Today’s News August 8, 2015

• Economic Reality Now Catching Up To Market Fantasy

  Submitted by Brandon Smith via Alt-Market.com,

  In the mind of a schizophrenic person, internal elements of fantasy (negative and positive) are made manifest in the psyche and projected out onto the real world. Often, the daydream images of the mind are not merely images to them. Rather, what they imagine subconsciously becomes reality. Their faculties of observation become so limited, either due to a reaction to trauma or merely an inherent inability to cope, that they cannot decipher between fact and fiction. A person could go on like this for quite some time if all his needs are provided for by someone else. But the moment that support ends (and it will), the realities of necessity, not to mention supply and demand, take hold. One cannot live in a schizophrenic world indefinitely.

  The current global mishmash of interdependent and socialized economies are, at bottom, schizophrenic. Our markets are not based in any fundamental reality. There is very little tangible foundation left to stand on, and this has been the case for several years. Yet some people might argue that since the derivatives crash of 2008, most of the world has continued to walk on air and there is little for us to worry about.

  The power of fantasy is that it is self-perpetuating. Fantasies are fueled most commonly by misplaced hopes and unhealthy or unrealistic desires, and such things are darkly and grotesquely energizing. Fantasies can indeed keep economies around the world functionally alive even when they are clinically dead. But again, there is always an end.

  Equities and commodities markets in particular have levitated despite economic fact, making their eventual fall ever more spectacular. That fall has now begun halfway through 2015.

  Let’s look at the cold hard truths of our current situation.

  New signals of market crisis are generating every two to four weeks as we grind on into the third quarter. This is in stark contrast to the relatively predictable and "stable" market behavior of the past three years. I realize that we are experiencing a “slow boil” and that many people may not even be taking note of the exponential increase in negative economic signs, but really, think about it – at the beginning of 2014, what was the general financial sentiment compared to today?

  Europe has just experienced the worst “near miss” yet with the Greek crisis, a crisis that is still not over and will likely end in chaos as the last-minute deal with the European Central Bank is derailed by International Monetary Fund intervention.

  Keep in mind that Europe is overwhelmed with debt as peripheral countries border collapse and core nations like France float in a recessionary ether they refuse to openly acknowledge.

  Asia is the biggest story right now, with Chinese markets in veritable free fall despite all attempts by the communist government to quell stock selling and shorting, to the point of threatening arrest and imprisonment for some net short sellers.

  China’s Shanghai Stock Exchange has experienced a 30% drop in market value in a month's time. The mainstream argument meant to marginalize this fact is that less than 2% of China’s equities are owned by foreign investors; therefore, a crash there will not affect us here. This is, of course, pure idiocy.

  China is the largest importer/exporter in the world; and it’s set to become the world’s largest economy within the next two years, surpassing the United States. China’s economy is a production economy, and the nation is a primary supplier for all consumer goods everywhere. Thus, China is a litmus test for the fiscal health of the rest of the world. When Chinese companies are struggling, when exporters are seeing steady overall declines and when manufacturing begins to crawl, this is not only a reflection of China’s economic instability, but also a reflection of the collapsing demand in every other nation that buys from China.

  Collapsing demand means collapsing sales and collapsing market value. For a global economic system so dependent on ever growing consumption, this is a death knell.

  In the U.S., markets have experienced a delayed reaction of sorts, due in great part to the Federal Reserve’s constant injections of fiat fantasy fuel since the credit crisis began. This kind of artificial support for markets has become an expected and essential part of market psychology, resulting in utter dependency on easy money siphoned into big banks that then use it to bolster equities through massive stock buybacks (among other methods). Now, however, quantitative easing has been tapered and zero interest-rate policy is nearing the chopping block.  The stock buyback scam is nearing an end.

  Already, U.S. stocks are beginning to feel the pain as reality slowly nibbles away once dependable gains. There is a good reason for this – Wages are in constant decline; manufacturing is in steady decline; retail sales are in decline, and government and personal debts continue to rise. We are not immune to the financial chaos of other nations exactly because we have been railroaded into a highly interdependent global economic system. In fact, much international fiscal uncertainty is tied directly to the fall of the American consumer as a reliable cash cow and economic engine.

  So where is this all headed?

  Commodities tell part of the story, with oil sliding steadily, signaling what we in the alternative economic community have been saying for years: Fiat stimulus propped up markets (including energy markets) that should have been allowed to deflate long ago, and now we are suffering the consequences. Crude oil prices fell 19 percent in July alone as energy companies the world over scramble to adapt. Gold and silver have taken considerable hits to their paper value while physical purchases continue to skyrocket, meaning the street price of metals may soon decouple from illegitimate and manipulated market prices.

  Smaller and some medium-sized economies will continue to “surprise” markets with volatile debt issues, like Puerto Rico (nearing possible default) and Venezuela (nearing certain doom). These are more canaries in the coal mine to watch carefully.

  It is also important to keep in mind that prices on necessities including food and housing remain high despite deflation in other areas (like wages).  This suggests we are in the midst of a stagflationary fiscal environment.

  Centralization is the key to every single economic development we’ve seen since the 2008 crash. Venezuela, in particular, is a marker for where we are all headed: total price controls, food confiscation from farms, rationing and even computer-chipped ration cards in order to thwart any attempts by citizens to stockpile essentials.  Do not assume that such draconian measures are limited to third world socialist hellholes.  Or, at the very least, do not assume that a country like the U.S. is not on the verge of becoming a third world hellhole.

  As for Europe, French president Francois Hollande has openly called for a centralized “eurozone government” in order to deal with the ongoing economic crisis there (something I have been warning about for several years).  Supranational government is the endgame for sovereign humanity, and the EU is on the fast track.

  In China, the march continues toward the inclusion of the yuan in the IMF’s SDR currency basket, the greatest economic centralization scheme of all time. The recent suggestion by an IMF panel to "delay" inclusion until 2016 only reinforces the likelihood that the Yuan will be entered into the basket.  If the IMF had no intention to bring China into the fold, they would have suggested a 5 year delay just as they did back in 2010.  For those who think China’s recent market crisis will somehow thwart their inclusion into the SDR, think again. The IMF has already announced that the market route in China will have no bearing on the SDR conference, which is set to end in November.

  In the U.S., the markets wait for the Federal Reserve’s rate hikes. The rate hike issue is an underestimated one by some analysts, who seem to think that initial hikes will be "minor" and will result in little to no reverberations.  Interest rates affect more than just overnight bank lending; they are the primary pillar supporting current market psychology.  There is NO other financial element giving positive influence to investor psychology.  There is no good economic news out there to warrant the bull market of the past few years.  There is no open form of QE (and future QE seems unlikely as renewed stimulus would only be an admission that the first three attempts at QE failed miserably, derailing any point to new easing).  There is no recovery.  And when any even minor or engineered "good news" is presented in the mainstream, markets have reacted NEGATIVELY for fear that this will hasten higher interest rates.

  Beyond psychology and false hopes, even minor increases in interest rates will essentially kill most large scale bank lending.  We know through the limited audit of the TARP bailouts that trillions in fiat was created simply to feed international banks and corporations through ZIRP and that this kind of free money lending has been a mainstay ever since.  ZIRP is the primary driver of stock buybacks and the equities bull market.  But this will only continue as long as the Fed loans remain free (or almost free).  Trillions in loans can equal billions in interest even with a minor rate rise, meaning, with the end of ZIRP and free money, banks and corporations will stop borrowing, stock buybacks will dissolve, and equities will lose the artificial support they have so far enjoyed.

  Even mainstream financial news outlets are beginning to question why the Fed would push at all for rate hikes and pretend that the American fiscal system is in recovery, when ALL other information would lead the rational person to the contrary conclusion. I would point out that in order to understand central planners and globalist motives, you need to look at what they chase.

  The Fed’s job is to destroy the U.S. economy and the dollar, not save them, which is why the Fed continues to deny economic turmoil and charges headlong into a rate hike scenario even though no one in the mainstream asked them to. The Chinese central bank’s job is to make all arrangements for Yuan inclusion in the SDR, despite the fact that China is supposedly in conflict with Western banks. The ECB and Europe are obsessed with centralized government even if they have to break several eggs to get it. And the IMF and Bank of International Settlements are set up to be the economic heroes of the day, warning us all (too late, of course) of the potential downfall of central bank stimulus policies and government debt obligations.

  In a murky world of market fantasy, our first guideposts are the fundamentals themselves. Supply and demand can be misrepresented for a time through manipulated statistics, but the tangible effects of decline cannot be. Our secondary guideposts are the paths that internationalists and central banks bulldoze through the fiscal forest. To anyone with any sense, the endgame is clear: Total centralization is the goal, and economic fear is the tool they hope to use to get there. I have written on numerous solutions to this threat in past articles; but the first and most important action is for each of us to acknowledge, wholeheartedly, that the system we know is ending. It is over. What replaces that system will either be up to us or up to them. Only by admitting that there is an end to the fantasy, a painful end, will we then be able to help determine our future reality.

  

  

  

  

  

• Black-White Race Relations Under Obama: The Worst In The 21st Century

  If there were any lingering questions about the state of race relations in America in the wake of the riots which reduced parts of Baltimore to smoldering ashes in April, they were answered rather emphatically when in June, 21-year old Dylann Roof killed nine black worshippers at the Emanuel AME church in Charleston, South Carolina. 

  

  And although Roof’s actions did not start a “race war” (his professed intent), they did raise fresh questions about black-white relations, questions which played a role in the removal of the Confederate flag from the South Carolina capitol.

  Since then, we’ve gotten multiple noteworthy (if alarming) sound bites from the likes of Louis Farrakhan who said in a speech this week that blacks may need to “rise up and kill those who kill [them],” and the Ku Klux Klan’s Grand Dragon who in June suggested that “a lot of the whites in the U.S. are starting to wake up.”

  As we noted on Tuesday, the US has had its share of deadly social violence over the past year, much of split along along racial lines, but it’s mercifully avoided a full-blown racial war.

  However, in recent weeks there has been a troubling increase in invocations toward even more violence, and even more deaths, which seek to achieve just that: a United States gripped in racial warfare. 

  It’s against that rather disturbing backdrop that we present the following results from Gallup, whose latest Minority Rights and Relations poll shows that “Americans rate black-white relations much more negatively today than they have at any point in the past 15 years.”

  

  More color from Gallup:

  Americans rate black-white relations much more negatively today than they have at any point in the past 15 years. Currently, 47% say relations between blacks and whites are “very good” or “somewhat good,” a steep decline from 70% in 2013. Whites’ positive ratings of black-white relations since 2013 have nose-dived by 27 percentage points, from 72% to 45%, while blacks show a smaller but still sizable drop of 15 points, from 66% to 51%.

   

  The results are based on Gallup’s Minority Rights and Relations poll, which interviewed more than 2,000 Americans, including more than 800 non-Hispanic whites and more than 800 non-Hispanic blacks from June 15 through July 10.

   

  Americans have generally been quite positive about black-white relations in the 15 years Gallup has asked this question. Prior to this year, between 63% and 72% of Americans rated relations between blacks and whites as very good or somewhat good.

   

  Whites and blacks are generally in accord on the state of relations, with 45% of whites and 51% of blacks rating them as good. Whites and blacks have generally had similar and quite positive views over the past 15 years, with a notable gap only in 2007, a year in which blacks’ ratings on a variety of measures were more negative.

   

  The most likely explanation for the deterioration in Americans’ perceptions of the health of black-white relations since 2013 are the multiple widely reported incidents in which black citizens were killed by the actions of white police officers. Several of those incidents sparked protests or riots.

   

  As a result, Americans are now the most negative in their evaluations of black-white relations since Gallup began tracking this measure.

  

  

  

  

• American Whirl

  I’ve written about American Girl before, such as this post. For those unacquainted with American Girl, it started off as a doll-based means for girls to learn about different periods of U.S. history, but it has developed into a phenomenal retail success story of overpriced Chinese-made junk sold in branded stores in high-end shopping malls (like, oh, say, the Stanford Shopping Center). It’s a big deal for the 9-12 year old crowd.

  I don’t make a habit of creating posts about girls’ dolls on Slope, but recently I treated my daughter to some (rare) television time so she could enjoy two different A.G. movies. One of them, Chrissa Stands Strong, came out in 2009 (meaning it was written and produced in 2008, during the throes of the financial crisis), and the one she watched the next night, Grace Stirs Up Success, came out only weeks ago (meaning it was written and produced in 2014, during the peak bullish mania).

  Lest you think I threw on my footie pajamas, curled up in a blanket, and watched both of these insipid things………..I didn’t. But I was in the room and saw enough to get the jist of each movie (which doesn’t take a lot, given the one-dimensional characters and plot lines offered to children).

  What struck me, having semi-witnessed both of these things over a 24 hour period, is how sharply different they were. The Chrissa one was relatively brutal: it featured a girl who moved into a new town who was subjected to the cruelty of the tall, pretty blonde girls in her class (which is a story that’s only been done several thousand times, most recently in Pixar’s Inside Out) and had a side-story about a girl who was homeless that managed to hide her homelessness from the others until she was “outed” by the bitchy blonde and brought to bitter tears.

  

  Exhibit A: Bitchy Girls

  I was kind of stunned watching this, because the nastiness seemed unrelenting. We’ve all had encounters with bullies before, but the emotional ugliness foisted on poor Chrissa never let up, and having upper-middle-class be-atches-in-training laugh and taunt an impoverished girl struck me as over-the-top, even for an American Girl movie.

  None of this really sunk in until the next movie, which was so sickly-sweet that I probably have type 2 diabetes now. Throughout the entire piece, the most violent “conflict” came when one of Grace’s friends suggest that maybe she not be so bossy. But that was it. It was 99% sweetness and light, and it ended with the kid (Grace) winning $100,000 from a baking contest held on Food Network (one of the many, many product tie-ins during the movie) and, naturally, giving the money to her grandparents to upgrade their bakery.

  

  Grace is Latina, even though her parents and grandparents are lily white. This is never explained.

  Now I don’t normally put huge amounts of faith in the nascent realm of Socionomics (championed by Elliott Waver Bob Prechter), but I’ve always thought that, yes, there is some crude correlation between social mood and financial markets. During the 2009 Academy Awards (held early in 2009, very near the bottom of the financial crisis), I remember Jon Stewart marveling that the two huge winners that year were There Will Be Blood and No Country For Old Men by saying “Does this country need a hug?” Well, Jon, actually, yeah, it kinda did.

  It’s the same story with these two movies: the one made in 2008 is packed with meanness, financial insecurity, shame, and back-stabbing. The one that just came out is nonstop saccharine (which, for a chap like me, is a bit hard to take). I guess it helps illustrates the times we live in, and the mindset of the populace…………including the consumers-in-training known as eleven year old girls.

  

  

  

  

• Ron Paul's Foreign Policy Of Peace Is Central To The Message Of Freedom

  Submitted by Llewllyn Rockwell via The Mises Institute,

  Ronald Reagan used to be called the Teflon president, on the grounds that no matter what gaffe or scandal engulfed him, it never stuck: he didn’t suffer in the polls. If Reagan was the Teflon president, the military is America’s Teflon institution. Even people who oppose whatever the current war happens to be can be counted on to “support the troops” and to live by the comforting delusion that whatever aberrations may be evident today, the system itself is basically sound.

  To add insult to injury, whenever the US government gears up for yet another military intervention, it’s people who pretend to favor “limited government,” and who pride themselves on not falling for government propaganda, who can be counted on to stand up and salute.

  I had the rare honor of serving as Ron Paul’s congressional chief of staff, and observed him in many proud moments in those days, and in his presidential campaigns. But Ron’s new book Swords into Plowshares: A Life in Wartime and a Future of Peace and Prosperity, a plainspoken and relentless case against war that ranks alongside Smedley Butler’s classic War Is a Racket, is possibly the proudest Ron Paul moment of all.

  It’s been calculated that over the past 5,000 years there have been 14,000 wars fought, resulting in three and a half billion deaths. In the United States, between 1798 and 2015 there have been 369 uses of military force abroad. We have been conditioned to accept this as normal, or at the very least unavoidable. We are told to stifle any moral qualms we may have about mass killing on the question-begging grounds that, after all, “it’s war.”

  Ron, on this as on a wide array of other topics, isn’t prepared to accept the conventional platitudes, and a recurring theme in his book involves speculating on whether, in the same way the human race has advanced so extraordinarily from a technological point of view, we might be capable of a comparable moral advance as well.

  There is much in this book for libertarians and indeed all opponents of war to enjoy – for starters, a refutation of the claim that war is “good for the economy,” a discussion of the dangers of “blowback” posed by foreign interventionism, and an overview of the War on Terror from a noninterventionist perspective. But there is a profoundly personal dimension to this book as well, as we follow Ron’s life from his childhood to the present and the evolution of his thought on war. I’ll leave readers to discover these gems for themselves.

  Likewise, Ron relates some little-known stories of war. In one, it’s two weeks after D-Day, and Captain Jack Tueller decided to play his  trumpet that evening. He was instructed not to do so: his commander explained that a German sniper had still not been captured from the day’s battle. Figuring the sniper was a frightened young man not unlike himself, he played the German song “Lili Marleen.” The sniper surrendered to the Americans the next day.

  Before being sent off to prison, the sniper asked to meet the trumpet player. He said, through tears, “When I heard that number that you played I thought about my fiancée in Germany. I thought about my mother and dad and about my brothers and sisters, and I could not fire.”

  “He stuck out his hand and I shook the hand of the enemy,” Tueller recalls. “He was no enemy. He was scared and lonely like me.”

  Another story takes place just before Christmas 1943. Charlie Brown, a 21-year-old farm boy from West Virginia was on his first combat mission as a pilot when his B-17 was seriously damaged over Germany. With half his crew dead or wounded, he was struggling to get his plane back to England when a German fighter came within three feet of his right wingtip. But Franz Stigler, the German pilot, did not fire. Instead, he simply nodded, pointed, and flew off, allowing Brown to make his way back to England.

  Some 46 years later, the two men met again. Brown finally got to ask Stigler why he had been pointing. Stigler replied that he was trying to tell Brown to fly to Sweden, which was closer. But since Brown knew only how to get back to England, that’s where he went.

  The two men became close friends, even fishing buddies. Stigler said that saving Brown’s life was the only good thing that came out of the whole war for him.

  You won’t be surprised to learn that in addition to human-interest anecdotes like these, Ron spends time in Swords into Plowshares linking central banking and war, one of his perennial themes over the years. It isn’t for nothing that again and again, countries abandoned the gold standard when they went to war.

  We rarely pause to consider what that tells us. If they needed to abandon the gold standard to go to war, that means the gold standard was a barrier against war. Of course, the ease with which governments could abandon the gold standard serves to remind us of the need to separate money and state altogether, and that the state cannot be trusted to maintain a sound money standard.

  As always, Ron is at his fiery best when he unleashes on the neoconservatives, whose every overseas fiasco becomes a justification for still another fiasco six months later. He invites us to consider a typical remark by neoconservative Michael Ledeen: “Paradoxically, peace increases our peril, by making discipline less urgent, encouraging some of our worst instincts, and depriving us of some of our best leaders.”

  Note that it is peace, according to Ledeen, and not war, that encourages our worst instincts. This was the view of Theodore Roosevelt, loved and admired by progressives and neoconservatives alike, who considered prolonged peace a deplorable state that made a people flabby and otiose.

  Neocons complain when libertarians describe them as “pro-war” – why, they favor war only as a last resort, they assure us, and only because there are bad people in the world – but how else can we describe the views of Ledeen, who to my knowledge has never been publicly taken to task by any other neocon?

  (Perhaps my favorite of Ron’s collection of ghoulish neocon quotations, though, if only for its obliviously Orwellian quality, is George W. Bush’s remark from June 2002: “I just want you to know that, when we talk about war, we’re really talking about peace.”)

  Meanwhile, the American people have been indoctrinated into a cult of the veteran, whom evangelicals blasphemously compare to Jesus Christ, and whereby everyone is expected to salute, applaud, and offer ostentatious thanks for the veteran’s “service.”

  Here, by contrast, is Ron:

  “Service” in our military to invade, occupy, and oppress countries in order to extend [the] US Empire must not be glorified as a “heroic” and sacred effort. My five years in the Air Force during the 1960s did not qualify me as any sort of hero. My primary thoughts now about that period of time are: “Why was I so complacent, and why did I so rarely seriously question the wisdom of the Vietnam War?”

  Ron calls upon the peoples of the world to resist their governments’ calls to war and to refuse to take part in violent conflict. “If the authoritarians continue to abuse power in spite of constitutional and moral limits,” he writes, “the only recourse left is for the people to go on strike and refuse to sanction the wars and thefts. Deny the dictators your money and your bodies…. The more this is a worldwide movement, the better.”

  This is why Ron is such a fan of the song “Universal Soldier,” which he asked singer Aimee Allen to perform at his dramatic Rally for the Republic in 2008. The man who enlists in the military and simply goes along with the prevailing current of opinion is the universal soldier. If he refused to “serve” and to fight, there could be no wars. Even Ron, a flight surgeon who never fired a shot, looks back on his time in the military and asks himself: why did I not resist? Why did I go along?

  Needless to say, few among our political class – people who, generally speaking, have rather more to repent of than mild Ron Paul – reflect seriously on their moral choices, or rebuke themselves publicly.

  When people read Swords into Plowshares generations from now – and they will – they will marvel that such a man actually served in the US Congress, and defied every campaign of war propaganda right on the House floor. But what’s great about Ron is not just his honesty, but also his constant intellectual growth – with the passage of time he has become an ever-more radical champion of freedom. His evolution is especially plain in this book, as you’ll discover for yourself.

  One of the most important things Ron accomplished in public life was to show that it’s possible to oppose war without being a leftist. He likewise explained that a foreign policy of peace and nonintervention was a central, indispensable feature of the message of freedom, and not just an odd personality quirk of Ron Paul – as the many people who said “I like Ron Paul except his foreign policy” seem to have believed.

  Bernie Sanders pretends to be antiwar, but as usual with socialists, a closer look shows he doesn’t really mean it. But even if he did, as a socialist he simply wants to point the guns at different targets – the undifferentiated aggregates like “the rich” to whom he urges his followers to direct their uncomprehending hate. Ron, on the other hand, is calling on us to put the guns down, and for peaceful interaction both between nations and among individuals.

  It is a position most people had never heard of before 2008, since election campaigns are all about grabbing the machinery of state and pointing its guns at whatever group the eventual victor despises. But Ron captured the imaginations of millions of intelligent young people, whose brains hadn’t yet been deformed by an American political culture designed to deprive them of humane possibilities.

  Ron turns 80 this month, and continues his life’s work of truth-telling. Wish Ron a happy birthday by joining us for a celebration in Lake Jackson on August 15, and by reading this extraordinary book.

   

  

  

  

  

  

• "The Top's In" David Stockman Warns Of "Epochal Deflation"

  The truth hurts… especially permabullish CNBC anchors. But when David Stockman explained why “the top is in,” and warned that the world is overdue for an “epochal deflation, like nothing it has ever seen,” one should listen. The “debt supernova” of the last decade or two has created massive over-capacity and this commodity deflation “is not temporary, it’s the end of the central bank bubble.” The catalyst has already happened -“It’s China,” Stockman exclaims, “China is the most lunatic pyramid of credit and speculation.. and capital is now fleeing the swaying towers of the China ponzi.”

   

  Well worth the price of admission…

  

  

  

  

  

• High-Level U.S. Military Official: U.S. Made a "Wilful Decision" to Support Al Qaeda and Other Terrorists

  An internal Defense Intelligence Agency (DIA) document produced recently shows that the U.S. knew that the actions of "the West, Gulf countries and Turkey" in Syria might create a terrorist group like ISIS and an Islamic caliphate.

  While the powers-that-be have tried to downplay the significance of the document, the former head of the DIA (Michael Flynn) just confirmed its importance.

  By any measure, Flynn was a top-level American military commander. Flynn served as:

  • The Director of the U.S. Intelligence Agency
  • The Director of intelligence for Joint Special Operations Command (JSOC), the main military agency responsible for targeting Al-Qaeda and other Islamic terrorists
  • The Commander of the Joint Functional Component Command for Intelligence, Surveillance and Reconnaissance
  • The Chair of the Military Intelligence Board
  • Assistant director of national intelligence

  Flynn confirmed the authenticity of the document in a new interview, and said:

  [Interviewer] So the administration turned a blind eye to your analysis?

  [Flynn] I don’t know that they turned a blind eye, I think it was a decision. I think it was a willful decision.

  [Interviewer] A willful decision to support an insurgency that had Salafists, Al Qaeda and the Muslim Brotherhood?

  [Flynn] It was a willful decision to do what they’re doing.

  Background here.

  Postscript: We did the same thing in Libya, Chechnya, and many other countries.  Sad, it is …

  

  

  

  

• Dropping "The Bomb" On Hiroshima And Nagasaki Was Never Justified

  Submitted by Naji Dahi via TheAntiMedia.org,

  August 6th and 9th of 2015 mark the 70th anniversary of the U.S. dropping two atomic bombs on Hiroshima and Nagasaki. This was the first and only time a state used a nuclear device on cities (or civilians) of another state. Some conservative estimates put the immediate death toll of the two bombs at 200,000 people. This is more than the total number of American soldiers killed in the Pacific front of World War II.

  Since the bombs were dropped, the U.S. government, U.S. high school history texts, and the American public have asserted that dropping the bombs was necessary. According to one review of American textbooks by Satoshi Fujita, an assistant professor of U.S. modern history at Meiji University,

  “…most of the textbooks published by the early 1980s carried the U.S. government’s official view that the nuclear attacks allowed the U.S. troops to avert the invasion of Japan’s mainland and minimize American casualties, thus contributing to an early conclusion of the war.”

  American politicians have continued to espouse this view. Primary among them was Harry S. Truman, the one-term president responsible for making the decision to drop the bombs in August of 1945. In his 1955 memoirs, Truman claimed the bombs saved half a million American lives. Truman insisted he felt no remorse and bragged that “he never lost any sleep over that decision,” while simultaneously referring to the Japanese as “savages, ruthless, merciless, and fanatic.” By 1991, George H.W. Bush claimed dropping the bombs saved millions of American lives. Historian Peter Kuznick sums up the ever-increasing number of American lives saved due to these actions:

  “…from the War Department’s 1945 prediction of 46,000 dead to Truman’s 1955 insistence that General George Marshall feared losing a half million American lives to Stimson’s 1947 claim of over 1,000,000 casualties to George H.W. Bush’s 1991 defense of Truman’s ‘tough calculating decision, [which] spared millions of American lives,’[11] to the 1995 estimate of a crew member on Bock’s Car, the plane that bombed Nagasaki, who asserted that the bombing saved six million lives—one million Americans and five million Japanese.”

  Twenty years ago (the 50th anniversary of the bombings) when the Smithsonian Museum tried to create a thought-provoking display about Enola Gay (the plane that dropped the first bomb on Hiroshima), the Senate threw a temper tantrum and passed a resolution condemning the move. The resolution stated that

  “…the Enola Gay during World War II was momentous in helping to bring World War II to a merciful end, which resulted in saving the lives of Americans and Japanese.”

  Of course, none of these figures about saved American lives are true. When President Truman was contemplating dropping the bomb, he consulted a panel of experts on the number of American soldiers that would be killed if the U.S. launched an invasion of the two main Japanese islands. According to historian Christian Appy,

  “[Truman] did…ask a panel of military experts to offer an estimate of how many Americans might be killed if the United States launched the two major invasions of the Japanese home islands…Their figure: 40,000 – far below the half-million he would cite after the war. ”[emphasis added]

  Americans are socialized to believe that dropping the bombs was necessary to end the war. As recently as January 2015, a Pew poll found that 56% of Americans believed dropping the two atomic devices was justified. Only 34% said it was not justified. This American attitude is understandable given the downplaying of Japanese deaths and the exaggeration of American lives saved in high school history books.

  In spite of this public perception, dropping the nuclear bombs was totally unnecessary from a military standpoint. America’s leading generals voiced their concerns before and after the bombs were dropped. General Eisenhower, Supreme Commander of the Allied Forces in Western Europe, reacted to the news in a way that contradicts politicians’ narratives:

  “During his [Secretary of War Henry L. Stimson] recitation of the relevant facts, I had been conscious of a feeling of depression and so I voiced to him my grave misgivings, first on the basis of my belief that Japan was already defeated and that dropping the bomb was completely unnecessary, and secondly because I thought that our country should avoid shocking world opinion by the use of a weapon whose employment was, I thought, no longer mandatory as a measure to save American lives ,” he said. [emphasis added]

  General Douglas MacArthur, Supreme Commander of Allied Forces in the Pacific, was not even consulted about the use of the bomb. He was only notified two days before the first bomb was dropped. When he was informed he thought “‘…it was completely unnecessary from a military point of view.’ MacArthur said that the war might ‘end sooner than some think.’ The Japanese were ‘already beaten.’”

  Tough, cigar-smoking “hawk,” General Curtis LeMay—who was responsible for the firebombing of Japanese cities—was also disappointed with the decision to drop the bomb. In an exchange with reporters he said,

  “The war would have been over in two weeks without the Russians entering and without the atomic bomb. [emphasis added]”

   

  “You mean that, sir? Without the Russians and the atomic bomb?” one journalist asked.

   

  “The atomic bomb had nothing to do with the end of the war at all,” LeMay replied.

  Admiral Chester Nimitz, Commander in Chief of the Pacific Fleet, sent out the following public statement: “The atomic bomb played no decisive part, from a purely military standpoint, in the defeat of Japan [emphasis added].”

  While Eisenhower, MacArthur, LeMay, and Nimitz believed the dropping of the bombs to be unnecessary, Chief of Staff Admiral William D. Leahy went even further, insisting that even the contemplated invasion of Japan was unnecessary to end the war. He said,

  “I was unable to see any justification…for an invasion of an already thoroughly defeated Japan. My conclusion, with which the naval representatives agreed, was that America’s least expensive course of action was to continue to intensify the air and sea blockade…I believe that a completely blockaded Japan would then fall by its own weight. [emphasis added]”

  At the conclusion of the war in the Pacific, President Truman appointed a panel of 1000 experts to study the conflict. One third of the experts were civilians and two-thirds were military. The panel issued its report, entitled “United States Strategic Bombing Survey”—a 108 volume publication on the Pacific front. The survey makes the following damning conclusion about the necessity of dropping the the atomic bombs and invading Japan:

  “Nevertheless, it seems clear that, even without the atomic bombing attacks, air supremacy over Japan could have exerted sufficient pressure to bring about unconditional surrender and obviate the need for invasion. Based on a detailed investigation of all the facts, and supported by the testimony of the surviving Japanese leaders involved, it is the Survey’s opinion that certainly prior to 31 December 1945,…Japan would have surrendered even if the atomic bombs had not been dropped, even if Russia had not entered the war, and even if no invasion had been planned or contemplated. [emphasis added]”

  Even the Japanese leaders knew they were defeated. They were even secretly willing to negotiate an unconditional surrender. According to the survey, there was

  “…a plan to send Prince Konoye to Moscow as a special emissary with instructions from the cabinet to negotiate for peace on terms less than unconditional surrender, but with private instructions from the Emperor to secure peace at any price.”

  If dropping the bombs was not necessary, and if Japan was even willing to contemplate an unconditional surrender, then why were the bombs dropped at all? One reason referenced by several historians was to project American power against the future enemy in the Cold War, the U.S.S.R. As the Christian Science Monitor noted in 1992,

  “Gregg Herken…observes…that ‘responsible traditional as well as revisionist accounts of the decision to drop the bomb now recognize that the act had behind…’a possible diplomatic advantage concerning Russia.’ Yale Prof. Gaddis Smith writes: ‘It has been demonstrated that the decision to bomb Japan was centrally connected to Truman’s confrontational approach to the Soviet Union.’”[emphasis added]

  Secondly, there was a rather large incentive to use the bomb—to test its effectiveness. On that subject, the most succinct quote comes from Admiral William F. Halsey, Jr., Commander U.S. Third Fleet. He said, “[The scientists] had this toy and they wanted to try it out, so they dropped it. . . . It killed a lot of Japs, but the Japs had put out a lot of peace feelers through Russia long before.”

  According to the Center for Strategic and International Studies, the Manhattan Project (the project to build the bomb) cost the U.S. an estimated $1,889,604,000 (in 1945 dollars) through December 31, 1945. That comes out to $25,051,739,964.00 in today’s dollars. The Center goes on to add:

  “Weapons were created to be used. By 1945, the bombing of civilians was already an established practice. In fact, the earlier U.S. firebombing campaign of Japan, which began in 1944, killed an estimated 315,922 Japanese, a greater number than the estimated deaths attributed to the atomic bombing of Hiroshima and Nagasaki.”

  From a purely numbers perspective, the detonation of the atomic bombs killed fewer people than the firebombing of the 67 Japanese cities with napalm. The sick logic of war is this: having killed close to 316,000 Japanese people by firebombing cities, killing 100,000-200,000 more is just as justifiable.

  It is clear from the recitation of some of the evidence that the dropping of the atomic bombs was not necessary to end the war. It was not necessary to obviate the U.S. invasion of Japan (which in and of itself was not necessary) and it was not necessary for an unconditional surrender.

  It is time for the United States to stop believing that the infamous nuclear attacks were justified. On that front, there is some hope. Back in 1991, 63% of Americans believed dropping the bombs was justified, compared to 56% today. Clearly, the numbers are heading in the right direction.

  The U.S. government could easily nudge public opinion in the appropriate direction by issuing a public apology for the dropping of these weapons of mass destruction on the cities of Hiroshima and Nagasaki. The U.S. is capable of doing this. In 1988, the U.S. Senate voted to compensate Japanese Americans for interning them during WWII. In 1993, President Bill Clinton signed a formal letter of apology. The U.S. did the right thing by apologizing to Japanese Americans. It is time to extend this apology to the entire Japanese nation.

  

  

  

  

  

• An Ex-Con's Advice To A Libor Rigger

  Earlier this week, something strange happened. 

  A real person – or at least he looks real – was found guilty by a jury of conspiring to manipulate LIBOR. 

  Then, something even stranger took place. 

  This real person – Tom Hayes, or “Rain Man” as he was affectionately known in rate-rigging circles – was sentenced to 14 years in jail for his role as the supposed “connective tissue” that held the global fix fixing infrastructure together. 

  

  The reason this is so out of the ordinary is that we’re not used to seeing human beings prosecuted for the various schemes Wall Street perpetrates on a daily basis.

  Since the crisis, regulators have been at pains to convince the public they’re serious about cracking down on the conspiratorial culture that’s been proven to pervade nearly every corner of global capital markets. This quest is made exceedingly difficult by the fact that, well, they’re not at all serious, which is why no actual people (and certainly no senior executives) are ever held accountable for anything, leaving bank logos as the only fall “guys”.

  This was on full display when several Wall Street firms pleaded guilty to FX rigging charges earlier this year. The punishment: fines that represented a mere fraction of the proceeds derived from the crimes themselves. 

  Having said all of that, occasionally prosecutors must produce a head and unfortunately for Hayes (and Nav Sarao), his will now be proudly displayed to the angry mob as proof that justice has been served. For the Rain Main, “justice” means 14 years in HM Prison Wandsworth, which Bloomberg describes as “a Victorian fortress south of the Thames known for its poor conditions and violent residents.”

  And while one might well argue that bulge bracket banks are also known for having “poor conditions and violent residents,” we suspect Hayes might have a bit of trouble adjusting to his new home. Never fear though, because Prison Consultants and its co-founder Steve Dagworthy are here to help. Here’s more from Bloomberg:

  Don’t rush to make friends and don’t get into debt. That’s the advice of an ex-convict for Tom Hayes as he adjusts to life behind bars.

   

  Hayes started a 14-year jail sentence this week after a jury found him guilty of conspiring to rig Libor, the interest-rate benchmark used to value more than $350 trillion of financial contracts.

   

  “In prison, it’s not about making friends,” said Steve Dagworthy, an ex-convict and co-founder of Prison Consultants, a London-based agency that gives advice to prospective inmates. “It’s about not making enemies.”

   

  Dagworthy set up the firm in 2013 after being convicted of fraud and realizing how little preparation there was for defendants facing prison time. 

   

  Hayes joins another recent financial crime casualty at Wandsworth. Magnus Peterson, founder of collapsed hedge fund Weavering Capital (UK) Ltd., is in the first of a 13-year stretch for fraud. And Navinder Singh Sarao, the British trader accused of contributing to the 2010 flash crash, is being held at Wandsworth as he fights extradition to the U.S.

   

  Known as “Wanno,” the high-security prison is the largest in the U.K., with more than 1,600 inmates. According to a July report from HM Inspectorate of Prisons, “overcrowding and severe staff shortages” mean almost every service there is insufficient.

   

  “You wake up one morning and think ‘I’m in prison,'” said Dagworthy, who hasn’t advised Hayes. “And that’s when it hits you, and you suddenly realize that you are no longer in control of your life.”

   

  Since arriving at the prison on Monday night, Hayes will have had his possessions cataloged, fingerprints taken and been fitted out with a standard-form gray tracksuit and bedding. He’ll shortly be moved from the induction wing to a house block, where he’ll meet his cell mate, a man he’ll share an open toilet with every day.

   

  “You have to come to terms with the fact that you’re in this new world and you have to understand the rules of this new world,” said Dagworthy.

   

  His advice? “Keep yourself to yourself.”

  We only hope that regulators have thought about whether it’s a good idea to lock Hayes up alongside Nav Sarao because after all, if the charges are to be believed, these two criminal masterminds were together responsible for rigging the most important benchmark rate on the planet and sending stocks on their most harrowing intraday rollercoaster ride in history.

  One can only imagine what they might dream up if left alone together in a dark prison to commiserate and plot for more than a decade. 

  

  

  

  

  

• Guest Post: Is Donald Trump Broke?

  Doug Litowitz raises a speculative contrarian position on Donald Trump's exact worth, based on what was released to the FEC. The bottom line is that no one knows Trump's net worth, but the speculation usually starts in the billions. Doug Litowitz explores the opposite possibility, namely that Trump is, in relative terms, broke. This is solely his speculation and is not meant as a factual statement but a possibility that has been ignored in the mainstream press.

  Submitted by Doug Litowitz via TheAlphaPages.com,

  I’ve just slogged through all ninety-two pages of Donald Trump’s financial disclosure submission to the Federal Election Commission, and I can’t make heads or tails of it. 

  I cannot tell how much Trump is worth, if anything. His empire, if he has one, is as mysterious as his haircut, and as impervious as his skyscraper in Chicago – a gigantic phallic mirror named after himself.

  In terms of real, lasting assets – is Donald Trump worth roughly $10 billion?

  The mainstream press erred horrendously by taking seriously Trump’s disclosure to the FEC, by asking reporters to sit down with the document and try to understand it on its own terms, so to speak. This approach yielded nothing but exhaustion and bewilderment. No one dared speculate that Trump’s purpose in disclosing so much was to disclose so little. It was a 52-Card Pickup, a maze of trees without a forest. The assets – some as small as the single-digit thousands – pile up like obsessive compulsive do-dads in the claustrophobic home of a hoarder. The range of projects goes beyond greed and passes into desperation. High rise buildings and golf courses are one thing, but the list of assets quickly degrades into obscure wineries, Israeli vodka and energy drinks, a mattress and clothing line, television shows, a pension from the screen actors guild, bottled water, book royalties, speaking gigs, and endless inchoate and impossible to value ‘marks’ (i.e. trademarks) and positions in partnerships that have his own name.

  This is why the New York Times threw up its hands and proclaimed with cool intrigue that Trump’s income and wealth were “hard to pinpoint.”

  The Wall Street Journal punted, saying tautologically that Trump’s disclosures contain disclosures totaling at least $1.5 billion, but conceding that the actual numbers are not known.

  Forbes puts his wealth at $4 billion, Bloomberg at $2.9 billion. Trump said recently that he is worth $10 billion and that his wealth has increased by more than $1 billion in the last year due to spiraling real estate prices (this was probably supposed to impress people, but it actually shows a dangerous volatility). The FEC form allows the filing party to value assets and liabilities within a range or at an upper limit, and most of Trump’s assets are vague interests of indeterminate worth and undisclosed indebtedness.

  Trump’s illiquid assets and unknown liabilities may or may not offset each other – and he isn’t telling.

  What does that leave?

  Not much. A relatively small amount of money in a couple of hedge funds, and brokerage portfolios of garden-variety stocks, a couple hundred thousand in gold, and other ho-hum assets consisting almost entirely of his ‘marks.’ He could be worth hundreds of millions, theoretically, but if leveraged, his worth could be negative. Who knows?

  This ambiguity plays into Trump’s hands: he loves a playing field where there is no difference between reality and fantasy, where the majestic paneled board room is really a stage set, where he is Making America Great by manufacturing clothes in Bangladesh, where he insults Mexicans and then sues a Spanish television network for not showing the Miss USA pageant, a paean to female innocence brought to us by a womanizer on his third marriage. This is Trump-territory: a nowhere land in which he threatens to sue anyone who disparages the size of an empire that he refuses to disclose. 

  You will never figure out Trump’s worth by looking at numbers. He’s far too slick for that, he can hide the ball forever.

  So let’s put aside the numbers. Instead, let’s look at his FEC submission as a psychological document, a testament, a confession. 

  Here we are faced with a paradox: Trump does not speak, act, or behave like a normal billionaire, nor even like a renegade or eccentric billionaire. He behaves like someone who is desperately broke.

  I know that sounds odd. Improbable. Counterintuitive. And I don’t – I can’t – I won’t – say for certain whether he is broke. But I think it is a very distinct possibility.

  I base this judgment on many years of working closely with very rich people. I’ve had the pleasure – though that is not quite the right word – of spending a lot of time around people who are extremely wealthy, and none of them behaves remotely like Trump.

  For one thing, true billionaires hate seeing their name in the papers or being discussed in public. They don’t want people stealing their ideas, they don’t want scrutiny from regulators, they don’t want others to control the narrative about their business dealings, and frankly there is no financial advantage to being well known among ordinary people who don’t have money to invest.

  The truly wealthy seek to be known in the right circles and not to the general public. It’s a fair bet that if the richest twenty hedge fund managers walked down the street, no one in the general public would turn their head; conversely, it is a also a fair bet that the twenty guys at the airport talking loudly into their cell phones about how they are returning to the head office after closing a big deal in Baltimore are actually worth next to nothing. Powerful people have secrets, barriers, walls. If Trump really had special ideas or assets, he would crave secrecy, not publicity.

  Second, the truly wealthy do not brand themselves. Whatever you may think of how Bill Gates or Warren Buffett or Steven Cohen made their fortunes, they did not get into the bottled water industry to compete with “Trump Ice,” nor do them sponsor beauty pageants or have television shows where they send out contestants to make ice cream cones and then berate them mercilessly for choosing $1.45 as a price point. There is a very revealing type of bullying taking place on Trump’s show The Apprentice.

  He never puts himself up against equals in world of finance, but surrounds himself with childlike sycophants whose fate he controls with an iron hand. By demonstrating so much power against unequal opponents, and by expressing this power in an artificial setting, he actually conveys his own powerlessness in the real world. In attempting to come off as patrician, he devolves into sanctimonious self-aggrandizement while flanked by his robotic and obedient offspring who are displayed like products.

  Third, billionaires do not announce how much money they have. It’s déclassé. And they don’t want to boast because it gives the Internal Revenue Service, the SEC, and regulators another bite at the apple. If someone says you are worth $1 billion and you are really worth $10 billion that can be great news! Use it to your advantage.

  Finally, real billionaires also choose their deals carefully, weighing risk and return. They don’t start clothing lines or energy drinks because the risks (bad reviews, parodies, lawsuits) outweigh the rewards. What kind of person starts their own Trump University and then lets it dissolve a few years later amid lawsuits and investigations by the New York State Attorney General that the students were being defrauded. What is the economic advantage to a billionaire 10 times over of having a brand of bottled water that brings in $280,000, or a beauty pageant, or a line of cheap clothing, or a modeling agency, when the money can just sit in an account that mirrors the market and makes double digit growth? Some of these eponymous projects can be dismissed as flights of narcissism; but there are so many that something other than narcissism is at work here.

  It smells of overreach, desperation, and pettiness.

  Fourth, consider how Trump reacts with vituperative indignation when anyone has the temerity to question his supposed wealth. When comedienne Rosie O’Donnell claimed that Trump was a “snake oil salesman” who had been bankrupt, he threatened to sue her for defamation (presumably because the bankruptcy of Trump casino was not a personal bankruptcy for Trump himself). When MSNBC reporter Lawrence O’Donnell suggested that Trump was worth less than $1 billion, Trump threatened to sue. A decade ago he sued the author of a book about him for claiming that he was only worth a few hundred million instead of the nearly $3 billion that he claimed to be worth at the time. He even threatened to sue his ex-wife Ivana for talking too much about his finances, in violation of her agreement to keep quiet. 

  Methinks he doth protest too much.

  Why threaten to sue someone for underestimating your wealth . . . unless . . . unless . . . unless the sole valuable asset that you have is the general belief that you are worth $10 billion? Unless, that is, if you are really much poorer, and you have nothing to fall back on besides your reputation, and your main asset is the impression you convey. In that case, you might consider doing precisely what Trump does.

  Here is where I am heading: Could it be the case that Trump is an empty suit with no meaningful net assets other than his persona, his brand? That like a shark, he has to keep moving and keep projecting the image of great wealth, or else his empire will sink? This is consistent with the FEC disclosure document where so many of his assets are ‘marks’; in other words, he makes money by lending his name.

  Trump’s FEC document impresses me as the statement of a person who does not have much of anything other than himself – he is his own product. He is the professional wrestler of the financial world – a person who is famous for being famous, the tragic product of a society that produces images instead of actual things.

  Yes, he has built a few golf courses and buildings, but so have others – on a bigger scale; what he has really built is himself, or rather a caricature of himself. My suspicion is that Trump has nothing other than himself. He invented himself. He is his own brand, and that is all he is. Any crack in the mask will cause the whole thing to crumble down. 

  It is fitting that he gets a pension from the Screen Actors Guild.

  He is an actor who plays a man worth $10 billion.

  

  

  

  

  

• Buffett Bailout 2.0? Berkshire Hathaway Misses Earnings By Most Since Lehman

  It looks like it is time for Warren to get on the Obamaphone and make it clear this is unacceptable…  

  Berkshire Hathaway announced (a 10% decline) $2,367 (Adjusted) EPS, missing estimates of $3,038 by 22.09% – the biggest disappointment since Nov 2008…

   

  

   

  Worst still, Net income for the Omaha, Nebraska-based insurance and investment company fell to $4.01 billion, or $2,442 per share, from $6.4 billion, or $3,889 per share, a year earlier – a stunning 37% plunge.

  The driver of the weakness appears to be a fall in the paper value of its investments and its insurance companies reported an underwriting loss.

  Berkshire's insurance underwriting business, which includes Geico, swung to a $38 million loss.

   

  In the same period a year earlier the business had posted a $411 million after-tax profit.

  *  *  *

  Perhaps, as David Stockman previously noted, Warren's ride on the coat-tails of Fed exuberance is over…

  During the 27 years after Alan Greenspan became Fed chairman in August 1987, the balance sheet of the Fed exploded from $200 billion to $4.5 trillion. Call it 23X.

  

  Let’s see what else happened over that 27 year span. Well, according to Forbes, Warren Buffet’s net worth was $2.1 billion back in 1987 and it is now $73 billion. Call that 35X.

  During those same years, the value of non-financial corporate equities rose from $2.6 trillion to $36.6 trillion. That’s on the hefty side, too—- about 14X.

  

  Corporate Equities and GDP – Click to enlarge

  When we move to the underlying economy that purportedly gave rise to these fabulous gains, the X-factor is not so generous. As shown above, nominal GDP rose from $5.0 trillion to $17.7 trillion during the same 27-year period. But that was only 3.5X

  Next we have wage and salary compensation, which rose from $2.5 trillion to $7.5 trillion over the period. Make that 3.0X.

  Then comes the median nominal income of US households. That measurement increased from $26K to $54K over the period. Call it 2.0X.

  Digging deeper, we have the sum of aggregate labor hours supplied to the nonfarm economy. That metric of real work by real people rose from 185 billion to 235 billion during those same 27 years. Call it 1.27X.

  

  Further down the Greenspan era rabbit hole, we have the average weekly wage of full-time workers in inflation adjusted dollars. That was $330 per week in 1987 and is currently $340 (1982=100). Call that 1.03X

  

  Finally, we have real median family income. Call it a round trip to nowhere over nearly three decades!

  

  OK, its not entirely fair to compare Warren Buffet’s 35.0X to the median household’s 0.0X. There is some “inflation” in the Oracle’s wealth tabulation, as reflected in the GDP deflator’s rise from 60 to 108 (2009 =100) during the period. So in today’s dollars, Buffet started with $3.8 billion in 1987. Call his inflation-adjusted gain 19X then, and be done with it.

  And you can make the same adjustment to the market value of total non-financial equity. In 2014 dollars, today’s aggregate value of $36.7 trillion compares to $4.5 trillion back in 1987. Call it 8.0X.

  Here’s the thing. Warren Buffet ain’t no 19X genius nor are investors as a whole 8X versions of the same. The real truth is that Alan Greenspan and his successors turned a whole generation of gamblers into the greatest lottery winners in recorded history.

  That happened because the Fed grotesquely distorted and financialized the US economy in the name of Keynesian management of the purported “business cycle”. The most visible instrument of that misguided campaign, of course, was the Federal funds or money market rate, which has been pinned at the zero bound for the last 78 months.

  *  *  *

  With The Fed on the verge of raising rates, perhaps the days of the Warren Buffet economy are indeed numbered.

  

  

  

  

  

• "Markets In Turmoil" Dow Suffers Worst Streak Since 2011, Yield Curves Collapse

  Nail-biter… or Cliff-hanger? (Stallone is The PPT, the girl is the market, the carabiner is The Fed, the guy in the other chopper is CNBC)

  *  *  *

  Post-Payrolls reaction…

  

   

  Despite reassurances that a) rate-hikes are priced-in, 2) rate-hikes are bullisher for stocks than rate-cuts (why would The Fed raise rates if everything was not awesome?), and thirdly) buy the dip! It appears the rising rate-hike probability is 'coincidental' with markets turmoiling…

  

  But don't forget…

  Flashback Friday! http://t.co/KXtCoypZ8Z cc @jtcrombie @zerohedge pic.twitter.com/XMq9jc2ZoO

  — Rudolf E. Havenstein (@RudyHavenstein) August 7, 2015

  Equity markets in turmoil… Small Caps broke…

  

   

  And Futures show the big drops…but Europe-based drift higher…

  

  • Dow down 7 days in a row – first time since Aug 2011
  • Dow down 800 points in 3 weeks – worst run since Aug 2011

  Note – Death cross (50DMA crossing below 200DMA) looms…
  

   

  The S&P was held above its 2014 close and the 200DMA (2073) was very aggressively defended… thanks to a VIX clubbing…VIX ended the day lower!!! bwuahahahah!!!

  

   

  The ramp effort broke the markets…

  NYSE's direct feed clock just went whack – slowing dropping 10,000 micros over 15 minutes: pic.twitter.com/pTkuSg2kYj

  — Eric Scott Hunsader (@nanexllc) August 7, 2015

   

  • Biotechs down 9.2% – biggest weekly drop since Aug 2011
  • Media down 8.4% – worst week since Aug 2011
  • Energy down 2.7% – down 13 of last 14 weeks
  • AAPL down 5.1% – worst week since Jan 2014; worst 3 weeks (-11%) since Jan 2013

  

   

  Catching down to credit…

  

   

  VIX up 19% – biggest weekly jump since Jan 2015 before the gapping effort down at the close to rescue stocks…

  

   

   In Bond land…

  • 2Y Yield rose 6bps – biggest jump since June 2015 (near 4 year highs)
  • 30Y Yield down 5 of last 6 weeks (40bps biggest drop since Jan 2015)

  

  • 2s30s Curve down 14bps – biggest weekly flattening since April 2013
  • 5s30s Curve down over 9% – biggest weekly flattening since Sept 2011

  

   

  The Corporate (IG and HY) Bond market is not happy… 

  • HYCDX +40bps in 3 weeks – worst run since Dec 2014, highest risk since Dec 2014

  

   

  • HYG down 1.25% to lowest since Nov 2011 (worst 3 week run since Dec 2014)

  

   

  Commodity Carnaged…

  • Crude down 7.0% – down 6 weeks in a row (28% drop) to 5mo lows
  • Copper down 11 of last 12 weeks – lowest since July 2009
  • Silver Up 0.6% (before post-close slide) – best week in 3 months, breaks 5 week losing streak
  • Gold could not hold green – extends losing streak to 7 weeks

  

   

  But not everything was down…

  

   

  Note that Oil and stocks have become highly correlated once again…

  

   

  As Crude was clubbed back to a $43 handle close…

  

   

  Ironically, FX markets were actually relatively quiet (at least in the majors)…

  

   

  Although EM saw some pain (from Ruble to Real…)

  

   

   

  Charts: Bloomberg

  Bonus Chart: VIX under 14 and CNN Fear-and-Greed Index collapses to 10!!

  

  

  

  

  

• The U.S. Is Destroying Europe

  Authored by Eric Zeusse via Strategic-Culture.org,

  In Libya, Syria, Ukraine, and other countries at the periphery or edges of Europe, U.S. President Barack Obama has been pursuing a policy of destabilization, and even of bombings and other military assistance, that drives millions of refugees out of those peripheral areas and into Europe, thereby adding fuel to the far-rightwing fires of anti-immigrant rejectionism, and of resultant political destabilization, throughout Europe, not only on its peripheries, but even as far away as in northern Europe.

  Shamus Cooke at Off-Guardian headlines on 3 August 2015, “Obama’s ‘Safe Zone’ in Syria Intended to Turn It into New Libya,” and he reports that Obama has approved U.S. air support for Turkey’s previously unenfoceable no-fly zone over Syria. The U.S. will now shoot down all of Syrian President Bashar al-Assad’s planes that are targeting the extremist-Muslim groups, including ISIS, that have taken over huge swaths of Syrian territory.

  Cooke reports:

  “Turkey has been demanding this no-fly zone from Obama since the Syrian war started. It’s been discussed throughout the conflict and even in recent months, though the intended goal was always the Syrian government. And suddenly the no-fly zone is happening — right where Turkey always wanted it — but it’s being labeled an 'anti-ISIS' safe zone, instead of its proper name: 'Anti Kurdish and anti-Syrian government' safe zone.”

  The New York Times reported on July 27th, that, "the plan calls for relatively moderate Syrian insurgents to take the territory, with the help of American and possibly Turkish air support.” However, the Times, stenographically reporting (as usual) from and for their U.S. Government sources (and so propagandizing for the U.S. Government), fails to define “relatively moderate,” but all of the “relatively moderate insurgent” groups in Syria cooperate with ISIS and help them to find and decapitate, or sometimes hold for ransoms, any non-Muslims there. Under Assad, Syria has been a non-clerical state, and has enjoyed freedom of religion, but all of the Syrian opposition to Assad’s rule is alien to that. The U.S. is now, even more clearly than before, anti-Assad, pro-Islamist.

  Seymour Hersh reported in the London Review of Books on 17 April 2014, that the Obama Administration’s Libyan bombing campaign in 2011 was part of a broader program to bring sarin gas from Libya to the al-Nusra Front in Syria, in order to help produce a gas-attack upon civilians, which the U.S. Administration could then blame upon Assad, as being an excuse to bomb there just as Obama had already so successfully done in Libya. Both dictators, Gaddafi and Assad, were allied with Russia, and Assad especially has been important to Russia, as a transit-route for Russia’s gas supplies, and not for Qatar’s gas supplies — Qatar being the major potential threat to Russia’s status as the top supplier of gas into Europe.

  Obama’s top goal in international relations, and throughout his military policies, has been to defeat Russia, to force a regime-change there that will make Russia part of the American empire, no longer the major nation that resists control from Washington.

  Prior to the U.S. bombings of Libya in 2011, Libya was at peace and thriving. Per-capita GDP (income) in 2010 according to the IMF was $12,357.80, but it plunged to only $5,839.70 in 2011 — the year we bombed and destroyed the country. (Hillary Clinton famously bragged, “We came, we saw, he [Gaddafi] died!”) (And, unlike in U.S. ally Saudi Arabia, that per-capita GDP was remarkably evenly distributed, and both education and health care were socialized and available to everyone, even to the poor.) More recently, on 15 February 2015, reporter Leila Fadel of NPR bannered “With Oil Fields Under Attack, Libya’s Economic Future Looks Bleak.” She announced: “The man in charge looks at production and knows the future is bleak. 'We cannot produce. We are losing 80 percent of our production,' says Mustapha Sanallah, the chairman of Libya's National Oil Corporation.” Under instructions from Washington, the IMF hasn’t been reliably reporting Libya’s GDP figures after 2011, but instead shows that things there were immediately restored to normal (even to better than normal: $13,580.55 per-capita GDP) in 2012, but everybody knows that it’s false; even NPR is, in effect, reporting that it’s not true. The CIA estimates that Libya’s per-capita GDP was a ridiculous $23,900 in 2012 (they give no figures for the years before that), and says Libya’s per-capita GDP has declined only slightly thereafter. None of the official estimates are at all trustworthy, though the Atlantic Council at least made an effort to explain things honestly, headlining in their latest systematic report about Libya’s economy, on 23 January 2014, “Libya: Facing Economic Collapse in 2014.”

  Libya has become Europe’s big problem. Millions of Libyans are fleeing the chaos there. Some of them are fleeing across the Mediterranean and ending up in refugee camps in southern Italy; and some are escaping to elsewhere in Europe.

  And Syria is now yet another nation that’s being destroyed in order to conquer Russia. Even the reliably propagandistic New York Times is acknowledging, in its ‘news’ reporting, that, "both the Turks and the Syrian insurgents see defeating President Bashar al-Assad of Syria as their first priority.” So: U.S. bombers will be enforcing a no-fly-zone over parts of Syria in order to bring down Russia’s ally Bashar al-Assad and replace his secular government by an Islamic government — and the 'anti-ISIS' thing is just for show; it’s PR, propaganda. The public cares far more about defeating ISIS than about defeating Russia; but that’s not the way America’s aristocracy views things. Their objective is extending America’s empire — extending their own empire.

  Similarly, Obama overthrew the neutralist government of Viktor Yanukovych in Ukraine in February 2014, but that was under the fake cover of ‘democracy’ demonstrations, instead of under the fake cover of ‘opposing Islamic terrorism’ or whatever other phrases that the U.S. Government uses to fool suckers about America’s installation of, and support to, a rabidly anti-Russia, racist-fascist, or nazi, government next door to Russia, in Ukraine. Just as Libya had been at peace before the U.S. invaded and destroyed it, and just as Syria had been at peace before the U.S and Turkey invaded and destroyed it, Ukraine too was at peace before the U.S. perpetrated its coup there and installed nazis and an ethnic cleansing campaign there, and destroyed Ukraine too.

  Like with Libya before the overthrow of Gaddafi there, or Syria before the current effort to overthrow Assad there, or the more recent successful overthrow of Ukraine’s democratically elected President Viktor Yanukovych, it’s all aimed to defeat Russia.

  The fact that all of Europe is sharing in the devastation that Obama and other American conservatives — imperialists, even — impose, is of little if any concern to the powers-that-be in Washington DC, but, if it matters at all to them, then perhaps it’s another appealing aspect of this broader operation: By weakening European nations, and not only nations in the Middle East, Obama’s war against Russia is yet further establishing America to be “the last man standing,” at the end of the chaos and destruction that America causes.

  Consequently, for example, in terms of U.S. international strategy, the fact that the economic sanctions against Russia are enormously harming the economies of European nations is good, not bad.

  There are two ways to win, at any game: One is by improving one’s own performance. The other is by weakening the performances by all of one’s competitors. The United States is now relying almost entirely upon the latter type of strategy.

  *  *  *

  Investigative historian Eric Zuesse is the author, most recently, of  They’re Not Even Close: The Democratic vs. Republican Economic Records, 1910-2010, and of  CHRIST’S VENTRILOQUISTS: The Event that Created Christianity.

   

  

  

  

  

  

• When Work Is Punished: The Ongoing Tragedy Of America's Welfare State

  Wage growth – or a persistent lack thereof – has become something of a hot topic in America. 

  Thanks to the nationwide push for a higher pay floor (personified by mobs of angry fry cooks demanding $15/hour and Democrats on Capitol Hill who are pushing hard for “$12 by ‘20“) and wage growth’s role as an input in Janet Yellen’s mental “liftoff” model, everyone from Main Street to Wall Street feels compelled to weigh in. 

  The standard criticism of hiking the minimum wage is that forcing employers to pay more will simply result in layoffs and/or a reduced propensity to hire, but as we saw with Dan Price and Gravity Payments, there are a whole lot of other things that can go wrong. For instance, higher paid employees may not understand why everyone under them in the corporate structure suddenly makes more money and if people who are higher up on the corporate ladder don’t receive raises that keep the hierarchy proportional they may simply quit. 

  But while politicians, pundits, and economists run in circles perpetuating a debate that’s better suited for an undergrad introductory economics course than it is for the national stage (it’s really quite simple, as New York Burger King franchisee David Sutz made clear when he told CBS that “businesses are not going to pay $15 dollars an hour [because] the economics don’t work in this industry [given that] there is a limit to what you’re going to pay for a hamburger”), there’s a far more troubling situation unfolding behind the scenes and it harkens back to an issue we discussed at length almost three years ago. 

  In short, the welfare system punishes work and incentivizes dependency. More concretely, the structure is such that rational actors will eschew hard work, because the more they earn, the poorer they will effectively be in terms of total resources (calculated as welfare benefits plus earnings). 

  In the simplest possible terms: for many Americans, wage growth is a very, very bad thing.

  We encourage readers to go back and read “When Work Is Punished: The Tragedy Of America’s Welfare State,” and not only because it serves as a helpful primer, but because it also underscores the degree to which exactly nothing has changed in the 30 or so months since it was written. At issue is the so-called “welfare cliff” beyond which families will literally become poorer the higher their wages, as the drop off in entitlements more than offsets the increase in earnings.

  A study by the Illinois Policy Institute shows just how dramatic the effect of “falling off the cliff” (so to speak) can be. In one of the most startling findings for instance, if a single mother raising two children were to accept a pay raise from $12 to $18 per hour, her total resources would fall by nearly 33%. Here’s more:

  From: “Making work pay in Illinois: how welfare cliffs can trap families in poverty“

   

  For single-and two-parent households in Illinois, there is a significant welfare “cliff” where the household may become worse off financially as they work more hours or as their wages increase. That is because the available welfare benefits decline by a greater amount than the increase in earned income.

   

  This study analyzed a potential welfare benefits package for single- and two-parent households, both with two young children, in Cook, Lake and St. Clair counties. The potential means-tested benefits included tax credits, cash assistance, food assistance, housing assistance, child-care subsidies and health care.

   

  The study’s findings for Cook County include: 

  • A wide range of benefits provides a large magnitude of support. The potential sum of welfare benefits can reach $47,894 annually for single-parent households and $41,237 for two-parent households. Welfare benefits will be available to some households earning as much as $74,880 annually. 
  • Welfare cliffs are significant and can trap families. A single mom has the most resources available to her family when she works full time at a wage of $8.25 to $12 an hour. Disturbingly, taking a pay increase to $18 an hour can leave her with about one-third fewer total resources (net income and government benefits). In order to make work “pay” again, she would need an hourly wage of $38 to mitigate the impact of lost benefits and higher taxes. 
  • The system is inequitable. A minimum wage increase to $10 an hour would push a household where both parents work for minimum wage over the welfare cliff. They would suffer a net loss in household resources of about $9,000 as reduced government benefits more than cancel out the higher wages.

  As bad as this sounds on paper, it’s even more stunning visually. The following graphic for Cook County shows just how financially destructive it can be for low-paid workers to try and break free of their dependence on the public purse:

  

  There are several things to note here. First, as mentioned above, for a single mother of two, going from $12/hour to $18/hour would be a disaster, economically speaking. Her total resources (net income plus benefits) would collapse $24,840 from a peak of $63,597 to just $38,757. But perhaps the most distrubing part of the entire equation is that in this case, the single parent would have to make $38/hour before “recovering” from the welfare cliff. 

  And this isn’t confined to Cook County:

  In all cases, net earned income and welfare benefits climb quickly from no income through part-time work at minimum wage until full-time at minimum wage ($8.25 per hour). Net earned income and benefits then plateau until a peak of $12 per hour, which is only slight greater — and probably unnoticeable — than at minimum wage. Thereafter, net earned income and benefits begin to decline until they reach a trough at $18 per hour. The drop from peak to trough is highly significant, reducing disposable income resources by more than one-third. Table 6 provides the values for each locality for the drop. For Cook County, net earned income and benefits drop $24,840, from a peak of $63,597 to a trough of $38,757. The values are nearly identical for the city of Chicago: a drop of $24,830 from a peak of $63,586 to a trough of $38,757. Although the values are lower for Lake County and St. Clair County, the drop is relatively the same, i.e., more than one-third. For Lake County, the drop is $23,396, from a peak of $61,655 to a trough of $38,259. For St Clair County, the drop is $19,408, from a peak of $58,473 to a trough of $39,065.

   

  For Cook County and the city of Chicago, the parent would have to earn $38 per hour before she would make up for loss of benefits when she earned only $12 per hour.

  In other words: in Illinois, a rising minimum wage is actually negative (and severely so) unless it’s hiked enough to make total compensation around $80,000!

  For the purpose of simplification, here is a generalized illustration of welfare cliff dynamic: 

  

  The full report is below and you’re encouraged to have a look as it goes into quite a bit of detail on the perverse incentives that emanate from the current system. For our part, we’ll close with what we said on the subject in November of 2012: 

  We realize that this is a painful topic in a country in which the issue of welfare benefits and cutting (or not) the spending side of the fiscal cliff have become the two most sensitive social topics. Alas, none of that changes the matrix of incentives for Americans who find themselves facing a comparable dilemma: either remain on the left side of minimum US wage and rely on benefits, or move to the right side at far greater personal investment of work, and energy, and… have the same (or much lower) disposable income at the end of the day.

  Welfare Report Final

  

  

  

  

  

• Carl Icahn "Accepts Donald Trump's Offer For Secretary Of Treasury"

  Has Carl been drinking?

  1/3 After last night’s debate I decided to accept @realDonaldTrump offer for Secretary of Treasury.

  — Carl Icahn (@Carl_C_Icahn) August 7, 2015

  2/3 Seriously, the methods of electing our corporate and political leaders have become completely dysfunctional.

  — Carl Icahn (@Carl_C_Icahn) August 7, 2015

  3/3 In both areas, we are in dire need of a breath of fresh air.

  — Carl Icahn (@Carl_C_Icahn) August 7, 2015

  Of course, no mention that he was the main creditor who ended up owning The Trump Hotel in Atlantic City, of course…

  

  

  

  

• Weekend Reading: Serious Indigestion

  Submitted by Lance Roberts via STA Wealth Management,

  Another week of market volatility with no ground gained. It's enough to give you indigestion. I made an assessment earlier this week in reference to the markets rally attempt stating:

  "Any rally that occurs over the next few days from the current oversold condition should be used as a "sellable rally" to rebalance portfolios and related risk. (Chart updated through Thursday's close)

  

  • "While the market did rally over the last week as expected, it failed to rally above the current downtrend that has confined the market since mid-May.
  • The failure of the market to rise back towards new-highs, given the "oversold" condition discussed last week, continues to confirm the underlying weakness in the market.
  • While overhead resistance has kept the markets from rising in recent months, downside support at the 150 and 200-day moving averages has kept the "bullish trend" alive for now.
  • Lastly, the oversold condition that existed last week has been primarily worked off. However, the market has not returned to an overbought condition that has previously marked the end of bull rallies. The market must close above 2180 by Friday's close to reverse the current weakness.

  This short-term analysis suggests, especially when combined with the ongoing deterioration of internal measures, that rallies remain useful opportunities to rebalance portfolio risk as discussed last week."

  As suspected, the rally failed at the current downtrend resistance and is currently testing support at the 200-dma. Importantly, the market is NOT oversold currently which could potentially fuel further selling. 

  I discussed yesteday's that more warning signs have emerged suggesting there may be more to the recent consolidation than just a pause. This weekend's reading list will delve into a variety of views on the current market action.

  Is this just a simple case of indigestion or is it something more viral? 

  ---

  1) US Stocks Can't Keep Shrugging Off Global Pressures by Anthony Mirhaydari via Fiscal Times

  "Yet a better indication of what's happening in world markets comes from the MSCI World (ex USA) Index, which is down more than 7 percent from its high set last summer. Or the iShares MSCI Emerging Markets (EEM), which is down 19 percent from last summer's highs. Or the DB Commodities Tracking Index Fund (DBC), which is down 43 percent.

   

  Something is slipping. Factory orders here have expanded on a monthly basis only twice in the last 11 months. Excluding transportation, factory orders collapsed at a 7.5 percent annual rate in July, the worst since the maw of recession in 2009. With America's manufacturing sector looking shaky, the risk is that a global stalling pulls us down, too."

   

  

  Read Also: Too Early To Worry About The Bear by Chris Puplava via Financial Sense

  Also Read: 3 Warning Signs For Market Bulls by Lance Roberts via Streettalklive

   

  2) The Wizard Of Odds For The USD by Erik Swarts via Market Anthropology

  "From our perspective – and represented by the Fed's arduous task of administrating policy from ZIRP and within the trough of the long-term yield cycle, the conditions in the economy that were reflected in the markets of the 70's, 80's and 90's – are not remotely similar with today or have the potential reach and trend capacity that was fundamentally set in motion and sustained by the rise and fall in yields, from their secular icarus heights of the early 1980's.

   

  Although anythings possible – and admittedly the bulls continue to hold the fort and battle for now, we feel it would behoove such lofty expectations to approach the dollar with the aforementioned long-term intermarket cycles in mind. Moreover, from a performance point-of-view, the magnitude and pace of gains over the past year is in fact rare and more representative of culminating blowoff extremes – rather than the early headwaters of a longer trend."

  

  Read Also: The Great Tragedy by Joe Calhoun via Alhambra Partners

   

  3) Things Are About To Get Bumpy  by Russ Koesterich via BlackRock

  "Investors should be aware, however, that the good times may not last for long. Higher volatility should be expected given the recent evidence of slowing global growth and less benign credit conditions. This suggests to us that so-called momentum stocks, which have rallied strongly this year, could falter."

  Read Also: The Stock Market Is Weaker Than It Looks by J C Parets via Business Insider

  

   

  4) The "Big Short" Opportunity May Be At Hand by Doug Kass via Kass' Corner 

  "Too little attention has been placed on the continued subpar growth that's been the consistent feature of the U.S. economy since "The Generational Low" in March 2009.

   

  It's worth noting that recoveries out of severe U.S. recessions like the 2007-2009 one have historically been V-shaped. But this time around, gross domestic product has only expanded at a 2.1% real annual rate from the recession's bottom – well below the historical trend line of slightly more than 3%.

   

  This fact, coupled with the more-sluggish corporate-profit growth than has emanated from a weaker economy, has formed my cautious market view over the last two years. I also think this slow-growth condition has generated a dependency on aggressive monetary tactics from the Federal Reserve and the world's other central banks."

  Read Also: 2015 Recession Probabilities And Bear Markets by Chris Ciovacco via Ciavocco Capital

   

  5) Coming Out As A Bear by Axel Merk via Merk Investments

  "Increasingly concerned about the markets, I've taken more aggressive action than in 2007, the last time I soured on the equity markets. Let me explain why and what I'm doing to try to profit from what may lie ahead.

   

  I started to get concerned about the markets in 2014, when I heard of a couple of investment advisers that increased their allocation to the stock market because they were losing clients for not keeping up with the averages.

   

  Earlier this year, as the market kept marching upward, I decided that buying put options on equities wouldn't give me the kind of protection I was looking for. So I liquidated most of my equity holdings. We also shut down our equity strategy for the firm.

   

  Of late, I've taken it a step further, starting to build an outright short position on the market. In the long-run, this may be losing proposition, but right now, I am rather concerned about traditional asset allocation."

   

  

  Read Also: Short Seller Who Called Financial Crisis See Calamity Ahead  by Michael Newberg via CNBC

  ---

  Other Interesting Reads

  The Revenue Recession by Charlie Bilello via Pension Partners

  Fed Policy Keeps Introducing Distortions by Dr. John Hussman via Hussman Funds

  The Fed Is Cornered by Guy Hasselmann via ZeroHedge

  A Compendium Of Awesome Observations by Meb Faber via Meb Faber Research

  ---

  "These are the cards we've been dealt. We can't trade the market we want, we have to trade the market we have." – J C Parets

  Have a great weekend.

  

  

  

  

  

• Something Doesn't Add Up…

  Away from the utter farce of the rigged close in today's manipulated, volatility-crushing market

  

   

  We could not help but notice that with CNN's Fear & Greed Index at 10 – Extreme Fear…

  

   

  …and 6 of the 7 underlying factor at 'Extreme Fear', something doesn't add up that the VIX 'factor' is "neutral"…

  Spot The Odd One Out…

  

   

  Or more clearly…

  

   

  Anything China can do, "we" can do better!

   

  Source: CNN

  

  

  

  

• Artist's Impression Of Obama's 'Clean Power Plan'

  Just shut up, smile, and nod…

   

  

   

  Source: Investors.com

  

  

  

  

  

• The Big "Earnings Beat Expectations" Lie Exposed (In 2 Simple Posts)

  Quarter after quarter, we are spoon-fed statistics 'proving' that everything is awesome trotting out the percentage of companies 'beating expectations'. However, as is widely-known 'inside' Wall Street, this is simply all smoke and mirrors. As the following two charts prove: every quarter, 'hockey-stick' hope starts off high, is then drastically reduced into the actual earnings period…

   

  

   

  …which then rises during earnings to a level still lower than the pre-earnings period hope-fest…

  

   

  and once again, hope is pushed off into the next quarter… just one more quarter.

  And sure enough you can buy stocks safely on forward earnings expectations that the hockey stick is just around the corner!!

  How many more quarters do we have to see this 'game' play out before there are no greater fools left?

   

  Source: Deutsche Bank

  

  

  

  

  

• Here Comes The Next Crisis "Nobody Saw Coming"

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  When borrowing become prohibitive (or impossible) and raising taxes no longer generates more revenues, state and local governments will have to cut expenditures.

  Strangely enough, every easily foreseeable financial crisis is presented in the mainstream media as one that "nobody saw coming." No doubt the crisis visible in these three charts will also fall into the "nobody saw it coming" category.

  Take a look at this chart of state and local government debt. As we noted yesterday, nominal GDP rose about 77% since 2000. So state and local debt rose at double the rate of GDP. That is the definition of an unsustainable trend.

  

  As noted earlier in the week, state and local taxes have soared 75%. While this would be no big deal if wages and salaries had risen by 75% in the same time frame, but earnings have barely kept pace with inflation (38% since 2000).

  So state and local taxes have risen at a rate twice that of wages/salaries. State and local governments can keep raising taxes, but where's the money going to come from?

  

  State and local government expenditures have risen faster than inflation or GDP.

  

  Here is the context that matters: household income. This is median real income, i.e. adjusted for inflation.

   

  

  Wages and salaries are barely keeping up with inflation, real household incomes are down 8.5% since 2000 and state and local government taxes and spending are rising at twice the rate of inflation–where does this lead to?

  1. The bond market may choke if state and local governments try to "borrow our way to prosperity" as they did in the 2000s.

  2. If state and local taxes keep soaring while wages stagnate and household income declines, households will have less cash to spend on consumption.

  3. Declining consumer spending = recession.

  4. In recessions, sales and income taxes decline as households spending drops. This will crimp state and local tax revenues.

  5. This sets up an unvirtuous cycle: state and local governments will have to raise taxes to maintain their trend of higher spending. Higher taxes reduce household spending, which reduces income and sales tax revenues. In response, state and local governments raise taxes again. This further suppresses disposable income and consumption. In other words, raising taxes offers diminishing returns.

  At some point, local government revenues will decline despite tax increases and the bond market will raise the premium on local government debt in response to the rising risks.

  When borrowing become prohibitive (or impossible) and raising taxes no longer generates more revenues, state and local governments will have to cut expenditures. Given their many contractual obligations, these cuts will slice very quickly into sinews and bone.

  If this doesn't strike you a crisis, please check back in a few years. It is easily foreseeable, but very inconvenient. As a result, it too will be a crisis that "nobody saw coming."

  

  

  

  

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