• CeNTRaL PLaNNiNG!

  

  

  

  

  

• Government Wants To "Implant Recipients Of Welfare Assistance With Satellite-Tracked Chips"

  Submitted by Mac Slavo via SHTFPlan.com,

  Implantable RFID tracking chips. You know, to stop terrorism.

  And to keep tabs on all the welfare queens, in order to keep tax dollars accountable.

  There will be other rationales, too.

  But really, governments just want to do all the spying they can within their power – and right now, technology offers more power than ever before to carry out universal surveillance, track and trace every person and every thing and put civil rights in the backseat where they belong.

  The latest proposal from a politician in the Finnish government seems like a near-future dystopic film, but may not be far reality.

  It’s not much of a stretch to imagine that the U.S., Britain or other governments in Europe would do this too, if they could get away with it.

  In fact, an RFID chipped population could only be years away.

  Sputnik News reports:

  A politician from Finland’s conservative Finns Party suggested implanting welfare recipients with satellite-tracking chips following news that some recipients continued receiving payments after leaving the country to join ISIL.

  A member of Finland’s right-wing Finns Party, Pasi Maenranta, has suggested implanting all recipients of government assistance with satellite-tracked chips if they choose to leave the country.

   

  Maenranta made the proposal after Finnish media revealed that some recipients of government assistance continued to receive payments after leaving the country to join ISIL in Syria and Iraq.

   

  “The law should be changed: To receive payments from Kela [the Social Insurance Institution], one has to tell exact data about your location using your personal code, read by a satellite. It is also possible to implant electronic chips to all going abroad, who for example receive medical welfare from Kela,” Maenranta wrote on his Facebook page.

  It is true that Western governments essentially created ISIS, by agitating angry Muslims with continued aggression, while at the same time funding the “new al Qaeda” extremist group via the misguided efforts to arm and bankroll “Libyan rebels” and “Syrian rebels.”

  Really, the Pentagon and NATO have been building up our own enemy, and using its horrendous violence to frighten the public back into the War on Terror.

  Under the new twist, Muslim immigration to the West has been increased, and Western governments have been subsidizing future jihadists, too. Many are on the government dole, until and even after, they decide to leave and join ISIS/ISIL.

  Meanwhile, normal struggling citizens who accept government assistance might be tracked via an implanted chips… betraying all the rights governments in “free countries” are supposed to protect. They might not be doing anything wrong at all, but now they are under constant watch.

  But as George W. Bush famously said, “they hate us for our freedoms,” right?

  

  

  

  

  

• The #1 Reason Why Donald Trump Is What America Needs (And Deserves)

  Submitted by Simon Black via SovereignMan.com,

  Just a few weeks ago, US talk show host Stephen Colbert was asked if he thought that Donald Trump had a chance of becoming President of the United States.

  Colbert responded sincerely. “Honestly, he could. And that’s not an opinion of Trump. That’s my opinion of our nation.”

  He’s right. The Land of the Free may very well be ready for something completely different. And Trump certainly seems able to deliver.

  He is, after all, unique in his field. Donald Trump has never served in politics, and his blunt style is almost the exact opposite of every other major candidate.

  But there’s one thing that really sets him apart, that, in my opinion, makes him the most qualified person for the job:

  Donald Trump is an expert at declaring bankruptcy.

  When the going gets tough, Trump stiffs his creditors. He’s done it four times!

  Candidly, this is precisely what the Land of the Free needs right now: someone who can stop beating around the bush and just get on with it already.

  As history shows, a default is inevitable.

  The calculus is quite simple: when governments take on too much debt, they start having to divert a huge amount of their tax revenue just to pay interest.

  This means that, at a minimum, the government has to sacrifice many of the promises they made to their citizens. They cut other programs in order to have enough money to pay interest.

  But that’s not too popular. So instead they typically just borrow more money… until they’re borrowing money just to pay interest on money they’ve already borrowed.

  This makes the problem exponentially worse.

  Debt skyrockets. And soon the government is spending more on interest payments than national defense. (The US is almost at this point).

  Eventually a bankrupt government has no choice: either default on their bondholders, or default on the obligations they made to their citizens. Or both.

  This could take the form of a ‘selective default’. For example, the US government could default on the $2.4 trillion that it owes the Federal Reserve.

  Or the $1.2 trillion that it owes China.

  These are both possibilities.

  But the prospect of default on “risk free” US government bonds would throw the global financial system into a tailspin; not to mention it would be the final nail in the coffin for the US dollar’s dominant reserve status.

  Fortunately there are easier options for Uncle Sam.

  The biggest debts that are owed by the US government are the obligations they owe to you.

  Specifically, all the benefits like Social Security and Medicare they promised to American taxpayers.

  The US government’s own numbers estimate these obligations at nearly $42 TRILLION, completely dwarfing what they owe China, or anyone else.

  Then there’s the obligation they have to preserve the purchasing power of the $12 trillion held by the American people.

  That’s the current value of the money supply in the United States right now.

  History shows that debasing a nation’s currency is one of the easiest and most effective ways for bankrupt governments to plunder their citizens’ wealth, little by little over time.

  As I explain in today’s podcast, the hard reality that most people don’t seem to get is that the US government is bankrupt.

  This isn’t some wild assertion or conspiracy theory; their own financial statements show that the government’s ‘net worth’ is NEGATIVE $17.7 trillion.

  And yes, the US is already borrowing money just to pay interest.

  In fact the combined expenses of interest on the debt plus mandatory entitlements like Social Security nearly exceed their entire tax revenue.

  In other words, you could eliminate nearly everything we think of as government– the EPA, the IRS, Homeland Security, etc. and it wouldn’t make a dent in the national debt.

  When things get this dire, it doesn’t matter who sits in the chair.

  You might as well elect a chimpanzee in the hopes that Mister Bubbles might accelerate the decline.

  Donald Trump may very well be that chimpanzee. Especially given his unparalleled experience in declaring bankruptcy.

  Nations that pass the economic point of no return can’t rebuild until they hit rock bottom.

  And the US is way past that point. So let’s get on with it already and hit the reset button.

  *  *  *
  Join me for more in today’s podcast as I break down the details of the US government’s $60 trillion in liabilities– and what you can do about it.

  click image for full podcast…

  

  

  

  

  

  

• The Future (As Predicted By Science Fiction)

  Based on speculative fiction, the following visualization analyzes 62 ‘foretold’ future events (social, scientific, technological, or political). Many are catastrophic, but, in the end – good news – in 802,701 the world will still exist and everything will be more or less ok…

   

  

   

  Source: OurWorldInData.org

  

  

  

  

  

• The Crisis Is Spreading: China, Australia, Brazil, Canada, Sweden…

  Earlier today, we posted an excerpt from IceCap Asset Management’s latest letter to investors focusing on the farce that is the Greek bailout #3, which can be summarized simply by the following table…

  

  … and Keith Dicker’s assessment which was that “for Greece, it’s mathematically impossible to repay its debt” and that the Greek “economy continues to plummet to deeper depths and is now -33% less than where it was in 2008.”

  But the truth is that for all the endless drama, Dicker continues, “the Greek debt crisis isn’t THE crisis. Rather it is simply a symptom of a much larger global debt crisis.”

  The problem is that the “larger global debt crisis” is finally metastasizing and spreading to more places, all of which are large enough that they can not be simply swept under the rug, like Greece.

  * * *

  IceCap’s Keith Dicker continues:

  We’ve written before that governments all around the world have borrowed too much money and the weight of these debts are choking economic growth.

  And to make matters worse – these very same governments and their central banks have implemented various plans that have only made matters worse.

  Our view has not changed – the global debt crisis has escalated to a point where the government bond bubble has inflated itself to become the mother of all bubbles. It’s going to burst, and when it does it wont be pretty.

  Further evidence to support our view is as follows:

  Canada – the collapse in oil and commodity markets has pushed the country into recession and the Canadian Dollar to decline to levels lower than that reached during the 2008 crisis.

  Oil dependent provinces Alberta and Newfoundland remain in deep denial. Since everyone in these provinces have only ever experienced a booming oil market, many naively believe things will bounce back – and quickly.

  Meanwhile, both Toronto and Vancouver housing markets also remain in denial as they continue to go gangbusters. Buyers today are likely buying at all-time highs.

  And as we predicted last year, the Bank of Canada has cut (not raised) interest rates twice in the last 6 months.

  We fully expect the Bank of Canada to eventually cut interest rates to 0% and start a money printing program as well. And for the stunner – NEGATIVE interest rates will not be that far behind.

  Australia – Over the last 20 years, China has been viewed as the growth engine of the world, and justifiably so. With annual growth rates between 8% to 15%, China’s economy was literally eating every rock, stalk and barrel of practically every commodity in the world.

  And naturally, any country or company that produced these commodities made a tonne of money – including Australia.

  Today, China’s growth rate has slowed to about 3% which is a dramatic slow down compared to what it achieved in the past. This slowdown and China’s effort to even maintain these rates, will have significant repercussions around the world.

  And the first up to bear the brunt of this slowdown is its closest supplier of raw materials – Australia.

  With dark clouds on the economic horizon, the Australian government and central bank is doing everything possible to prevent the unpreventable recession.

  Interest rates have been reduced to all-time historical lows, meanwhile the Australian Dollar has plummeted -25% over the last year. Yet – the negative outlook has not improved.

  Brazil – Like Australia, Brazil has benefitted immensely from China’s growth. And now, also like Australia, it too is feeling the affects of the dramatic Chinese slowdown.

  The economy has now declined for 12 consecutive months making it both the longest and deepest recession in 25 years.

  But wait – it gets worse. Despite declining growth, inflation continues to soar higher causing interest rates to rise as well.

  And if that wasn’t bad, also know that the Brazilian currency has fell off the cliff at -53%.

  Sweden – Unlike Australia and Brazil, Sweden relies very little on China as a buyer of last resort. Yet, the Swedish economy is also not very hot these days.

  In fact, instead of spectacular and dramatic declines in anything, it is doing the exact opposite – it just isn’t moving.

  While Sweden isn’t in the Eurozone, it is smack dab next to it and that in itself is reason enough for the lack of growth. We’ve written before how the debt crisis in the Eurozone is acting like a giant, slow moving tornado that is sucking the life out of the economy and everything near by. And unfortunately for Sweden, it is very near by.

  While economic growth in the Nordic state hasn’t declined, it hasn’t accelerated either – and this is what has many worried.

  So worried, that the central bank shocked everyone not once but twice, by first announcing that they would begin to print money, and then when they announced that interest rates would be NEGATIVE.

  These actions are so severe, that we need to repeat them:

  1) MONEY PRINTING
  2) NEGATIVE INTEREST RATES

  It is hoped that these actions will cause people and companies to loosen their wallets and start spending again. Yet, what the government and the central bank doesn’t understand is that these actions will actually make the problem worse.

  As the global economy continues to move as we expect, there is nothing Sweden can do to change what is coming – a global recession and a significantly weaker Krona.

  China, Australia, Brazil, Canada, Sweden – it is beyond us how anyone can declare the crisis isn’t spreading. Be prepared – there are going to be lots of opportunities to both make and lose money.

  But first, you have to recognize what is happening.

  * * *

  IceCap’s full letter below

  

  

  

  

  

• Americans Are Finally Waking Up To "False Flag" Terror

  From Washington's blog via GlobalResearch.ca,

  Governments Admit They Carry Out False Flag Terror

  Governments from around the world admit they carry out false flag terror:

  • A major with the Nazi SS admitted at the Nuremberg trials that – under orders from the chief of the Gestapo – he and some other Nazi operatives faked attacks on their own people and resources which they blamed on the Poles, to justify the invasion of Poland. Nazi general Franz Halder also testified at the Nuremberg trials that Nazi leader Hermann Goering admitted to setting fire to the German parliament building, and then falsely blaming the communists for the arson

  • Soviet leader  Nikita Khrushchev admitted in writing that the Soviet Union’s Red Army shelled the Russian village of Mainila in 1939, and declared that the fire originated from Finland as a basis launching the Winter War four days later

  • Israel admits that an Israeli terrorist cell operating in Egypt planted bombs in several buildings, including U.S. diplomatic facilities, then left behind “evidence” implicating the Arabs as the culprits (one of the bombs detonated prematurely, allowing the Egyptians to identify the bombers, and several of the Israelis later confessed) (and see this and this)

  • The CIA admits that it hired Iranians in the 1950′s to pose as Communists and stage bombings in Iran in order to turn the country against its democratically-elected prime minister

  • The former Italian Prime Minister, an Italian judge, and the former head of Italian counterintelligenceadmit that NATO, with the help of the Pentagon and CIA, carried out terror bombings in Italy and other European countries in the 1950s and blamed the communists, in order to rally people’s support for their governments in Europe in their fight against communism. As one participant in this formerly-secret program stated: “You had to attack civilians, people, women, children, innocent people, unknown people far removed from any political game. The reason was quite simple. They were supposed to force these people, the Italian public, to turn to the state to ask for greater security”(and see this)(Italy and other European countries subject to the terror campaign had joined NATO before the bombings occurred). And watch this BBC special

  • As admitted by the U.S. government, recently declassified documents show that in the 1960′s, the American Joint Chiefs of Staff signed off on a plan to blow up AMERICAN airplanes (using an elaborate plan involving the switching of airplanes), and also to commit terrorist acts on American soil, and then to blame it on the Cubans in order to justify an invasion of Cuba. See the following ABC news report; the official documents; and watch this interview with the former Washington Investigative Producer for ABC’s World News Tonight with Peter Jennings.

  • 2 years before, American Senator George Smathers had suggested that the U.S. make “a false attack made on Guantanamo Bay which would give us the excuse of actually fomenting a fight which would then give us the excuse to go in and [overthrow Castro]“.

  • And Official State Department documents show that – only nine months before the Joint Chiefs of Staff plan was proposed – the head of the Joint Chiefs and other high-level officials discussed blowing up a consulate in the Dominican Republic in order to justify an invasion of that country. The 3 plans were not carried out, but they were all discussed as serious proposals

  • The South African Truth and Reconciliation Council found that, in 1989, the Civil Cooperation Bureau (a covert branch of the South African Defense Force) approached an explosives expert and asked him “to participate in an operation aimed at discrediting the ANC [the African National Congress] by bombing the police vehicle of the investigating officer into the murder incident”, thus framing the ANC for the bombing

  • An Algerian diplomat and several officers in the Algerian army admit that, in the 1990s, the Algerian army frequently massacred Algerian civilians and then blamed Islamic militants for the killings (and see this video; and Agence France-Presse, 9/27/2002, French Court Dismisses Algerian Defamation Suit Against Author)

  • Senior Russian Senior military and intelligence officers admit that the KGB blew up Russian apartment buildings and falsely blamed it on Chechens, in order to justify an invasion of Chechnya (and see this report and this discussion)

  • According to the Washington Post, Indonesian police admit that the Indonesian military killed American teachers in Papua in 2002 and blamed the murders on a Papuan separatist group in order to get that group listed as a terrorist organization.

  • The well-respected former Indonesian president also admits that the government probably had a role in the Bali bombings

  • As reported by BBC, the New York Times, and Associated Press, Macedonian officials admit that the government murdered 7 innocent immigrants in cold blood and pretended that they were Al Qaeda soldiers attempting to assassinate Macedonian police, in order to join the “war on terror”.

  • Although the FBI now admits that the 2001 anthrax attacks were carried out by one or more U.S. government scientists, a senior FBI official says that the FBI was actually told to blame the Anthrax attacks on Al Qaeda by White House officials (remember what the anthrax letters looked like). Government officials also confirm that the white House tried to link the anthrax to Iraq as a justification for regime change in that country

  • Former Department of Justice lawyer John Yoo suggested in 2005 that the US should go on the offensive against al-Qaeda, having “our intelligence agencies create a false terrorist organization. It could have its own websites, recruitment centers, training camps, and fundraising operations. It could launch fake terrorist operations and claim credit for real terrorist strikes, helping to sow confusion within al-Qaeda’s ranks, causing operatives to doubt others’ identities and to question the validity of communications.”

  • United Press International reported in June 2005:
    
    

    U.S. intelligence officers are reporting that some of the insurgents in Iraq are using recent-model Beretta 92 pistols, but the pistols seem to have had their serial numbers erased. The numbers do not appear to have been physically removed; the pistols seem to have come off a production line without any serial numbers. Analysts suggest the lack of serial numbers indicates that the weapons were intended for intelligence operations or terrorist cells with substantial government backing. Analysts speculate that these guns are probably from either Mossad or the CIA. Analysts speculate that agent provocateurs may be using the untraceable weapons even as U.S. authorities use insurgent attacks against civilians as evidence of the illegitimacy of the resistance.

  • Undercover Israeli soldiers admitted in 2005 to throwing stones at other Israeli soldiers so they could blame it on Palestinians, as an excuse to crack down on peaceful protests by the Palestinians

  • Quebec police admitted that, in 2007, thugs carrying rocks to a peaceful protest were actually undercover Quebec police officers (and see this)

  • At the G20 protests in London in 2009, a British member of parliament saw plain clothes police officers attempting to incite the crowd to violence

  • A Colombian army colonel has admitted that his unit murdered 57 civilians, then dressed them in uniforms and claimed they were rebels killed in combat

  • U.S. soldiers have admitted that if they kill innocent Iraqis and Afghanis, they then “drop” automatic weapons near their body so they can pretend they were militants

  • The highly-respected writer for the Telegraph Ambrose Evans-Pritchard says that the head of Saudi intelligence – Prince Bandar – admitted last the Saudi government controls “Chechen” terrorists

  

  Painting by Anthony Freda

  So Common … There’s a Name for It

  This tactic is so common that it was given a name for hundreds of years ago.

  “False flag terrorism” is defined as a government attacking its own people, then blaming others in order to justify going to war against the people it blames. Or as Wikipedia defines it:

  False flag operations are covert operations conducted by governments, corporations, or other organizations, which are designed to appear as if they are being carried out by other entities.

   

  The name is derived from the military concept of flying false colors; that is, flying the flag of a country other than one’s own. False flag operations are not limited to war and counter-insurgency operations, and have been used in peace-time; for example, during Italy’s strategy of tension.

  The term comes from the old days of wooden ships, when one ship would hang the flag of its enemy before attacking another ship in its own navy. Because the enemy’s flag, instead of the flag of the real country of the attacking ship, was hung, it was called a “false flag” attack.

  Indeed, this concept is so well-accepted that rules of engagement for naval, air and land warfare all prohibit false flag attacks.

  Leaders Throughout History Have Acknowledged False Flags

  Leaders throughout history have acknowledged the danger of false flags:

  “This and no other is the root from which a tyrant springs; when he first appears he is a protector.”
  – Plato

   

  “If Tyranny and Oppression come to this land, it will be in the guise of fighting a foreign enemy.”
  – U.S. President James Madison

   

  “A history of false flag attacks used to manipulate the minds of the people! “In individuals, insanity is rare; but in groups, parties, nations, and epochs it is the rule.”
  ? Friedrich Nietzsche

   

  “Terrorism is the best political weapon for nothing drives people harder than a fear of sudden death”.
  – Adolph Hitler

   

  “Why of course the people don’t want war … But after all it is the leaders of the country who determine the policy, and it is always a simple matter to drag the people along, whether it is a democracy, or a fascist dictatorship, or a parliament, or a communist dictatorship … Voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is to tell them they are being attacked, and denounce the pacifists for lack of patriotism and exposing the country to danger. It works the same in any country.”
  – Hermann Goering, Nazi leader.

   

  “The easiest way to gain control of a population is to carry out acts of terror. [The public] will clamor for such laws if their personal security is threatened”.
  – Josef Stalin

  People Are Waking Up to False Flags

  People are slowly waking up to this whole con job by governments who want to justify war.

  More people are talking about the phrase “false flag” than ever before.

  

  

  

  

  

• America's Economic Reset Will Trigger Global Recession, New Crises

  Submitted by Eugen Bohm-Bawerk

  

  In Episode 1 we showed how the US labour market changed dramatically from the 1970s on back of excess money printing which allowed Americans to buy tradable goods on the international market, hollowing out its own manufacturing base, and essentially creating an unsustainable consumer driven economy where the broad masses get their employment within service sector.

  We will now take that a step further and look at what this has meant for the US worker. As our first chart shows, non-supervisory real wages stagnated in the early 1970s and has essentially remained flat ever since.

  Measured labour productivity on the other hand continued upward, but its rate of growth shifted down. More on this in our next blog post.

  

  The American middle class, i.e. the non-supervisory workers, managed to grow their consumption in the midst of stagnating wages through

  • moving to two income households (women constitute almost 50 per cent of the labour force today)

  

  • by increasing debt

  

  It should be clear that when the share of women in the labour force has reached 50 per cent and further leverage of a shrinking household income has become counterproductive the end-game has started. The only way to increase living standards from here will be the old fashioned way; consume less than you produce and productively invest the surplus.

  This brings us back to the previous post, where we suggested the end-game will be one where global manufacturing powerhouses such as China, Japan and Germany will discover their overexposure to exports to the same extent that the US is overexposed to its service sector. As Americans start to save more, invest it domestically and rebuild their manufacturing base global exporters will be forced to do the opposite. Needless to say, this change will not come voluntarily, but through recession, financial crisis and necessity. Excesses must be liquidated at some point, no matter.

  But why did US wages stagnate? Simple, through  a Faustian bargain they traded highly productive jobs in the manufacturing sector for low productive jobs in the service sector. While it felt great at the time – we are all amazed to see the convenient lifestyle Americans live – it came with long term consequences.

  As the US employment changed toward part-time, low benefit, low paid service sector jobs the quality in the overall labour market deteriorated. We have made a job quality index to depict just this. Unsurprisingly, this index, along with so many, peaks right after Bretton-Woods collapses. And the really scary thing is how it has completely fallen off a cliff in the period after the financial crisis.

  

  And while we could conclude this missive here, we will repeat an argument we made in How the FOMC got institutionally corrupt because it is a direct result of the changes that has occurred in the US labour market.

  The so-called wealth effect that rules today’s macroeconomic model output brings quacks and charlatans like Greenspan to claim that stock market gains cause economic growth; perversely enough they are semi-right due to faulty concept of  GDP  and the way inflated asset values in the US can be used as leverage to purchases tradable goods on the international market. The last chart today talks volumes about what is going on in US policy circles, and why things have become as confused as they are.

  

  

  

  

  

  

• Why the Next Round of the Crisis Will Be Exponentially Worse Than 2008

  As you know, we’ve been calling for a bond market crisis for months now. That crisis has officially begun in Greece, and will be spreading in the coming months. Currently it’s focused in countries that cannot print their own currencies (the PIIGS in Europe, particularly Greece).

   

  However, China and Japan are also showing signs of trouble and ultimately the bond crisis will be coming to the US’s shores.

   

  However, it’s critical to note that crises do not unfold all at once. The Tech Bubble, for instance, which was both obvious and isolated to a single asset class, took over two years to unfold.

   

  As terrible as the bust was, that crisis was relatively small as far as the damage. At its peak, the market capitalization of the Tech Bubble was less than $15 trillion. Moreover, it was largely isolated to stocks and no other asset classes.

   

  By way of contrast, the bond bubble is now well over $199 trillion in size. And if we were to include credit instruments that trade based on bonds, we’re well north of $600 trillion.

   

  Not only is this exponentially larger than global GDP (~$80 trillion), but because of the structure of the banking system the implications of this bubble are truly systemic in nature.

   

  Modern financial theory dictates that sovereign bonds are the most “risk free” assets in the financial system (equity, municipal bond, corporate bonds, and the like are all below sovereign bonds in terms of risk profile).

   

  The reason for this is because it is far more likely for a company to go belly up than a country.

   

  Because of this, the entire Western financial system has sovereign bonds (US Treasuries, German Bunds, Japanese sovereign bonds, etc.) as the senior most asset on bank balance sheets.

   

  Because banking today operates under a fractional system, banks control the amount of currency in circulation by lending money into the economy and financial system.

   

  These loans can be simple such as mortgages or car loans… or they can be much more complicated such as deriviative hedges (technically these would not be classified as “loans” but because they represent leverage in the system, I’m categorizing them as such).

   

  Bonds, specifically sovereign bonds, are the assets backing all of this.

   

  And because of the changes to leverage requierments implemented in 2004, (thanks to Wall Street lobbying the SEC), every $1 million in sovereign bonds in the system is likely backstopping well over $20 (and possibly even $50) million in derivatives or off balance sheet structured investment vehicles.

   

  Globally, the sovereign bond market is $58 trillion in size. 

   

  The investment grade sovereign bond market (meaning sovereign bonds for countries with credit ratings above BBB) is around $53 trillion. And if you’re talking about countries with credit ratings of A or higher, it’s only $43 trillion.

   

  This is the ultimate backstop for over $700 trillion in derivatives. And a whopping $555 trillion of that trades based on interest rates (bond yields).

   

  The significance of these developments cannot be overstated. The financial system today is even more leveraged than it was in 2008. The US alone has 30% more debt in the financial system… and even less bonds backstopping it because of the Fed’s QE programs.

   

  A new crisis is approaching. Smart investors are preparing now, BEFORE it hits.

   

  If you've yet to take action to prepare for this, we offer a FREE investment report called the Financial Crisis "Round Two" Survival Guide that outlines simple, easy to follow strategies you can use to not only protect your portfolio from it, but actually produce profits.

   

  We made 1,000 copies available for FREE the general public.

   

  As we write this, there are less than 15 left.

   

  To pick up yours, swing by….

  http://www.phoenixcapitalmarketing.com/roundtwo.html

   

  Best Regards

   

  Phoenix Capital Research

   

  Our FREE e-letter: www.gainspainscapital.com

   

   

   

  

  

  

  

• China's Debt Load To Hit 250% Of GDP In 5 Years, IMF Says

  Anyone who follows China knows that the country faces a particularly vexing problem when it comes to debt. The way we explain it is simple: Beijing is attempting to deleverage and re-leverage simultaneously. Needless to say, this isn’t possible, but that hasn’t stopped China from trying, as is clear from the multitude of contradictory policies and directives that have emanated from Beijing over the course of the last nine months. 

  Nowhere is the confusion more apparent than in China’s handling of its local government debt problem. In an effort to skirt official limits on borrowing, the country’s provincial governments racked up an enormous amount of off-balance sheet liabilities. These loans carried higher interest rates than would traditional muni bonds and ultimately, servicing the debt became impossible. In order to help provinces deleverage, Beijing launched a program whereby high interest LGFV loans can be swapped for new local government bonds that carry substantially lower interest rates. In fact, yields on the new bonds are close to yields on general government bonds meaning provincial governments are saving somewhere on the order of 300 to 400 bps. But there’s a problem. Banks aren’t particularly keen on swapping a higher yielding asset for a lower yielding one. The PBoC’s solution was to allow the new bonds to be swapped for central bank cash which the banks could then re-lend into the real economy. The problem with this is that it transforms a deleveraging effort (the local government refi program) into a re-leveraging program (the LTRO component). Shortly after the program was launched, the PBoC effectively negated the entire effort when it moved to loosen restrictions on the very same LGVF loans that caused the problem in the first place. 

  Admittedly, lengthy discussions about fiscal mismanagement across China’s various provincial governments doesn’t make for the most exciting reading, but it’s hugely important from a big picture perspective. Why? Here’s why:

  

  That’s from the IMF and as you can see, local government debt will account for an estimated 45% of GDP by the end of this year. If one looks at what is classified as “general government debt”, China’s debt-to-GDP ratio looks pretty good – especially by today’s standards. Simply counting central government debt and local government bonds, the country’s debt-to-GDP ratio is just a little over 20%. Thus, if you fail to include the provincial LGVF debt burden, the effect is to dramatically understate China’s debt-to-GDP.

  Below, find two charts from the IMF, the first showing China’s actual debt-to-GDP (i.e. including LGFV financing) and another showing China’s total debt-to-GDP (which includes corporate debt and which you’ll note is set to hit 250% of GDP by 2020). We’ve also included some color from the Fund’s debt sustainability analysis.

  

  

  From the IMF:

  Without reforms, growth would gradually fall to around 5 percent in 2020, with steeply increasing debt ratios.

   

  The general government debt is slightly above 20 percent of GDP over the projection periods. Augmented debt, however, rises to about 71 percent of GDP in 2020 from less than 57 percent of GDP in 2014. Even with the favorable interest rate-growth differential, augmented debt rises over the medium term as the augmented deficit is assumed to decline gradually. 

   

  The augmented debt level is also sensitive to a contingent liability shock, which would push debt to near 100 percent of GDP in 2020. Such a shock, for instance, could be a large-scale bank recapitalization or financial system bailout to deal, for example, with a potential rise in NPLs from deleveraging. A combined macrofiscal shock would increase the debt-to-GDP ratio from about 71 percent to 78 percent in 2020.

  

  

  

  

• Liar, Liar, Pantsuit On Fire

  But will it matter?

   

  

   

  Source: Townhall.com

  

  

  

  

  

• Approaching A Global Deflationary Crisis?

  Submitted by Brian Davey via CredoEconomics.com,

  Anyone with any sense for global economic trends ought to be worried. The signs are everywhere of a serious deflationary crisis. It is obvious that Chinese growth is falling. The prices for energy and the raw materials that feed the growth economy keep falling. The demand for Chinese exports is down too. Stock Markets in Asia are falling, despite attempts to prop them up. Countries are being tempted to export their problems abroad – for example by competitive devaluation. In Europe its obvious that a “solution” is being cobbled together for the Euro and Greek crisis even though no one at all believes that it will work. At the same time the policy response of “quantitative easing” which has kept interest rates down very low has reached the end of the road. With interest rates at or near to zero the scope for addressing the crisis through monetary policy (low interest rates) is exhausted. Many pundits believe that low interest rates have not encouraged productive investment but speculative bubbles – the creation of capacity in fields that in the long run will not pay, or fuelled a casino style speculation, a giant bubble of bets that could soon collapse, bringing the global economy down with it.

  So what is going on? How do we explain the situation? In this paper I am going to argue that there are a number of ways of understanding and addressing what is developing into a global crisis. The desire to make the crisis understandable can convert into a temptation to make it seem simpler than it is. At its most banal we have the explanations that neo liberal German politicians are prone to – like the idea that the crisis is because of a lack of confidence and trust and that this can be resolved (in Europe) purely and simply by countries following the Eurozone rules. If the confidence and trust are restored then all will be well and the market will restore prosperity.

  A more adequate story is needed than this – and it is one that needs to focus on global trends not just in Europe but in the USA, the so-called developing world and above all in China. This story has a number of different plots and sub plots, not one. We need to understand how the sub plots interweave. The story is one of debt, competitive imbalances and an energy crisis and all need to be told. To make the story even more complicated we need to keep in mind too that an even more important story, that of climate change, has to be held in our minds too. If and when humanity has any chance of resolving these crises it will have to resolve that one at the same time. Will this be possible? I don’t know – what I do know is that there is a theory, by archeologist Joseph Tainter, that humanities’ problem solving capacities are limited by complexity. A friend is currently trying to get me to use twitter. However I am daunted by reducing complex situations to short simple messages. Understanding the global economy is like entering a labyrinth. As I get older I notice that some people become famous because of the clarity in the way that they write. What may not be noticed is that the apparent clarity in a political economic message is often the result of simplification. The popularity of neo-liberal economcs is like that.
  So lets look at the ways of describing the crisis. In summary this can be described as the interrelationship between 4 processes.

  (1) Structural policy stupidity – policy governance cannot cope with the complexity of the crisis. Politicians cannot cope with communicating complex messages to their peoples nor find the mechanisms to cope with the complexity of the issues.

   

  (2) Problems are also caused by uneven development between countries and sectors which cannot be sustained without methods for recycling purchasing power from the more competitive countries to the less competitive ones. These imbalances become most problematic when capital export from surplus to deficit countries slows which happens when growth slows in the deficit countries.

   

  (3) The crisis is both cause and effect of a rising amount of debt – personal, corporate, state and financial sector – which has acted as a drag on growth. As growth falls all kinds of debt become more difficult to service so the monetary authorities have tried to push interest rates down. Nevertheless the finance sector has tended to become both more speculative and more predatory as there is a “hunt for yield”. Interest rates rise when risk premiums are imposed on distressed borrowers (including states), money making occurs through financing arrangements based on “passing the risk parcel” exploiting the naivety of lenders about complex financial arrangements and by the promotion of asset price bubbles. The bigger players are rescued during crises but the smaller players (including tax payers and those who lose their state benefits) are made to pay.

   

  (4) The crisis is the result of reaching “the limits of economic growth” and, in particular, because of resource depletion in the energy sector. This is less obvious because of currently low and falling energy and commodity prices but we need to study the experience of the energy sector over last few years, not just the immediate situation. The immediate fall in commodity and energy prices is a result of the onset of the crisis – a crisis which very high and rising energy prices up until recently helped bring on. The high energy prices have been compatible with a high level of debt only because interest rates have been so low and because there has been a “hunt for yield”, something that would pay more than leaving money on deposit paying very little.

  Depletion of resources in the energy and mining sector means that it is taking more energy than before to extract energy (and other mined resources) and this has pushed up the costs of extraction of energy and other minerals. High energy costs act as a drag on the growth of the economy as a whole – because energy costs, like interest rates, enter into the production of virtually everything else. This is particularly acute problem in the energy sector itself as the energy sector is such a huge user of energy. The energy companies need a high price for energy otherwise they cannot actually make a profit. However, if energy prices are high for too long the economy wilts.

  The development of unconventional oil and gas has been possible because quantitative easing has made a large amount of money to Wall Street at a low interest rate and they have been “searching for yield” – looking for somewhere to put this money to earn a high rate of interest. This funded the voracious capital expenditure needs of the industry with its high drilling intensity. However it pre-supposed that prices would remain high enough for long enough to cover costs and this has not happened. The problem is set to get a lot worse as depletion speeds up.

  So, to repeat, the best way to tell the story of this crisis needs to relate ALL of these elements together – policy failure, debt, imbalances, energy. Each element is causatively connected to the others but sometimes in a time lagged way which obscures the relationships. Together these elements are bringing about what some observers are calling “secular stagnation”.

  “Stanley Fischer, vice-chairman of the US Federal Reserve, has laid out the predicament that forecasters face. Half way through each year, economists have had to explain why their global growth forecasts were too optimistic, he said, and this has happened “year after year”. While growth rates have been falling across the world, it’s not yet clear whether this is all a hangover from the 2008 crash or something more fundamental.”

  In my view it is “something more fundamental”. It is related to reaching the limits to growth – and this has to do with fossil fuel and materials depletion and the end of cheap energy. However, this does not exclude a partial truth in the other narratives that economists are using to explain low growth.

  In the reminder of this article I run through each of these themes in more depth.

  Explanation number one: “structural policy stupidity”

  First of all structural policy stupidity – all politics must be sold in one way or another to the governed. Even autocrats strive to govern with ideas as well as through simple fear. The rhetoric of politicians must to some degree match the way people think about things – that means one ingredient for successful politics is where politicians succeed in appealing to popular illusions embodied in “common sense”. One such popular illusion is that states have to arrange their finances using the same principles that ordinary households use to run their personal finances. Never mind that this is not true – the politicians who pursue policies and use a rhetoric that appeals to the “person in the street” viewpoint have a head start. As a number of economists have noted these politicians work with an ultra simple (and wrong) model of economic reality – that if governments follow rules and don’t borrow excessively this will inspire confidence and trust and economies will grow, spurred on by competition. It does not matter that this idea may actually be self defeating when an economy is slipping into recession – the important point is that collective illusions persist when they fulfil a collective purpose for those that hold them. In this case a key collective purpose of “the balanced budget illusion” is that it makes communicating with electorates so much easier. It enables a message of “we cannot afford” and “being cruel to be kind” to be directed against vulnerable groups who can be more easily scapegoated.

  Complex messages are not popular and don’t sell well even if they more accurately reflect reality. Please note here that I am saying something more than politicians are mistaken – my argument is that ideas like the balanced budget illusion is more than “a mistake”. It is an illusion that has a structural function in the political process. It is not an accident that this particular theme repeats itself in history again and again. There is no reason to believe that once an idea has been rejected by one generation after a bitter learning experience, that a subsequent generation that have not been through the same learning experience will not have to learn it the hard way all over again.

  One of the sayings of the management theorist Stafford Beer was that “the purpose of a system is what it does”. I really like this because it cuts through all the rhetorical justifications and excuses. If a system like the Eurozone is ruining its less competitive members in favour of the more competitive ones then this is the purpose of the system. Were it not the purpose of the system most powerful players in it would change it.

  In this regard the very structure of the Eurozone has proved ideal for putting the banking and financial elite of Europe out of reach of democratic political processes. The currency is managed at a level out of the reach of any one state with the finances of each state disciplined by a set of rules that enforces close to a balanced budget. Given the inevitable crises each government that becomes vulnerable then has to cede more and more economic policy to financial interests who are free to impose neo-liberal policies like privatisation quasi automatically. The “coup” against Greece was a design feature of the Euro and delivers the primacy of finance over any pretence of democratic politics.

  Given the complexity of eurozone governance, in which every state is supposed to have a say and decisions must be passed back to all of these governments, it seems as if governance requires a set of rules that governments adhere to, otherwise there would be endless re-negotiations for each new situation, and for each state, that would go on forever. In an interview in the New Statesman Yanis Varoufakis explained this when he described the viewpoint of Wolfgang Schaueble.

  “Schäuble was consistent throughout. His view was ‘I’m not discussing the programme – this was accepted by the previous government and we can’t possibly allow an election to change anything. Because we have elections all the time, there are 19 of us, if every time there was an election and something changed, the contracts between us wouldn’t mean anything.’”

  If you think about it this is not only a recipe for the negation of democracy it is the negation of any kind of economic policy discussion or policy variability. A common currency zone cannot work in these circumstances because it is paralysed by its complexity into ever being unable to adapt its economic policy. The default is then to a neo-liberal assumption of a balanced budget (or budget surplus, free market rules and privatisation). All it can do is to follow a set of pre-determined rules. In this case the policy that destroys economies like that of Greece appears as the price paid to avoid endless renegotiations.
  The problem for the Eurozone and the global economy is that this is leading to a massive deflation….or maybe from an elite viewpoint this is not so negative. Maybe this is not “policy stupidity” but a cunning plan???

  In a massive crisis in which only the super elite are rescued and everyone else ruined there would be a further massive concentration of wealth and power. Perhaps members of the super elite – the 1% of the 1% – think in this way. Or maybe I am paranoid.

  Explanation number two – too much debt

  

  Some economists think that that somehow debt doesn’t matter since, supposedly, debt transfers purchasing power from debtors to creditors who will spent it instead so debt is not supposed to affect “aggregate demand”. Alas this misunderstands the mechanisms of bank credit creation. In order for money creation and demand expansion to occur in the current system there is a requirement that more bank credit creation – i.e. more borrowing from banks – takes place. If individuals and companies are maxed out (“peak debt”) and if they are reluctant to take on more debt then aggregate demand cannot be increased. In fact, even if the central bank pumps out more money through “quantitative easing” this will do little or nothing to increase demand. The central bank will create money to buy bonds from banks but the money created and paid over will remain unused by the banks and the velocity of circulation will fall. The single demand expansion influence is that interest rates are lower and this is supposed to encourage investment – something that does not happen if the conditions for expansion do not otherwise exist. What happens instead is that money goes into speculation.

  Meanwhile if companies and individuals are maxed out they will be making an effort to pay back their debts to the banks. When this happens money is destroyed and goes out of circulation. More particularly chain reactions from defaults and collapsing confidence destroys the trust and confidence on which the financial system works and leads to massive deflation. Now this situation of collapsing purchasing power in the private economy could in theory be balanced out by government spending leading to the governments running deficits – but that’s against the eurozone rules.

  Explanation number three – global imbalances/failing mechanisms to recycle purchasing power

  Another explanation for current stagnation is the breakdown of mechanisms for dealing with international trade and financial imbalances. In his book The Global Minotaur Yanis Varoufakis, describes the history of the post war economy by focusing on the story of how trade and financial imbalances were managed – particularly the imbalances between the USA and the rest of the world, but also imbalances in the Eurozone. As he explains, unless there is a mechanism for recycling surpluses from countries in trade surplus back to countries in trade deficit then purchasing power drains away from the deficit countries who are put in a deflationary squeeze as is happening to Greece currently. In the initial period after world war two the USA was dominant in the global economy and was in trade surplus to the rest of the world. It used the financial flows into America that were generated by its surplus of exports over imports by investing back into the rebuilding of countries like Germany and Japan and more generally into the American design for the postwar economy as bulwark against communism. The recycling of surpluses back into deficit countries kept the boom going. But you won’t catch Germany recycling its surpluses back into Greece now.

  The answer to an export surplus in one country which occurs over and against import surpluses in other countries is for the countries with the export surplus to use the money that they earn in capital export back to the deficit countries. They invest in those countries. However, that implies that there is something in the deficit countries that is an attractive focus for investment. It implies that those countries are growing – which brings the argument round full circle. For decades the USA was the largest economy in the world and a growing economy. This meant that when the US first went into what was to be a long running trade deficit it was still worth Germans, Japanese or Chinese parking their dollar earnings as deposits into Wall Street banks or using them to lend to the US government. The dollars earned by Germany, Japan and later by China could be invested in the US economy or they could be used to buy oil. This was also because, by agreement with countries like Saudi Arabia, oil had to be purchased in dollars. This arrangement partly broke down however when Wall Street crashed in 2007 – in large part because it was operating a criminal business model. Loans were made to people who it was known would never be able to pay them back and packaged up with other assets and then sold on across the world to pension funds and other financial institutions who picked up the risk parcel, misled by ratings agencies. The ratings agencies were paid to say that the “toxic trash” was AAA grade.

  Turning the finance explanation upside down

  So, to come back to the story – yes the current problems are due to too much debt. Yes, mechanisms for recycling global financial flows arising out of trade imbalances no longer work so well after Wall Street and other banksters in London and Frankfurt are seen to be run by crooks….but one can argue that these two phenomena are also the result of the failure to grow, as much as the cause. You can turn at least a part of the argument on its head.

  What I mean by that is that a rising amount of debt in general and troubled debt in particular is not just a cause of faltering growth – the faltering growth is a cause of the increasing amount of troubled debt.

  Debt is not usually seen to be a problem for companies and individuals where their income is rising and sufficiently secure for people to pay the interest. It is when people find that their real income is stagnating or falling that more debt becomes distressed debt and distressed debt becomes the lender business model. Prudential lending pays in a growing economy with growing investment opportunities – but the temptation to resort to predatory lending occurs when there is an awareness of, even a decision to exploit, the desperation of people in trouble. This becomes part of the model. What happens when a country, or a company, or an individual, cannot pay? The answer is that the interest rate that they are supposed to pay for any new credit rises dramatically because they are now supposed to pay the lender “a risk premium”. This is the last stage of a process of debt accumulation. When a debt pyramid comes crashing down it does so because, just before it crashes, debt servicing costs get dramatically worse as “risk premiums” are loaded onto borrowers.

  This “risk premium” might lead one to suppose that lenders actually are tolerating a higher level of risk for which they must be compensated – however this is only partly true for the biggest players. When the biggest players are deemed “too big to fail” they get backed by politicians so the “risk” is taken off – that is, after all, what happened to the German and French banks that lent to Greece. The deal stitched up by the IMF and the ECB meant that they got bailed out and the debt loaded onto the Greek people. So while risk premiums allow banks to increase their take the real risks do not rise commensurately.

  The temptation to borrow under increasingly unfavourable conditions is not like borrowing to invest or to buy an asset with the secure expectation of a rising income. As debt increases the business model for lenders becomes more and more making money with distressed debt, vulture funds, passing the risk parcel and toxic trash. It occurs because borrowing states, institutions and individuals resort to what becomes a kind of gambling considered as a last resort, as an attempt at a way out of a desperate situation. That’s one of the ideas of Prospect Theory. Normally people are risk averse, they don’t risk what little they still have if they have anything left – however they do gamble when all of their other options seem hopeless anyway. Underlying all of this is that the rising incomes are no longer there. By way of contrast the institutions lending are not taking real risks because they have friends in very high places.

  Turning the imbalance argument around

  One can turn the idea about imbalances the other way round too. In one way of looking at the situation it seems that growth falters because the mechanisms to handle imbalances by recycling surpluses break down. No doubt there is truth in this but you can turn that idea round – i.e. it is when growth falters that the mechanisms to handle imbalances by recycling surpluses dry up. As we have argued the way to recycle surpluses is through capital export – the purchasing power flows back to the deficit countries not as money to purchase their goods as imports into the surplus countries but rather as money to buy into the industries and economies of the deficit countries, as investment. But who is going to invest into a stagnant or contracting economy?

  Look what happened to the German privatisation of East Germany. The institution that was entrusted to sell off East German industry, the Treuehand, made a big loss. How could that be? When the East German economy was merged with the West German economy it was at the rate of one East German mark for one West German mark. This was an early lesson of what would happen in the eurozone except that it all happened inside Germany itself. The East Germans could not compete after reunification, just like the Greeks cannot compete now. So most East German businesses were making huge losses. However, if you want to sell off companies then you have to sell them as going concerns. You have to keep them going before you sell them….which often meant making huge losses. What they got for the sale of these companies never covered these losses.

  Wolfgang Schaueble knows this – he was involved. They will not make any money selling Greek assets either. When the Austrian Railways considered a takeover of the Greek railways they said they would only do this if the Greek railways were given away. Unless Greece is growing and prospering there will be very little capital export into Greece to actually buy privatised assets.

  So, to summarise the argument so far: slowing growth can be explained by increasing debt reaching its limits and the breakdown of mechanisms to even imbalances by recycling purchasing power from surplus to deficit countries. On the other hand the fact that debt is reaching its limits and surplus recycling limits are breaking down can be explained by slowing growth. Both are true in both directions of causation and what we are seeing here is a “vicious cycle” in operation.

  Explanation number four – the energy crisis

  Now let’s add the fourth way of looking at the issues. Let us start by making a distinction between growth of production and growth of production capacity. Growth of production can occur if there is spare capacity in an economy in the form of unemployed resources which can be brought back into utilisation – but for growth to be long term there must be a growth of the capacity of an economy.

  This depends upon expenditure in capital formation – the creation of buildings, equipment and infrastructure. Capital formation is an energy intensive business because infrastructure, buildings and equipment require energy in their production – plus they require an energy throughput for their utilisation. The point about energy is that it is required for every good or service purchased. Even a haircut requires electric light or warmth in the barbers shop and to run electric clippers. Anything that enters into the production of all goods and services is a cost of production that all share. So if the cost of energy rises so does the cost of producing everything.

  The nearest comparable example of a cost that enters into the production of all goods and services is interest rates. Virtually all individuals and companies must borrow so the interest rate enters into the cost of all production and into many everyday living expenses too. You can argue therefore that the real reason that interest rates have been driven down so low by central bankers is that energy costs have been so high. It is has not been possible for the economy to sustain BOTH high interest rates AND the higher energy prices. This is the reason for the stagnation.

  Most energy intensive of all is investment in the energy and mining sector. The amount of energy required to tap and process energy is rising as it becomes harder to find, extract, process and transport oil, gas and coal from smaller, deeper, more remote, and harder to tap geological sources.

  Slowing growth of global productive capacity is the result of the global economy running up against ecological system limits. This is particularly apparent in the climate crisis and the costs that occur as a result of this but, more immediately too, in the economics of extracting fossil fuels. The long run trend is towards rising energy costs which acts as a drag upon the growth of the productive capacity of the global economic system. The most energy intensive sector of all is the energy sector itself. We can see that if we compare the amount of energy used per hour of human activity in the energy and mining sector compared to the amount of energy used per hour of human activity in other economic sectors. (This is the so called exosomatic metabolic rate). These figures are for Catalonia in 2005 because the academics who have studied this issue are mainly at the University of Barcelona but one can expect comparable figures in other places. The rates are 2,000 Megajoules per hour of human activity devoted to energy and mining. This compares to 2.8 Megajoules per hour outside of paid work in households, 75 Megajoules per hour in services and government, 331 Megajoules per hour in the building and manufacturing sector (not including energy and mining) and 175 MJ/h in agriculture. As a matter of fact 11% of the energy throughput of society was taken by the energy sector itself – even though only 0.0945% of the time of everyone in Catalonia was devoted to energy and mining.

  With energy and mining being the most energy intensive sector one would expect the impact of rising energy costs to be felt initially and most powerfully in the energy and mining sector itself. This has indeed been the case. In a presentation by Steve Kopits of the Douglas Westwood Consultancy he shows this graph (CAGR = compound annual growth rate).

  

  As can be seen the capital expenditure required per barrel of oil in the exploration and production sector has increased enormously. To extract oil is requiring greater and greater amounts of investment in exploration and production.

  We can see very clearly what is happening if we look at the statistics for fracking for shale oil in the USA. The fact that the US oil and gas industry has had to resort to fracking is a sign that American oil and gas fields are highly depleted and near to exhaustion. As an analyst called Arthur Berman puts it, fracking is the “retirement party” of the oil and gas industry. It is not a new beginning. As a matter of fact the USA, Russia and Saudi Arabia almost produce an identical amount of oil but look at the difference in the way that they produce it:

  USA = 11.7 MMBl/d, 35,669 wells, 297 million feet
  Russia = 10.9 MMbls/d, 8688 wells, 83 million feet
  Saudi Arabia = 11.4 MMBls/d, 399 wells, 3 million feet [2]

  In order to extract a roughly equivalent amount of oil the US industry has to drill almost 100 times the footage in wells and drill 90 times the number of wells. It is obvious that that will require an enormous amount of energy to get out an equivalent amount of oil (and gas) and that the cost will be a lot higher. But is this investment actually profitable? The answer is that it is only profitable at higher and higher oil prices. Different oil and gas companies require different prices to break even but, according to Kopits most of the oil companies require an oil price of at least $100 for new investment in conventional oil production to be profitable. High prices are needed in the unconventional sector too and most of the fracking companies in the USA have not been making money for several years. In the last year the price has fallen even lower.

  So how come that they are still around? How come they have not gone bust? There are several kinds of reply to this.

  Firstly, in economics things happen if people take a view of the future in which they believe that they will be profitable – even if subsequent experience shows this not to be the case. No one can know the future exactly so every investment is to some degree a gamble. A whole economic sector can share the same gamble and invest on the assumption that they will make money even if this turns out not to the case – and indeed they can be encouraged to. An oil sector drilling 90 times the number of wells and 100 times the footage is going to be immensely profitable for the companies selling and/or hiring out the drilling rigs, pipelines, tankers and other equipment. As the saying goes – in a gold rush sell shovels. A coalition can form around illusions that are profitable to some powerful players who make a lot of money even while others lose. A vested interest coalition pursuing a delusion is called a Granfalloon. It is important to realise that it is in the interests of the Granfalloon to keep on hyping their message in order to keep the money flowing. (This does not mean that the members of a Granfalloon are intentionally misleading – it means that there is an element of confirmation bias in the way that they interpret and describe things. We all do this to some degree – it is very difficult not to select and interpret available information in a way that confirms ones existing preconceptions, one’s faiths).

  Secondly, at this time with interest rates very low there have been very few places where businesses in the finance sector can make much money. There is a temptation to make money on a gamble and the oil and gas industry has been a place for Wall Street to make another gamble. This is especially the case as the collateral for the industry is in the ground. However, when the sub-prime mortgage boom went bust after 2007 banks were left with a lot of houses. Shifting them was not so easy – finding a use for the assets of insolvent fracking companies is likely to prove even more of a problem. How many banks have the expertise to run fracking companies?

  Thirdly in economics things happen with a time lag. Even if companies are making a loss they do not immediately go bust. They and their creditors may take the view that the unfavourable conditions are temporary and more credit may be extended to bridge them over what are assumed to be temporary hard times. If oil and gas prices have fallen they may still be able to sell at a higher price because they have insured themselves by selling their oil and gas already on the futures market. To respond to soon would be to lay off workers, and break up teams that would be difficult to reassemble. The temptation is to hang on, assume that difficulties are temporary and to tell the world that there are no problems, that everything is just fine, that the latest technologies make it possible to produce at a profit at even lower prices. If one looks at the figure however this does not appear to be what is happening. That part of the oil and gas pursuing new development, and particularly in countries where depletion is already advanced, are caught in a dilemma that unconventional oil and gas is expensive oil and gas – and the market cannot be made to pay these high prices over a long enough period to make the development of their part of the industry profitable.

  In conclusion

  The story thus described is one in which the world economy could be heading into a massive economic meltdown. The authors of the famous Limits to Growth, writing in 1972, thought it likely that unless humanity could adjust to the limits that there would be an overshoot and collapse sometime in the future. The crisis of 2007-2008 gave a preliminary taste of what that kind of collapse might look like. The after shocks in the Eurozone and what has been happening in Greece likewise give us a picture of what the future might be like for all of us.

  What this does not mean however is that there will be some general realisation, some mass epiphany or “Aha” moment when everyone realises in a blinding flash of insight that humanity has reached the limits of growth. There are also limits to the extent to which people change their basic faiths about the world. Such flashes of insight about their real situation do sometimes happen when people are thrown into troubled times and circumstances that challenge all that they believe. However, even then most people are reluctant to abandon their faiths as that could leave them even more disorientated and fearful – living in a world that suddenly appears a lot less secure, and facing a future that is a lot less rosy, than they previously believed.

  Most mainstream economists and politicians will continue to believe that the task at hand is “get growth going again” and, in the vast tangle of connected events, will privilege those connections and processes for their mental attention that confirm their viewpoint on what is wrong, the other people who are responsible for what has gone wrong – and what must be done to remove these people. To drum up support for themselves elite politicians of this type will no doubt identify favourite scapegoats and enemies to demonise.

  The worst futures would be where these kind of politicians get a mass following, sponsored financially by the elite, and lead emerging fascist movements.

  The best of all futures would be where these kind of political leaders drift into irrelevance because a popular majority gravitate to those who have positive community level responses of sharing, mutual aid and re-localisation connected to ecological design – and link this to a new approach to politics that supports the transformation at the base of society. This would go together with a new politics of finance to replace the debt based money system and a new politics of energy that keeps the carbon in the ground. A politics of this type would not be about “getting growth going again”. It would be about creating economic arrangements that create security for communities while conserving resource use. This would involve a revival of the commons and a solidarity economy, making growth unnecessary for a good life.

  

  

  

  

  

• Airline Begins Weighing Passengers, Will 'Exclude' Heavy Flyers

  In 2013, Samoan Air became the world's first airline to charge passengers according to their their weight. Now, two years later, Uzbekistan Airways has gone one further than the pay-by-weight model. The Tashkent-based airline has installed special weighing machines in the departure gate zones to weigh people and their hand luggage, noting that some overweight people could be excluded from busy flights on smaller planes if limits are exceeded.

  

   

  As The Daily Mail reports,

  Passengers will be put in three categories – men, women and children – and the company, who are based in Tashkent, have promised not to reveal the weight of individual passengers.

  Of course, its for your own safety…

  The company said they needed to know the weights of both people and their luggage because it was important, especially with smaller planes.

   

  In a statement they said: 'Uzbekistan Airways airline is carrying out the procedure of pre-flight weighing in order to determine the average weight of passengers with hand luggage.

   

  'According to the laws of the International Air Transport Association, airlines are obliged to carry out regular procedures of pre-flight control such as weighing passengers with hand luggage in order to observe the requirements for ensuring flight safety.

   

  'After passing check-in on a flight and prior to boarding into the aircraft, we will ask you to pass the weighing procedure with a special weighing machine placed in the departure gate zone.

   

  'The weighing record will only contain the corresponding passenger category (i.e. male/ female/ children). As for the rest, the full confidentiality of results is guaranteed.

   

  'We appreciate your assistance and thank you in advance for the help in the solution of our common task of flight safety.'

  This is not the first time an airline has instituted the pay-as-you-weigh model, but Uzbekistan's plan to exclude heavier passengers is an escalation… (as CNN reports)

  "The next step is for the industry to make those sort of changes and recognize that, 'Hey, we are not all 72 kilograms [about 160 pounds] anymore and we don't all fit into a standard seat,'" Chris Langton, Samoa Air chief executive told CNN in 2013.

   

  "What makes airplanes work is weight. We are not selling seats, we are selling weight."

  The airline's motto?

  "A kilo is a kilo is a kilo!"

  Of course, the truly sad thing about the airliness need to do this is the 'growing' gurth of a global population spoiled by fake wealth.

  *  *  *

  Of course, there is always alternative travel methods…

  

   

  *  *  *

  Finally. there is this… (via The Guardian)

  A man is suing an airline, claiming he injured his back after sitting next to an obese man who coughed a lot.

   

  James Andres Bassos has taken Etihad Airways to court in Queensland, Australia, saying he was forced to twist and contort his body for long periods on a flight in 2011 from Sydney to Dubai.

   

  Bassos’s district court claim states the “grossly overweight” passenger was spilling into his seat, coughing frequently and had fluid coming from his mouth.

   

  After five hours he asked to be moved but airline staff allegedly refused. Half an hour later, Bassos complained again and he was moved to a crew seat.

   

  However, he had to return to his seat next to the man later for another hour, and again for the final 90 minutes of the flight for security reasons, according to court documents.

   

  Bassos is claiming damages for personal injuries, saying that being forced to twist his body for such a long time to avoid contact with the other passenger gave him a back injury and exacerbated an existing back condition.

  Seriously…

   

  

  

  

  

  

• When Internet Zillions Slipped My Grasp

  From the Slope of Hope: I’ve been writing this blog for so long (over a decade), I sometimes despair that my uninteresting life will stop yielding anything worth writing about. Yes, the blog is principally about technical analysis of stocks, but I like to share anecdotes from time to time, and every time I compose a good anecdote I figure that, welp, that’s the last shareable morsel of my life. So far, though, I wind up thinking of another one, sooner or later.

  So here I am again.

  I started my company, Prophet Financial Systems, in 1992 (and, for those interested, I produced an entire video series called The Prophet’s Tale which describes its history, all the way up through when I sold it to Ameritrade).

  For the first few years, it was really just a historical data company that provided daily updates via modem; in other words, just about the least sexy high-tech outfit one could imagine. The Silicon Valley was a relatively moribund place in those days. Apple was very much on the wane, the commercial Internet didn’t exist, and most companies in this area weren’t any more thrilling to be at than, say, Johnson & Johnson, duPont, or General Dynamics.

  Things changed swiftly in the middle of 1995, however. The “big bang” was Netscape’s public offering. A much smaller event took place just one day before that, however. An electronic discussion board was launched called Silicon Investor, run by a couple of brothers (Jeff and Brad Dryer) that had moved from Kansas to the Bay Area to chase their high-tech entrepreneurial dreams.

  In a stunning example of being at the right place at the right time, Silicon Investor took off like a shot. There was nothing – – absolutely nothing – – remarkable about the web site’s design or functionality. However, it quickly became the go-to place to talk about high-tech stocks, and back in those days, there weren’t many other places to do so. The nature of communities is that once members find a home, they tend to stay there, so even as superior discussion platforms came along, the crowds still flocked to Silicon Investor.

  My own tiny company, Prophet, had built a simple charting platform, and I was looking for customers. I reached out to Brad and Jeff, and we got together at the Just Desserts coffee shop to learn about each other’s businesses and talk it over. They were good guys, and we set up an arrangement for me to provide charts to their site.

  It wasn’t really clear to me how popular their site was, though, until the news hit on April 23, 1998 that Silicon Investor had been bought by go2net for $33,000,000 in stock. Now keep in mind this was just a discussion board we’re talking about, little more sophisticated than the dial-up BBS’s I had enjoyed back in 1981 on my TRS-80. But the magic word those days was “eyeballs”, and Silicon Investor had lots of them, even though it had virtually no revenue.

  Most (if not all) of you are wondering what go2net was. Well, in those days, search engines pretty much sucked. A few companies decide to put together a “meta” search engine, the thought being that if you execute a search against a bunch of crappy search engines, maybe the consolidated results will be semi-decent. So that was pretty much what go2net did: they would submit searches to the search engines of the day and produce a list of the results.

  Of course, that was enough to create a public company (symbol GNET) which was worth hundreds of millions of dollars. (The fact that I can’t even find an image to show you what a go2net screen looked like kind of tells you how lasting and impactful the technology was). And with all that overvalued stock on hand, it was pretty simple to snap up an even smaller site like Silicon Investor for an impossibly high figure.

  Now I was watching all of this with great interest, naturally, because I had my only little business, also in the Silicon Valley, and also devoted to stock market traders, that I’d have loved to sell to go2net (or anyone!) as well. I thought, hell, my site is nicer, my technology is better, and it’s very complementary – – – why not pursue the same outcome? I’ve always had this fantasy that, in this Valley, if you work hard enough, you eventually get tapped with the magic wand, and voila, you’re suddenly rich and famous (I, errr, have dispatched this notion in my mind as of now). So i figured…………the stars had finally lined up!

  So I contacted Brad, and he said, sure, he’d tell the management at go2net about me and my business and see if there was any interest.

  A few days later, the light on my answering machine was flashing. I pressed Play, and there was a message from go2net’s CFO, suggesting I pull some information together about Prophet and mail it to him, and if it looked promising, arrange for a meeting up in Seattle. I could scarcely believe my ears. I excitedly went to press Play to listen to the message again, but in my enthusiasm, I pressed Erase instead. ARGH! I frantically emailed Brad to tell him what had happened and to try to figure out the name of the guy who called. Brad just about died laughing at my message and looped back to me shortly thereafter with the guy’s name and email.

  So I was on my own. After providing some basic financials and product background on Prophet to the CFO, he agreed it would make sense to fly me up to Seattle to meet with Russell Horowitz, go2net’s founder. I felt like I was living in a dream, because everything was happening so fast, just like I hoped it would. I imagined it wouldn’t be long before there would be a press release about Prophet and the princely sum paid for it. I would join in the glorious maelstrom of cash flying around the west coast in the late 1990s.

  “Knock ’em dead!” my wife said to me as she dropped me off at San Francisco International.

  Arriving at the high-rise tower that housed go2net, I was flush with anticipation. I met with the CFO, both of the Dryers, and was escorted in to meet the big man: Russell Horowitz, which was in his late 20s and looked cherubic with a head full of curly, lengthy hair. I was dazzled by their cool office, accustomed as I was to slumming it in a spare bedroom of my house.

  I gave Russ a demonstration of the products I had created, walked him through my patent portfolio of inventions, and discussed some of my plans for future products. He seemed satisfied with what he was hearing, so he handed me back over to the CFO.

  It was at that point I started to run out of answers, because the CFO was interested in seeing my financials. The only “financials” I had was a checking account, and my principal goal there was that it had a positive, and growing, balance at all times. This exposed the first real weakness in my tiny outfit, which was that I was completely unsophisticated about metrics. I didn’t have traffic data, financial reporting, or any of the other stuff that I considered too tiresome to bother with as a one-man shop. I promised the CFO I’d pull the information together and get it to him.

  The second weakness, and this was more severe, was Prophet’s scope. I never sought to have a “millions of eyeballs” business. Mine was in very much a niche market, and its numbers reflected that. I was hoping that wouldn’t weigh on their decision, since I was offering them was technology and, for whatever it was worth, my own vision as to where we could take it. To this day, I believe they would have been wise to make the acquisition.

  As you’ve surely gathered by now, no such acquisition took place. Although the meeting was all smiles and handshakes, it was pretty silent thereafter. I don’t know the reason they decided not to proceed. Maybe there wasn’t enough critical mass of “stuff” to interest them. But, for whatever reason, I was left on my own, slogging away in the spare bedroom, and no gigantic stock certificate was dropped into my lap.

  The irony is that, over time, Prophet kept growing, and it was a pretty good little business. I know it’s quaint, but we had real revenues, real profits, didn’t require any VC funding, and we eventually sold for $8 million in cash (as opposed to really, really, really overvalued stock.) It’s rounding error in the world of Silicon Valley, but for me, it was a great outcome on what had been a long journey.

  So what if go2net had, in fact, bought Prophet? I’m really not sure, because I don’t know (a) what the price would have been, although it certainly would have been much more than $8 million (b) what the holding period of the stock would have been (c) when I would have sold it, although knowing me, I’d probably  be anxious to convert the stock into cash as quickly as legally permitted.

  The path that go2net took, however, is plain to see. GNET stock continued to soar in value, along with all Internet companies, and it was purchased for nearly $3 billion (!) by InfoSpace (a company which itself has since fallen from grace, and which how has adopted the completely lame name of Blucora.) I’ve marked on the chart below the point when InfoSpace bought go2net:

  

  The arrow marks the approximate point when Infospace bought go2net

  As is plain from the chart above, InfoSpace went into a death spiral, losing something like 99% of its value. I would encourage you to read this fascinating piece of investigative journalism from The Seattle Times, published in March 2005, showing what kinds of insane shenanigans were happening with executives dumping stock through any means necessary. Here’s one particularly hilarious tidbit, illustrating (once again) the Orwellian language that investment banks use:

  Merrill Lynch had made millions as a consultant in the Go2Net merger. But Blodget had lost confidence in InfoSpace, records show. He asked a colleague to remove the stock from the brokerage house’s most-favored-stocks list.

  “Can we please reset this stupid price target and rip this piece of junk off whatever list it’s on?” he wrote Oct. 20. “If you have to downgrade it, downgrade it.”

  It took seven weeks, but on Dec. 11, Merrill Lynch downgraded InfoSpace to “accumulate.” The decision pummeled the stock, which fell 16 percent that day.

  Got that? “Accumulate” means “This stock sucks” to normal people. OK, we’re clear now.

  Horowitz, of course, had made zillions of dollars through all of this. He bought a $20 million spread in one of Seattle’s ritzy neighborhoods and was featured in this bizarre report in which he fires a warning shot at a guy who he saw digging up some plants from the front of his property.

  On Sept. 24, a Saturday night around 9 p.m., Horowitz saw a man digging up the plants outside the fence and along his front curb on one of his video monitors. According to the police report, he went outside, past the front fence, taking his gun as a precaution.

  Horowitz “later explained that he has had two death threats in the last six months and he was fearful that perhaps this incident might somehow be related to the threats,” the police report states. A spokesman for Horowitz said they were less specific than death threats but a cause for concern nonetheless. The Seattle Police were unaware of any threats.

  I suspect maybe the death threats could have been from ordinary, non-rich people who had had their heads handed to them by losing big on InfoSpace stock. But I digress.

  Not wanting to sit idle, Horowitz moved on with some other original go2net people to put together a new Seattle firm named Marchex which also went public (He seems quite proficient at it!) As you can see, Marchex’s performance isn’t going to win many accolades these days, except from securities litigators:

  

  Marchex isn’t exactly setting the world on fire

  You may wonder how the Dryer brothers wound up after all this. I have no earthly idea. I don’t know if they managed to dump their stock and be set for life, or if they hung on through the bitter end and wound up with pennies on the dollar. I was so disappointed at the non-sale that took place, I just fell out of touch with them completely.

  I was curious, however, to see how the site looked. I hadn’t even peeked at it since the Internet bubble, and I figured 20 years – twenty years! – after its founding, it was probably pretty slick by now. Here’s what it looks like today.

  

  Hey, SI. 1995 called, and they want their web design back.

  So, yes, the site above was once considered one of the hottest properties on the web. I read that it was re-sold to a firm for $250,000 in cash a few years ago. That’s still probably about $200,000 too high.

  We are, of course, in the throes of a bubble right now that makes the Internet bubble look like child’s play. There are still companies like Clinkle (which I’ve written about repeatedly) which garner tens of millions of venture capital and fizzle into nothing, and Facebook’s $22 billion acquisition of the Whatsapp mobile app (with all of $10 million of revenue behind the business) makes acquiring Silicon Investor for $33 million seem like the most prudent investment of the century.

  I enjoy my work, and I enjoy building small businesses (I am engaged in a new one at this very moment, far removed from my everyday blogging), but I’ve accepted that I’m never going to be touched by that magic wand. I’ve observed things around here long enough, though, to realize that the wand is sometimes a wand, and sometimes it’s a bludgeon.

  

  

  

  

• Caught On Tape: Hillary Clinton Explains Why She Loves Snapchat

  Sometimes laughter is the best medicine, especially when you’re running a Presidential campaign that’s rapidly losing momentum thanks to an FBI investigation into your e-mailing habits and a suddenly popular socialist who is surging in the polls.

  And while we appreciate a good joke now and again, we think this might come across as a bit sinister to some “everyday American” folks…

  

  

  

  

  

• Grossly Inflated Gargantuan Asset Prices

  

  Submitted by StealthFlation.org

  STEALTHFLATION: An intractable economic condition that inevitably arises as excessively issued fiat currency compulsively pursues non-productive wealth assets in a grossly over-leveraged economy, which has been artificially reflated by the Central Banking authorities, in a misguided attempt to synthetically engineer growth via extreme monetization.  (ie: Counterfeit Quantitative Easing & Interest Rate Suppression)

  This ill-advised monetary regime effectively prevents the real economy on the ground from realizing the healthy normalization of free market forces crucial to genuine capital formation, authentically derived from bona fide industrious production generating actually earned savings, the very life blood essential to inducing legitimate and sustainable economic growth.

  Under the imposition of StealthFlation, contrived asset prices are grossly inflated deliberately eliciting a vapid wealth effect, while the generative velocity of money is extinguished. Meaningless Equity Markets are pointlessly driven higher by the perverse implementation of impotent stock buybacks. Worse still, the seeds of hyperinflation are sown, as the compromised overtly financialized economy becomes increasingly dependent upon the interminable entirely destructive monetization.

  Also known as, wishful thinking and robbing Peter to pay Paul.

  

  This entirely synthesized approach to capital formation brings about the following disastrous conditions:

  1) Engenders dormant velocity of money, concealing embedded future inflationary risks to the economy.

  2) Produces highly unstable and recurring capital market asset bubbles.

  3) Drives superfluous misallocation of true investment capital, disregarding and disadvantaging the crucial SME sector.

  4) Generates excessive foreign exchange / capital market volatility and unpredictability, disrupting deliberate business development and planning.

  5) Delivers lethargic economic at the groundlevel activity with limited unsustainable growth.

  6) Encourages deleterious off-shoring of the manufacturing base.

  7) Facilitates fantastic fiscal deficit spending sprees.

  8) Decreases median incomes and new job creation.

  9) Spawns extreme income inequality and social discontentment.

  10) Eviscerates the essence of money by compromising the means of exchange and its crucial role as a conduit for savings.

  Visualizing the Vanishing Velocity of Money Vortex 

  

  The inflationary risks are deliberately concealed and remain latent due to the synthetic suppression of determinant free capital market forces.  However, the grossly excessive supply of money has definitively been created, and it will debase the currency, it’s just a matter of time, same as it ever was………..

  When an economy is healthy, there is much buying and selling and money tends to move around quite swiftly. Unfortunately, the U.S. economy is manifesting the precise opposite of that these days.  In fact, the velocity of M1 & M2 has fallen to near all-time record lows. This is a very serious indication that the underlying economy has entered a period of extreme stagnation.

  In its infinite wisdom, the Federal Reserve has been attempting to counter this economic standstill by absolutely flooding the financial system with newly printed money.  As it always does, this has created monumental financial and fixed asset bubbles. However, it has not addressed what is fundamentally and structurally wrong with our economy.  On a very basic level, the amount of real economic activity that we are witnessing is not anywhere near where it should be, and the anemic flow of money through our economy is proof positive of the ongoing dilemma.

  

  Clearly, the transmission mechanism between the relentless synthetic origination of fresh money by the monetary miracle men and the velocity at which that new money is circulating in the real underlying economy on the ground is completely disconnected, FUBAR. Why is this?  Well, it’s really not that difficult to comprehend.

  First of all, much of the supposed economic activity generated today is not being driven from the bottom up by the healthy deployment of excess savings, naturally created from genuine self-sustaining productive industrious economic activity at the fundamental level, but rather in an unnatural fashion, force fed from the top down via the easy street ZIRP/QE induced debt financing incessantly being encouraged by our misguided megalomaniac monetary authorities.

  Perhaps even more malignant, the largest capital market of them all, namely the U.S. bond market has been put down by the Fed’s activist zero bound anesthesiologist. Thus, the utterly comatose American treasury market is no longer facilitating the natural growth of traditional savings income streams generated via secure interest bearing accounts and prudential savings products throughout the financial system’s depository structure.  In short, the healthy income flows constructively generated from legitimate savings produced from genuine economic activity, namely people going to work every day, has been effectively terminated by these wizards of wanton monetary policy at the wayward central bank.

  Let’s face it, if the major pension funds can’t generate 5-6% per year holding conservative debt instruments in order to meet their massive obligations, they are up a creek without a paddle.  They require substantive returns in order to remain solvent. The Fed understands this all too well, they are most concerned on that score, and so should you be.

  Having thoroughly shut down the sound, well established and effective channels of capital formation, which have consistently engendered bona fide and constructive growth over the years through the virtuous avenues of productive savings, the foolish authorities have left themselves utterly hamstrung with only one risky road to travel down. Indeed, now that they have totally cracked the transmission on our fiscally busted and broken down American bus, they have become 100% reliant on the equity market to drive their top fuel funds into the U.S. economy via the wealth effect.   Pedal to the metal at 2,150 SPX mph.  Make no mistake my friends, we are on a crash course, and we will hit the wall.

  Got Gold?

  

  

  

  

  

  

• How Keynes Almost Prevented The Keynesian Revolution

  Submitted by Mark Tovey via The Mises Institute,

  October 30, 1929. A brisk autumn’s day in Manhattan. The Savoy-Plaza Hotel’s thirty-three stories cast a long shadow over Central Park. At the base of the hotel a financier lies freshly fallen, motionless, while his last breath, wrenched from the lungs by force of impact, is now a red mist of gore in the air.

  Sirens and uniforms. The suicide spot quickly becomes crowded by spectators, who form a vision-impairing ring-fence of backs, much to the annoyance of elbow-throwers at the periphery. Winston Churchill stands at his hotel window looking down on the mess. To nobody’s surprise, the police will find an empty wallet and five margin calls in the dead man's pockets.1

  Churchill’s curtains flutter shut, and we are left to wonder whether anyone — Churchill included — can yet see his clumsy, cigar-wielding hand in it all; whether anyone realizes that, had Churchill as Chancellor of the Exchequer only restored the gold standard at a lower exchange rate, as Keynes had recommended, the Wall Street Crash of 1929 could have been averted (or at least ameliorated).

  Alas, by ignoring Keynes in 1925, Churchill triggered a calamity so severe that it not only inspired one man to kill himself beneath the British statesman’s very window but, more insidiously, also provided the impetus for the economics profession’s rejection of the “classical” axioms. As Keynes’s biographer Robert Skidelsky writes, Keynes “did not believe in the system of the ideas by which economists lived; he did not worship at the temple.” And while “in former times he would have been forced to recant, perhaps burnt at the stake, as it was … the exigencies of his times enabled him to force himself on his church.”

  1925: Britain’s Return to the Gold Standard

  The pound sterling’s link to gold was severed at the start of WWI. After eleven years of unfettered inflation, Chancellor of the Exchequer Winston Churchill restored convertibility at the pre-war level of 4.25 pounds per ounce of gold.

  Keynes, quite rightly, took exception to this particular detail: expecting Britain’s global customers to go on paying the same gold-price for the weakened pound was unrealistic. At this exchange rate the pound would be overvalued, and the only cure would be a sustained period of deflation — which was “certain to involve unemployment and industrial disputes.” Indeed, in 1926 a general strike crippled Britain for nine days.

  What Keynes did not predict, however, was how Churchill’s blunder would later bring about an easing of monetary policy in America. And even supposing Keynes had predicted this side effect, would he have understood its implications for long-run sustainability? (Recall that both F.A. Hayek and Keynes predicted a crash would occur in 1929: Hayek because interest rates were too low, Keynes because they were too high!)

  1927: At the Fed (With Cap in Hand)

  American sellers (in particular) were accepting British gold in exchange for goods, but were dissuaded from returning it due to the unfavorable rate of exchange. As a result, Britain’s gold supplies diminished at a rapid rate, which made the authorities understandably twitchy: how could they keep their pledge to convert pounds into gold if they had none?

  In response, the Governor of the Bank of England, Montagu Norman, set off across the Atlantic and, with much pleading, persuaded the Federal Reserve to ease monetary policy. By lowering interest rates and raising inflation, the Fed stemmed gold flows into America, giving the British a much-needed respite from the ill-effects of Churchill’s costly pound.

  With this episode of soft-hearted internationalism came an upswing in the Wall Street boom and “from that date,” wrote Lionel Robbins, “according to all the evidence, the situation got completely out of control.”

  In The Great Crash, a very popular account of the lead up to the Great Depression, John Kenneth Galbraith writes:

  the rediscount rate of the New York Federal Reserve was cut from 4 to 3.5 percent. Government securities were purchased in considerable volume with the mathematical consequence of leaving the banks and individuals who had sold them with money to spare. The funds that the Federal Reserve made available were either invested in common stocks or … they became available to help finance the purchase of common stocks by others. So provided with funds, people rushed into the market.

  Galbraith goes on to quote a member of the Federal Reserve Board who, with hindsight, called the operation “one of the most costly errors” committed by a banking system “in 75 years.”

  Galbraith finishes: “the view that the action of the Federal Reserve in 1927 was responsible for the speculation and collapse which followed has never been seriously shaken.”

  John Maynard Who?

  When Keynes wrote against returning to the gold standard at pre-war parity in 1925, he did so with the expectation that he might actually influence policy. As a younger, unknown man he had worked at the Treasury for a brief stint, leaving a legendary impression; and by 1925, six years after his best-seller The Economic Consequences of the Peace, he was a famous man whose words carried weight.

  It is not outlandish then to imagine a world in which Keynes got his way. In such a world, the Wall Street crash and ensuing depression might never have happened – without the costly pound, the Fed would have had no impetus to inflate. Keynes would subsequently have found the economics profession less rattled, less willing to abandon its “classical” axioms in favor of his new-fangled approach. Keynes might have averted Keynesianism.

  

  

  

  

  

• Spot The Difference

  The two main economic systems in the world today…

   

  

   

  h/t @RudyHavenstein

  

  

  

  

• Global Consumer Confidence Tumbles

  Consumer confidence deteriorated in most countries in July.

  

  While some of the deterioration was likely due to sentiment effects around the situation in Greece/Europe and the market volatility in China, rather than fundamental deterioration (which will be confirmed at the end of August if sentiment rebounds) it is worth paying attention to the trends in global consumer confidence, as it generally tends to reflect the prevailing global macro winds.

  Indeed, if you track the trends in consumer confidence against changes in bond yields, you can see a loose relationship (which would be logical as falling demand is consistent with falling bond yields).

  

   

  The further drop in oil would tend to be supportive for consumer confidence meaning we would probably would expect to see a rebound in the August numbers (which will be available in early September) – something to keep a close eye on as a warning sign for global demand.

  Source: AMP Capital

  

  

  

  

  

• Guess What Happens Next

  Courtesy of Keith Dicker of IceCap Asset Management

  Well, if you’re not Greeked-out by now you should be. After all, the Greek debt crisis has been spinning in and out of control for 5 years and counting.

  Why should it be any different this time?

  Everyone knows there is no way on this earth that Greece will ever be able to repay these debts. Unless the Greek economy can grow faster and longer than it has ever grown before, AND it can avoid the political temptation to never again spend more money than it collects in taxes – then just maybe it stands a chance of paying off some of the over $400 Billion it owes.

  

  In today’s age of money printing, negative interest rates, and bank bailouts, many have become somewhat desensitized to “billions” and “trillions”. Yet, we assure you $400 billion for Greece is a lot of money.

  For perspective, Australia owes about $1.3 trillion in various loans. If Australia suddenly entered a debt crisis on the same scale as Greece, its debt owing would skyrocket to nearly $2.5 trillion, or put another way – about $106,000 for every man, woman and child.

  For Greece, it’s mathematically impossible to repay its debt. If anyone else tells you otherwise, it means they have no understanding whatsoever of how real economies actually work.

  The sharpest and brightest minds at the IMF, the EU and the ECB (collectively referred to as the TROIKA) all agree that the solution to the Greek crisis is for Greece to pay more in taxes, for the Greek government to spend less money, and to continue to pay off its debt.

  Let’s think about this for a very quick second:

  1. Greeks have to pay more taxes, which means less money is available for spending
  2. the Greek Government has to spend less money, which means less money is available for spending
  3. and of the money that the Greek government does spend, more of it has to be used to repay its debt, which means less of it is available for real spending;

  And considering that economic growth is a function of aggregate spending, how on earth can any sane person expect the Greek economy to recover and grow?

  The answer: they can’t. For further proof why it doesn’t work and it will never work, you just have to look at Iceland.

  Iceland was the very first country wiped out by the 2008 global debt crisis. The Icelandic government and the Icelandic banks completely mismanaged everything for which they were financially responsible.

  And when everything hit the fan – no one come running to save them, in fact, the complete opposite happened. Both Britain and the Netherlands threatened to completely wipe Iceland off the global financial map.

  At the time, Icelandic banks offered regular banking accounts in Britain and the Netherlands that paid 6% interest. Considering other global banks offered 3% and less, and also considering that the vast majority of people in the world have no idea how a bank is structured; thousands of British and Dutch savers blindly ploughed their savings into these Icelandic bank accounts.

  After all, it was a bank deposit, it was guaranteed by the bank and 6% is greater than 3%. Where was the risk with this?

  Next, when the crisis hit Iceland – all bank accounts were frozen, and the savings of many British and Dutch investors melted away.

  Suddenly, the risk with 6% was crystal clear. Naturally, the British and Dutch governments both demanded their citizens be repaid for making stupid investment decisions.

  The Icelandic government meanwhile, finally woke from their frozen state and assessed the situation. Not only did the government not have enough money to repay bank depositors, it didn’t have enough money to pay themselves.

  And since no one would lend Iceland any money – the country was officially broke. The rivers would stop running, the glaciers would stop flowing, and the thermal baths would stop steaming – or so we were told.

  Instead, Iceland allowed its banks to collapse, allowed its currency to drop by over 70%, decided not to pay back all of the money it owed, and finally – it actually imprisoned certain bank executives for putting the country into such a financially toxic position.

  A comparison between the Icelandic approach and the European approach forced upon Greece is as follows:

  

   

  And as for the outcome, the chart below clearly shows the economic recovery experienced by both countries, over the exact same time frame, and using completely opposite solutions.

  

   

  Iceland’s economy has recovered from the depths of the crisis and is now only -3% less than where it was in 2008.

  Greece’s economy continues to plummet to deeper depths and is now -33% less than where it was in 2008.

  The Icelandic recovery has not been perfect. Locals and foreign investors have been unable to get money out of the country. Originally, capital controls were expected to last 6 months. 7 years later they are finally being relaxed. That’s a long time not being able to access your money.

  In addition, prices for all things soared with inflation hitting 20% at one point. Job losses also soared with unemployment tripling.

  Yes, bad times were had – yet the country and economy survived. Greece meanwhile, continues to be subjected to a 100% guaranteed doomed strategy.

  

  

  

  

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