit side.  Loans are greater than deposits and other bank liabilities to the extent of capital minus capital assets on the ledger.  Thus, the real estate the bank occupies that it owns is a reduction of the gap between liabilities and capital.  

This brings us to the $64,000 question or maybe the $6.4 trillion question.  On what balance sheets are the credits for the debits of the banks?  The depositors possess the means to pay these debits and no one else.  Even if the government injects money into banks through borrowing and financing, this remains true.  Thus, if the balance sheet of those that own the income producing assets are enriched by government spending through doing business with increased cash balances, the bank is still liable to those that don't need the money to pay.  But, what about the people that owe the loans?

If someone owes money and they have the same amount of money in the bank, then the game is a wash.  If they have more money than debt, then they too end up on the surplus side of the equation with the person with deposits and no debt.  But, the person who has a ton of debt and little money, he is insolvent to the bank, no matter what his other asset base might be.  He is then faced with selling what he has to those that own the deposits in order to gain possession of cash to extinguish his debts or there is no remedy or potential to pay the debt.  He can sell labor or physical assets to pay the debt over time or he can default.  As long as cash balances increase in the accounts of debt free or high cash surplus individuals, those that are net debtors to cash are unable to extinguish the debts they owe.  On a current basis, the debit entries of these debts on bank ledgers are pure fiction.  

What would have to happen for these debtors to make good on the money and capital on bank balance sheets?  For one, the individual or institution would need to have the means to produce income and liquidation  of assets sufficient to live and pay the debts down.  If they had the assets, they could merely sell them to someone who has cash and pay the bank and the credit side and a like sized debt would be done on the bank ledger and the cash and the loan would no longer exist.  But, if they had to labor, absent an increase in pay, which in itself depends on credit expansion to a great extent, they would have to reduce their expenditures on non-essentials to the extent of the debt plus the extent of their prior deficit spending.  This is simple math in a way, but it is not only important, it eludes the general economic arena today.  

What has transpired over the last 50 or more years has been an accelerating equity extraction from housing and other real estate through leverage.  Consumers have been doing a modified version of vendor financing through equity extraction by refinance or contracts for financed sale of housing for years.  This practice accelerated in the 2000's and eventually equity disappeared and the loans became in doubt.  What else went with this procedure was the credit standing of people and their means to repay current and future debt that existed prior to the busted bubble.  These people, which included a sizable share of the first worlds population, no longer had the means to spend or repay, because of the end of Ponzi financing of home equity. This additional money greased a lot of financial wheels around the world and the game no longer functions.  Their capacity to borrow and spend has been sucked dry.  To a very large extent, these are the people who list on their credit side, the assets or debits of banks.  Selling the house is no longer a remedy.  

This is the essence of deflation.  Cash is capitive and it cannot exist beyond the extent of the assets on the balance sheet of banks and other institutions.  Thus, the writing off of debt is by itself a reduction in money.  There is very little difference between a pretend and extend loan and one that has been wiped out through default.  Banks and governments know this money doesn't exist, but they have no choice but to extend and pretend.  

The great secret about Greece is that not only are they having problems refinancing their debt, but that their economy is faltering with a 7.5% of GDP budget deficit.  A shrinking debt base is what is needed to fix this mess, but shrinking in itself produces more shrinking.  In the long run, there is no money on a banks ledger in excess of its good assets. The other reality is if they lose the capacity to create new credit, they also lose the capacity to produce what allows for the payment of interest in general, as interest is never created.  I theorize that the monetary base, which includes accumulated interest will shrink to wipe out all accumulated interest since the last great depression.   This is all credit as well. 

They Have All Been Sucked Dry Part 1

I wrote this on market ticker somewhat as a sarcastic response to what Karl Denninger, the host of the site said in response to another poster.  I have been wanting to write a post labeled "They Have Been Sucked Dry" and this would a good part 1 of such a post.  Guys like Krugman are probably right, if you could keep a straight face and let the government spend $10 trillion extra a year, but that would be absurd to say the least.  The world can't exist in absurdity for long, as nature will correct such an error.  

http://market-ticker.org/akcs-www?post=190229&findnew#new

KD wrote..

Oh no they don't. The wick burns at the same speed irrespective of your dreams. Just as with economics and fundamental math, the speed of a cannon fuse's burn is controlled by the formulation of the powder in it, and nothing you can do - including dunking it in water - changes it once it's lit.

I beg to differ some on this. I held and lit enough fire crackers when I was a kid to know that some fuses suddenly went off. This is known today by the term, the shit has hit the fan. We will wake up one day and suddenly realize the bomb has gone off. I think it has already happened. Some days, I realize what is coming and start looking for a place to hide. There may not be one.

Some people keep looking for an event. Creditanstalt wasn't an event.

What caused the Great Depression was the same thing that is going to cause the depression they are hiding from us right now. That is pretending that bad assets or loans are good assets. Creditanstalt merely was the first crack in the dam to go. The mises.org site has a little book called "The Bubble That Broke the World". I don't know really how accurate the book is, but it discusses a series of actions that were intended to cover up the debt that couldn't be paid, namely the British and French war debts, which were being covered up by the German reparations. The US was loaning money to Germany so they could pay France and Britain so they could pay the debts to the US banks. The US got in the war so they could loan money to Britain and France. One bad debt to cover up another bad debt.

The purpose of all this lending was to finance the big trade surpluses that gave the appearance that the loans the the US were good and the bubble in the US stock market was real. Japan ran into this same mess in the late 1980's, where their bubble was supported by ever growing balances of trade with the US. The US caught cold in a credit crunch in the late 1980's and the Japan bubble broke. The Great Depression was worst in the US, because the US depended on the trade dollars for its economy. These trade dollars would have never materialized if the pretend and extend mess hadn't have happened in the first place.

The roles are now reversed. China buys US bonds because it has a dance to maintain. Revolution in China is probably the alternative. If China refused to buy bonds, what would they do with the trade dollars? They would have to spend them, thus possibly wiping out the capital they need to acquire to modernize their economy and support their own phony debt pyramid. The same holds true with Germany, which exports more goods than any country in the world. What is maintaining Germany's exports? Loans out of German banks to the customers of German corporations, most likely. The debts of Italy, France, Spain, Ireland, Portugal, the United States and Greece among others are the result of the big surpluses run in Germany.

There are lit fuses all over the planet. Consumer credit is rampant in Brazil at rates that compare to the paycheck and title loan sharks on every corner in America. The TBTF banks around the world are all being supported on pretend and extend accounting. The solution is to loan governments money to support the economies to support the cash flow to the banks so they can cover up the fact their assets aren't good. One of them will blow and they will be blamed for the systematic insolvency that permeates the entire system.

There seems to be a lot of fingers pointed at LEH. Do people forget that FNM and FRE went broke. That AIG went broke. That Citi was broke. That WAC was broke and most likely the other banks. That MER was broke and that most of the banks in Europe were broke as well. The insolvencies were probably in the tens of trillions, not in the couple of trillion that has been throw into the pot.

The purpose of this mess isn't only to kick the can down the road, but to cover up the crimes of the system. Had they gone through the banks in 2009, how many of these bankers would have not been put in jail or at least had evidence that they should be in jail? I would venture there are plenty of regulators as well that are guilty of wrong doing and would have been swept out into the street. But, the real fact is that the system under which we operate would have been laid bare as faulty and because it is the system devised by the political class and the elite, that wouldn't have played well on main street.

The problem of all of this is the assets of the intermediaries are the assets of the customers as well and the liabilities of many that can't pay. It is okay if Joe takes a haircut, but I want my damn money. That is the thought process of the average person and you can't blame them.

I doubt the typical financial asset is worth 10 cents on the dollar if it had to be set up and valued to operate in a sustainable credit world. The system is geared to mass mismanagement and not to the capacities of sound business and personal finance practices. The only thing that keeps most of what operates out there afloat is prolifigate credit extension to many that can't pay. This, of course, includes the governments around the world.

At what point does sound reasoning move to sound reasoning from fantasy land? Is there any sound reasoning that can follow the statement I heard Obama make last week, "that responsible countries pay their debts", so "Lend me another $2 trillion so the US can pay theirs"? The man is either a trained liar or totally delusional. The US ran up a big debt after world war II, but in doing so, it enriched its citizens with the debt itself. Time had liquidated the debts of the depression. This is not true today, as the debts being taken on by the US government are an attempt to make good the debts of the people, the inflated values of real estate and stocks and the international trade and debt game that has already been financed beyond reason. At some point, we are going to wake up to find the fire cracker that was barely lit the night before has gone off in our hands.