Today’s News 20th February 2016

• Iraq War: Not A Mistake, But A Holocaustic Crime

  Authored by Ben Tansoborn,

  Either our minds have softened in the United States, or our hearts have hardened way beyond the callous stage.  Or, likely both!

  Just 13 years past his criminal decision to invade Iraq, George W. Bush is campaigning in South Carolina to get his younger brother, Jeb, in the White House.  A fitting payback by an illegitimate and unworthy former president to return Jeb’s intercession as Florida’s governor in America’s mishandling, comical if it hadn’t been for the eventual very tragic consequences, of the 2000 presidential election.  It might be worthwhile to remember that it was the US Supreme Court that basically decided to put George Bush, and not Al Gore, in the White House in a 5-4 decision eloquently, but incorrectly, authored by the just-deceased and widely admired justice, Antonin Scalia.

  Time and time again we, Americans, keep referring to the invasion of Iraq in 2003 as a mistake; almost in unanimity: Democrats and Republicans.  But it was not a mistake, not by a long shot!  It was a calculated, belligerent act by a government clique of elitist war-hawks, Bush-Junior and Dick Cheney at the top of the criminal heap.  Fortunately for these American leaders, and unfortunately for the rest of us, only leaders from nations vanquished are indicted and go to trial.  If the Axis had prevailed in World War II, and we were living in Hitler’s Millennium, there would not have been those Nuremberg Trials (1945-9), or the subsequent enactment of important, critical international law, such as the Universal Declaration of Human Rights (1948), or the Geneva Convention (1949).  No, no gallows for Bush and Cheney… only admiration from fools!

  We, as a nation, need to stop calling Bush’s Iraq-deed a mistake, and stop minimizing the holocaustic repercussions of such idiotic, ill-conceived criminal behavior.  We should visit and revisit the consequences, if for no other reason than to learn or relearn; and keep George Santayana’s dictum alive: Those who cannot remember the past are condemned to repeat it.  And Bush’s decision was no venial sin, not just “a mistake”… and its disruptive consequences have proven to be grave and lasting.

  US’ unnecessary and irrational post World War II meddling in the Middle East, helping the anachronistic Shah of Iran (1967-79) as the zenith of geopolitical stupidity, was only topped by lack of peripheral vision in international politics from a far from lucid George W. Bush… given credit by some (perhaps many) claiming “he kept Americans safe.”  Yes, George (Santayana, not Bush); stupidity reigns supreme and history, unfortunately, recycles in a circle in this United States of America.

  Bush-43’s new mission of the sibling-type, the election of Brother-Jeb, just like the other mission, Iraq, is only likely to become accomplished once again atop an aircraft carrier, but not at the polls; people (a definite majority) have had it with the Bush brand.

  And, that same resolve is beginning to take hold in the Democratic electorate with the Clinton name.  Hillary’s recitals of smartness-by-association with the likes of Obama, Henry Kissinger and Madeleine Albright may not bring her the credentials she is after.  After all, Kissinger’s policies can be directly associated with the death of countless millions of innocent civilians in Cambodia-Vietnam; while Albright’s conscience should weigh heavily with the death of hundreds of thousands of Iraqi children.  

  Just a side note for Donald Trump and his legion of birthers: Wouldn’t it make sense to advocate “purity” in US’ presidential succession, making sure that the top 5 positions in government (maybe more) are filled by natural born citizens?  The position of Secretary of State comes to mind as fourth in line (after the Vice President, the Speaker of the House, and the President pro-tempore of the Senate) which would have disqualified those two foreign born politicians, Henry Kissinger (Germany) and Madeleine Albright (Czech Republic) from becoming president.

  Yes; Hillary Rodham Clinton, former First Lady, Senator and Secretary of State constantly invokes her extensive experience in affairs of state as strongly qualifying her for the White House; yet her vast experience follows for the most part decisions with bad judgment… bad experience which in my book is counterproductive to that required from a prospective good and effective leader.  Two superbly flawed American dynasties or dynasties-wannabe: Bush-es and Clinton-s; yet, most Americans hold admiration for one or the other when both probably deserve to be flushed down the historical toilet.

  

  

  

  

  

• Photographs Of The "Surreal, Uncanny" Emptiness Of China's Ghost Cities

  When one week ago we presented the latest Chinese ghost city being built on the edge of Nanning, immediately thousands of readers flocked to observe its sterile, pointless, yet very curious existence. The reason, perhaps, is that there is something oddly morbid, grotesque and yet fascinating about the clinical emptiness of China’s relentless attempts to artificially boost its GDP by creating “larger than life” Lego sets meant for human existence, yet which remain devoid of virtually any civilization.

  That is what drew Chicago photographer Kai Caemmerer to them.

  Take the Kangbashi District of Ordos, China is a marvel of urban planning, 137-square miles of shining towers, futuristic architecture and pristine parks carved out of the grassland of Inner Mongolia. It is a thoroughly modern city, but for one thing: No one lives there. Kai Caemmerer visited Kangbashi and two other cities for his ongoing series Unborn Cities. According to Wired, the photos capture the eerie sensation of standing on a silent street surrounded by empty skyscrapers and public spaces devoid of life. “These cities felt slightly surreal and almost uncanny,” Caemmerer says, “which I think is a product of both the newness of these places and the relative lack of people within them.”

  It is well-known that China has built hundreds of new cities over the last three decades as it reshapes itself into an urbanized nation with a plan to move 250 million rural inhabitants—more than six times the population of California—into cities by 2026. The newly minted cities help showcase the political accomplishments of local government officials, who reason that real estate and urban development is a safe, high-return investment that can help fuel economic growth.

  The problem is that this attempt at recreating SimCity in the real world never works: most people don’t want to live somewhere that feels dead, and these new cities sometimes lack the jobs and commerce needed to support those who would live there. In Kangbashi, the government used some administrative tricks to address this, relocating bureaucratic buildings and schools, then trying to convince people in surrounding villages to move in. It had minor success. Today, a city designed for at least 500,000 has around 100,000 inhabitants.

  Others are less lucky.

  It was their designation as “modern ghost towns” that initially drew Caemmerer to them. Fascinated, he decided to visit China and see them himself. He spent almost three months exploring three cities during two trips last spring and fall. He was not disappointed.

  As Wired writes, his first stop was the Yujiapu Financial District in the Binhai New Area, just outside Tainjin. Construction on the 1.5-square mile replica of Manhattan—complete with a Rockefeller center and twin towers—started in 2008 and will cost an estimated $30.4 billion. The immensity astonished Caemmerer. “There was a sense of vastness that surprised me,” he says.

  From there he traveled south to Meixi Lake City. The development covers 4.3 square miles, encircles a man-made lake and is designed to one day house more than 180,000 people. The lake is lined with tidy paths and benches, and soft music emanates from speakers at all hours. Caemmerer saw many skyscrapers under construction, their skeletons wrapped in green scrim. Real estate agents scurried about, busily selling apartments in buildings soon to be completed. “I felt like I was walking into the future,” he says.

  He wanted his photographs to reflect that. He’d wander the cities in the dim and eerie light before sunrise and after sunset, taking long exposures with his 4×5 film camera. In the final images, the buildings are so enormous that the edges of the photograph can’t contain them. They rise as strange concrete specters, displaced in time and lacking any sense of history. For now, the fate of most of them remains unknown. “I find that the images make me ponder the future,” Caemmerer says. “which, to me, is interesting because photographs are so commonly read as fragments of moments past.”

  Here are some the photos he took which make up his “Unborn Cities” collection.

  

  Near Yujiapu Financial District, Binhai New Area, Tianjin

  

  A design rendering at a construction zone near Meixi Lake Development, Chengsha

  

  Yujiapu Financial District, Binhai Nre Rea, Tianjin

  

  Near Kangbashi New Area, Ordos, Inner Mongolia

  

  LCD screens on a building glow near Kangbashi New Area, Ordos, Inner Mongolia

  

  A portion of Yujiapu Financial District’s skyline in the hazy light of day. The district is part of Binhai New Area, Tianjin

  

  Construction continues on a pavilion outside of Ordos, Inner-Mongolia

  

  Uncompleted residential buildings in the Meixi Lake Development, near Changsha

  

  An abstract sculpture frames a construction project near Meixi Lake Development, Changsha, Hunan province

  

  Palm trees surround a construction area near Yujiapu Financial District, Binhai New Area, Tianjin

  

   

  Office buildings glow in the early morning darkness of the Yujiapu Financial District, Binhai New Area, Tianjin

  

  A residential high-rise nears completion near Meixi Lake Development, Changsha

  

  Residential buildings in the Meixi Lake Development, near Changsha

  

  Ordos 100 is a construction project curated by Al Weiwei and architectural firm Herzog & de Meuron near Ordos, Inner-Mongolia

  

  Construction near Changsha, Hunan province
  

  

  

  

  

• The US Economy Has Not Recovered And Will Not Recover

  Authored by Paul Craig Roberts,

  The US economy died when middle class jobs were offshored and when the financial system was deregulated.

  Jobs offshoring benefitted Wall Street, corporate executives, and shareholders, because lower labor and compliance costs resulted in higher profits. These profits flowed through to shareholders in the form of capital gains and to executives in the form of “performance bonuses.” Wall Street benefitted from the bull market generated by higher profits.

  However, jobs offshoring also offshored US GDP and consumer purchasing power. Despite promises of a “New Economy” and better jobs, the replacement jobs have been increasingly part-time, lowly-paid jobs in domestic services, such as retail clerks, waitresses and bartenders.

  The offshoring of US manufacturing and professional service jobs to Asia stopped the growth of consumer demand in the US, decimated the middle class, and left insufficient employment for college graduates to be able to service their student loans. The ladders of upward mobility that had made the United States an “opportunity society” were taken down in the interest of higher short-term profits.

  Without growth in consumer incomes to drive the economy, the Federal Reserve under Alan Greenspan substituted the growth in consumer debt to take the place of the missing growth in consumer income. Under the Greenspan regime, Americans’ stagnant and declining incomes were augmented with the ability to spend on credit. One source of this credit was the rise in housing prices that the Federal Reserves low inerest rate policy made possible. Consumers could refinance their now higher-valued home at lower interest rates and take out the “equity” and spend it.

  The debt expansion, tied heavily to housing mortgages, came to a halt when the fraud perpetrated by a deregulated financial system crashed the real estate and stock markets. The bailout of the guilty imposed further costs on the very people that the guilty had victimized.

  Under Fed chairman Bernanke the economy was kept going with Quantitative Easing, a massive increase in the money supply in order to bail out the “banks too big to fail.” Liquidity supplied by the Federal Reserve found its way into stock and bond prices and made those invested in these financial instruments richer. Corporate executives helped to boost the stock market by using the companies’ profits and by taking out loans in order to buy back the companies’ stocks, thus further expanding debt.

  Those few benefitting from inflated financial asset prices produced by Quantitative Easing and buy-backs are a much smaller percentage of the population than was affected by the Greenspan consumer credit expansion. A relatively few rich people are an insufficient number to drive the economy.

  The Federal Reserve’s zero interest rate policy was designed to support the balance sheets of the mega-banks and denied Americans interest income on their savings. This policy decreased the incomes of retirees and forced the elderly to reduce their consumption and/or draw down their savings more rapidly, leaving no safety net for heirs.

  Using the smoke and mirrors of under-reported inflation and unemployment, the US government kept alive the appearance of economic recovery. Foreigners fooled by the deception continue to support the US dollar by holding US financial instruments.

  The official inflation measures were “reformed” during the Clinton era in order to dramatically understate inflation. The measures do this in two ways. One way is to discard from the weighted basket of goods that comprises the inflation index those goods whose price rises. In their place, inferior lower-priced goods are substituted.

  For example, if the price of New York strip steak rises, round steak is substituted in its place. The former official inflation index measured the cost of a constant standard of living. The “reformed” index measures the cost of a falling standard of living.

  The other way the “reformed” measure of inflation understates the cost of living is to discard price rises as “quality improvements.” It is true that quality improvements can result in higher prices. However, it is still a price rise for the consumer as the former product is no longer available. Moreover, not all price rises are quality improvements; yet many prices rises that are not can be misinterpreted as “quality improvements.”

  These two “reforms” resulted in no reported inflation and a halt to cost-of-living adjustments for Social Security recipients. The fall in Social Security real incomes also negatively impacted aggregate consumer demand.

  The rigged understatement of inflation deceived people into believing that the US economy was in recovery. The lower the measure of inflation, the higher is real GDP when nominal GDP is deflated by the inflation measure. By understating inflation, the US government has overstated GDP growth.

  What I have written is easily ascertained and proven; yet the financial press does not question the propaganda that sustains the psychology that the US economy is sound. This carefully cultivated psychology keeps the rest of the world invested in dollars, thus sustaining the House of Cards.

  John Maynard Keynes understood that the Great Depression was the product of an insufficiency of consumer demand to take off the shelves the goods produced by industry. The post-WW II macroeconomic policy focused on maintaining the adequacy of aggregate demand in order to avoid high unemployment. The supply-side policy of President Reagan successfully corrected a defect in Keynesian macroeconomic policy and kept the US economy functioning without the “stagflation” from worsening “Philips Curve” trade-offs between inflation and employent. In the 21st century, jobs offshoring has depleted consumer demand’s ability to maintain US full employment.

  The unemployment measure that the presstitute press reports is meaningless as it counts no discouraged workers, and discouraged workers are a huge part of American unemployment. The reported unemployment rate is about 5%, which is the U-3 measure that does not count as unemployed workers who are too discouraged to continue searching for jobs.

  The US government has a second official unemployment measure, U-6, that counts workers discouraged for less than one-year. This official rate of unemployment is 10%.

  When long term (more than one year) discouraged workers are included in the measure of unemployment, as once was done, the US unemployment rate is 23%. (See John Williams, shadowstats.com)

  Fiscal and monetary stimulus can pull the unemployed back to work if jobs for them still exist domestically. But if the jobs have been sent offshore, monetary and fiscal policy cannot work.

  What jobs offshoring does is to give away US GDP to the countries to which US corporations move the jobs. In other words, with the jobs go American careers, consumer purchasing power and the tax base of state, local, and federal governments. There are only a few American winners, and they are the shareholders of the companies that offshored the jobs and the executives of the companies who receive multi-million dollar “performance bonuses” for raising profits by lowering labor costs. And, of course, the economists, who get grants, speaking engagements, and corporate board memberships for shilling for the offshoring policy that worsens the distribution of income and wealth. An economy run for a few only benefits the few, and the few, no matter how large their incomes, cannot consume enough to keep the economy growing.

  In the 21st century US economic policy has destroyed the ability of real aggregate demand in the US to increase. Economists will deny this, because they are shills for globalism and jobs offshoring. They misrepresent jobs offshoring as free trade and, as in their ideology free trade benefits everyone, claim that America is benefitting from jobs offshoring. Yet, they cannot show any evidence whatsoever of these alleged benefits. (See my book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West.)

  As an economist, it is a mystery to me how any economist can think that a population that does not produce the larger part of the goods that it consumes can afford to purchase the goods that it consumes. Where does the income come from to pay for imports when imports are swollen by the products of offshored production?

  We were told that the income would come from better-paid replacement jobs provided by the “New Economy,” but neither the payroll jobs reports nor the US Labor Departments’s projections of future jobs show any sign of this mythical “New Economy.”

  There is no “New Economy.” The “New Economy” is like the neoconservatives promise that the Iraq war would be a six-week “cake walk” paid for by Iraqi oil revenues, not a $3 trillion dollar expense to American taxpayers (according to Joseph Stiglitz and Linda Bilmes) and a war that has lasted the entirety of the 21st century to date, and is getting more dangerous.

  The American “New Economy” is the American Third World economy in which the only jobs created are low productivity, low paid nontradable domestic service jobs incapable of producing export earnings with which to pay for the goods and services produced offshore for US consumption.

  The massive debt arising from Washington’s endless wars for neoconservative hegemony now threaten Social Security and the entirety of the social safety net. The presstitute media are blaming not the policy that has devasted Americans, but, instead, the Americans who have been devasted by the policy.

  Earlier this month I posted readers’ reports on the dismal job situation in Ohio, Southern Illinois, and Texas. In the March issue of Chronicles, Wayne Allensworth describes America’s declining rural towns and once great industrial cities as consequences of “globalizing capitalism.” A thin layer of very rich people rule over those “who have been left behind”—a shrinking middle class and a growing underclass. According to a poll last autumn, 53 percent of Americans say that they feel like a stranger in their own country.

  Most certainly these Americans have no political representation. As Republicans and Democrats work to raise the retirement age in order to reduce Social Security outlays, Princeton University experts report that the mortality rates for the white working class are rising. The US government will not be happy until no one lives long enough to collect Social Security.

  The United States government has abandoned everyone except the rich.

  In the opening sentence of this article, I said that the two murderers of the American economy were jobs offshoring and financial deregulation. Deregulation greatly enhanced the ability of the large banks to financialize the economy. Financialization is the diversion of income streams into debt service. When debt service absorbs a large amount of the available income, the economy experiences debt deflation. The service of debt leaves too little income for purchases of goods and services and prices fall.

  Michael Hudson, who I recently wrote about, is the expert on finanialization. His book, Killing the Host, which I recommended to you, tells the complete story. Briefly, financialization is the process by which creditors capitalize an economy’s economic surplus into interest payments to themselves. Perhaps an example would be a corporation that goes into debt in order to buy back its shares. The corporation achieves a temporary boost in its share prices at the cost of years of interest payments that drain the corporation of profits and deflate its share price.

  Michael Hudson stresses the conversion of the rental value of real estate into mortgage payments. He emphasizes that classical economists wanted to base taxation not on production, but on economic rent. Economic rent is value due to location or to a monopoly position. For example, beachfront property has a higher price because of location. The difference in value between beachfront and nonbeachfront property is economic rent, not a produced value. An unregulated monopoly can charge a price for a service that is higher than the price that would bring that service unto the market.

  The proposal to tax economic rent does not mean taxing you on the rent that you pay your landlord or taxing your landlord on the rent that you pay him such that he ceases to provide the housing. By economic rent Hudson means, for example, the rise in land values due to public infrastructure projects such as roads and subway systems. The rise in the value of land opened by a new road and in housing and commercial space along a new subway line is not due to any action of the property owners. This rise in value could be taxed in order to pay for the project instead of taxing the income of the population in general. Instead, the rise in land values raises appraisals and the amount that creditors are willing to lend on the property. New purchasers and existing owners can borrow more on the property, and the larger mortgages divert the increased land valuation into interest payments to creditors. Lenders end up as the major beneficiaries of public projects that raise real estate prices.

  Similarly, unless the economy is financialized to such an extent that mortgage debt can no longer be serviced, when central banks lower interest rates property values rise, and this rise can be capitalized into a larger mortgage.

  Another example would be property tax reductions and legislation such as California’s Proposition 13 that freeze in whole or part the property tax base. The rise in real estate values that escape taxation are capitalized into larger mortgages. New buyers do not benefit. The beneficiaries are the lenders who capture the rise in real estate prices in interest payments.

  Taxing economic rent would prevent the financial system from capitalizing the rent into debt instruments that pay interest to the financial sector. Considering the amount of rents available to be taxed, taxing rents would free production from income and sales taxation, thus lowering consumer prices and freeing labor and productive capital from taxation.

  With so much of land rent already capitalized into debt instruments shifting the tax burden to economic rent would be challenging. Nevertheless, Hudson’s analysis shows that financialization, not wage suppression, is the main instrument of exploitation and takes place via the financial system’s conversion of income streams into interest payments on debt.

  I remember when mortgage service was restricted to one-quarter of household income. Today mortgage service can eat up half of household income. This extraordinary growth crowds out the production of goods and services as less of household income is available for other purchases.

  Michael Hudson and I bring a total indictment of the neoliberal economics profession, “junk economists” as Hudson calls them.

  

  

  

  

  

• Has The Market Crash Only Just Begun?

  Having successfully called the market's retreat in the fall of 2015, Universa's Mark Spitznagel is not taking a victory lap as he warns Bloomberg TV that "the crash has only just begun."

  Investors are facing the most binary "let's make a deal" market in history in Spitznagel's view: choose Door #1 to bet on Keynesianism, central planners, and monetary interventionism; or Door #2 to bet on free markets and natural price discovery.

  "There is massive cognitive dissonance here," Spitznagel explains as history teaches us that door #2 is the right choice… but it's not possible to do that today as investors have been coerced to choose door #1, but when door #1 is slammed open "we will see that dreaded black swan monster."

  That is what is going on right now:

  "Investors want to go with The Fed when it's working – like David Zervos… the problem is, when do you know that it is not working?"

  "At some point this stops working…"

   

  "the market is going through a resolution process, transitioning from the cognitive dissonance of Door #1 to the harsh reality of Door #2… if everyone were to change doors at the same time, that is a market crash… it can't be done in a non-messy way."

  Must watch reality check behind the smoke and mirrors we call markets… (we note Mark's excellent analogy starting at around 3:10)

  

  

  

  

  

• The Global Oil Glut Is So Great, Tankers Take The Long Route Around Africa To Find A Buyer

  While we have previously observed the massive glut of oil product in the US, which has led to such arcane developments as a “parking lot” of oil tankers outside of Galveston, TX…

  

   

  … or ships loaded to the brim with crude making U-turns in the middle of the Atlantic Ocean, taking advantage of the supercontango while unable to find buyers…

  

   

  … we can now say that things in Europe are just as bad, if not worse. According to the latest “This week in petroleum” blog post by the EIA, European distillate oversupply has results in floating storage and shipping changes, such as tankers taking the long route around Africa (40 days vs 20 days), because they are unable to find a buyer and hoping that demand will spike while ships are at sea. So far demand continues to plunge even as more and more supply comes online.

  From the EIA:

  Europe, like the U.S. East Coast, is experiencing a relatively warm
  winter. In addition to the resulting weak winter heating demand, high
  refinery runs in Europe and increased imports have kept distillate
  inventories in the Amsterdam, Rotterdam, and Antwerp (ARA) area far
  above normal. Higher inventories have pushed distillate futures prices
  in the ARA into a steep contango (meaning prices for delivery dates
  further in the future are higher than for near-month delivery). As a
  result, inventories are being held in floating storage and imported
  cargos are being diverted to longer voyages.

  Increased European refinery runs [have] contributing to
  high distillate inventories in the ARA region. As demand for gasoline in
  the United States and in West Africa increased last summer and fall, higher gasoline crack spreads
  led to increased European refinery runs. The increased refinery runs
  yielded distillate, along with the more profitable gasoline.

  At the same time, new and traditional sources of distillate have
  expanded capacity to supply ultra-low sulfur distillate (ULSD) to
  Europe. In Russia, which is a longtime supplier of distillate to Europe,
  refineries have been upgraded to produce lower-sulfur distillate fuels
  that are widely used in Western Europe, and have increased exports to
  Europe. Elsewhere, several new refineries, including those in Saudi
  Arabia and India, which are geared toward maximizing ULSD output, have
  come online in the past few years, further adding to the supply of
  distillate.

  These factors — reduced heating demand, increased European refining
  runs, and increased imports — have pushed independently held distillate
  inventory levels in the ARA to more than 26 million barrels in recent
  months, more than 7 million barrels higher than the five-year average
  (Figure 2).

  

  The ARA is the delivery point for the Intercontinental Exchange (ICE) gasoil (distillate) futures contract.
  Consistently high distillate inventories in the ARA have pushed prices
  lower and ICE gasoil futures into a steep contango. The futures spread
  between the prompt month ICE gasoil contract and the contract for 12
  months forward was $8.90 per barrel contango in January (Figure 3).

  

  Trade press reports indicate that a lack of storage space and a large contango have pushed distillate supplies into floating storage
  and encouraged import cargoes to take longer shipping routes. When
  contango in the futures contracts become sufficiently large, market
  participants can lock in a profit by purchasing distillate supplies on
  the spot market, chartering a vessel, and selling a longer-dated futures
  contract.  

  Trade press report that several vessels in European waters,
  such as off the coast of Gibraltar in southern Spain and outside of the
  ARA ports, have been booked specifically for distillate floating
  storage.

  Another tactic employed by market participants is to have
  inbound cargoes take longer voyages, which allows more time to find a
  buyer, or onshore storage space, and also provides a return from the
  higher priced later delivery date.

  According to the trade press, many
  cargoes from the Middle East and India have diverted around the Cape of
  Agulhas, at the southernmost point of Africa, on their way to Europe
  rather than passing through the Suez Canal in Egypt. The longer trip
  takes 30-40 days instead of the 15-20 day journey through the Suez Canal
  (Figure 4).

   

  h/t @GreekFire23

  

  

  

  

  

• Stephen Roach: "Central Banking Has Lost Its Way, Is In Crisis"

  Authored by Stephen Roach, originally posted at Project Syndicate,

  In what could well be a final act of desperation, central banks are abdicating effective control of the economies they have been entrusted to manage. First came zero interest rates, then quantitative easing, and now negative interest rates – one futile attempt begetting another. Just as the first two gambits failed to gain meaningful economic traction in chronically weak recoveries, the shift to negative rates will only compound the risks of financial instability and set the stage for the next crisis.

  The adoption of negative interest rates – initially launched in Europe in 2014 and now embraced in Japan – represents a major turning point for central banking. Previously, emphasis had been placed on boosting aggregate demand – primarily by lowering the cost of borrowing, but also by spurring wealth effects from appreciating financial assets. But now, by imposing penalties on excess reserves left on deposit with central banks, negative interest rates drive stimulus through the supply side of the credit equation – in effect, urging banks to make new loans regardless of the demand for such funds.

  This misses the essence of what is ailing a post-crisis world. As Nomura economist Richard Koo has argued about Japan, the focus should be on the demand side of crisis-battered economies, where growth is impaired by a debt-rejection syndrome that invariably takes hold in the aftermath of a “balance sheet recession.”

  Such impairment is global in scope. It’s not just Japan, where the purportedly powerful impetus of Abenomics has failed to dislodge a struggling economy from 24 years of 0.8% inflation-adjusted GDP growth. It’s also the US, where consumer demand – the epicenter of America’s Great Recession – remains stuck in an eight-year quagmire of just 1.5% average real growth. Even worse is the eurozone, where real GDP growth has averaged just 0.1% over the 2008-2015 period.

  All of this speaks to the impotence of central banks to jump-start aggregate demand in balance-sheet-constrained economies that have fallen into 1930s-style “liquidity traps.” As Paul Krugman noted nearly 20 years ago, Japan exemplifies the modern-day incarnation of this dilemma. When its equity and property bubbles burst in the early 1990s, the keiretsu system – “main banks” and their tightly connected nonbank corporates – imploded under the deadweight of excess leverage.

  But the same was true for over-extended, saving-short American consumers – to say nothing of a eurozone that was basically a levered play on overly-inflated growth expectations in its peripheral economies – Portugal, Italy, Ireland, Greece, and Spain. In all of these cases, balance-sheet repair preempted a resurgence of aggregate demand, and monetary stimulus was largely ineffective in sparking classic cyclical rebounds.

  This could be the greatest failure of modern central banking. Yet denial runs deep. Former Federal Reserve Chair Alan Greenspan’s “mission accomplished” speech in early 2004 is an important case in point. Greenspan took credit for using super-easy monetary policy to clean up the mess after the dot-com bubble burst in 2000, while insisting that the Fed should feel vindicated for not leaning against the speculative madness of the late 1990s.

  That left Greenspan’s successor on a very slippery slope. Quickly out of ammunition when the Great Crisis hit in late 2008, former Fed Chair Ben Bernanke embraced the new miracle drug of quantitative easing – a powerful antidote for markets in distress but ultimately an ineffective tool to plug the hole in consumer balance sheets and spark meaningful revival in aggregate demand.

  European Central Bank President Mario Draghi’s famous 2012 promise to do “whatever it takes” to defend the euro took the ECB down the same path – first zero interest rates, then quantitative easing, now negative policy rates. Similarly, Bank of Japan Governor Haruhiko Kuroda insists that so-called QQE (quantitative and qualitative easing) has ended a corrosive deflation – even though he has now opted for negative rates and pushed back the BOJ’s 2% inflation target to mid-2017.

  It remains to be seen whether the Fed will resist the temptation of negative interest rates. But most major central banks are clinging to the false belief that there is no difference between the efficacy of the conventional tactics of monetary policy – driven by adjustments in policy rates above the zero bound – and unconventional tools such as quantitative easing and negative interest rates.

  Therein lies the problem. In the era of conventional monetary policy, transmission channels were largely confined to borrowing costs and their associated impacts on credit-sensitive sectors of real economies, such as homebuilding, motor vehicles, and business capital spending.

  As those sectors rose and fell in response to shifts in benchmark interest rates, repercussions throughout the system (so-called multiplier effects) were often reinforced by real and psychological gains in asset markets (wealth effects). That was then. In the brave new era of unconventional monetary policy, the transmission channel runs mainly through wealth effects from asset markets.

  Two serious complications have arisen from this approach.

  The first is that central banks have ignored the risks of financial instability. Drawing false comfort from low inflation, overly accommodative monetary policies have led to massive bubbles in asset and credit markets, resulting in major distortions in real economies. When the bubbles burst and pushed unbalanced economies into balance-sheet recessions, inflation-targeting central banks were already low on ammunition – taking them quickly into the murky realm of zero policy rates and the liquidity injections of quantitative easing.

   

  Second, politicians, drawing false comfort from frothy asset markets, were less inclined to opt for fiscal stimulus – effectively closing off the only realistic escape route from a liquidity trap. Lacking fiscal stimulus, central bankers keep upping the ante by injecting more liquidity into bubble-prone financial markets – failing to recognize that they are doing nothing more than “pushing on a string” as they did in the 1930s.

  The shift to negative interest rates is all the more problematic. Given persistent sluggish aggregate demand worldwide, a new set of risks is introduced by penalizing banks for not making new loans. This is the functional equivalent of promoting another surge of “zombie lending” – the uneconomic loans made to insolvent Japanese borrowers in the 1990s. Central banking, having lost its way, is in crisis. Can the world economy be far behind?

  

  

  

  

  

• Currency And The Collapse Of The Roman Empire

  At its peak, the Roman Empire held up to 130 million people over a span of 1.5 million square miles.

  Rome had conquered much of the known world. The Empire built 50,000 miles of roads, as well as many aqueducts, amphitheatres, and other works that are still in use today.

  Our alphabet, calendar, languages, literature, and architecture borrow much from the Romans. Even concepts of Roman justice still stand tall, such as being “innocent until proven guilty”.

  So, as Visual Capitalist's Jeff Desjardins' asks, how could such a powerful empire collapse?

   

  

  Courtesy of: The Money Project

   

  The Roman Economy

  Trade was vital to Rome. It was trade that allowed a wide variety of goods to be imported into its borders: beef, grains, glassware, iron, lead, leather, marble, olive oil, perfumes, purple dye, silk, silver, spices, timber, tin and wine.

  Trade generated vast wealth for the citizens of Rome. However, the city of Rome itself had only 1 million people, and costs kept rising as the empire became larger.

  Administrative, logistical, and military costs kept adding up, and the Empire found creative new ways to pay for things.

  Along with other factors, this led to hyperinflation, a fractured economy, localization of trade, heavy taxes, and a financial crisis that crippled Rome.

  Roman Debasement

  The major silver coin used during the first 220 years of the empire was the denarius.

  This coin, between the size of a modern nickel and dime, was worth approximately a day’s wages for a skilled laborer or craftsman. During the first days of the Empire, these coins were of high purity, holding about 4.5 grams of pure silver.

  However, with a finite supply of silver and gold entering the empire, Roman spending was limited by the amount of denarii that could be minted.

  This made financing the pet-projects of emperors challenging. How was the newest war, thermae, palace, or circus to be paid for?

  Roman officials found a way to work around this. By decreasing the purity of their coinage, they were able to make more “silver” coins with the same face value. With more coins in circulation, the government could spend more. And so, the content of silver dropped over the years.

  By the time of Marcus Aurelius, the denarius was only about 75% silver. Caracalla tried a different method of debasement. He introduced the “double denarius”, which was worth 2x the denarius in face value. However, it had only the weight of 1.5 denarii. By the time of Gallienus, the coins had barely 5% silver. Each coin was a bronze core with a thin coating of silver. The shine quickly wore off to reveal the poor quality underneath.

  The Consequences

  The real effects of debasement took time to materialize.

  Adding more coins of poorer quality into circulation did not help increase prosperity – it just transferred wealth away from the people, and it meant that more coins were needed to pay for goods and services.

  At times, there was runaway inflation in the empire. For example, soldiers demanded far higher wages as the quality of coins diminished.

  “Nobody should have any money but I, so that I may bestow it upon the soldiers.” – Caracalla, who raised soldiers pay by 50% near 210 AD.

  By 265 AD, when there was only 0.5% silver left in a denarius, prices skyrocketed 1,000% across the Roman Empire.
  Only barbarian mercenaries were to be paid in gold.

  The Effects

  With soaring logistical and admin costs and no precious metals left to plunder from enemies, the Romans levied more and more taxes against the people to sustain the Empire.

  Hyperinflation, soaring taxes, and worthless money created a trifecta that dissolved much of Rome’s trade.
  The economy was paralyzed.

  By the end of the 3rd century, any trade that was left was mostly local, using inefficient barter methods instead of any meaningful medium of exchange.

  The Collapse

  During the crisis of the 3rd century (235-284 A.D), there may have been more than 50 emperors. Most of these were murdered, assassinated, or killed in battle.

  The empire was in a free-for-all, and it split into three separate states.

  Constant civil wars meant the Empire’s borders were vulnerable. Trade networks were disintegrated and such activities became too dangerous.

  Barbarian invasions came in from every direction. Plague was rampant.

  And so the Western Roman Empire would cease to exist by 476 A.D.

  

  

  

  

  

• The Famous Vancouver Teardown Shack Just Sold For $2.5 Million, $80,000 Over Asking

  Three weeks ago, when observing the ongoing lunacy in the Vancouver housing market, we mentioned the case of Canadian Bill Ring, head of operations for a property management company who, as Bloomberg quotes, said  “I don’t want to invest in stocks because they’re crazy and real estate is a solid, safe investment.”

  Much to our chagrin we mocked Bill’s zest, adding that “if the housing market in Canada were overheating, you wouldn’t be able to get “bargains” like the listing shown below from Vancouver.”

  

  

   

  Little did we know that Bill would have the last laugh less thatn three weeks later.

  As CBC News reported this week, “the latest poster child for Vancouver real estate excess is off the market, having fetched — of course — more than the asking price, proving that when it comes to securing a plot of dirt on the city’s west side, there seems to be no limit to what buyers will spend.”

  Well, not buyers: desperate Chinese cash smugglers who will park money into virtually anything offshore if it means avoiding the upcoming collapse of the Chinese financial system, because if anyone knows what is coming in China, it’s them.

  The (perhaps not so shocking) punchline: the property sold for $2.48 million, $80,000 more than what was considered an outrageous list price just two weeks ago when it was put on the market.

  Located on West 14th near Sasamat in the location-location location-driven Point Grey neighbourhood, the house had a sale price that reflects a new upper range for land value. It’s certain the wrecking ball will soon land on the shabby little house currently sitting on the property, cheekily dubbed a “dream home” by local newspapers.

  Only two blocks away, a brand new four-bedroom, six-bathroom home perched on a slightly smaller lot is currently listed for $4.3 million.

  

   

  Even the local media can barely contain its amusement at the insanity of it all:

   

  And yes, it is insanity as we showed a few weeks ago – if one is looking for an indicator of how fast Chinese capital is fleeing the mainland, just look at the lines below: they tell the full story.

  

  

  

  

  

  

• Gold Is The "Shining Bright Spot" In The Commodity Complex

  Gold is many things to many people. A perennial battleground subject, gold remains arguably one of the most debated asset classes across global financial markets, but as Goldman's precious metals equity analyst notes, from a fundamental perspective, the risk/reward looks more balanced than that of its bulk and base metal peers, especially in terms of the supply/demand dynamics.

  Bulls believe gold is the ultimate store of wealth, and should be compulsory in a welldiversified portfolio given its perceived safe-haven appeal.

   

  In contrast, bears are quick to highlight the lack of industrial use for this non-yielding asset and focus on the fact there is an abundance of above-ground inventory.

   

  Love it or hate it, gold will always be relevant and mentioned in the same sentence as oil when market participants refer to the all-important commodities complex.

  Gold is probably the pick of a bad bunch from a future investment standpoint.

  Macro trumps micro

  Gold is the chameleon of commodities, but ultimately it is primarily used as a financial asset by investors as a store of wealth, a hedge against the threat of inflation, and in some instances, as portfolio insurance. Historically, one of the strongest relationships is the inverse relationship between the gold price and US real interest rates; higher TIPS, lower gold prices, mainly owing to the fact that gold is a non-yielding asset and as such the opportunity cost will increase for investors holding gold as rates increase.

  As can be seen from the chart below, the relationship between US 5-year TIPS and gold has been very strong, returning an R-squared of 0.85. In 2016, our economists expect above-trend US economic growth and a corresponding recovery in US inflation expectations.

  As we gingerly move through 2016, and the market recalibrates its expectations for the imminent Fed rate hiking cycle, the gold price could be an interesting sideshow and alternative store of value for investors, if the currently anticipated timetable is pushed out.

  

  One of the reasons for the drawn out correction in gold prices in 2013 was the partial liquidation of ETFs.

  

  Above, we show that the number of ounces of gold in ETFs has stabilised in the past 12 months, and in fact, has ticked upwards in 2016.

  Saving lustre

  While a US market correction is not our base case, below we identify the major risk-off periods over the past 45 years, and investigate whether gold acted as effective short-term portfolio insurance. We observe that for nine of the last 10 major downturns in US equity markets, gold outperformed the S&P with 1980-82 the only exception (the gold bubble burst in 1980). Moreover, gold generated positive returns in eight of those instances.

  

  Chindia

  In 2014, the world’s two most populous nations accounted for over 50% of total gold demand. Citizens and the governments of these two countries play pivotal roles in the global gold market from both a supply and demand perspective. China is now the largest gold producing nation, more than doubling its output over the past decade to 450t. To put this in perspective, China was listed as #4 in 2005. In India, gold has always been a symbol of wealth, status, and a fundamental part of many rituals. In 2013, the government tried to introduce policies to reduce its current account deficit that included curbing gold imports, but these policies ultimately increased smuggling. While the 80:20 gold import rule was scrapped in November 2014, the 10% import duty on all gold imports is still in place.

  Miner miner 49er

  The fundamental difference between gold and other commodities is that once extracted, it is generally not consumed. It remains in existence in a form (jewelry, art, coins, bars) that is easily recoverable and is periodically returned to the market through recycling. Owing to this, gold’s above-ground stock is always rising. Mine output accounts for about c.75% of total annual supply. A labour-intensive and costly activity with long lead times, mine production is relatively inelastic to prices in the short run. In 1Q15, mine supply increased by 1% yoy to 734t while in 2014, global gold production increased by 5% yoy.

  Mine supply rose significantly during gold’s bull run in 2003-11, when prices rose 450% and new mines ramped up to full capacity following significant investments in new projects. However, with gold prices falling dramatically (by 42% since September, 2011), miners have been forced to delay/suspend new projects as they seek to increase operational efficiencies and cut growth capex. Consequently, reducing operating costs to optimise free cash flow has been a major focus for the gold companies.

  While closures and suspensions have been limited to small and ageing operations, there have been deferrals of major development-stage projects as part of the drive to reduce unnecessary capital expenditure. Most activities are centered on the divestment of non-core operations. Miners have taken steps to enable their survival through the current squeeze of their margins, and it seems that the consequences of these actions will be detrimental to mine supply levels in future years.

  The pain that the broader mining industry experienced in 2015 was endured by the gold sector in 2013/14. After the gold price fell 25% in the first six months of 2013, the gold companies were forced in to action to conserve cash. Dividends were cut, capex was significantly pared back, non-core assets were sold and balance sheets slowly improved. The aggressive action from gold companies resulted in a sector that is able to survive and generate cash at a US$1,000/oz gold price.

  The need to conserve cash in the face of sustained lower commodity prices is a situation we believe that the broader mining complex is slowly coming to terms with. As the chart below indicates, the gold sector has been more decisive in addressing the issues.

  Global miners are all facing their problems (BHP: dividend and Samarco; Glencore: debt; Anglo: debt & restructuring; Chinese producers: high debt) and these are likely to drag on performance in 2016. Buy-rated Barrick Gold (US$12.25) and AngloGold Ashanti (R172) have ‘cleared the decks’ on the cash conservation front and are well positioned to perform in 2016. They are cash flow positive at respective gold prices of US$890/850 per oz. FCF yields are strong and we believe the gold miners provide more stable mining opportunities relative to their large cap non-gold peers.

  
   
  The need to conserve cash in the face of sustained lower commodity prices is a situation we believe that the broader mining complex is slowly coming to terms with. As the chart above indicates, the gold sector has been more decisive in addressing the issues.

  

  

  

  

  

• Freedom Isn't Free

  Submitted by Simon Black via SovereignMan.com,

  Years ago back in my days at the academy and in the military, I used to hear this phrase “freedom isn’t free” over and over again.

  It was almost a sort of motto for a lot of military units– a self-motivating expression that freedom came at a price, and it was our solemn responsibility to pay that price.

  It’s a true statement. Freedom is NOT free.

  History shows that the path to liberty almost invariably involves conflict, whether it was the American Revolution, or Brown vs. the Board of Education.

  And these conflicts often demand a very steep price from those who fight them.

  Today we are in the midst of another great conflict. I’m not talking about hostilities in Syria or even the Global War on Terror.

  This conflict is between the individual and the state.

  Governments around the world have demonstrated that they are willing to trample on individual liberties with no thought to the larger implications.

  They tell us what we can and cannot put in our bodies. They take our children away when they deem us unfit parents in their sole discretion.

  They tell us to be afraid of men in caves… or angry teenagers in the desert… or bad people lurking in the night… and then use that fear as an excuse to dismantle the freedoms that previous generations paid such a steep price to achieve.

  We’ve now found out that the US government has demanded that Apple, in the words of CEO Tim Cook, “build a backdoor to the iPhone.”

  Cook’s letter to customers describes how the government wants to access data on the iPhone of the man who perpetrated the 2015 San Bernadino mass shooting.

  Apple’s iPhone operating system automatically encrypts data and only makes it available to a user who knows the password.

  Since Apple doesn’t know the shooter’s password, they cannot access the data through normal means.

  That’s why the FBI wants them to build a backdoor, and the government has commanded Apple to comply under the authority of a law dating back to 1789.

  As Tim Cook points out,

  “[W]hile the government may argue that its use would be limited to this case, there is no way to guarantee such control.

   

  “The implications of the government’s demands are chilling. If the government can use the All Writs Act to make it easier to unlock your iPhone, it would have the power to reach into anyone’s device to capture their data.

   

  “The government could extend this breach of privacy and demand that Apple build surveillance software to intercept your messages, access your health records or financial data, track your location, or even access your phone’s microphone or camera without your knowledge.”

  The government may very well be acting in the interest of ‘protecting the American people’.

  And US presidents often point out these days that their #1 responsibility is to keep American safe.

  Actually, it’s not.

  Nearly all federal officials, including the President, take an oath to support and defend the Constitution of the United States against ALL enemies, foreign and domestic.

  That is their #1 responsibility– to uphold the principles of freedom that define an entire nation.

  They have routinely broken that oath, trading other people’s freedom for the illusion of greater security.

  It’s easy to sing songs about how free you are… to cheer Lady Gaga’s rendition of the national anthem at the Superbowl when she hits the high note on the word “free”.

  But none of that comes at a price.

  Our price is making a difficult choice between liberty and security– to choose fear or freedom.

  When we feel that our families’ security is threatened, the knee-jerk reaction is often to say “give the government whatever it needs to make us safe!”

  But the harsh reality is that such short-term thinking creates a much more ominous world in the long-term.

  And every tacit acquiescence to intrusive government authority is a brick laid on the road to tyranny.

  

  

  

  

  

• When Cash Is Outlawed… Only Outlaws Will Have Cash

  Submitted by Bill Bonner of Bonner & Partners (annotated by Acting-Man.com's Pater Tenebrarum),

  Control, Tax, Confiscate

  Harvard economist Larry Summers is a reliable source of claptrap. And a frequent spokesman for the Deep State.

  To bring new readers up to speed, voters don’t get a say in who runs the country. Instead, a “shadow government” of elites, cronies, lobbyists, bureaucrats, politicians, and zombies – aka the Deep State – is permanently in power.

   

  

  Larry Summers – the man with a plan for everyone. An economist whose economic theorizing is truly abominable crap (more on this in an upcoming post), a reliable, crypto-fascist, bought and paid for evil intellectual in the service of the Deep State. His “policy proposals” all have one thing in common: they are apodictically certain to restrict economic progress and individual liberty.

  Put simply, it doesn’t matter which party is in power; the Deep State rules. Want to know what the Deep State is up to now? Read Larry Summers.

  “It’s time to kill the $100 bill,” he wrote in the Washington Post (another reliable source of claptrap).

  The Deep State wants you to use money it can easily control, tax, and confiscate. And paper currency is getting in its way.

  France has already banned residents from making cash transactions of €1,000 ($1,114) or more. Norway and Sweden’s biggest banks urge the outright abolition of cash. And there are plans at the highest levels of government in Israel, India, and China to remove cash from circulation.

  Deutsche Bank CEO John Cryan predicts that cash “probably won’t exist” 10 years from now. And here is Mr. Summers in the Washington Post:

  “Illicit activities are facilitated when a million dollars weighs 2.2 pounds as with the 500 euro note rather than more than 50 pounds, as would be the case if the $20 bill was the high denomination note.”

  He proposes “a global agreement to stop issuing notes worth more than say $50 or $100. Such an agreement would be as significant as anything else the G7 or G20 has done in years.”

  What makes Mr. Summers so confident that a ban on Ben Franklins would be a good thing? It turns out that a research paper – presented by Peter Sands, the former CEO of British bank Standard Chartered, and published for the Harvard Kennedy School of Government – says so.

   

  Idiotic Ideas

  “High denomination notes,” said the report, “play little role in the functioning of the legitimate economy, yet a crucial role in the underground economy.”

  Mr. Sands should know about hiding money. While he was CEO, New York’s top financial regulator threatened to strip Standard Chartered of its banking license. It claimed the bank “schemed” with the Iranian government to hide at least 60,000 illegal transactions – involving at least $250 billion.

   

  

  If the Benjamin is killed, it will “deter illicit activities” they say, apparently taking us all for complete idiots. Very organized criminals all over the world could be heard rolling on the floor laughing their heads off at this pronouncement. Here’s another idea: if we lock all the peasants up in a small room without doors and windows, they will no longer have to suffer the indignities and dangers inflicted by bad weather! Never again will they be made wet and uncomfortable by rain, and the threat of skin cancer due to excessive exposure to sunlight (as recently highlighted by Hugh Jackman’s withering nose) will soon be but a distant memory. Isn’t such a comprehensive level of security well worth whatever small trade-offs it involves?

   

  Here at the Diary, we don’t pretend to know how to improve the world. We just know what we like. And we don’t like other people telling us what to do. Last year, we traveled all around the world. We went where we wanted to go. We did more or less what we wanted to do. Rarely did we feel that someone was bossing us around. But back in the USA…

  “Take your belt off. Take your shoes off. Anything in your pockets? Take it out…”

  “Turn on lights. Fasten seat belts. Turn on windshield wipers.”

  This morning, walking through the park, we found this sign:

  Curb Your Pets

  Not just a courtesy to your neighbors

  IT’S THE LAW

   

  

  The unspoken threat behind the “law”, made explicit.

  People who insist you follow their ideas are always the same people whose ideas are idiotic.

  “Always do the opposite of what they tell you do,” said a friend in France whose father was mayor of a small town during World War II.

   

  “There had been ‘an incident.’” he explained. “I think the Resistance had killed a German soldier in the area. It was that time, late in the war, when the Nazis were retaliating against civilians.

   

  “So, they told my father to get everyone in town to assemble in the town square. Instead, my father told everyone to run for the woods. They all did. They were lucky. They survived the war.”

  Electronic Dollars

  And now, Mr. Summers wants us to bring our cash to the town square. Instead of $100 bills, he wants to force us to use electronic notations faithfully recorded in a federally regulated bank. Have you ever seen one of these “electronic dollars,” dear reader?

  We have not. We don’t know what they look like. And we’re deeply suspicious of the whole thing. The European Central Bank and the Bank of Japan – along with central banks in Denmark, Sweden, and Switzerland have already imposed a negative interest rate “tax” on the accounts commercial banks hold with them (known as “reserve accounts”).

   

  

  Negative yielding government bonds in Europe as of December 2015 – a monument to the decline of Western civilization

   

  These central banks are hoping banks will pass on this new tax to their customers. This has already happened in Switzerland…

  As colleague Chris Lowe told Bonner & Partners Family Office members at our recent annual meeting in Rancho Santana in Nicaragua, Alternative Bank Schweiz (ABS) will begin charging a negative interest rate on customers’ deposits this year.

  ABS will levy an annual penalty of 0.125% on deposits of less than 100,000 Swiss francs ($101,173) and an annual penalty of 0.75% on deposits of more than 100,000 Swiss francs. Essentially, ABS is charging its customers to keep their money on deposit.

  If you put $1 million in the bank, at 0.75% negative interest, you come back a year later, and you have $992,500 left. The bank has confiscated the other $7,500. At a negative rate of, say, 3%… you pay $30,000 a year just to keep your money on deposit. It sounds like a scam…

  Governments abolish cash. You have no choice but to leave your savings on deposit. And you’re forced to pay banks for storing your money.

   

  Cash Outlaw

  But wait. Banks are not really storing “your” money at all. A bank deposit is an IOU from your bank. There is no vault cash backing it up… just 1s and 0s on a database somewhere. If the bank decides not to give you “your” money, you’re out of luck.

  It’s as though someone offers to store your cherry pie. Then he goes and eats the pie, promising to give you one just like it when you want it. He then has the cheek to charge you every month for “storing” the pie. And when you want it, he won’t be able to give it to you.

   

  

  The precedent – no-one can say they weren’t warned.

   

  “I don’t have any baking powder. You’ll have to come back tomorrow,” he says. Or, “I’m sorry. But the federal government has declared cherries an endangered species. I’m not allowed to give you your pie back. It was very tasty, though.”

  How much could this electronic pie be worth anyway… if you have to pay someone to eat it for you? Imagine the automobile you have to pay someone to drive away. Or the rental unit you have to pay someone to live in.

  When you have to pay someone to take it off your hands, you can imagine how much your money is really worth. And when your bank – or the Deep State – wants to confiscate your money, who will stop it?

  At least if you have your money in cold, hard cash, they will have to come and physically get it from you. When it is “in the bank” – existing as nothing but electronic account balances – all they have to do is push a button.

   

  

  Once it’s all numbers in a computer, they won’t even have to point their guns at you anymore. Then it will be possible to rub out your money savings by simply pushing a button on a computer keyboard. At that juncture you’d better not be too uppity, citizen.

   

  That’s what happened in Cyprus. The banks were going to the wall. So, they confiscated deposits to help make themselves whole again. Who will stop the same thing from happening in America?

  The judge the Deep State appointed? The police on the Deep State’s payroll? The politicians the Deep State bought and paid for?

  When cash is outlawed… only outlaws will have cash. And we intend to be among them.

  

  

  

  

  

• Here Are The States With The Highest Household Debt Burdens

  Americans are in debt. And massively so.

  In fact, the US is laboring under $1.1 trillion in auto loan debt and $1.3 trillion in student loan obligations. 

  This massive burden may well be holding back the beleaguered consumer in the US, a country which depends on consumer spending for three quarters of economic growth. 

  According to the New York Fed, total indebtedness is now $12.12 trillion and while mortgage debt accounts for the lion’s share of the burden, student debt is on the rise, as are auto loan obligations. 

  “How much does the average household owe?,” Bloomberg asks. “Nationwide, the per-capita debt is about $46,170.”

  

  Most of that is mortgage debt, although in Texas, where the jobs market has been hit especially hard by the sharp decline in crude prices, auto loan debt has spiked of late.

  

  In California, total debt amounts to around $66,000 per capita.

  If you live in one of the states mentioned above and are struggling under a $60,000 debt burden, just remember: you can always refi via a P2P website. Oh… wait…

  

  

  

  

  

• Cable Rallies After EU President Confirms EU-UK Deal Done

  Unless Cameron heard what he wanted to hear, as we detailed earlier, he would not have campaigned for the UK to remain in the bloc ahead of an expected referendum on membership in June…. which would likely have rocked the EU once again. Well after 30 minutes of chaos after the bell tonight, EU President Donald Tusk has tweeted that "Deal. Unanimous support for new settlement." GBPUSD is rallying on the news but now comes the fun part where Cameron persuades an increasingly euroskeptic Britain to stay inside Brussels shell…

  Deal it is… No details yet…

  Deal. Unanimous support for new settlement for #UKinEU

  — Donald Tusk (@eucopresident) February 19, 2016

   

  And cable rallies…

  

   

  This is far from over of course, and as we detailed earlier, here's a bit of color from Bloomberg on what "Brexit" would mean for London's "City": 

  • What is at stake? Financial services account for 180 billion pounds ($258 billion) a year — about 12 percent — of U.K. economic output and contribute 66 billion pounds in taxes. In some areas, like foreign exchange trading (41 percent of the world total) and over-the counter derivatives (49 percent), London is the undisputed global leader. Opponents of a Brexit fear a departure would precipitate years of uncertainty and steady waning of influence and market share.
  • What is passporting and why does it matter? Under the current regime, any firm authorized in the U.K. firm is free to do business in any other European Economic Area state by applying for a "passport" from British regulators. For non-EU banks like JPMorgan Chase & Co., Credit Suisse Group AG or Nomura Holdings Inc., the ability to access the region’s 500 million customers from a base in London has been an important draw. Without it, many firms may seriously consider upping sticks.
  • What would Brexit mean for the banks? Every day more than a trillion dollars worth of euros change hands in London, close to half the global total, according to the Bank for International Settlements. The City’s global dominance of the foreign-exchange market is likely to be tested by any Brexit package that fails to guarantee a continuation of access to the single market. Over-the-counter derivatives are another area for concern. About three-quarters of all trading in such instruments in Europe currently takes place in the British capital. Without access to the single market, much of that is likely to migrate, according to lawyers and bankers who say that U.S. banks are already mulling moving operations.

  

  Right. So this isn't just symbolic. "While no FTSE 100 company said it wanted Britain to leave the EU, only 18 were prepared to state unequivocally that they supported continued membership," FT goes on to note.

  Right. Because in reality, there aren't very many solid arguments for supporting continued memebership and whatever arguments were left have been significantly diminished by the bloc's worsening migrant crisis. Still, Cameron is calling for a "live and let live approach." Here's a look at UK trade vis-a-vis the rest of Europe. 

  

  But numbers aren't likely to sway the British people who are prepared to opt out of the ill-fated union. 

  Cameron says he's "battling for Britain", but in reality he's "battling for the EU." With the future of the union already in question thanks to the festering migrant crisis, Britain may well be better off abandoning this sinking ship. "It's the EU in question, not just one country in the EU," French President Francois Hollande said on Friday.

  Indeed. And the time has now come for Britain to decide whether it's prepared to go down with this ship, or forge a path ahead on its own. In the meantime, expect volatility, PIMCO says. "Irrespective of the twists and turns in the debate over U.K.’s planned referendum on EU membership, uncertainty over the result is likely to weigh on U.K. markets for a good few months yet," Mike Amey, Pimco portfolio manager said in a press release. Right. it is likely to cast a pall on markets "for a good few months yet," as you can tell from the below: 

  

  

  

  

  

  

• Weekend Reading: The Bull Is Back?

  Submitted by Lance Roberts via RealInvestmentAdvice.com,

  That didn’t take much. After a three-day rally, the media is back into “bullish” mode suggesting the bottom is likely in and by the end of this year, it’s all going to be just fine.

  Unfortunately, history suggests that after such a long unabated expansion risks are substantially higher than it has been previously. Furthermore, as I have repeated often in these missives, in an economy that is driven primarily based on consumption, and such consumption is already weak, it doesn’t take much to “flip the switch.” 

  Believe it or not, this was a point make by former bull Joseph LaVorgna, Chief Economist for Deutsche Bank, now turned…da..da..dum…“bear.”  (Lord help us, hell hath frozen over.)

  This week’s reading list in a continuation of thoughts on the current state of the financial markets, economy and the Fed. Is the recent correction now over setting the stage for the bull to begin its next charge? Or, is the recent rally just a trap drawing unwitting investors into the next sell off? No one knows for sure, but what you decide next could have potentially serious ramifications.

  ---

  1) Bearish Sentiment A Cocktail For Rallies by Doug Kass via Real Clear Markets

  “As I noted both four weeks ago and again late last week, numerous precedents and positive technical divergences have led to our current sharp rally, including the fact that:

   

  Despite the S&P 500 and Dow Jones Industrial Average recently hitting fresh lows, only about 50% as many New York Stock Exchange-listed companies hit new 52-week lows this month as did so in January.

   

  The percentage of stocks trading above their 50- and 200-day moving averages was higher at the recent low than it was at the market’s January low.

   

  The McClellan Oscillator and Summation Index recently held at higher oversold levels.

   

  Conversely, the market’s recent leaders have gone on the defensive and become laggards. But as I’ve previously pointed out, leadership changes often accompany a weak overall market — so we have to stay alert.”

  But Also Read: The Curious Case Of Surging Transports by Mark Hulbert via MarketWatch

  But Read: Bert Dohmen Is Uber-Bearish by Financial Sense

  2)  Odds Of A Recession At 33% By Next Year by Larry Summers via The Washington Post

  “I would put the odds of a U.S. recession at about 1/3 over the next year and at over ½ over the next 2 years.   There is a substantial chance that widening credit spreads, a strengthening dollar as Europe and Japan plunge more deeply into the world of negative rates, and lower inflation expectations will be tightening financial conditions even as recession looms.  And while there is certainly scope for quantitative easing, for forward guidance and possibly for negative rates, it is very unlikely that the Federal Reserve can take steps that are nearly the functional equivalent of 400 basis point cut in Fed funds that is normally necessary to respond to an incipient recession.”

  But Also Read: The 4-Horseman Of The Economy Are Here by Constantin Gurdgiev via True Economics

  3) Kyle Bass: A Ticking Bomb In China by Julia La Roche via Business Insider

  “China’s banking system has grown from under $3 trillion to over $34.5 trillion in assets over the last 10 years alone. No credit system in history has ever attempted this rate of growth. There is no precedent.

   

  What does this mean for Chinese banks? There is a bad answer and a worse answer. The bad answer is that Chinese bank capital – the equity buffer – is significantly overstated. A TBR requires much less capital to be set aside (only 2.5c as opposed to 11c for an on-balance sheet loan) at the time of origination (anyone thinking Fannie and Freddie?). Adjusting reported bank capital ratios for this effect changes reasonable 8-9% Core Tier 1 capital ratios (CT1) to undercapitalized 5-6% levels.

   

  Now, the worse news. TBRs are one of the biggest ticking time bombs in the Chinese banking system because they have been used to hide loan losses.“

  

  Also Read: The China Delusion by Rob Johnson via Project Syndicate

  4) Central Banks & The Ongoing Dispute

  • Negative Rates Are A Failure by Ambrose Evans-Pritchard via The Telegraph
  • Yes, NIRP Was A Bad Idea by Izabella Kaminska via FT AlphaVille
  • NIRP Doomed To Failure by Frank Hollenbeck via The Mises Institute
  • Central Banks Face Credibility Test by John Plender via FT.com
  • Japan Near Ending Of Stimulus by Jeffrey Snider via Alhambra Partners
  • Central Banks Face New World by Caroline Baum via E21
  • Central Banks Are Clueless by Alanna Petroff via CNN Money
  • Negative Rates, Deficits & Defaults by Reuven Brenner via Asia Times

   

  5) It’s August 2008 All Over Again by Ken Goldberg via The Street

  “The stock market’s path for the next month or two is likely to take its toll on both bulls and bears. This is because of how the market tends to “frack” its way through major peaks and troughs, as some indices peak earlier than others, while others tend to trough earlier than others. If you know which index is leading the others, the solution is simple. Once the leader shows its hand, take the appropriate action in the followers and wait for them to catch up, as the profits should be close behind, right? Maybe. Unless humans are involved. We tend to use coping mechanisms that limit our ability to see what the markets are showing us. That historically results in situations where the herd becomes bullish at major tops and bearish at major bottoms.”

  

  But Also Read: An Unambiguous Buy Signal by Jeff Cox via CNBC

  And Read: Bear Market Rallies by Urban Camel via Financial Sense

  ---

  THE USUAL SUSPECTS

  • Fed Bullard – Unwise To Hike Rates, More QE by Tyler Durden via Zero Hedge
  • 21 Numbers On The Global Economy by Michael Snyder via Economic Collapse
  • Foundation Of Housing Still Missing by Mark Hanson via MHanson.com
  • The Case For Global Tightening by Sober Look
  • Warning With A Capital “W” by John Hussman via Hussman Funds
  • Art & Shipping Send Warning by Jesse Felder via The Felder Report
  • Transports Flagging A Warning via Dana Lyons via Tumblr
  • Flipping Volatility Regimes by Salil Mehta via Statistical Ideas

  ---

  “Investors are condemned by almost mathematical law to lose” – Ben Graham

  

  

  

  

  

• "It Just Occurred To Me" – Trump Proposes Boycott Of Apple, While Tweeting From An iPhone

  Moments after AAPL announced on Wednesday that it would not comply with FBI demands to hack into its phone, Donald Trump was already arguing vehemently that Apple should help investigators crack the phone’s encryption system: “To think that Apple won’t allow us to get into her cell phone,” Trump said on Fox and Friends Wednesday morning. “Who do they think they are? No, we have to open it up.”

  “Apple, this is one case, this is a case that certainly we should be able to get into the phone,” he said. “And we should find out what happened, why it happened, and maybe there’s other people involved and we have to do that.”

  “I agree 100% with the courts,” the mogul added. “In that case, we should open it up. I think security over all — we have to open it up, and we have to use our heads. We have to use common sense.”

  And then, moments ago during a campaign event in Pawleys Island, South Carolina, Trump had an epiphany: “It just occurred to me.” His solution: a boycott of Apple Inc products until the tech giant agrees to U.S. government demands that it unlock the cellphone of the San Bernardino killer.

  “Boycott Apple until they give up the information,” Trump said. “The phone is owned by the government… Tim Cook is looking to do a big number probably to show how liberal he is. Apple should give up.”

  The billionaire’s call to action followed an interview with Bloomberg in which he offered harsh words for Cook.

  “Tim Cook is living in the world of the make believe,” Trump said Friday in a telephone interview. “I would come down so hard on him — you have no idea — his head would be spinning all of the way back to Silicon Valley.”

  “I think Tim Cook is totally out of line and I think the government should come down on Tim Cook very, very hard,” Trump said in the interview Friday. “I think it’s a disgrace what he is doing, we’re talking about lives, potentially thousands of lives, and we should find out who else was involved in the plot where 14 people were killed.”

  It was unclear initially it Trump had a specific cell phone company as an alternatives, or if this was all part of a grand marketing ploy by Tim Cook to get Trump’s opponents to rush out and purchase iPhones in retaliation. We will keep an eye on channels checks over the next few days for the answer.

  But the biggest irony is shown is self-evident in the screengrab of Trump’s latest tweet below.

  

   

  Update: less than an hour later, Trump appears to have realized his error by tweeting from a Google-based platform, the same Google which supports Apple in its fight with the government:

  

  

  

  

  

  

• Best Week Of 2016 For Stocks Amid Biggest Short-Squeeze In A Year

  Come on… stocks are up large… everything must be awesome!!

   

  This was S&P and Dow Transports best week of the year… (Dow Industrials best week in 3 months, Nasdaq and Small Caps best week in 4 months)

  

  Today's moves were capped at the European close…

  

   

  Trannies are up 5 weeks in a row – the same after The Oct 2014 Bullard Bounce…

  

   

  Let's just look across assets this week:

  • US equities Up 2.5% to 3.5%
  • US Treasuries ~Unchanged
  • Oil ~Unchanged
  • Gold ~Unchanged
  • USDJPY -0.5%
  • IG Credit ~Unchanged

  

   

  Homebuilders outperformed (despite weak Starts and Permits data, weak sentiment, weak mortgage applications and weak architecture billings), and Financials and Energy had their best week of the year…

  

   

  But Credit markets did not play along with financial stocks…

  

   

  The Wednesday panic spike in stocks appears to have been some kind of market-neutral liquidation as "Weak Momentum" stocks soared relative to "Strong Momentum" stocks…

  

   

  And shorts were massively squeezed also… this was the biggest short-squeeze week since the first week of Feb 2015

  

   

  And something very odd was going on in The VIX ETF complex…

  

   

  Icahn Enterprises plunged after S&P shifted to negative watch, implying a junk rating looms…

  

   

  Treasury yields see-sawed all week (shortened week), ending with 10Y practically unchanged and the short-end up 2-3bps…

  

   

  USDJPY's tumble was the biggest news this week but EUR weakness helped USD Index rise 0.75% on the week…

  

   

  Modest USD strength on the week left gold and silver lower. Copper and crude outperformed, after crude plunged to unch on the week early on today…

  

   

  The crude futures roll today sparked panic-buying in the March contract into the close which ramped the cash-roll higher…

  

   

  Notably Oil VIX plunged on the week (from over 80 to almost 60)…

  

   

   

  Charts: Bloomberg

  

  

  

  

• $500 Million In ISIS Cash "Reserves" Destroyed By US Airstrikes, Officials Swear

  On Thursday, we revealed something truly shocking: ISIS is no longer handing out free Snickers bars and Gatorade to its fighters.

  Apparently, the cash crunch created by Russia’s unrelenting assault on the group’s illicit oil trafficking operation has left Abu Bakr al-Baghdadi with little choice but to cut salaries by 50% and eliminate some of the perks soldiers have until now enjoyed.

  Like free candy bars.

  And complementary sports beverages.

  

  For those unaware, ISIS brings in around a billion a year in proceeds from various illicit activities including, but certainly not limited to, illegal crude sales, slave trading, and taxes (and yes, we deliberately lumped taxes in with “illicit activities”, an editorial decision we’re sure readers will agree with).

  Those profits are being eroded by the Russian Defense Ministry’s assault on militant oil smuggling routes, and unless Raqqa’s terror-crats can figure out how to extract a commensurate amount of profits from Libya’s oil riches, the caliphate may be set to enter a terminal decline.

  As we also noted on Thursday, Islamic State’s balance sheet demise “isn’t a consequence of one airstrike on a Mosul cash center as AP and other Western media would have you believe.”

  We were referring to the much balleyhooed strike on an ISIS “bank” in Mosul, Iraq’s second largest city that’s been controlled by ISIS for the better part of two years. “We’re talking about an organization that brings in a billion dollars a year here, so destroying a few million in hard currency isn’t going to make a difference,” we remarked.

  Well, don’t look now, but ABC is out with a new piece claiming that “coalition” strikes have destoryed more than a half billion in illegal dollars procured by Islamic State. “The U.S. believes that airstrikes in Iraq and Syria have destroyed more than $500 million in cash that ISIS used to pay its fighters and fund its terror and military operations,” ABC reports. “Ten strikes have been conducted since then with the most high profile being two airstrikes in Mosul, in northern Iraq, targeting facilities that American officials characterized as ISIS banks.” 

  Col. Steve Warren, the U.S. military spokesman in Baghdad now says “hundreds of millions of dollars” have been destroyed by US airstrikes in the past several months. That’s a rather remarkable upgrade to his previous assessment in which he claimed “tens of thousands” had likely been vaporized.

  “Obviously, it’s impossible to burn up every single bill,” Warren says. “So presumably they were able to collect a little bit of it back. But we believe it was a significant series of strikes that have put a real dent in their wallet.”

  We imagine Janet Yellen will say the exact same thing when the FOMC runs out of options and bans cash.

  

  

  

  

  

• Bank of America: "Corporate Balance Sheets Are The Most Unhealthy They Have Ever Been"

  BofA’s HY credit strategist Michael Contopoulos, whose work we have recently presented on several occasions, has been rather dour over the past year on the future of HY debt, as the junk bond market first descended into purgatory, and then right into the 9th circle of hell, courtesy of a collapse in the energy sector unlike anything seen in history…

  

  … a collapse which virtually everyone admits will spread into all other sectors and products: it’s just a matter of time.

  However, rarely if ever have we heard Contopoulos as downright apocalyptic as he is in his latest note, “A Minsky Moment”, which has to be read to be believed, if only for the selected excerpts below:

  With a view that the market will eventually price in a much worse default environment than it is currently, we are left trying to determine when peak spreads will occur and for how long they will last. Unfortunately, when peak spreads are reached is not consistent across time periods, making it difficult to time the optimal entry. For example, in 1989 spreads peaked 178 days before the default rate peaked, in 2002 it was 165 days after, and in 2008 it was 290 days before (Chart 2). Convoluting the picture today is that the Energy default rate has the potential to skew that of the overall market. For example, if high yield E&P companies realize a 50% default rate this year and the rest of Energy experiences a 25% default rate, the Energy component of the market default rate could be nearly 6ppt. If the rest of the market experiences just a 4ppt rate, the market could realize double digit default rates in 2016, despite a relatively benign  non-commodity contribution.

   

  

  * * *

  In our opinion, however, we think the biggest issue in the market is the buildup of corporate leverage without a place for it to go. And what will likely cause peak spreads is not an increase in defaults, but a capitulation moment that creates a rush for the exits. In this way, we think the 1989 and 2008 cycles are more representative of what we could see this go around, as max spreads occur before the highest defaults – whether that is in 2016 or 2017 will depend on the timing of the catalyst.

  * * *

  Although we have argued for some time that what matters to market performance is underlying fundamental growth, we have further argued that should high yield be the canary in the coal mine for earnings and the macro economy, the ensuing crisis is likely to be one defined by the excessive credit creation in the corporate market. Should a market meltdown be accompanied with a lack of inflationary pressure, the credit creation of the last 5 years will likely be met with a period of significant credit destruction.

   

  And in a world where corporate balance sheets are arguably the most unhealthy they have ever been (all-time high leverage in HG and HY) where companies have relied on cheap debt to fund a growth through acquisition strategy, what happens if funding is either unavailable or too expensive to make a growth through acquisition strategy make sense? Same goes for buybacks and special dividends? Then one would have to cut capex. But with little capex to cut, personnel could be cut next (particularly if those people are beginning to cost more). And when coupled with a consumer that is already saving 5.5% of disposable income, should we see layoffs amidst an already low GDP, poor CEO confidence, and banks that are risk averse and perhaps hurting with commodity exposure, things could potentially get messy in such a scenario.

  * * *

  … perhaps the biggest innovation of the post-GFC years, and potentially the most detrimental and levering, was the massive increase in the Fed’s balance sheet on the back of quantitative easing. As the Fed’s financial engineering created a lack of yield globally, opportunities to invest in corporate debt abounded both within the US and globally. Although consumer and bank balance sheets have been repaired, the post-GFC easy monetary world created an unsustainable thirst for corporate debt that earnings growth never supported (Chart 9 and Chart 10).

   

  

   

  Herein lies our concern for markets and where the fear of a Fisherian debt deflation spiral can become worrisome. Although it is unlikely that the corporate market is enough to cause outright deflation, certainly a corporate credit bust can create disinflation or enhance deflation if it already exists. As liquidation leads to falling prices, dollar strength causes the very debt that needs to be paid down all the larger. Liquidation leads to defaults and layoffs, which, in a post-Volcker world, would likely cause banks to pull back on lending even further. The lack of lending coupled with job losses could create a weak consumer, which would further propagate a negative feedback loop to corporate earnings and further liquidation. Although we stress that this is not the scenario our economists envision for the US economy, we think attention needs to be paid to the potential impact credit markets can have on the macro economy, should the debt deflation cycle kick off.

  And in a subsequent post we will lay out the three potential catalysts to the capitulations that BofA believes could unleash the endgame of this particular cycle of central planning. 
  

  

  

  

  

  

• Sam Zell:"We Are Already In Recession"

  "We are either already in a recession or rapidly moving towards one," warns billionaire investors Sam Zell. A stunned Maria Bartiromo is shocked to hear from Zell that world trade has slowed dramatically and currency wars and election uncertainties have contributed to this. Most shocking of all to the Keynesian pump-primers (and oil bulls) is Zell's remarks that "when I look around the world for prospective demand, it's not there… demand is pretty weak." Markets are not pricing in recession and Zell warns, even with recent declines that "this is pretty frothy" thanks to easy money and he is a seller not a buyer.

  Zell warns – "The Fed is out of tools [to save the markets].. and that is going to make this more problematic."

  

  

  

  

  

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