Today’s News August 17, 2015

• Travails Of Empire – Oil, Debt, Gold & The Imperial Dollar

  Via Jesse's Cafe Americain,

  "We are imperial, and we are in decline… People are losing confidence in the Empire."

  This is the key theme of Larry Wilkerson's presentation.  He never really questions whether empire is good or bad, sustainable or not, and at what costs.  At least he does not so in the same manner as that great analyst of empire Chalmers Johnson.

  It is important to understand what people who are in and near positions of power are thinking if you wish to understand what they are doing, and what they are likely to do.  What ought to be done is another matter.

  Wilkerson is a Republican establishment insider who has served for many years in the military and the State Department. Here he is giving about a 40 minute presentation to the Centre For International Governance in Canada in 2014.

  I find his point of view of things interesting and revealing, even on those points where I may not agree with his perspective.  There also seem to be some internal inconsistencies in this thinking.

  But what makes his perspective important is that it represents a mainstream view of many professional politicians and 'the Establishment' in America. Not the hard right of the Republican party, but much of what constitutes the recurring political establishment of the US.

  As I have discussed here before, I do not particularly care so much if a trading indicator has a fundamental basis in reality, as long as enough people believe in and act on it. Then it is worth watching as self-fulfilling prophecy.  And the same can be said of political and economic memes.

  At minute 48:00 Wilkerson gives a response to a question about the growing US debt and of the role of the petrodollar in the Empire, and the efforts by others to 'undermine it' by replacing it.  This is his 'greatest fear.'

  He speaks about 'a principal advisor to the CIA Futures project' and the National Intelligence Council (NIC), whose views and veracity of claims are being examined closely by sophisticated assets.  He believes that both Beijing and Moscow are complicit in an attempt to weaken the dollar.

  This includes the observation that "gold is being moved in sort of unique ways, concentrated in secret in unique ways, and capitals are slowly but surely divesting themselves of US Treasuries. So what you are seeing right now in the supposed strengthening of the dollar is a false impression."

  The BRICS want to use oil to "force the US to lose its incredibly powerful role in owning the world's transactional reserve currency."   It gives the US a great deal of power of empire that it would not ordinarily have, since the ability to add debt without consequence enables the expenditures to sustain it.

  Later, after listening to this again, the thought crossed my mind that this advisor might be a double agent using the paranoia of the military to achieve the ends of another.  Not for the BRICS, but for the Banks.  The greatest beneficiary of a strong dollar, which is a terrible burden to the real economy, is the financial sector.  This is why most countries seek to weaken or devalue their currencies to improve their domestic economies as a primary objective.  This is not so far-fetched as military efforts to provoke 'regime change' have too often been undertaken to support powerful commercial interests.

  Here is just that particular excerpt of the Q&A and the question of increasing US debt.

  I am not sure how much the policy makers and strategists agree with this theory about gold. But there is no doubt in my mind that they believe and are acting on the theory that oil, and the dollar control of oil, the so-called petrodollar, is the key to maintaining the empire.

  Wilkerson reminds me very much of a political theoretician who I knew at Georgetown University. He talks about strategic necessities, the many occasions in which the US has used its imperial power covertly to overthrow or attempt to overthrow governments in Iran, Venezuela, Syria, and the Ukraine. He tends to ascribe all these actions to selflessness, and American service to the world in maintaining a balance of power where 'all we ask is a plot of ground to bury our dead.'

  A typical observation is that the US did indeed overthrow the democratically elected government of Mossadegh in 1953 in Iran. But 'the British needed the money' from the Anglo-Iranian oil company in order to rebuild after WW II. Truman had rejected the notion, but Eisenhower the military veteran and Republic agreed to it.  Wilkerson says specifically that Ike was 'the last expert' to hold the office of the Presidency.

  This is what is meant by realpolitik. It is all about organizing the world under a 'balance of power' that is favorable to the Empire and the corporations that have sprung up around it.

  As someone with a long background and interest in strategy I am not completely unsympathetic to these lines of thinking. But like most broadly developed human beings and students of  history and philosophy one can see that the allure of such thinking, without recourse to questions of restraint and morality and the fig leaf of exceptionalist thinking, is a terrible trap, a Faustian bargain. It is the rationalization of every nascent tyranny. It is the precursor to the will to pure power for its own sake.

  The challenges of empire now according to Wilkerson are:

  1) Disequilibrium of wealth – 1/1000th of the US owns 50% of its total wealth. The current economic system implies long term stagnation (I would say stagflation. The situation in the US is 1929, and in France, 1789. All the gains are going to the top.

   

  2) BRIC nations are rising and the Empire is in decline, largely because of US strategic miscalculations. The US is therefor pressing harder towards war in its desperation and desire to maintain the status quo. And it is dragging a lot of good and honest people into it with our NATO allies who are dependent on the US for their defense.

   

  3)  There is a strong push towards regional government in the US that may intensify as global warming and economic developments present new challenges to specific areas.  For example, the water has left the Southwest, and it will not be coming back anytime soon.

  This presentation ends about minute 40, and then it is open to questions which is also very interesting.

  

  

  

  

  

• Asian Currency Crisis Continues As China Holds, Malaysia Folds, & Japan Heads For Quintuple Dip Recession

  Asia got off to an inauspicious start this evening with Japan printing a disappointing 1.6% drop in GDP – heading for its fifth recession in 6 years… so much for Abenomics, but, of course, Amari spewed forth some standard propaganda that he expects Japan to recover moderately (and Japanese stocks popped modestly assuming moar QQE). Then Malaysia continued its collapse with the Ringgit down another 1% hitting fresh 17-year lows and stocks dropping further, as the Asian Currency crisis continues. Heading into the China open, offshore Yuan signaled further devaluation but the CNY Fix printed very modestly stronger at 6.3969; and following last week's best gains in 2 months, Chinese stocks are plunging at the open after Chinese farmers extend their streak of margin debt increases. Finally, WTI Crude drifted back to a $41 handle in early futures trading.

   

  Asian Contagion…

  Japan heads for Quintuple Dip recession…

  

   

  The Asian currency crisis continues (led by Malaysia)

  • *MALAYSIAN RINGGIT DROPS 0.9% TO 4.1155 PER DOLLAR
  • *MALAYSIA'S KEY STOCK INDEX OPENS DOWN 0.4% AT 1,590.81

  

   

  But broad-based USD strength against Asian FX continues…

  

   

  Then China opened..

  Great news – Chinese farmers and grandmas are releveraging!!

  • *SHANGHAI MARGIN DEBT HAS LONGEST STREAK OF RISE IN TWO MONTHS

  Seriously!

  And Chinese futures appeared to mini-flash-crash…

  

   

  As China revalues modestly..

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3969 AGAINST U.S. DOLLAR (against 6.3975 fix Friday)
  • *PBOC'S YUAN REFERENCE RATE SET WITHIN 0.1% OF FRIDAY'S CLOSE

  Offshore Yuan leaking weaker…

  

  And finally WTI Crude continues to drift lower… once again trading with a $41 handle…

  

   

  So while China may have succeeded in jawboning/intervening the yuan back to some semblance of (temporary) stability, the global reverberations look to have just begun.

  Charts: Bloomberg

  

  

  

  

  

• Goldman Weighs In On America's Pension Ponzi: Contributions Must Rise $100 Billion Per Year

  Over the past several months, we’ve taken a keen interest in the deteriorating condition of state and local government finances in America. 

  Moody’s move to downgrade the city of Chicago to junk in May put fiscal mismanagement in the national spotlight and indeed, the Illinois Supreme Court ruling that triggered the downgrade (in combination with a subsequent ruling by a Cook County court which struck down a bid to reform the city’s pensions), effectively set a precedent for other states and localities, meaning that now, solving the growing underfunded pension liability problem will be that much more difficult. 

  Just how big of a problem is this you ask? Well, pretty big, according to Moody’s which, as we noted last month, contends that the largest 25 public pensions are underfunded by some $2 trillion. 

  It’s against that backdrop that we present the following graphic and color from Goldman which together demonstrate the amount by which state and local governments would need to raise contributions to “bring plans into balance over time.”

  

  From Goldman:

  Unfunded pension liabilities have grown substantially. There are several factors behind this, led by lower than expected investment returns and insufficient contributions from state and local governments to the plans. The two issues are related. The assumed investment return is used as a discount rate to determine the present value of liabilities. The higher the discount rate, the lower the estimated liability, and the lower the periodic payment into the fund a state or local employer is expected to make. There is, of course, no clear answer about what the discount rate ought to be, though the fact that the average assumption used by private plans has continuously declined for more than a decade suggests that the rates have probably been too high and that the current average assumption of 7.7% may come down further.

   

  Contributions have also generally been lower than necessary to stabilize or reduce unfunded liabilities because of the rules around how those unfunded liabilities are amortized. Payments into pension plans are generally meant to account for the future cost of benefits accrued during the current year, as well as catch-up payments equal to some fraction of the unfunded liability left from prior years. Many plans target payment amounts that would work off this underfunding over 30 years, though some use shorter periods. However, the amounts of these payments are often backloaded, with the result that even if the “required” payment is made in full the unfunded liability often grows.

   

  A separate but related issue is that some states have simply declined to make even the “required” contribution, which is probably lower than it should be in any case due to the factors just noted. For example, over the last few years New Jersey has made on average only around 40% of the expected payment. New accounting rules promulgated by the Government Accounting Standards Board (GASB) will penalize underfunded plans with a lower discount rate, but the change is fairly minor and, in any case, affects only the accounting; it will not impose any new legal requirements to make the contributions.

   

  If state and local governments are ultimately forced to devote more resources to these obligations, the effect on state and local spending would be noticeable. Exhibit 8 shows the states’ pension contributions, as a share of gross state product, with two potential additions. The first is the level that would be required to simply meet the “actuarially required contribution.” To bring the plans back into balance over time, further contributions would be necessary. In aggregate this would raise government pension contributions by something like $100bn per year (0.6% of GDP), lowering spending in other areas (or raising taxes) by a similar amount. In theory, OPEB costs could push this adjustment a bit higher.

  

  

  

  

  

• How Humans Cause Mass Extinctions

  Authored by Paul and Anne Ehrlich, originally posted at Project Syndicate,

  There is no doubt that Earth is undergoing the sixth mass extinction in its history – the first since the cataclysm that wiped out the dinosaurs some 65 million years ago. According to one recent study, species are going extinct between ten and several thousand times faster than they did during stable periods in the planet’s history, and populations within species are vanishing hundreds or thousands of times faster than that. By one estimate, Earth has lost half of its wildlife during the past 40 years. There is also no doubt about the cause: We are it.

  We are in the process of killing off our only known companions in the universe, many of them beautiful and all of them intricate and interesting. This is a tragedy, even for those who may not care about the loss of wildlife. The species that are so rapidly disappearing provide human beings with indispensable ecosystem services: regulating the climate, maintaining soil fertility, pollinating crops and defending them from pests, filtering fresh water, and supplying food.

  The cause of this great acceleration in the loss of the planet’s biodiversity is clear: rapidly expanding human activity, driven by worsening overpopulation and increasing per capita consumption. We are destroying habitats to make way for farms, pastures, roads, and cities. Our pollution is disrupting the climate and poisoning the land, water, and air. We are transporting invasive organisms around the globe and overharvesting commercially or nutritionally valuable plants and animals.

  The more people there are, the more of Earth’s productive resources must be mobilized to support them. More people means more wild land must be put under the plow or converted to urban infrastructure to support sprawling cities like Manila, Chengdu, New Delhi, and San Jose. More people means greater demand for fossil fuels, which means more greenhouse gases flowing into the atmosphere, perhaps the single greatest extinction threat of all. Meanwhile, more of Canada needs to be destroyed to extract low-grade petroleum from oil sands and more of the United States needs to be fracked.

  More people also means the production of more computers and more mobile phones, along with more mining operations for the rare earths needed to make them. It means more pesticides, detergents, antibiotics, glues, lubricants, preservatives, and plastics, many of which contain compounds that mimic mammalian hormones. Indeed, it means more microscopic plastic particles in the biosphere – particles that may be toxic or accumulate toxins on their surfaces. As a result, all living things – us included – have been plunged into a sickening poisonous stew, with organisms that are unable to adapt pushed further toward extinction.

  With each new person, the problem gets worse. Since human beings are intelligent, they tend to use the most accessible resources first. They settle the richest, most productive land, drink the nearest, cleanest water, and tap the easiest-to-reach energy sources.

  And so as new people arrive, food is produced on less fertile, more fragile land. Water is transported further or purified. Energy is produced from more marginal sources. In short, each new person joining the global population disproportionately adds more stress to the planet and its systems, causing more environmental damage and driving more species to extinction than members of earlier generations.

  To see this phenomenon at work, consider the oil industry. When the first well was drilled in Pennsylvania in 1859, it penetrated less than 70 feet into the soil before hitting oil. By comparison, the well drilled by Deepwater Horizon, which famously blew up in the Gulf of Mexico in 2010, began a mile beneath the water’s surface and drilled a few miles into the rock before finding oil. This required a huge amount of energy, and when the well blew, it was far harder to contain, causing large-scale, ongoing damage to the biodiversity of the Gulf and the adjacent shorelines, as well as to numerous local economies.

  The situation can be summarized simply. The world’s expanding human population is in competition with the populations of most other animals (exceptions include rats, cattle, cats, dogs, and cockroaches). Through the expansion of agriculture, we are now appropriating roughly half of the energy from the sun used to produce food for all animals – and our needs are only growing.

  With the world’s most dominant animal – us – taking half the cake, it is little wonder that the millions of species left fighting over the other half have begun to disappear rapidly. This is not just a moral tragedy; it is an existential threat. Mass extinctions will deprive us of many of the ecosystem services on which our civilization depends. Our population bomb has already claimed its first casualties. They will not be the last.

  

  

  

  

  

• Bouts Of Extreme Volatility Have "Little Obvious Explanation," Citi Warns

  Don’t get us wrong, we’re happy that the entire world has finally woken up to the fact that liquidity is rapidly disappearing from every corner of global capital markets. Indeed, the wholesale adoption of the illiquidity meme serves as a ringing endorsement of the arguments we’ve been making in these very pages for years. 

  And while we’ve grown accustomed to seeing tin foil hat conspiracy theories gradually metamorphose into undeniable conspiracy facts (much to the chagrin of the begrudging pundit echo chamber), the degree to which everyone from the mainstream financial news media to the C-suite is suddenly screaming about illiquid credit markets has surprised even us.

  And while it’s not always clear that everyone talking about illiquid markets completely understands what it is they’re saying, they’ve undeniably picked up on the fact that somewhere deep inside the secondary market for govies and corporate credit, something sinister is amiss and they can’t afford to be the only ones not talking about it.  

  Having said all of that, one of the few people who, like us, began documenting the disappearance of liquidity long ago and who is generally quite adept when it comes to illustrating the problem is Citi’s Matt King, and for anyone still confused as to what exactly we mean when we discuss the admittedly amorphous concept of “liquidity”, we present the following graphics from King’s latest missive by way of explanation.

  

  And here is what it looks like when liquidity dries up…

  

  

  

  

  

• Goldman's 4 Reasons Why The S&P Will Remain Unchanged For The Rest Of 2015

  Anyone expecting a surge in market volatility as Mario Draghi recently warned, will be disappointed to read Goldman’s latest forecast which not only does not budge on its year end S&P forecast of 2100, but predicts that the market will be flat as a pancake for the balance of the year.

  Here is Goldman’s assessment of why one may as well take the rest of the year off:

  The most likely path of the US stock market during the next six months is sideways. We forecast the S&P 500 index will end 2015 at 2100, roughly unchanged from the current level. S&P 500 delivered a compound annual price return of 18% during the past three years and 13% during the past five years, both well above the long-term average annual return of 5%. Mean reversion is a powerful force. Put simply, “flat is the new up” when it comes to the future path of the US stock market.

  And here are Goldman’s four reasons why the bank expects the S&P 500 will end 2015 unchanged from the current level: High starting valuation, negligible earnings growth, outflow from domestic equity mutual funds and ETFs, and modest economic growth. Offsetting these headwinds to a higher market, buybacks remain robust and serve as a pillar of support in the current environment.

  Finally, Goldman adds that its “sentiment indicator stands at 0, implying a tactical rally is likely during the next month.” So… expect a plunge?

  Here are the four reasons with more detail:

  1. At 2100, S&P 500 currently trades around fair value based on a range of financial metrics (P/E, EV/sales, EV/EBITDA, and P/B). During prior periods when real interest rates were 0%-1%, the forward P/E multiple averaged 11.2x, 33% below the current P/E of 16.7x. The Fed Model implies a year-end fair value of 2100 assuming the 10-year US Treasury yield climbs to 2.8% and the earnings yield gap narrows/equity risk premium falls and P/E remains at 16.7x. Note that our target would remain 2100 if interest rates remain unchanged from today’s level and the yield gap also remained constant. In prior tightening episodes, the P/E multiple has contracted by an average of 8% during the first three months following an initial Fed hike.

   

  2. S&P 500 earnings will be essentially flat in 2015, rising just 1% ($1/share) from last year as Energy EPS plunges by 63% ($8/share). Our topdown EPS and margin forecast and bottom-up consensus are nearly identical. We estimate EPS of $114 and margins of 8.9%. Consensus equals $112 and 9.1%. Excluding Energy, 2015 S&P 500 EPS growth will equal 8%.

   

  3. Domestic equity ETFs experiencing net outflows for the first time. US domestic equity mutual funds have witnessed net outflows in 8 of the last 9 years totaling $664 billion. But in prior years the outflow from actively managed mutual funds was more than offset by inflows into domestic ETFs. However, domestic ETFs have experienced YTD outflows totaling $6 billion. Domestic equity mutual fund YTD outflows totaled $90 billion. In contrast, international equity mutual fund and ETF inflows totaled $187 billion.

   

  4. The US economy is expanding at an annualized pace of 3.0% based on our Current Activity Indicator (CAI), a real-time measure of GDP growth developed by our Economics research colleagues. We forecast GDP growth will average 2.6% during 2H 2015. Slack has diminished on many metrics. For example, the labor market has firmed with monthly payroll gains averaging 220,000 jobs during the past three years and the unemployment rate now stands at 5.3%. However, retail sales growth has been disappointing and inflation remains below the Fed’s target. Domestic sales represent 67% of the aggregate revenue of S&P 500 firms. Accordingly, nominal US GDP growth is the primary driver of sales growth. We forecast nominal US GDP growth of 3.3% and global ex-US growth of 3.2% in 2015.

  All of which means one thing: Goldman is hoping to buy vol from any remaining clients who still have not had enough after many years of brutal muppeteering and are drawn like moths to a flame to that VIX 10 handle which for them will be proof that there is nothing to worry about (even as the credit market is approaching a Bear Stearns-like 2008 freakout) , and that the S&P will close 2015 anything but unchanged. Time to buy strangles.

  

  

  

  

  

• "Deal Or War": Is Doomed Dollar Really Behind Obama's Iran Warning?

  Authored Op-Ed by Finian Cunningham via RT.com,

  US President Barack Obama has given an extraordinary ultimatum to the Republican-controlled Congress, arguing that they must not block the nuclear accord with Iran. It’s either “deal or war,” he says.

  In a televised nationwide address on August 5, Obama said: “Congressional rejection of this deal leaves any US administration that is absolutely committed to preventing Iran from getting a nuclear weapon with one option: another war in the Middle East. I say this not to be provocative. I am stating a fact.”

  The American Congress is due to vote on whether to accept the Joint Comprehensive Plan of Action signed July 14 between Iran and the P5+1 group of world powers – the US, Britain, France, Germany, Russia and China. Republicans are openly vowing to reject the JCPOA, along with hawkish Democrats such as Senator Chuck Schumer. Opposition within the Congress may even be enough to override a presidential veto to push through the nuclear accord.

  In his drastic prediction of war, one might assume that Obama is referring to Israel launching a preemptive military strike on Iran with the backing of US Republicans. Or that he is insinuating that Iran will walk from self-imposed restraints on its nuclear program to build a bomb, thus triggering a war.

  But what could really be behind Obama’s dire warning of “deal or war” is another scenario – the collapse of the US dollar, and with that the implosion of the US economy.

  That scenario was hinted at this week by US Secretary of State John Kerry. Speaking in New York on August 11, Kerry made the candid admission that failure to seal the nuclear deal could result in the US dollar losing its status as the top international reserve currency.

  “If we turn around and nix the deal and then tell [US allies], ‘You're going to have to obey our rules and sanctions anyway,’ that is a recipe, very quickly for the American dollar to cease to be the reserve currency of the world.”

  In other words, what really concerns the Obama administration is that the sanctions regime it has crafted on Iran – and has compelled other nations to abide by over the past decade – will be finished. And Iran will be open for business with the European Union, as well as China and Russia.

  It is significant that within days of signing the Geneva accord, Germany, France, Italy and other EU governments hastened to Tehran to begin lining up lucrative investment opportunities in Iran’s prodigious oil and gas industries. China and Russia are equally well-placed and more than willing to resume trading partnerships with Iran. Russia has signed major deals to expand Iran’s nuclear energy industry.

  American writer Paul Craig Roberts said that the US-led sanctions on Iran and also against Russia have generated a lot of frustration and resentment among Washington’s European allies.

  “US sanctions against Iran and Russia have cost businesses in other countries a lot of money,” Roberts told this author.

  “Propaganda about the Iranian nuke threat and Russian threat is what caused other countries to cooperate with the sanctions. If a deal worked out over much time by the US, Russia, China, UK, France and Germany is blocked, other countries are likely to cease cooperating with US sanctions.”

  Roberts added that if Washington were to scuttle the nuclear accord with Iran, and then demand a return to the erstwhile sanctions regime, the other international players will repudiate the American diktat.

  “At that point, I think much of the world would have had enough of the US use of the international payments system to dictate to others, and they would cease transacting in dollars.”

  The US dollar would henceforth lose its status as the key global reserve currency for the conduct of international trade and financial transactions.

  Former World Bank analyst Peter Koenig says that if the nuclear accord unravels, Iran will be free to trade its oil and gas – worth trillions of dollars – in bilateral currency deals with the EU, Japan, India, South Korea, China and Russia, in much the same way that China and Russia and other members of the BRICS nations have already begun to do so.

  That outcome will further undermine the US dollar. It will gradually become redundant as a mechanism of international payment.

  Koenig argues that this implicit threat to the dollar is the real, unspoken cause for anxiety in Washington. The long-running dispute with Iran, he contends, was never about alleged weapons of mass destruction. Rather, the real motive was for Washington to preserve the dollar’s unique global standing.

  “The US-led standoff with Iran has nothing to do with nuclear weapons,” says Koenig. The issue is: will Iran eventually sell its huge reserves of hydrocarbons in other currencies than the dollar, as they intended to do in 2007 with an Iranian Oil Bourse? That is what instigated the American-contrived fake nuclear issue in the first place.”

  This is not just about Iran. It is about other major world economies moving away from holding the US dollar as a means of doing business. If the US unilaterally scuppers the international nuclear accord, Washington will no longer be able to enforce its financial hegemony, which the sanctions regime on Iran has underpinned.

  Many analysts have long wondered at how the US dollar has managed to defy economic laws, given that its preeminence as the world’s reserve currency is no longer merited by the fundamentals of the US economy. Massive indebtedness, chronic unemployment, loss of manufacturing base, trade and budget deficits are just some of the key markers, despite official claims of “recovery.”

  As Paul Craig Roberts commented, the dollar’s value has only been maintained because up to now the rest of the world needs the greenback to do business with. That dependency has allowed the US Federal Reserve to keep printing banknotes in quantities that are in no way commensurate with the American economy’s decrepit condition.

  “If the dollar lost the reserve currency status, US power would decline,” says Roberts. “Washington’s financial hegemony, such as the ability to impose sanctions, would vanish, and Washington would no longer be able to pay its bills by printing money. Moreover, the loss of reserve currency status would mean a drop in the demand for dollars and a drop in willingness to hold them. Therefore, the dollar’s exchange value would fall, and rising prices of imports would import inflation into the US economy.”

  Doug Casey, a top American investment analyst, last week warned that the woeful state of the US economy means that the dollar is teetering on the brink of a long-overdue crash. “You’re going to see very high levels of inflation. It’s going to be quite catastrophic,” says Casey.

  He added that the crash will also presage a collapse in the American banking system which is carrying trillions of dollars of toxic debt derivatives, at levels much greater than when the system crashed in 2007-08.

  The picture he painted isn’t pretty: “Now, when interest rates inevitably go up from these artificially suppressed levels where they are now, the bond market is going to collapse, the stock market is going to collapse, and with it, the real estate market is going to collapse. Pension funds are going to be wiped out… This is a very bad situation. The US is digging itself in deeper and deeper,” said Casey, who added the telling question: “Then what’s going to happen?”

  President Obama’s grim warning of “deal or war” seems to provide an answer. Faced with economic implosion on an epic scale, the US may be counting on war as its other option.

  

  

  

  

  

• Hillary's 'Big Crowds'

  Maybe not all publicity is good publicity….

   

  

   

  Source: Cagle.com

  

  

  

  

  

• Billionaire Stanley Drucknemiller Loads Up On Gold, Makes It His Largest Position For First Time Ever

  Over the past several years, one of the biggest critics of the Fed’s ruinous monetary policy has been billionaire investor Stanley Druckenmiller, who in 2010 announced he would be shutting down his legendary Duquesne Capital Management, and convert it to a family office. Yet, despite his constant drumbeat of warnings that the period of ZIRP/QE/NIPR will end in tears, he had yet to put money where his mouth was (aside for a brief period in mid-2012 when we bought a lot of GLD calls, only to unwind the almost instantly).

  This ended on June 30, when following Friday’s filing by the Duquesne Family Office, we learned that as of the end of Q2, the largest position for Stanley Druckenmiller was none other than gold, following the purchase of 2.9 million shares of the GLD ETF shares. In other words, as of this moment, gold amount to over 20% of Druckenmiller’s total holdings.

  In a world in which starved for ideas alpha-chasers do anything and everything that billionaires report they did a month and a half ago, we wonder if this marks the end of the relentless liquidation in the GLD, which recently hit a multi-year low, as a result driving the price of paper gold to multi-year lows even as physical demand has approached record levels.

  So with Druckenmiller now back and strapped in for the ride, we wonder which other prominent investor will promptly follow?

  

  h/t Shane Obata

  

  

  

  

  

• The FDA Just Approved OxyContin To Be Prescribed To Children

  Submitted by Josh Mur via TheAntiMedia.org,

  The infamously untrustworthy Food and Drug Administration (FDA) has furthered its reputation as one of America’s most beloved hypocrites with its latest motion. It was reported on Thursday that the FDA has just approved OxyContin prescriptions for children between the ages of 11 and 16 years-old.

  For those unfamiliar, OxyContin is an opiate-based pharmaceutical painkiller used to ease severe pain. Aside from being known for its powerful effects on users, it is also notorious for its widespread abuse. Its effects on the mind and body are strikingly similar to heroin, making it dangerously addictive. It typically contains anywhere between 40-160 milligrams of OxyCodone, which lasts around 12 hours thanks to its extended release. However, abusers generally crush the pills to inhale or inject them with a syringe by mixing it with water, thus receiving a dose that is meant to stretch over a 12-hour span almost instantly.

  After a 2004 study was abandoned due to an apparent lack of monetary resources, the FDA announced that pediatric studies on the effects of OxyContin would be underway in order to establish whether or not this pharmaceutical version of heroin should be available for children. After a very short period of trials and research, the FDA has concluded that three years is enough time to evaluate the long-term effects of extended use of a highly potent drug in children. Keep in mind that the FDA is the same government organization that has lumped marijuana and psilocybin mushrooms into the same category as Schedule 1 narcotics, deeming them to have zero medicinal value and heightened potential for abuse (because we all know a handful of people addicted to psychedelic mushrooms, right?).

  One of the most blatant problems with this new allowance is that opiate addiction itself has become one of the most pressing health crises of modern times. In 2010 alone, 16,651 people died from opiate overdoses — making up 60% of all overdose deaths. Prescription drug overdoses are now responsible for more deaths than all illegal drug overdoses combined. Another recent study has shown that 4 out of 5 new heroin addicts initially became addicted from using prescription opiates. One can’t help but ask whether or not prescribing children OxyContin will lead to heroin addiction at an earlier age.

  This is just the latest move which allows for the mass (over)medication of America’s youth. As we reported last year, at least 10,000 toddlers are now prescribed amphetamine-based ADHD drugs in the U.S.

  Ironically, despite the fact that marijuana and heroin are all considered to lack any acceptable medicinal value, both of them have synthetic pharmaceutical versions available to patients. For example, Marinol and Cesamet are pharmaceutical drugs that are readily available, typically to cancer patients. The irony is in the fact that these drugs are literally modeled on active ingredients in marijuana. On the other hand, we have the drug of discussion, OxyContin, which, as stated earlier, is modeled around heroin itself. There is clearly either a major conflict of interest, unfathomable stupidity, or perhaps both.

  Regardless of the motive behind these contradictions, the message is clear: these regulators have proven themselves unfit to handle this sort of responsibility. Even considering the fact that children will have to undergo a more extensive evaluation than adults to obtain a prescription, these methods and regulations are supported by the imbeciles responsible for the clear absurdities stated above. Furthermore, does not the FDA’s refusal to recognize the inefficiency in its own approved medications while ignoring the success of “alternative” medicine imply that it is guilty of more ignorance than meets the eye?

  Health is not a monopoly, it is a state of well-being. The fact that we have corporations and organizations that immensely benefit from the sales of medication implies two things.

  First, illness and injury are key components in the demand for sales, manufacturing, and further development of medicine — constituting a clear conflict of interest between the physical and mental well-being of American citizens and the financial well-being of Big Pharma.

   

  Second, it implies that the FDA’s evaluation methods are not nearly efficient enough to safely decide whether or not certain chemicals should be available for human consumption.

  This is why a naturally occurring chemical like psilocybin — which is proven to have not only psychological benefits, but physical benefits as well — is considered illegal in the United States.

  Does the FDA need to re-evaluate its infrastructure? Do you think it is okay to prescribe children highly addictive medications?

  

  

  

  

  

• "A Locally Produced Hitler Or Stalin": Lawmakers Blast US Ally For Staging "Coup"

  Last week, we noted that the Turkish lira had plunged to a record low against the dollar as coalition talks between the country’s two largest political parties broke down, setting the stage for snap elections later this year. 

  

  As we’ve detailed over the past several weeks, President Recep Tayyip Erdogan is keen on sending the country back to the polls in an effort to nullify a stunning ballot box victory by the pro-Kurdish HDP in June.

  Ankara’s renewed battle against the PKK is a rather transparent attempt to undermine support for the Kurds ahead of the next election which he hopes will see AKP regain its parliamentary majority, a precondition for his plans to rewrite the constitution, creating an executive presidency. In other words, Erdogan is more than willing to plunge the country into civil war if it means beating back opposition and clearing the way for his power grab.

  

  With the deadline to form a governing coalition just days away (August 23), new elections look all but inevitable and now, opposition leaders are openly accusing the President of staging a “coup” on the way to rewriting the country’s laws and overhauling its political system. 

  “Accept it or not, Turkey’s governmental system has become one of an executive presidency,” Erdogan said on Friday. “What should be done now is to finalize the legal framework of this de facto situation with a new constitution.” 

  “He’s now saying ‘I won’t listen to the laws or constitution.’ This is a very dangerous period,” warns Kemal Kilicdaroglu, leader of the Main Republican People’s Party. “He wants to give a legal foundation to this coup he’s carried out. Those who carry out coups always do this: First they carry out the coup, then they give it a legal foundation.’”

  But the most pointed criticism came from Nationalist opposition leader Devlet Bahceli who took to Twitter, and accused Erdogan of being a “locally produced Hitler, Stalin or Qaddafi.’”

  Yönetim sistemi bir ki?inin eline kald?ysa vay halimize! Bizim yerli üretim Hitler’e, Stalin’e, Kaddafi’ye tahammülümüz olmaz, bu iyi biline

  — Devlet Bahçeli (@dbdevletbahceli) August 15, 2015

  Meanwhile, fighting between Ankara and the PKK has escalated in the guise of a fight with ISIS. As The Economist notes, “many warn that the situation could spin out of control.” Here’s more:

  Yet every day is carrying Turkey further away from peace. The funerals of security personnel, broadcast on television, inflame Turkish tempers. Some Turkish nationalists vilify Kurds as terrorist sympathisers, deepening the polarisation. Human-rights groups say over a thousand Kurds have been detained in the south-east in the past few weeks. Allegations of maltreatment are spreading.

   

  Many warn that the situation could spin out of control. Young Kurds born in families displaced by the earlier conflict tend to support the militants. In October 2014, protests against Turkey’s lack of support for the Syrian Kurds fighting Islamic State (IS) led to street violence in which nearly 40 people died. Meanwhile the autonomous area carved out by Kurdish fighters in Syria, which they call Rojava, is fuelling dreams on the Turkish side of the border too. In Kurdish towns, the fresh graves of young fighters killed in Rojava, festooned with flowers and flags, testify to the growing numbers joining the struggle.

   

  Civil-society organisations say there is little time left to avert disaster.  

  But it won’t be a disaster for Erdogan. The more intense the fighting, the more support AKP will likely garner. If the President gets the outcome he wants in a new round of elections he will have succeeded not only in subverting the democratic process but of rewriting the constitution in blood – literally. 

  And this, ladies and gentlemen, is the type of regime that Washington considers a strong regional “ally.”

  *  *  * 

  Bonus: Some recent color from Barclays on politics and the economy in Turkey

  Our macro team notes downside risks to economic growth due the ongoing political uncertainty and external risks. They have revised Turkey GDP growth for 2015 to 2.8% from 3.1%, despite the stronger than expected Q1 15 GDP growth of 2.3%. One of the key reasons is that the strong private consumption growth in Q1 15 is not sustainable and partly due to base effects and carry forward demand due to the TRY sell-off. Additionally, key export markets such as Russia and Iraq are expected to continue to weigh negatively on export performance due to weak growth outlooks.

  Politics and geopolitics have also taken a central role in economic growth assumptions. The current uncertainty has the potential to dampen private consumption and investment, ultimately affecting the growth outlook. The recent attacks on PKK and ISIS have inflamed political rhetoric and already tense coalition talks, raising risks significantly of snap elections in November. Escalating security risks are perceived to work in favour of AKP in a snap election as it could tilt the electorate’s preference towards strong leadership and a one party model. A snap election coupled with rising domestic security and external risks will effectively mean an extension of the current investor uncertainty. This in turn would weigh on consumer and business confidence, reducing domestic demand and private investments and ultimately pressuring economic growth. 

  

  

  

  

  

• American Malls In Meltdown – The Economic Recovery Is Complete & Utter Fraud

  Submitted by Jim Quinn via The Burning Platform blog,

  The government issued their monthly retail sales this past week and four of the biggest department store chains in the country announced their quarterly results. The year over year retail sales increase of 2.4% is pitifully low in an economy that is supposedly in its sixth year of economic growth with a reported unemployment rate of only 5.3%. If all of these jobs have been created, why aren’t retail sales booming?

  The year to date numbers are even worse than the year over year numbers. With consumer spending accounting for 70% of our GDP and real inflation running north of 5%, it’s pretty clear most Americans are experiencing a recession, despite the propaganda data circulated by the government and Fed. The only people not experiencing a recession are corporate executives enriching themselves through stock buybacks, Wall Street bankers using free Fed Bucks while rigging the the markets in their favor, politicians and government bureaucrats reaping their bribes from billionaire oligarchs, and the media toadies who dispense the Deep State approved propaganda to keep the ignorant masses dazed, confused, and endlessly distracted by Cecil the Lion, Bruce/Caitlyn Jenner, Ferguson, and blood coming out of whatever.

  You won’t hear CNBC, Bloomberg, the Wall Street Journal or any corporate mainstream media outlet reference the fact retail sales growth is at the exact same levels as when recession hit in 2008 and 2001. Their job is to regurgitate the message of economic recovery and confidence in the future, despite overwhelming evidence to the contrary.

  

  Retail sales are actually far worse than the 2.4% reported number. Excluding the subprime debt fueled auto sales, retail sales only grew by 1.3% in the last year. The automakers are practically giving vehicles away as their lots are stuffed with inventory. The length of auto loans and the average amount of auto loans are now at all-time highs. The percentage of subprime auto loans is surging to record levels, as defaults begin to rise. The percentage of vehicles being leased is also at an all-time high. To call these “auto sales” strains credibility. These people are either perpetually renting their vehicles or just driving them until the repo man shows up.

   

  

  The relatively strong year over year furniture sales is also driven by the fact that you can finance the purchase at 0% interest for seven years. All is well for the Ally Financial, GE Capital and the myriad of fly by night subprime lenders until the recession arrives, unemployment soars, and defaults skyrocket. Then their bloated debt ridden balance sheets will explode in an avalanche of defaults. That’s when they insist on another taxpayer bailout to “save the financial system”.

  The year over year crash in oil prices was supposed to result in a huge spending splurge by the masses, according to the media talking heads. You don’t hear much about that storyline anymore. The talking heads are now worried that oil prices are too low. I guess the tens of thousands of layoffs in the oil industry and the obliteration of the Wall Street financed shale oil fraud storyline is offsetting the $10 per week in gasoline savings for the average driver.

  At least restaurant and bar sales remain strong. It seems Americans have decided to eat, drink and be merry, for tomorrow they die. I do believe there is some truth to that saying in today’s world. I think people are drowning their sorrows by drinking and eating. They’ve drastically reduced buying stuff they don’t need with money they don’t have. Spending their gas savings at a restaurant or bar is still doable.

  With real median household income at 1989 levels, real unemployment north of 15%, a massive level of under-employment, young people unable to buy a home – saddled with $1 trillion of student loan debt, middle aged parents struggling to take care of their aging parents and struggling children, and Boomers who never saved for their retirement, the mood of the country is decidedly dark and getting darker by the day. The rise of Trump and Sanders in the polls is an indication of this dissatisfaction with the existing social order.

  The part of the retail report flashing red is the sales of General Merchandise stores, and particularly department stores. This category includes the likes of Wal-Mart, Target, Costco, Sears, Macy’s, Kohls, and JC Penney. General merchandise sales fell 0.5% in July, with Department store sales dropping by 0.8%. Sales at these behemoth retailers have barely budged in the last year, with overall sales up a dreadful 0.3%. The dying department stores have seen their sales plummet by 2.7%. The talk of a retail revival is dead on arrival. Wal-Mart and Target muddle on with lackluster results, while JC Penney and Sears continue their Bataan Death March towards the retail graveyard.

  The false narrative of economic recovery can be blown to smithereens by the historical data on the Census Bureau website. Their time series data goes back to 1992. GDP has supposedly risen by 22% since 2007. General merchandise sales were $48.4 billion in July 2007. They were $56.1 billion in July 2015. That’s a 15.9% increase in eight years. Even the manipulated and massaged BLS CPI figure has increased 14.5% over this same time frame. That means that REAL retail sales at the nation’s biggest retailers has been virtually flat for the last eight years. Does that happen during an economic recovery?

  The department store data is almost beyond comprehension. July department store sales were the lowest in the history of the data series. Sales of $13.8 billion were 22% below the July 2007 level of $17.6 billion. They were 28% below the peak level of $19.2 billion in 1999. Real department store sales are 36.5% BELOW where they were in 2007, and Wall Street shysters have had buy ratings on these stocks the whole way down. These worthless hucksters remove the buy rating the day before these dinosaur department stores declare bankruptcy. Excluding the debt driven auto sales, real retail sales are flat with 2008 levels.

  The data from the Census Bureau has been more than confirmed by the absolutely atrocious financial results reported by Macy’s, Kohls, Sears and J.C. Penney. Retailers do not report results this poor during economic recoveries. The results clearly point to an ongoing recession for the middle and lower classes who do the majority of working and spending in this country. The rich continue to spend their stock market winnings at exclusive boutiques and high end retailers like Nordstrom, but the average American is being sucked into the abyss by rising food prices, rent, home prices, tuition, and the Obamacare driven health insurance and medical costs. With declining real wages, they have less and less disposable income to spend buying cheap Chinese crap at their local mall department stores.

  Here is a glimpse into the results of department store dinosaurs headed towards extinction:

  Macy’s

  • Overall sales fell 2.6%, while comparable store sales fell by 2.1%, as Macy’s continues to close under-performing stores. News flash: there are many more stores to close.
  • Profits crashed by 25.7% as gross margins declined and expenses rose.
  • Cash flow from operations has declined by a staggering 46% in the first six months of this year.
  • The bozos running this sinking retailer have mind bogglingly burned through $787 million of cash, while adding $452 million in long term debt to buyback their own stock. Executive compensation is stock based, so wasting close to $1.6 billion in the last year as sales and profits fall, is considered prudent management by the CEO.
  • Despite falling sales, the management of this sinking ship have increased inventory by $200 million in the last year. This bodes well for margins in the second half of the year.
  • The long-term future for this retailer gets bleaker by the day as their long-term debt, pension liabilities, and other long term obligations total $10.4 billion, while their declining stockholder’s equity totals $4.8 billion.
  • To show you how far Macy’s has come in the last nine years you just need to compare their results from the 2nd quarter of 2006 to today. They registered sales of $6.0 billion versus $6.1 billion today. On a real, inflation adjusted basis, their sales have fallen by 16% over the nine year period. They had profits of $317 million in 2006, 46% more than the $217 million in the 2nd quarter of 2015. They had $13.6 billion of equity and $8.2 billion of long-term debt.
  • And now for the best part. Despite generating 46% less income than they did 9 years ago, Macy’s stock sits at $63 per share, while it traded at $36 per share in 2006. A company with declining revenue, declining profits and a bleak future should not be sporting a PE ratio of 16. When this recession really takes hold, their 2009 price level of $9 per share will be challenged on its way to Radio Shack land – $0 per share.

  Kohl’s

  • Overall sales were up a pathetic 0.6% after last year’s 2nd quarter sales were lower than 2013. Comp store sales were up only 0.1% after being down 1.3% the previous year.
  • Profits fell precipitously by a mere 44% versus the prior year, down by $102 million. Margins fell while expenses rose.
  • In the lemming like behavior of corporate CEOs across the land, this struggling retailer thought it was a brilliant idea to go $330 billion further into debt, while buying back $543 million of stock in the first six months.
  • While sales are essentially flat, the executives of this company ratcheted up their inventory levels by 9% in the last year. Flat sales growth and surging inventory levels leads to plunging margins and profits. I guess that’s why I got a 30% off everything coupon in the mail last week.
  • Cash from operations has crashed by 52% in the first six months. You would think prudent executives would be using a half a billion of cash to buy stock and boost their compensation packages.
  • Another comparison to yesteryear provides some perspective on how well Kohl’s is performing. During the 2nd quarter of 2007 they generated $3.6 billion of sales and $269 million of profits. Their overall sales are up 19% (3% on a real basis) even though they have increased their store base by 38%. Profits in 2015 were 52% lower than 2007.
  • Sales per store is 14% lower today than it was in 2007. And even more worrisome for their long term survival, inventory levels are up 59% compared to the 19% increase in sales.
  • Again, the stock price peaked in 2007 at $76 and earlier this year reached a new all-time high of $79. Despite deteriorating financial conditions, poor management, plunging cash levels, and nothing on the horizon to portend a turnaround, the stock trades at a PE ratio of 13.

  Sears

  • Sears hasn’t reported their 2nd quarter results yet, but pre-announced that same store sales crashed by 10.6% versus last year. They are truly dead retailer walking, as Eddie Lampert’s real estate maneuvers attempt to hide the coming bankruptcy from unsuspecting investors is nothing but smoke and mirrors perpetuated by Eddie and his Wall Street shyster bankers. Excluding his desperate real estate schemes, they will lose another $300 million.
  • In the last four years, during an economic recovery, Sears has seen their sales crater from $43 billion to $31 billion, and still falling. They have managed to lose $7.4 billion in just over four years and their stock still trades at $25 per share – proving there is a sucker born every minute.
  • They continue to close hundreds of stores and still can’t stop the hemorrhaging. The decade of using financial gimmicks rather than investing in his stores  is coming home to roost for Eddie “the next Warren Buffett” Lampert. Of course, he will arrange matters in a way where he wins, while the stockholders lose when the bankruptcy papers are filed.
  • The balance sheet is a disaster. They have generated a Negative cash flow from operations of $1.4 billion in the last twelve months. They have burned through $556 million of cash. They have $8.4 billion of long-term debt and other liabilities, with equity of NEGATIVE $1.2 billion.
  • Sears may be the worst run business in America, and its chances of going bankrupt are 100%, but the Wall Street hype machine has its stock price at $25 per share, 20% higher than it was in late 2008. For some perspective, Sears’ 2nd quarter 2008 revenues totaled $11.8 billion and they made a $65 million profit. Sales in the 2nd quarter of 2015 will be approximately $6 billion with a loss of at least $300 million. Of course their stock should be higher.

  J.C. Penney

  •  I found it humorous to see the Wall Street hucksters and their mainstream media mouthpieces cheering on the J.C. Penney 2nd quarter results as “better than expected” and proof they have turned the corner. Their overall sales went up by 2.7% and comp store sales went up by 4.1%, as they continue to close stores. For some perspective on this tremendous sales gain to $2.9 billion, their sales in the 2nd quarter of 2009 were $3.9 billion. When your sales are still 26% below where they were six years ago, maybe you shouldn’t be crowing too much.
  • It seems Wall Street and the MSM didn’t really want to focus on the only thing that matters – profits. They lost another $138 million and have racked up $305 million of losses so far this year. They have lost money for 13 consecutive quarters. That is no easy feat. They have managed to lose $3.6 billion in the last four and a half years, while driving their annual sales from $18 billion to $12 billion.
  • Their balance sheet isn’t as horrific as Sears’, but it is nothing to write home about. They have $6.2 billion of long-term debt and other liabilities, supported by a mere $1.6 billion of equity. Back in 2011 they had $5.5 billion of equity to support $4.9 billion of long term liabilities. The deterioration of this once proud retailer is clear to anyone with two eyes and a brain. So that eliminates all CNBC pundits and guests.
  • Wall Street pumped the stock 5% higher on Friday to celebrate their $138 million loss. A company that is on track to lose $500 million has seen its stock price rise 32% this year on hopes and dreams. Wall Street has had buy ratings on this stock from its peak of $82 per share in 2007 on its 90% downward path to its current price. I’m sure they’re right this time.

  The truly disturbing revelation from the Census Bureau data and the terrible financial results being reported by some of the biggest retailers in the world is that it is occurring with unemployment at 5.3%, the economy in the sixth year of a recovery, and a Fed who has pumped $3 trillion into the banking system while still keeping interest rates at 0%. What happens when we roll back into the next official recession, unemployment soars, and consumers really stop spending?

  What is revealed when you look under the hood of this economic recovery is that it is a complete and utter fraud. The recovery is nothing but smoke and mirrors, buoyed by subprime auto debt, really subprime student loan debt, corporate stock buybacks, and Fed financed bubbles in stocks, real estate, and bonds. The four retailers listed above are nothing but zombies, kept alive by the Fed’s ZIRP and QE, as they stumble towards their ultimate deaths. The coming recession will be the knife through their skulls, putting them out of their misery.

  

  “Retail chains are a fundamentally implausible economic structure if there’s a viable alternative. You combine the fixed cost of real estate with inventory, and it puts every retailer in a highly leveraged position. Few can survive a decline of 20 to 30 percent in revenues. It just doesn’t make any sense for all this stuff to sit on shelves.”

  Marc Andreessen

  

  

  

  

  

• North Korea Threatens To "Invade USA," Use Weapons "Unknown To The World"

  If Washington does not cancel its planned military exercises with South Korea, North Korea has issued new nuclear threats and says it is ready to use its latest weapons, which "are unknown to the world." The drills, called Ulchi Freedom Guardian, are due to start Monday are designed to "protect the region and maintain stability on the Korean peninsula." However, as expected Pyongyang is not happy, "If [the] United States wants their mainland to be safe," said state TV, "then the Ulchi Freedom Guardian should stop immediately."

   

  

   

  The US-led exercises involve South Korea, Australia, Canada, Colombia, Denmark, France, New Zealand and the UK, due to take place Monday, have become an annual event for the US, South Korea and other allies, a fact that has often irked North Korea. As RT reports,

  As has been the case in the past, Pyongyang has shown its displeasure, but the rhetoric coming out of the secretive nation has been stronger than in previous years.

   

  "The army and people of the Democratic People’s Republic of Korea (DPRK) are no longer what they used to be in the past when they had to counter the US nukes with rifles," a spokesman for North Korea’s National Defense Commission (NDC) said.

   

  The spokesman added that “North Korea… is the invincible power equipped with both [the] latest offensive and defensive means unknown to the world.”

   

  "The further Ulchi Freedom Guardian joint military exercises are intensified, the strongest military counteraction the [Democratic People's Republic of Korea] will take to cope with them," he added.

   

  "If [the] United States wants their mainland to be safe," said a newswoman for the state TV station, KCNA, "then the Ulchi Freedom Guardian should stop immediately."

  Washington has brushed aside the comments coming out of Pyongyang, with a former US Army general, who had previously taken part in the Ulchi drills saying that the North Korean leader Kim Jong Un is just seeking attention from the international community.

  "One of the key propaganda goals of the young leader is to just get on the radar of the US," said retired Lt. Gen. Mark Hertling, who was speaking to CNN.

   

  "With all the other things we're focused on — ISIS, al Qaida in the Arabian Peninsula, Russia and Ukraine, etc., Kim Jong Un wants to ensure he grabs attention."

  

  

  

  

  

• The Donald vs. China (Or The Fallacy Of Protectionism)

  Submitted by Pater Tenebrarum via Acting-Man.com,

  Not Every Populist Topic is Worth Exploiting

  For reasons that will forever remain a mystery to us, mercantilism and protectionism actually hold enormous popular appeal. The best explanation we can come up with for this phenomenon is that the support for such policies is based on a mixture of economic ignorance and relentless propaganda by vested interests over the past, say, four centuries. Still, it is almost comical that people are so vociferously clamoring for policies that can actually cost them a fortune and will definitely lower their standard of living.

   

  

  Entangled in the Donald’s magnificent hair.

  Cartoon by Sack

  Donald Trump currently enjoys great success as the frontrunner in the Republican nomination race. Usually the business candidate never wins, and maybe his participation will end up increasing the chances of the candidate the Republican establishment really wants – i.e., Jeb Bush, a member of the immensely costly American aristocracy, and a dependable neo-con warmonger. For now though, Trump seems to have said establishment in disarray.

  Anyway, the Donald has evidently noticed that his political incorrectness and populism are a huge draw for the grumpy and by now quite cynical electorate, and so he couldn’t let an opportunity for a little China bashing pass him by. As we have pointed out, we do like him for his great entertainment value and his remarkably candid and correct assessment of Fed policy, but there are a number of areas in which he seems quite deficient. As CNBC reports, Trump reacted with characteristic hyperbole to the recent devaluation of the yuan:

  Republican presidential candidate Donald Trump on Tuesday said China’s devaluation of the yuan would be “devastating” for the United States. “They’re just destroying us,” the billionaire businessman, a long-time critic of China’s currency policy, said in a CNN interview.

   

  “They keep devaluing their currency until they get it right. They’re doing a big cut in the yuan, and that’s going to be devastating for us.”

   

  Earlier on Tuesday, China devalued its currency following a series of poor economic data in the yuan’s biggest fall since 1994. Some said this could signal a long-term slide in the exchange rate.

   

  China has been a frequent theme for Trump since he entered the 2016 presidential campaign, promising to be a tougher negotiator with Beijing in order to bolster the U.S. Economy.”

  (emphasis added)

  If a devaluation of the yuan by a few percentage points really has the potential to “devastate the US economy”, the US economy must be a lot more fragile than we thought.

   

  

  I solemnly hair that I will faithfully execute the office…

  Cartoon by Mike Luckovich

   

  Is a Weaker Yuan a Threat?

  It is of course absolutely true that China has manipulated its currency for decades. However, the economic rationale of China’s rulers is simply misguided – and Trump seems to be saying “we should pursue the very same misguided currency policy”. In other words, he seems to believe that China will gain wealth to the detriment of the US by lowering the value of its currency and would prefer it if things were the other way around.

  First of all, we should point out here that the yuan was actually egregiously overvalued at its recent highs. In trade-weighted terms, it had risen by 14% against the US dollar just over the past year – the only currency in the world exhibiting such strength against the surging USD. At the same time, China’s economy has actually begun to wobble, as its credit and housing bubbles are teetering on the edge. If China’s leaders were to finally listen to their critics and make the yuan fully convertible, we would confidently predict that it would crash by at least 30% against the dollar. In short, if China were to cease to act as a currency manipulator, its critics would be faced with the exact opposite outcome they are apparently hoping for.

   

  

  The yuan vs. the USD, daily – if the yuan were to become fully convertible, it would likely weaken a lot more.

   

  It is true that China’s policymakers for a long time did everything they could to keep the yuan from appreciating. As a result, they kicked off an almost unprecedented credit bubble in China, creating an orgy of malinvestment that has been stunning to behold. However, the low yuan was a great boon to consumers in the countries trading with China. Thus, while China’s economy was structurally undermined, others reaped great benefits. Every dollar a consumer can save because China offers him goods at extremely low prices can be put to other uses – it can be saved and invested, or used for additional consumption. This is great for individual consumers and the economic areas in which they reside.

  However, in recent years, China’s currency policy has changed. The country’s policymakers gained a lot of “face” when China was the only emerging economy not to devalue after the 2008 crisis. Subsequently a decision seems to have been made to let the yuan appreciate, for three main reasons: 1. protectionists in the US and Europe had to be pacified. 2. China’s economy needed to be moved away from its investment-heavy model to a more balanced one (especially in light of the fact that much of this investment was akin to Keynesian pyramid building or ditch digging, i.e., a complete waste of scarce resources) and 3. China wanted and still wants to see the yuan included in the SDR currency basket, which is a matter of prestige and would moreover imbue the yuan with potential reserve currency status. Apparently the fact that the IMF rejected the application for the time being caused China’s policymakers to bring the yuan closer to its market value, essentially saying “let’s see how you like it”.

   

  

  A subtle gesture from Beijing…

   

  Capital outflows, a weak economy and a number of easing measures by the PBoC over the past year were all contradicting the strong yuan policy. The markets were well aware of this fact, which is why setting the yuan’s trading band closer to the appropriate value indicated by the markets resulted in a weaker yuan. Trump seems to be saying that China should continue to manipulate the value of its currency, only in a direction more to his liking.

   

  

  Not least due to the “strong yuan” policy of the past few years, money supply growth rates in China have collapsed – this is beginning to unmask a lot of malinvested capital, leading to a weakening of economic activity in China – click to enlarge.

  The great error of both China’s mercantilists and US protectionists is to believe that a positive trade balance is somehow improving a country’s welfare. They all need to urgently read what Frederic Bastiat wrote on the topic 167 years ago already . Apparently Mr. Trump and many other politicians are the modern-day incarnations of a certain M. Maguin:

  “The balance of trade is an article of faith. We know what it consists in: if a country imports more than it exports, it loses the difference. Conversely, if its exports exceed its imports, the excess is to its profit. This is held to be an axiom, and laws are passed in accordance with it.

   

  On this hypothesis, M. Mauguin warned us the day before yesterday, citing statistics, that France carries on a foreign trade in which it has managed to lose, out of good will, without being required to do so, two hundred million francs a year.

   

  “You have lost by your trade, in eleven years, two billion francs. Do you understand what that means?”

   

  Then, applying his infallible rule to the facts, he told us: “In 1847 you sold 605 million francs’ worth of manufactured products, and you bought only 152 millions’ worth. Hence, you gained 450 million.

   

  “You bought 804 millions’ worth of raw materials, and you sold only 114 million; hence, you lost 690 million.”

   

  This is an example of the dauntless naïveté of following an absurd premise to its logical conclusion. M. Mauguin has discovered the secret of making even Messrs. Darblay and Lebeuf laugh at the expense of the balance of trade. It is a great achievement, of which I cannot help being jealous.

   

  Allow me to assess the validity of the rule according to which M. Mauguin and all the protectionists calculate profits and losses. I shall do so by recounting two business transactions which I have had the occasion to engage in.

   

  I was at Bordeaux. I had a cask of wine which was worth 50 francs; I sent it to Liverpool, and the customhouse noted on its records an export of 50 francs. At Liverpool the wine was sold for 70 francs. My representative converted the 70 francs into coal, which was found to be worth 90 francs on the market at Bordeaux. The customhouse hastened to record an import of 90 francs.

   

  Balance of trade, or the excess of imports over exports: 40 francs. These 40 francs, I have always believed, putting my trust in my books, I had gained. But M. Mauguin tells me that I have lost them, and that France has lost them in my person.

   

  And why does M. Mauguin see a loss here? Because he supposes that any excess of imports over exports necessarily implies a balance that must be paid in cash. But where is there in the transaction that I speak of, which follows the pattern of all profitable commercial transactions, any balance to pay? Is it, then, so difficult to understand that a merchant compares the prices current in different markets and decides to trade only when he has the certainty, or at least the probability, of seeing the exported value return to him increased? Hence, what M. Mauguin calls loss should be called profit.

   

  A few days after my transaction I had the simplicity to experience regret; I was sorry I had not waited. In fact, the price of wine fell at Bordeaux and rose at Liverpool; so that if I had not been so hasty, I could have bought at 40 francs and sold at 100 francs. I truly believed that on such a basis my profit would have been greater. But I learn from M. Mauguin that it is the loss that would have been more ruinous.

  (italics in original)

   

  

  Frédéric Bastiat: bane of protectionists and social engineers

  Image via Wikimedia Commons

   

  What more can one say? A good businessman of course doesn’t necessarily have to be a good economist. In fact, in most cases that would probably be a drawback rather than an advantage (Bastiat evidently was a rare exception). However, if someone wants to become president, he should perhaps acquaint himself with a few basic principles of economics.

  With regard to the policy of devaluation, we always cite the two paragraphs shown below, which were penned by Ludwig von Mises. They represents the most concise and easy to grasp indictment of the debasement policy we have ever seen in print:

  “The much talked about advantages which devaluation secures in foreign trade and tourism, are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption. This effect may appear as a boon in the opinion of those for whom the balance of trade is the yardstick of a nation’s welfare.

   

  In plain language it is to be described in this way: The British citizen must export more British goods in order to buy that quantity of tea which he received before the devaluation for a smaller quantity of exported British goods.”

  (emphasis added)

   

  

  Ludwig von Mises: Hi there, sorry to inform you that you can’t get richer by devaluing your currency.

  Photo via Mises.org

  So if you like restricting your consumption (i.e., if you like your standard of living to decline), you should root for the devaluation of your own country’s currency and root for currencies elsewhere to strengthen. This is why we will never truly understand the populist appeal of protectionism. It helps only a tiny group of producers to the detriment of everybody else in the economy, and even that tiny group’s advantages are strictly temporary.

  In fact, in the long run, advantages gained due to either devaluation or the imposition of tariffs always turn into a competitive disadvantage, because they make businessmen lazy and foster the misdirection of resources that could be much better employed in other sectors than the protected ones.

  Someone should perhaps get Mr. Trump a book or two.

   

  Conclusion

  If China’s authorities are so eager to support consumers in the US and elsewhere in the world by making Chinese goods cheaper for them, then by all means let them forge ahead! Should he be involved in negotiations with Beijing in the future, Mr. Trump should perhaps choose different topics to discuss.

   

  

  One more hair joke – because we can.

  

  

  

  

  

• New Snowden Leak Exposes AT&T's "Extreme Willingness To Help" NSA Spy On Americans

  Newly disclosed NSA files expose the spy agency's relationship through the years with American telecoms companies. As NYTimes reports, The National Security Agency’s ability to spy on vast quantities of Internet traffic passing through the United States has relied on its extraordinary, decades-long partnership with a single company: the telecom giant AT&T. The documents, provided by the former agency contractor Edward Snowden, described the NSA-AT&T relationship as "highly collaborative," while another lauded the company’s "extreme willingness to help."

   

  While it has been long known that American telecommunications companies worked closely with the spy agency, newly disclosed N.S.A. documents show that the relationship with AT&T has been considered unique and especially productive. As The NY Times reports,

  AT&T’s cooperation has involved a broad range of classified activities, according to the documents, which date from 2003 to 2013.

   

  AT&T has given the N.S.A. access, through several methods covered under different legal rules, to billions of emails as they have flowed across its domestic networks. It provided technical assistance in carrying out a secret court order permitting the wiretapping of all Internet communications at the United Nations headquarters, a customer of AT&T.

  The documents, provided by whistleblower and former NSA contractor Edward Snowden, as RT adds, explain that the telecom giant was able to deliver under various legal loopholes international and foreign-to-foreign internet communications even if they passed through networks located in the US.

  To show the extent of AT&T’s involvement, the files revealed that the company installed surveillance equipment in at least 17 of its major US internet hubs, thought to be a lot more than Verizon installed. AT&T’s engineers were also the first ones to get their hands on this new surveillance technologies created by the NSA, the newspaper reported.

   

  Further proving a unique relationship is the NSA’s top-secret budget from 2013, which doubled the funding of any other cooperation of similar size, according to the documents.

   

  AT&T was (is) the NSA's enthusiastic top surveillance partner http://t.co/OfMfxgTN5X pic.twitter.com/Iyh7rHqwEc

  — Anonymous (@YourAnonNews) August 15, 2015

    

  “This is a partnership, not a contractual relationship,”   one document said, warning NSA officials to be polite and professional. “[AT&T’s] corporate relationships provide unique accesses to other telecoms and ISPs [Internet service providers],” said another.

  In 2011 AT&T began to supply NSA with over 1.1 billion domestic cellphone calling records per day in 2011, which was “a push to get this flow operational prior to the 10th anniversary of 9/11,” the Times reported.

  AT&T spokesman Brad Burns told Reuters that the company does not “voluntarily provide information to any investigating authorities other than if a person’s life is in danger and time is of the essence. For example, in a kidnapping situation we could provide help tracking down called numbers to assist law enforcement.”

  As The NY Times concludes,

  It is not clear if the programs still operate in the same way today. Since the Snowden revelations set off a global debate over surveillance two years ago, some Silicon Valley technology companies have expressed anger at what they characterize as N.S.A. intrusions and have rolled out new encryption to thwart them. The telecommunications companies have been quieter, though Verizon unsuccessfully challenged a court order for bulk phone records in 2014. At the same time, the government has been fighting in court to keep the identities of its telecom partners hidden.

   

  In a recent case, a group of AT&T customers claimed that the N.S.A.’s tapping of the Internet violated the Fourth Amendment protection against unreasonable searches. This year, a federal judge dismissed key portions of the lawsuit after the Obama administration argued that public discussion of its telecom surveillance efforts would reveal state secrets, damaging national security.

  The US government continues to pursue Snowden, insisting that he stole classified information, and betrayed the nation, claiming that his “dangerous” decision had “severe consequences” for the security of the United States. Others, however, have hailed Snowden as a “hero” who has disclosed unconstitutional activities by the US government.

  Karl Denninger asks the all-important question… Why are we stil using AT&T?

  I often ask myself why I should bother with continuing to do the work I do in the area of writing on the various outrages that our government — and various other entities — engage in.  It is very hard to make the argument that anyone in material numbers gives a damn when this sort of thing doesn't result in the instantaneous destruction of the customer base of any business involved in such an act.

  It was often claimed that these records were "mostly" wireline (that is, old-fashioned phone-on-the-kitchen-wall) records.  This is now known to have been a lie.

  The documents show that AT&T's cooperation has involved a broad range of classified activities, according to the Times. AT&T has given the NSA access, through several methods covered under different legal rules, to billions of emails as they have flowed across its domestic networks.

   

  It also has provided technical assistance in carrying out a secret court order permitting the wiretapping of all Internet communications at U.N. headquarters, a customer of AT&T, the Times reported. While NSA spying on U.N. diplomats had been previously reported, the newspaper said Saturday that neither the court order nor AT&T's involvement had been disclosed.

  The documents also reveal that AT&T installed surveillance equipment in at least 17 of its Internet hubs on American soil, the Times reported, far more than similarly sized competitor Verizon.

   

  AT&T engineers were the first to try out new surveillance technologies invented by the NSA, the newspaper reported.

  I don't know what the bigger problem is here — that AT&T willingly assisted wiretapping all communications at the UN or that a court issued a blanket wiretap order for all communications taking place at the UN.

  We're not talking about "some" communications, or "those associated with (certain) regimes and nations"; this order appears to have been a blanket one that covered literally everything that went on at the facility.

  Further, AT&T is reported to be have not only made no attempt to resist through process of law but to have been fully involved and willing to assist — hardly the adversarial process that is expected in our legal system!

  It has been said (somewhat jokingly) that the AT&T logo was best-associated with this:

  

  Emperor Palpatine, is that you in there?  And more to the point why does this company have any civilian US customers left that willingly pay money to — or use — it?

   

  

  

  

  

  

• Austerity – Elite Terrorism Against Ordinary People

  Submitted by Brian Davey via CredoEconomics.com,

  This article arises from increasing frustration and irritation about the way that the debate about Greece, and in general about austerity, is framed. My frustration is not only with the policy thugs who are implementing austerity, but also, to a degree, with their critics – which includes the failure of most of the critics of growth to actually get involved in this controversy and argue their own point of view. There have been attempts, for example by Nicola Hinton of the Post Growth Institute. It seems like a tough one to argue for degrowth in the context of the Greek crisis and as an alternative to austerity – but then all the more reason to try. Otherwise a movement for degrowth will never get out of the university lecture rooms into the real world. It will never become a guide or a narrative for the future of society to be realised in practical and popular politics.

  Austerity – elite terrorism against ordinary people

  So let’s start by reframing the debate about austerity. When Yanis Varoufakis describes what has happened to Greece as “Fiscal Waterboarding” he is part way in the direction that I mean. His description of austerity as a form of terrorism is also right.

  The purpose of austerity is to create insecurity and instill fear in the general population in order to protect the finance and banking sector from popular rage against the crimes the participants of this sector have committed against ordinary people. This rage ought to have given rise a long time ago to legal actions and desperately needed fundamental reforms to take away from bankers the right to create money, a right which they have abused at tremendous cost to ordinary people. Instead of a rage focused on collective reforms what we are being subjected to is a policy of deliberately spreading insecurity together with the scapegoating of vulnerable people. Attention and emotion is directed away from the financiers and their political representatives onto easier targets who cannot fight back and who had no part in creating our difficulties. Peoples’ anger and discontent is channelled towards people weaker than themselves which also serves to exacerbate the sense of fear by making the prospect of “social descent” into the vulnerable groups – even more of a frightening prospect. The people who run the mass media and the PR industry have been only too willing to help.

  So what, exactly is this fear that is being instilled in people? I am writing here of the sort of ruin in which because one does not have money to pay the rent, one can be evicted from where one lives and through that lose the ability to maintain relationships. Where one can fail in one’s responsibilities to dependents and from this point on fall in a downwards spiral, lose one’s job, lose everything else and that includes one’s emotional and mental equilibrium. Elite terrorism does not operate by setting off bombs but by creating fear of being pushed beyond one’s coping capacities into life management breakdowns. For that fear to be generalised it helps to have scapegoat social groups – “swarms” as David Cameron calls them – whose desperate state is an example of what can happen if you do not pay your debts and work for whatever pittance you are offered. The mentality of the elite can be observed from comments like those of the economist Hayek. Unemployment was necessary, he wrote, as an alternative to corporal punishment for disciplining the labour force. In the absence of a “reservoir” of unemployed, he wrote “discipline cannot be maintained without corporal punishment, as with slave labour” (quoted in Smith and Max-Neef, Economics Unmasked, 2011 p 35)

  But if austerity is financial sector sponsored terrorism, if it is the defensive strategy to shift the blame off its own shoulders for the financial crisis, it is clear that what needs to be counterposed is not “growth” – but measures that would help ordinary people feel safe. Safe that they will be able to pay the bills, safe that they will be able to meet their basic needs. A policy against terrorism is a policy that creates security. In this case security can only come about by being part of communities where people are looking after each other.

  But surely, one is tempted to ask, is it not true that increasing income and therefore growth plays an important part in personal and collective risk management? If one has more income and wealth is one not further back from the cliff edge of potential ruin? For many people income growth can be thought of two ways. On the one hand it is additional purchasing power to buy new toys to play with so as to entertain and educate, to pursue existing or new interests and aspirations. On the other hand it is also a means to a greater sense of security in life management – that which will help an individual or family get through “rainy days”.

  Of course there is truth in the idea that money means greater safety – particularly in an individualist and competitive society we are all supposed to look after ourselves individually. In consumer societies there are not enough common arrangements that one can join in order to contribute to communities that, in turn, look after their members. In the absence of protective communities more money appears to be the chief means of greater personal security. This is what the money men want us to think. It is why in time of crisis the owners and managers of the money system can use their control over the financial liquidity in circulation to create financial insecurity as a means of social control.

  Running economies for safety…. or for growth?

  It was not always like that. To fully understand what is involved here we need to go back to the roots of “economic theory”. Before the rise of the merchants and of the money men communities who managed their local eco-systems through local commons arrangements were not concerned to “grow economies”; they were concerned to keep people in their communities safe, to give them security. Commons management was about sharing decision making about local ecological systems/landscapes so that local resources were shared equitably but so that they were not degraded by overuse. At the same time the market and moneylending activities, which were much more limited than they are today, were subjected to moral frameworks. Markets were regulated to protect the poor and usury was frowned on and regulated too. The economics of these times was considered to be a branch of moral philosophy and its key idea was that power should not be abused. Society was by no means ideal because the monarchs and their aristocratic lieutenants were essentially gangs running protection rackets. Nevertheless, at the base of society commoners managed the local ecological system together and shared its resources in order to survive.

  Over several centuries in Britain commoners lost their rights to manage and access the resources of local landscapes. These resources were stolen from them by the elite during the enclosures. British and European merchants allied with mercantilist states to conquer countries on other continents who had no need or wish to trade with Europe. Over time the ideology changed and the moral dimensions of economics were degraded too. The new economics of the 18th century and afterwards was based on the ideology that technological change, production growth and progress were all the same thing. In the new ideology it was fully acceptable to impose insecurity and misery on ordinary people to bring societies and colonies into “the Age of Commerce” as Adam Smith called it. Enclosures, colonialism, slavery were the prices to be paid to achieve “progress”. It is still assumed today that insecurity is needed as a discipline to force people into the labour market on terms that suit employers and to pay their debts.

  Economic theorists still teach a rubbish 19th century psychological understanding of what underlies the “economic decision making”. Their banal idea is that we live making calculations about how we can “maximise utility or satisfaction”. It is as if our whole lives were focused on what we can get from shops – as if shopping is the high point of human existence.

  In contrast to the simplistic ideas of economists about how people are motivated there is often an undercurrent of fear. People are driven not just, or even mainly, by how can they get more, more, more – but how can they avoid losing what they have already got. Psychologists who have not been contaminated by an economics training have looked more closely about what people do when they make decisions about purchasing things. One of the most important findings of Daniel Kahneman and Amos Tversky was that people are motivated by risk aversion. When they weigh up their options losses are valued twice as much as gains. It turns out that people manage the day to day practicalities of their lives within reference points which they do not like to fall back from. (“This is too expensive. I am already deep in debt. If I purchased this then at the end of the month I would risk going over the edge, be unable to pay the rent and that I cannot risk because my children need a roof over their heads”) Risk averse people take decisions with safety in mind. They are indeed times when they are prepared to gamble but this will be when all of their options seem bad, and they take what appears to be an outside chance by gambling to extricate themselves. Is it because people are feckless that there are so many betting shops in areas of poverty – or is it desperation combined with wishful thinking?

  The alternative to austerity – is it production growth or an economics of safety?

  It follows from this that a more accurate description of what people want from their economic arrangements is not “growth” but security – and this means a need to feel the assurance of living in a community in which people are looking after each other. It means a need to feel safe because one knows that other people will look after all those who are themselves looking after the community if they are able to contribute. (And look after those too who are too young, ill or disabled to contribute). This is what a commons based economy and a solidarity economy is all about.

  In important respects what community arrangements for mutual support imply is a removal of the very need for income growth – because in a community like this there are both interesting and meaningful ways in which nearly everyone (except the very young and very ill) can contribute plus a removal of the fear that comes with being on one’s own in a hostile rat race. The re-creation of the commons is not only about the re-creation of community management of local ecological systems as happened several centuries ago, it is also about sharing and mutual support. To recreate these arrangements is incremental system change from below in favour of social security rather than production growth feeding a consumer and debt economy.
  This is very much not framing the issues as a discussion of “how we can get growth going again” – it is framing the issues as “how can we make people secure?” which is not the same thing.

  A major reason that it is not the same thing is because continually increasing material production based on fossil fuel production is actually making everyone more insecure – it is bringing on a catastrophic ecological crisis in general and a climate crisis in particular.

  Fire and flood – the ecological crisis in Greece

  What we want is not production and income growth – it is safety and security. Unfortunately this is not the narrative and counter narrative that we have at the moment. It should be because Greece too will be deeply affected by a climate crisis. Towards the end of July 2015 around Athens and in the south of the country there were around 50 forest fires fanned by strong winds and high temperatures which give a potential feel of things to come.

  As a seafaring country and a nation of islands Greece will also be affected by rising sea levels. If one looks closely it appears that few of the islands would disappear until sea levels have risen a great deal. However a closer look reveals that, with even one or two metres of sea level rise, densely developed holiday coastlines, like the coast of northern Crete, packed with hotels and holiday installations would be underwater. Meanwhile places like Thessaloniki could be seriously affected too. The main route into the city from the south west would go under if sea levels rise only one or two metres.

  So we need a story that is not solely about the economy of money and debt. Over and again the counter narrative to that of the bankers and politicians who are turning Greece into a debtors prison has been that the deflationary policies of the Eurozone have led to a massive fall in income and this makes it much more difficult for the Greeks to repay their debts.

  So there is then a counter narrative that looks like this – it is a situation in which a suite of policies for growth is necessary. According to this counter narrative if incomes recover, and if enough debt is cancelled, it will be possible to service and repay the debts remaining. In this context the policies of countries like Germany appear to be either ignorant or Machiavellian. In the Machiavellian version of the story the perpetual crisis in Greece has multiple benefits for Germany. It disciplines other countries like France, it creates a weak euro that benefits German exporters who are selling outside the eurozone, it draws money into Germany which makes for very cheap borrowing there….and enables a feeling of self righteous indignation among the readers of Bild Zeitung that distracts from internal German difficulties. All of this seems obvious – although not, apparently, to certain German politicians and the sort of condescending journalists who write for Der Spiegel.

  Yet….if the solution for Greece is “growth” then what is to be done about the ecological crisis? How does anti-austerity relate to degrowth? We need a different way of understanding the issues. The reframing to counterpose safety and security rather than growth is one part of the answer but on its own this is not enough either. In order to get to the heart of the issues we must develop an alternative narrative to what the future might look like yet further – in a revival of the commons and of a solidarity economy.

  Two sides to degrowth – top-down and bottom-up

  To get a better understanding of the tasks ahead it would be helpful to see “degrowth” as having two different but complementary sides – one involves the contraction of production down to a safe maximum possible ecological carrying capacity of the planet. The scale of the economy must be made ecologically safe. Then there is the other question of safety for people. There is a need for a credible story of how to make this harmonisation of economy with the ecology safe for people in communities.

  More specifically what is needed is structural change so that contracting material production does not mean contracting employment and generalised financial ruin. Under current conditions if production is rising less than labour productivity unemployment of labour will increase. If production falls employment will fall even more rapidly. This is a major challenge for any degrowth approach. Strong state intervention will be needed to create employment.

  So one should ask: what kind of meaningful employment creation could occur if production were actually shrinking? Or, in Greece, what kind of meaningful employment could occur that would soak up unemployment given that production and incomes have already fallen by over 25% – and would be employment that does not simply recreate the features of a consumerist and debt focused economy?

  While rising employment is needed falling production is needed too. To achieve this ideally requires both top down and bottom up components. The drive for a new economy of social and ecological safety needs to have an energy and ecological dimension. That’s why if there is to be any contraction then it should not be driven through the money system or through fiscal means but directly by reducing the amount of carbon fuels that are allowed into the economy. This is because it is the burning of carbon fuels that is dangerous to the wellbeing of global society, not money creation and employment creation.

  Top-down degrowth – driven through energy system transformation and cap and share

  Most people probably assume that administering policies to bring down carbon emissions must be hopelessly complicated given the huge number of users and uses for fossil fuels. From this it looks as if the logistical nightmare of bringing down emissions will be too great. But this is to look to the wrong place for where the control must be placed. As an increasing number of climate change activists are realising the key thing is to keep fossil fuels in the ground. The focus needs to be on policies that prevent fossil fuels being extracted in the first place. Cap and share or cap and dividend are similar policies of this type. They ban the extraction of fossil fuels without a permit for the amount of carbon extracted and limit the number of permits. The number of fossil fuel extraction permits needs to be reduced rapidly year on year to reduce the amount of carbon fuels allowed out of the ground. If this were done at the pace that climate scientists now say is necessary it would undoubtably contract many forms of material production – particularly those which are energy intensive. Above all such policies would contract the lifestyle of rich people – and rightly so, because it is the rich that have the most carbon intensive lifestyle.

  If extraction permits are auctioned the money raised should be distributed back to the public on a per capita or some other agreed equitable basis. That is the share bit of the policy. Strictly speaking cap and share is not one but two policies. The cap, if strictly enforced, would prevent carbon being dug up and burned. That’s the climate policy. The share is a policy for social equity – to make the burden of adjusting the energy system fair to all, rich and poor alike. Given that most of the world’s carbon is burned to power the lifestyle of the rich, such a policy would have its impact mainly on the rich and would actually be likely to re-distribute income to the poor. Companies that would be paying more for the fuels and the products made with them would put up the prices of their products to recoup the cost of buying the shrinking number of permits. The poor would thus have to pay more for the limited amount that they do buy but given their carbon light lifestyle it is likely that the share of the carbon revenue that they receive would initially exceed this extra that they have to pay out in increasing prices. On a net basis the poor would tend to gain.

  Thus a policy like cap and share would ensure that the contraction in material production happens in the areas that it needs to contract – that part of production that caters for the lifestyle of the rich. Because the poor might even gain we can expect that their consumption might rise to some degree initially. If you redistribute income from rich to poor then, in the jargon of economics, you are likely to increase the marginal propensity to consume. A rich person saves the bulk of their income and if a chunk of their riches are given to poor people then the poor people are likely not to save but to spend their new cash on consumer goods. So redistribution could actually increase expenditure and that would generate employment. But would this not then undo the beneficial effect in reducing carbon emissions? The answer is not if the cap is strictly maintained – it would still be the case that only as much carbon as permitted comes out of the ground.

  It is important to get this point because some well meaning climate activists are pushing another policy called “fee and dividend” which misunderstands this point. The fee and dividend promoters want to increase the price of carbon by putting a price or a fee on all fossil fuel coming out of the ground and then redistributing that money to everyone in a share rather similar to the way described. However putting a price on carbon in this way leaves indefinite how much carbon will be extracted. But, as we have shown, the redistribution involved in a carbon price combined with a share is likely to increase the consumption of the poor – but without a cap there is no clear guarantee that this increase in consumption goods produced and consumed in aggregate may not end up with the paradoxical effect of increasing the amount of carbon coming out of the ground. This is because an increase in goods produced and consumed by the poor would require an increase in energy to produce and to run them.

  (The reason that some prefer a “fee” to a “cap” probably varies. Some advocates are probably economists and thus ascribe importance to things having “the right price” because they are true believers in the “religion” of market and the price system. Others may have become opposed to “caps” because of the experience of “cap and trade” systems like the European Union’s shambolic Emissions Trading System where the “cap” is a misnomer. But the problem with “caps” that are not maintained as such is a problem of the lobbying power of the fossil fuel sector and that will apply to any scheme. If a “fee and dividend” system were adopted it there would be a political wager around the carbon price waged just the same. Multiple means would be deployed by the usual suspects to undermine a fee system too ).

  Bottom up degrowth – efficient sharing, efficient repairing, local and smaller inputs

  In current circumstances it would be necessary to drive production system contraction of the luxury sector in particular through a policy like cap and share. This top down policy would then need to be complemented by bottom upwards policies from the community level.

  Let us remind ourselves that the task in hand is to ensure employment, a reduction in poverty and above all a reduction of insecurity and fear, while at the same time material resource, energy use and production is, if possible contracting. How can this be achieve from the grass roots level? Here’s a few examples. For example someone newly employed in a tool library, community workshop and resource centre is not producing tools but is facilitating an arrangement to share them. Their job is helping to cut the demand for new products and thus to cut waste production. Someone employed in a workshop to help people repair furniture is reducing the need to create new furniture – likewise, clothes, bicycles, electronic equipment and so on. A sharing economy has a different kind of idea of efficiency. Efficient resource use means efficient sharing, easy repair, use of local inputs and a smaller requirement for energy throughput too. An economy like this has to be administered and supported and this requires employment too. It requires the kind of employment that state money creation should be supporting or if not, local authority created IOUs that can circulate as local liquidity. At the same time it requires much less new production and transport.

  This would largely be a bottom upwards process and the structural changes would be so wide ranging and varied in their features and effects that it simply could not be pre-directed in detail by governments. However, to occur properly these changes happening with communities would have to have the tacit support of governments – forms of support that do not try to take over.

  In conclusion

  What I hope I have done is shown that “degrowth” is nothing like austerity but is about making our economic and community arrangements safe – ecologically safe and safe for people as members of communities. Safety can no longer be found in “growth” and so a very different way of thinking about the issues is needed. What the crisis in Greece and elsewhere has done is force people out of their comfort zone into a fear zone but it has got them actively supporting each other looking at new ways of organising to reduce the insecurity to manageable levels via mutual aid and help.

  In Argentina at the turn of the century there was also a financial crisis that ruined large numbers of people – but, in a very similar way to what is happening in Greece communities came together to respond as best as they could at the “grass roots”. What happened in Argentina and is now happening in Greece consists of a mix of self employed and freelancers coming together in small start up companies; volunteers and self help projects establishing a variety of health, social welfare, cultural and artistic projects; emerging networks for sharing and local exchange; projects re-connecting local farmers with local consumers to the exclusion of more expensive supermarkets and international brands; digital networking arrangements; experiments with renewable and other computer controlled locally clustered energy systems; and workers who have taken over factories that would otherwise be closed and restarting production in more appropriate forms. All of these things are happening but require their own support arrangements and complementary state support too.

  With the right kind of top down and bottom up policies it ought to be possible to create a different way of thinking about the future that is neither based on conventional growth economics nor austerity – one which, as members of communities, we all have an important part in creating.

  

  

  

  

  

• Hundreds Of Thousands Take To The Streets In Brazil Demanding President's Impeachment

  Protests are underway in Brazil as hundreds of thousands take to the streets to call for the impeachment of President Dilma Rousseff. Here’s Bloomberg:

  An estimated 25,000 protesters in Brasilia marched toward Congress, chanting against Rousseff and corruption, carried a long banner demanding “Impeachment Now.”

   

  Rouseff monitored proceedings from her official residence, due to meet with some of her cabinet in the afternoon, said Justice Minister Jose Eduardo Cardozo.

  Protest in #Rio #Brazil: “Military intervention is not a crime” via @tariqpanja UNBELIEVABLE. pic.twitter.com/S8kcJmUJnq

  — juliana barbassa (@jbarbassa) August 16, 2015

  

  

  

  

  

  Background:

  When the world’s foremost mainstream media outlets begin to run stories with titles like: “How to Impeach a Brazilian President: A Step-by-Step Guide“, you know your political career may be in trouble. 

  Brazil’s Dilma Rousseff – who recently became the country’s most unpopular democratically elected president since a military dictatorship ended in 1985, with an approval rating of just 8% – faces a litany of problems, not the least of which are accusations around fabricated fiscal account data and corruption at Petrobras where she was chairwoman from 2003 to 2010. 

  

  But beyond that, Brazil is mired in stagflation and, as Morgan Stanley recently noted, is at the center of the global EM unwind triggered by falling commodity prices, slowing demand from China, and an imminent Fed rate hike. Underscoring the depth of the economic malaise is the following graphic from Goldman which shows that when it comes to inflation-growth outcomes, it doesn’t get much worse than what Brazil suffered through in Q2. 

  

  Now, frustrations have apparently reached a boiling point (again) and mass demonstrations are planned for Sunday. Here’s Bloomberg with more:

  As allegations of corruption and incompetence swamp Brazil’s government, and plummeting commodity prices sap its economy, hundreds of thousands of angry citizens are expected to descend on central squares across the country on Sunday, posing a key test for President Dilma Rousseff.

   

  This will be the year’s third mass protest against Rousseff, who is facing growing calls for her impeachment. A strong showing could help support her ouster and deepen a sell-off on financial markets.

   

  The Free Brazil Movement, one of the groups organizing the demonstrations, says rallies are confirmed in 114 cities.

   

  Congress is watching the turnout both to judge the support for impeachment proceedings and to measure the level of discontent in their home districts.

   

  Since narrowly winning reelection last October, Rousseff, Brazil’s first female president, has embarked on an austerity program that has cost her political capital. Her popularity has plummeted to 8 percent, a record low, and more than two-thirds of Brazilians support impeachment, according to Datafolha, a polling firm. The economy in 2015 is forecast to post its worst performance in 25 years amid ongoing corruption probes into politicians and executives.

   

  Rousseff has reversed herself on some popular but expensive measures such as caps on electricity and gasoline prices. The middle class that doesn’t qualify for subsidies has been hardest hit as power bills rose an average 23 percent, and more than 50 percent in some regions. Higher interest rates are restricting consumer credit, unemployment has hit 6.9 percent and inflation is rising, inching toward 10 percent.

   

  
  

   

  Rousseff won election in 2010 following Luiz Inacio Lula da Silva, the central figure of the Workers’ Party. She rode his popularity for most of her first term until demonstrations in 2013 brought millions to the streets protesting corruption and spending on the World Cup hosted by Brazil last year.

   

  Rousseff recovered enough to win reelection but protests in March and April took aim at her.

  Renan Machado, a 29-year-old lawyer from Sao Paulo said Sunday’s rallies will be an opportunity to demonstrate the outrage shared by many Brazilians.

   

  “I’m going to protest to end this wave of corruption because I can’t stand this incompetent government any longer,” Machado said.

  And more from AP:

  Demonstrators are taking to the streets of cities and towns across Brazil for a day of nationwide anti-government protests.

   

  Sunday’s protests, which were called mostly via social media by a variety of groups, are seen as a barometer of popular discontent with President Dilma Rousseff. Her second term in office has been shaken by a snowballing corruption scandal involving politicians from her Workers’ Party, as well as a spluttering economy, spiraling currency and rising inflation.

   

  Thousands of people brandishing green and yellow Brazilian flags streamed onto Rio’s Copacabana Beach, and smaller demonstrations were under way in the Amazonian city of Belem and the central city of Belo Horizonte.

   

  It was the third large-scale anti-government demonstration this year.

  

  

  

  

• Guest Post: Can Bernie's Soft-Evolution 'Trump' An American Second Revolution?

  Submitted by Ben Tanosborn,

  Wishful thinking can come in many shapes and sizes, but history and present reality do readily tell us that Bernie Sanders is more likely to walk among us during the early stage of the presidential campaign as a prophet than as a messiah.  And that is not such a bad thing, for martyrdom always seems to take place as precursor to major change; and this resolute honest New Yorker representing Vermont appears poised to bring inspirational change in the much-needed political transformation of American society.

  Yes; Americans, both the destitute and the destitute-in-waiting middle class do need a champion to forever improve their lives, or at least one to light up their torch of hope.  But the senator from Vermont isn’t likely to become that champion, becoming instead the prophet heralding the advent of a savior for America’s democracy, national dignity and pride; in Christian-speak, Bernie is not a Jesus but a John the Baptist.

  America’s self-serving corporate press is making hay of what they claim to be an uprising of the anti-establishment citizenry from both the Right and the Left.  In its oversimplified and questionable wisdom, the press is equating the increase in Donald Trump’s poll numbers with the ballooning, commanding crowds attracted by Bernie Sanders. It does appear, however, that for obvious reasons the media is using a concave mirror to reflect the pompous Trump while using a convex mirror to depict angry, but smaller than life, Bernie Sanders. In fact, the media is giving Mr. Trump an unmerited free ride worth tens of millions, perhaps more. 

  And the press does not appear to be alone in that assessment. Many politicians and other parasites of the body politic are maturing in the belief of a new universal Big Bang theory: one which proclaims people might no longer be as tolerant of an ineffective Washington where people’s business gets queued last. 

  Even the self-proclaimed leader of those who presumably make up the ranks of political independents in America, former Minnesota governor Jesse Ventura, categorizes these two current followings, Trump’s and Bernie’s, simply as replicas in dissatisfaction to the crowd which propelled him to the governor’s mansion in St. Paul back in 1998.

  But the populist and colorful former navy seal, professional wrestler and governor, who would love to be asked to cast a new political career with Trump [as suggested by his jabs at Jeb Bush on the Cuban-Dominican cigars – remindful of a Seinfeld TV episode] could not be more wrong: Bernie Sanders’ crowds, and those attracted by Donald Trump, may both be fueled by discontent but have totally different political DNAs. 

  While populist causes manifested in third parties, or independent campaigns, have at times reached moderate success – most recently with Geo. Wallace in 1968, John Anderson in 1980 and Ross Perot in 1992 and 1996 – Bernie Sanders’s crowd is quite different from them.  It is a larger, much larger, reenactment of the progressive wing of the Tweedledee Democratic Party… until Ralph Nader broke away from the sempiternal submission by progressives to give up their ideals and conform to “the lesser of two evils” in 2000, accepting the candidacy for the Green Party, and an eventual blame for Al Gore’s loss.  [The blame, if one must be found, should clearly reside in the United States Supreme Court that, undemocratically, handed over the presidency to George W. Bush.]

  Could Americans bestow presidential honors on such a comical self-bemedaled business provocateur?  Is the American electorate so fed up with the state of the body politic that instead of resorting to a good old revolution, they would opt, instead, to seat this character, Trump, in the White House’s oval office?   

  Donald Trump would not have been a likely a character worthy to be chronicled by Horatio Alger… not in an iconic, positive way.  Questionably a business wizard, if his “deals” were to be analyzed in depth, yet a promoter in the American tradition with better luck than most. His audacity to crown himself with unmerited fame and glory surpasses pomposity and reaches the realm of clownish ridicule.  And if many Americans feel amused by his contempt for humility and use of wrestling-world antics, perhaps they should not be and, instead, take a pause and reflect on the sad reality that the United States of America is not governed under the auspices of Lincoln’s democracy… but the tentacles of this type of celebratory oligarchy.

  This Trump-virus is not likely to persist for very long, but his damage to the Republican Party will remain undeletable… today’s version of India ink.

  As for Bernie; well, he is on target pointing our big problem as one of economic class struggle, but Americans aren’t quite ready for a second American revolution; no, not yet.  And failing to adequately acknowledge cultural and racial diversity in American society, or the need to achieve compromise and peace in the world, prevent Bernie from achieving messianic status.  [His time spent in an Israeli kibbutz likely did enhance his understanding of democracy, but prejudiced his attitude for compromise.]

  If only in his status as a prophet, Bernie Sanders could bring to the presidential stage the candidacy of America’s true messiah: Senator Elizabeth Warren!

   

  

  

  

  

  

• Yuan Devaluation Sparks Biggest Crash In US Corporate Bonds Since Lehman

  Just two days ago we warned of the dramatic disconnect between equity insurance and credit insurance markets – at levels last seen before Bear Stearns collapse. As the Yuan devaluation shuddered EURCNH carry traders and battered European assets, US equity markets stumbled onwards and upwards, impregnable in their fortitude with The Fed at their back no matter what. However, US corporate bond markets were a bloodbath…

  The Bank of America/Merrill Lynch High Yield CCC Yield got absolutely slammed this week, rising from 13.58% to 16.18%! The biggest spike in yields since the financial crisis.

  

   

  That would suggest, as all listed above, that there has been inordinate and tremendous “dollar” pressure not in foreign, irrelevant locales but creeping into the contours of the domestic and internal framework.

  And while the junkiest of the junk saw the biggest decompression since Lehman, the rest of the high yield bond market is also starting to catch the credit cold..

  

   

  Of course, some of this is energy related which has blown wider to record wides… (once again equity just totally ignoring the carnage)…

  

   

  But it's not all energy.

  And as we noted previously, BofA points out that in just the past two weeks, credit spreads from our HG corporate bond index have widened another 9bps to 164bps while equity volatility is down another percentage point (although technically BofA uses the 3rd VIX futures as its measure of equity volatility rather than VIX itself to get a smoother series that is less affected by the daily noises and seasonalities).

  This is how the resulting dramatic divergence looks like:

  

  Why is this notable?

  In BofA's own words: "this spread currently translates into 10.26 bps of credit spread per point of equity vol, the level reached on March 6, 2008 – ten days before Bear Stearns was forced to sell itself to JP Morgan for $2/sh. Recall that – unlike the credit market – the equity market well into 2008 was very complacent about the subprime crisis that led to a full blown financial crisis."

  

  In other words: unprecedented equity complacency matched by a state of near bond market panic.

  BofA's conclusion:

  The key reason for this weakness is that our market has transitioned from “too much money chasing too few bonds” to “too many bonds chasing too little money”. That shift is motivated by the impending Fed rate hiking cycle as issuance, M&A and other shareholder friendly activity has been accelerated while at the same time demand has declined. Again, we are not trying to predict a crisis – only to point out that the upcoming rate hiking cycle appears to concern issuers and investors so much that they have been taking real actions that have repriced our market lower relative to equities to an extent that we have only seen during the financial crisis.

  We can't wait to find if this is the first time in the history of capital markets when it is stocks that are right, and bonds wrong.

  And as Alhambra's Jeffrey Snider concluded rather ominously,

  The cumulative assessment of all these factors, great as they are in their individuality, is that the global financial system just endured this week another “dollar” run. We can say with some reasonable assurance there was one in early December, as well as one centered on October 15.

   

  They seem to be increasing in intensity and now reach, penetrating deeper into the bowels of the “dollar” system as well as taking down central banks with each successive wave.

  We have, of course, seen this picture before (most egregiously in 2007/8) and as Bloomberg calculates over 70% of the time since 1996, as spreads widened as much as they have since April, the S&P 500 has fallen, with the average decline exceeding 10%.

  

   

  History may not repeat but it sure does rhyme…

  Charts: Bloomberg, Alhambra Investment Partners

  

  

  

  

  

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