- ViCHY 2.0
- Freedom Or The Slaughterhouse? The American Police State From A To Z
Submitted by John Whitehead via The Rutherford Institute,
“Who needs direct repression when one can convince the chicken to walk freely into the slaughterhouse?”—Philosopher Slavoj Žižek
Despite the best efforts of some to sound the alarm, the nation is being locked down into a militarized, mechanized, hypersensitive, legalistic, self-righteous, goose-stepping antithesis of every principle upon which this nation was founded.
All the while, the nation’s citizens seem content to buy into a carefully constructed, benevolent vision of life in America that bears little resemblance to the gritty, pain-etched reality that plagues those unfortunate enough to not belong to the rarefied elite.
For those whose minds have been short-circuited into believing the candy-coated propaganda peddled by the politicians, here is an A-to-Z, back-to-the-basics primer of what life in the United States of America is really all about.
A is for the AMERICAN POLICE STATE. As I point out in my book Battlefield America: The War on the American People, a police state “is characterized by bureaucracy, secrecy, perpetual wars, a nation of suspects, militarization, surveillance, widespread police presence, and a citizenry with little recourse against police actions.”
B is for our battered BILL OF RIGHTS. In the cop culture that is America today, where you can be kicked, punched, tasered, shot, intimidated, harassed, stripped, searched, brutalized, terrorized, wrongfully arrested, and even killed by a police officer, and that officer is rarely held accountable for violating your rights, the Bill of Rights doesn’t amount to much.
C is for CIVIL ASSET FORFEITURE. The latest governmental scheme to deprive Americans of their liberties—namely, the right to property—is being carried out under the guise of civil asset forfeiture, a government practice wherein government agents (usually the police) seize private property they “suspect” may be connected to criminal activity. Then, whether or not any crime is actually proven to have taken place, the government keeps the citizen’s property.
D is for DRONES. It is estimated that at least 30,000 drones will be airborne in American airspace by 2020, part of an $80 billion industry. Although some drones will be used for benevolent purposes, many will also be equipped with lasers, tasers and scanning devices, among other weapons.
E is for ELECTRONIC CONCENTRATION CAMP. In the electronic concentration camp, as I have dubbed the surveillance state, all aspects of a person’s life are policed by government agents and all citizens are suspects, their activities monitored and regulated, their movements tracked, their communications spied upon, and their lives, liberties and pursuit of happiness dependent on the government’s say-so.
F is for FUSION CENTERS. Fusion centers, data collecting agencies spread throughout the country and aided by the National Security Agency, serve as a clearinghouse for information shared between state, local and federal agencies. These fusion centers constantly monitor our communications, everything from our internet activity and web searches to text messages, phone calls and emails. This data is then fed to government agencies, which are now interconnected: the CIA to the FBI, the FBI to local police.
G is for GRENADE LAUNCHERS. The federal government has distributed more than $18 billion worth of battlefield-appropriate military weapons, vehicles and equipment such as drones, tanks, and grenade launchers to domestic police departments across the country. As a result, most small-town police forces now have enough firepower to render any citizen resistance futile.
H is for HOLLOW-POINT BULLETS. The government’s efforts to militarize and weaponize its agencies and employees is reaching epic proportions, with federal agencies as varied as the Department of Homeland Security and the Social Security Administration stockpiling millions of lethal hollow-point bullets, which violate international law. Ironically, while the government continues to push for stricter gun laws for the general populace, the U.S. military’s arsenal of weapons makes the average American’s handgun look like a Tinker Toy.
I is for the INTERNET OF THINGS, in which internet-connected “things” will monitor your home, your health and your habits in order to keep your pantry stocked, your utilities regulated and your life under control and relatively worry-free. The key word here, however, is control. This “connected” industry propels us closer to a future where police agencies apprehend virtually anyone if the government “thinks” they may commit a crime, driverless cars populate the highways, and a person’s biometrics are constantly scanned and used to track their movements, target them for advertising, and keep them under perpetual surveillance.
J is for JAILING FOR PROFIT. Having outsourced their inmate population to private prisons run by private corporations, this profit-driven form of mass punishment has given rise to a $70 billion private prison industry that relies on the complicity of state governments to keep their privately run prisons full by jailing large numbers of Americans for inane crimes.
K is for KENTUCKY V. KING. In an 8-1 ruling, the Supreme Court ruled that police officers can break into homes, without a warrant, even if it’s the wrong home as long as they think they have a reason to do so. Despite the fact that the police in question ended up pursuing the wrong suspect, invaded the wrong apartment and violated just about every tenet that stands between us and a police state, the Court sanctioned the warrantless raid, leaving Americans with little real protection in the face of all manner of abuses by law enforcement officials.
L is for LICENSE PLATE READERS, which enable law enforcement and private agencies to track the whereabouts of vehicles, and their occupants, all across the country. This data collected on tens of thousands of innocent people is also being shared between police agencies, as well as with fusion centers and private companies.
M is for MAIN CORE. Since the 1980s, the U.S. government has acquired and maintained, without warrant or court order, a database of names and information on Americans considered to be threats to the nation. As Salon reports, this database, reportedly dubbed “Main Core,” is to be used by the Army and FEMA in times of national emergency or under martial law to locate and round up Americans seen as threats to national security. As of 2008, there were some 8 million Americans in the Main Core database.
N is for NO-KNOCK RAIDS. Owing to the militarization of the nation’s police forces, SWAT teams are now increasingly being deployed for routine police matters. In fact, more than 80,000 of these paramilitary raids are carried out every year. That translates to more than 200 SWAT team raids every day in which police crash through doors, damage private property, terrorize adults and children alike, kill family pets, assault or shoot anyone that is perceived as threatening—and all in the pursuit of someone merely suspected of a crime, usually some small amount of drugs.
O is for OVERCRIMINALIZATION. Thanks to an overabundance of 4500-plus federal crimes and 400,000 plus rules and regulations, it’s estimated that the average American actually commits three felonies a day without knowing it. As a result of this overcriminalization, we’re seeing an uptick in Americans being arrested and jailed for such absurd “violations” as letting their kids play at a park unsupervised, collecting rainwater and snow runoff on their own property, growing vegetables in their yard, and holding Bible studies in their living room.
P is for PATHOCRACY. When our own government treats us as things to be manipulated, maneuvered, mined for data, manhandled by police, mistreated, and then jailed in profit-driven private prisons if we dare step out of line, we are no longer operating under a constitutional republic. Instead, what we are experiencing is a pathocracy: tyranny at the hands of a psychopathic government, which “operates against the interests of its own people except for favoring certain groups.”
Q is for QUALIFIED IMMUNITY. Qualified immunity allows officers to walk away without paying a dime for their wrongdoing. Conveniently, those deciding whether a police officer should be immune from having to personally pay for misbehavior on the job all belong to the same system, all cronies with a vested interest in protecting the police and their infamous code of silence: city and county attorneys, police commissioners, city councils and judges.
R is for ROADSIDE STRIP SEARCHES and BLOOD DRAWS. The courts have increasingly erred on the side of giving government officials—especially the police—vast discretion in carrying out strip searches, blood draws and even anal probes for a broad range of violations, no matter how minor the offense. In the past, strip searches were resorted to only in exceptional circumstances where police were confident that a serious crime was in progress. In recent years, however, strip searches have become routine operating procedures in which everyone is rendered a suspect and, as such, is subjected to treatment once reserved for only the most serious of criminals.
S is for the SURVEILLANCE STATE. On any given day, the average American going about his daily business will be monitored, surveilled, spied on and tracked in more than 20 different ways, by both government and corporate eyes and ears. A byproduct of this new age in which we live, whether you’re walking through a store, driving your car, checking email, or talking to friends and family on the phone, you can be sure that some government agency, whether the NSA or some other entity, is listening in and tracking your behavior. This doesn’t even begin to touch on the corporate trackers that monitor your purchases, web browsing, Facebook posts and other activities taking place in the cyber sphere.
T is for TASERS. Nonlethal weapons such as tasers, stun guns, rubber pellets and the like, have resulted in police using them as weapons of compliance more often and with less restraint—even against women and children—and in some instances, even causing death. These “nonlethal” weapons also enable police to aggress with the push of a button, making the potential for overblown confrontations over minor incidents that much more likely. A Taser Shockwave, for instance, can electrocute a crowd of people at the touch of a button.
U is for UNARMED CITIZENS SHOT BY POLICE. No longer is it unusual to hear about incidents in which police shoot unarmed individuals first and ask questions later, often attributed to a fear for their safety. Yet the fatality rate of on-duty patrol officers is reportedly far lower than many other professions, including construction, logging, fishing, truck driving, and even trash collection.
V is for VIPR SQUADS. So-called “soft target” security inspections, carried out by roving VIPR task forces, comprised of federal air marshals, surface transportation security inspectors, transportation security officers, behavior detection officers and explosive detection canine teams, are taking place whenever and wherever the government deems appropriate, at random times and places, and without needing the justification of a particular threat.
W is for WHOLE-BODY SCANNERS. Using either x-ray radiation or radio waves, scanning devices are being used not only to “see” through your clothes but government mobile units can drive by your home and spy on you within the privacy of your home. While these mobile scanners are being sold to the American public as necessary security and safety measures, we can ill afford to forget that such systems are rife with the potential for abuse, not only by government bureaucrats but by the technicians employed to operate them.
X is for X-KEYSCORE. One of the many spying programs carried out by the National Security Agency (NSA) that targets every person in the United States who uses a computer or phone. This top-secret program “allows analysts to search with no prior authorization through vast databases containing emails, online chats and the browsing histories of millions of individuals.”
Y is for YOU-NESS. Using your face, mannerisms, social media and “you-ness” against you, you can now be tracked based on what you buy, where you go, what you do in public, and how you do what you do. Facial recognition software promises to create a society in which every individual who steps out into public is tracked and recorded as they go about their daily business. The goal is for government agents to be able to scan a crowd of people and instantaneously identify all of the individuals present. Facial recognition programs are being rolled out in states all across the country.
Z is for ZERO TOLERANCE. We have moved into a new paradigm in which young people are increasingly viewed as suspects and treated as criminals by school officials and law enforcement alike, often for engaging in little more than childish behavior. In some jurisdictions, students have also been penalized under school zero tolerance policies for such inane "crimes" as carrying cough drops, wearing black lipstick, bringing nail clippers to school, using Listerine or Scope, and carrying fold-out combs that resemble switchblades.
As you can see, the warning signs are all around us. The question is whether you will organize, take a stand and fight for freedom, or will you, like so many clueless Americans, freely walk into the slaughterhouse?
- "Everything Is Awesome" In China – Retail Sales, Industrial Production, & GDP All Mysteriously Crush Expectations
Retail Sales increased 10.6% YoY (smashing expectations of a 10.2% YoY Gain); Industrial Production rose 6.8% (crushing expectations of a 6.0% YoY gain); and the big daddy of goalseeked data, China GDP managed to rise 7.0% (comfortably beating expectations of just 6.8% but still the lowest since Q1 2009). Now it is up to the markets to decide if good data is bad news because it gives the government less excuses to throw more "measures" at the market; or is good data, good news as it "proves" the economic fundamentals underlying massively exponential gains in Chinese stocks (and excessive valuations compared to the rest of the world) are justified. When the data hit Chinese stocks were at the lows of the day, and for now, it appears good data is bad news as stocks are not bouncing at all.
SHANGHAI COMPOSITE FALLS 1.6% AT OPEN BEFORE GDP DATA. GDP better be a hugely goalseeked miss
— zerohedge (@zerohedge) July 15, 2015
Why would we ever think that?
Everything Is Awesome!!!
One quick question… What exactly are the Chinese suddenly producing so much of? Because its not steel, its not houses, and its not being exported overseas…
Do not question this!!
- *CHINA'S GDP 'NOT OVERESTIMATED', NBS SHENG SAYS
China – we are going to need some worse data than that…
* * *
Finally here is Cornerstone Macro with a less 'optimistic' look ahead…
- PBOC easing hasn’t worked b/c investment and credit are bubbles, lowering demand for credit and slowing investment, Cornerstone Macro economists led by Nancy Lazar write in note.
- Expect China official real GDP by 4Q to have 5% handle
- Inventory destocking likely to be drag on 2H growth; industrial production will probably slow further
- Implications of Chinese hard landing incl. slower global growth; risk of disappointing multinational earnings; inflation and rates, both lower for longer; continued decline in commodity prices; rising USD trend
- Potential ramifications for China incl. PBOC continues to ease, cutting base lending rate to zero from 4.85%, loweringRRR to 6% from 18.5%; weaker outbound investment, which presents problem for other EMs; weaker FDI into China; downturn in employment, retail sales; social unrest and geopolitical turmoil
One last thing – we're going to need a lot more betterer data…
Charts: Bloomberg
- De-Dollarization – Mapping The Ruin Of A Reserve Currency
The dollar has been a stalwart of international trade over the majority of the last century. Around the time of the formation of the Eurozone, it reached its recent peak at 71.0% of official foreign exchange reserves. Since then, its composition of global reserves has more recently dropped to a more modest 62.9% in 2014.
However, the dollar is slowly losing its status as the world’s undisputed reserve currency.
This is not an unusual event as far as history goes. In fact, about every century or so since the Renaissance, the global reserve currency has shifted. Portugal, Spain, The Netherlands, France, and Britain have had dominant currencies at different times.
Today’s infographic shows that the wind is shifting in international trade. With less countries and organizations using the dollar to settle international transactions, it slowly chips away at its hegemony of the dollar. China is at the epicenter and the country is making continued progress in cutting deals outside of the U.S. dollar framework. Deals shown in the graphic are currency flows between countries that have abandoned the dollar in bilateral trade, as well as countries that are considering such measures.
The most recent culmination of these trends is the creation of the Asian Infrastructure Investment Bank (AIIB), a China-led rival to the World Bank and IMF that includes 57 founding countries and $100 billion of capital. The United States is not a member and has actively lobbied its allies to avoid joining due to perceived governance issues.
Other recent deals by China include: a 30-year $400 billion energy alliance with Russia, a second energy deal focusing on natural gas worth $284 billion with Russia, and a deal removing tariffs on 85% of Australian commodity exports to China. Further, China and Russia have agreed to pay each other in domestic currencies in order to bypass the U.S. dollar.
It is not only the Chinese that are starting to question the viability of the dollar. A report in 2010 by the United Nations called for the abandonment of the U.S. dollar as the single reserve currency. The Gulf Cooperation Council has also expressed desires for an independent reserve currency.
In the short term, especially with a crashing Chinese stock market and fledgling Eurozone, the dollar will likely reign supreme. It’s still a stretch for the yuan to make its way into foreign reserve coffers so long as capital controls remain in place and the country’s bond market is not open or transparent to offshore investors. However, Beijing is currently mulling ways to internationalize the yuan, and each step it takes will take China closer to challenging dollar hegemony.
With more bilateral trade transactions bypassing the dollar, and the increasing internationalization of the Chinese financial system, the yuan is eventually going to give the dollar a run for its money.
- How The US Government Blew $1 Billion In Taxpayer Funds On "Ghost Schools" In Afghanistan
Submitted by Mike Krieger via Liberty Blitzkrieg blog,
BuzzFeed News obtained internal Ministry of Education data for 2011 that has never before been made public. For Afghanistan overall, the data showed 1,174 schools — almost 1 in every 12 — was a ghost school, an educational facility that the Afghan government publicly claimed was open but that was, in fact, not operating. In the provinces that are the most dangerous to monitor — and into which the U.S. poured the most aid money — that proportion soared. In Kandahar province, where DeNenno served, a full third of the 423 schools the Ministry of Education publicly reported as open in 2011 were not functioning, and in Helmand, it was more than half.
But teacher salaries continued to go to these ghost schools — and still do, according to numerous Afghan and U.S. sources. While the Afghan government puts in some of its own money to pay teachers, more than two-thirds of teacher salaries are provided through a World Bank fund, to which the United States is the biggest donor. The World Bank fund did not respond to requests for comment, but USAID said that World Bank financial controls guard against salaries going to ghost teachers.
And just as with ghost students, the U.S. government has known about ghost teachers for years. Back in 2005 and 2006, an internal education ministry task force calculated that at least $12 million in salaries were going to so-called ghost teachers annually, according to several former employees of the USAID contractors embedded in the ministry. A scathing, confidential 2013 USAID audit of the Afghan education ministry obtained by BuzzFeed News reveals that the United States had been injecting hundreds of millions of dollars for more than a decade into a ministry marred by an “inadequate payroll system” and lacking even the most basic auditing practices.
In some areas, the belief that ghost schools have enriched fat cats at the expense of Afghan children has stoked such widespread ire that American education aid is actually doing the opposite of what the U.S. intended: It’s turning locals against the government.
– From the Buzzfeed article: Ghost Students, Ghost Teachers, Ghost Schools
In the wake of so many wasteful, inhumane and disastrous foreign policy failures, the U.S. government has been desperate to highlight some significant successes in order to justify all of these tragic foreign imperial blunders.
One such supposed success relates to education in Afghanistan, an area into which some $1 billion in taxpayer money has been spent to build schools and pay teachers according to Buzzfeed. U.S. Government officials have consistently trumpeted all of the good work that has been done in this regard, but there’s one slight problem. Not only are most of the statistics complete bogus, but in many cases, a lot of this U.S. wealth that was meant to be targeted for education, has gone straight to the coffers of some of the most ruthless warlords in the county. How could this happen you ask? Here’s how.
From Buzzfeed:
Nearly four years later, water seeps through the leaky roof and drips onto students in this more than $250,000 construction. Doors are cut in half; some are missing altogether. There is no running water for the approximately 200 boys — and zero girls — who attend. But the school did enrich a notorious local warlord. In exchange for donating the land on which the school sits, he extracted a contract from the U.S. military worth hundreds of thousands of dollars.
Over and over, the United States has touted education — for which it has spent more than $1 billion — as one of its premier successes in Afghanistan, a signature achievement that helped win over ordinary Afghans and dissuade a future generation of Taliban recruits. As the American mission faltered, U.S. officials repeatedly trumpeted impressive statistics — the number of schools built, girls enrolled, textbooks distributed, teachers trained, and dollars spent — to help justify the 13 years and more than 2,000 Americans killed since the United States invaded.
But a BuzzFeed News investigation — the first comprehensive journalistic reckoning, based on visits to schools across the country, internal U.S. and Afghan databases and documents, and more than 150 interviews — has found those claims to be massively exaggerated, riddled with ghost schools, teachers, and students that exist only on paper. The American effort to educate Afghanistan’s children was hollowed out by corruption and by short-term political and military goals that, time and again, took precedence over building a viable school system. And the U.S. government has known for years that it has been peddling hype.
BuzzFeed News exclusively acquired the GPS coordinates and contractor information for every school that the U.S. Agency for International Development (USAID) claims to have refurbished or built since 2002, as well as Department of Defense records of school constructions funded by the U.S. military.
At least a tenth of the schools BuzzFeed News visited no longer exist, are not operating, or were never built in the first place. “While regrettable,” USAID said in response, “it is hardly surprising to find the occasional shuttered schools in war zones.”
USAID program reports obtained by BuzzFeed News indicate the agency knew as far back as 2006 that enrollment figures were inflated, but American officials continued to cite them to Congress and the American public.
All they do is lie. Constantly, and about pretty much everything.
As for the schools America truly did build, U.S. officials repeatedly emphasized to Congress that they were constructed to high-quality standards. But in 2010, USAID’s inspector general published a review based on site visits to 30 schools. More than three-quarters suffered from physical problems, poor hardware, or other deficiencies that might expose students to “unhealthy and even dangerous conditions.” Also, the review found that “the International Building Code was not adhered to” in USAID’s school-building program.
This year, BuzzFeed News found that the overwhelming majority of the more than 50 U.S.-funded schools it visited resemble abandoned buildings — marred by collapsing roofs, shattered glass, boarded-up windows, protruding electrical wires, decaying doors, or other structural defects. At least a quarter of the schools BuzzFeed News visited do not have running water.
By obtaining internal records from the Afghan Ministry of Education, never before made public, BuzzFeed News also learned that more than 1,100 schools that the ministry publicly reported as active in 2011 were in fact not operating at all. Provincial documents show that teacher salaries — largely paid for with U.S. funds — continued to pour into ghost schools.
Some local officials even allege that those salaries sometimes end up in the hands of the Taliban. Certainly, U.S.-funded school projects have often lined the pockets of brutal warlords and reviled strongmen, which sometimes soured the local population on the U.S. and the Afghan government.
One place where it’s a lot less than it’s cracked up to be is the province where America poured more aid money than almost any other: Kandahar, home to Zhari district, where DeNenno’s school sits.
Habibullah Jan had fled the country, but when the Americans overthrew the Taliban in 2001, he returned and reimposed his checkpoints. With more than 2,000 men under his command and, soon, a seat in parliament, he became the most powerful man in Zhari. When his old foe the Taliban began to surge in 2005, the Americans turned to him for help.
To put it plainly: The U.S. allied itself with a warlord so oppressive and kleptocratic that he helped create the Taliban in the first place.
You really can’t make this stuff up.
Few American soldiers knew that Haji Lala and Habibullah Jan were brothers, let alone of Habibullah Jan’s role in fomenting the Taliban. “I liked Haji Lala,” a soldier in DeNenno’s unit said. “I’m pretty sure he did some bad stuff, but for us he was helpful.” He added, “I knew he was a warlord, but he was our warlord.”
America: Apple pie, democracy and Afghan warlords.
One of the most common payments the military made was compensation. If U.S. soldiers killed an innocent bystander, or blew up a civilian’s house, or killed someone’s sheep, commanders would pay compensation. The amounts were often modest — from less than $100 to more than $25,000 — but in total they added up to more than $2.5 million, from which strongmen could take a cut. DeNenno said that Haji Lala would sometimes tell the Taliban, “Go blow up this area because we wanna get the Americans to pay for it.”
The American taxpayer, the biggest patsy on earth, as usual.
But the goal was never just to educate children. Education was also a means to advance America’s short-term military and political objectives. In 2003, a National Security Council–led “Accelerating Success” program demanded that USAID hasten its work and complete 314 schools by June 2004. The reason: The U.S. wanted achievements — statistics — to extol ahead of the Afghan presidential election.
As a result of the NSC directive, USAID Director Patrick Fine wrote in an October 2004 internal memo, first obtained by the Washington Post, “awards were made without having design specifications, without agreed sites selected or surveyed or a process to do this, and without adequate consultation with either the [Ministry of Education or Ministry of Health] or the beneficiary communities.” The target numbers, he continued, “had gained a life of their own and were driving USAID to continue to rush the process.”
Profiteers exploited that rush. A full reckoning of the waste and outright fraud has never happened, in part because cases of corruption have often been hidden for years.
When an accountant went to federal investigators in 2006 with evidence that one of USAID’s largest contractors, Louis Berger Group, had been defrauding the agency of millions for years, the investigation was kept under federal seal until late 2010. Only then did the Justice Department reveal that two executives had pleaded guilty to fraud and announce the deal it had reached behind closed doors: The company as a whole would avoid criminal charges and be allowed to continue winning government contracts in exchange for implementing new financial controls and paying nearly $70 million in fines. Since the whistleblower came forward, USAID has awarded the company contracts worth more than 10 times what it was fined.
Looks like Louis Berger was handed out some banker justice. Must be nice.
From 2008 to at least August 2013, USAID claimed it had built or refurbished more than 680 schools in the country since the U.S. invaded — a figure the agency sometimes used to counter bad press and that it repeated on Twitter and in blog posts, press releases, and a report from USAID’s Office of the Inspector General, not to mention in Secretary Clinton’s submission to Congress.
But over the last two years, USAID has quietly whittled away at that number without explaining what happened to the more than 115 schools it no longer says it built or refurbished. After BuzzFeed News pressed for an answer, Larry Sampler, the head of USAID’s Office of Afghanistan and Pakistan Affairs, said the agency had “revised its operational definition of school construction” to a “stricter definition.”
Less than 20 miles southeast of DeNenno’s school, Deh-e-Bagh Primary School was recorded in U.S. military records as completed in 2012, at cost and up to standard. The nine-room building, along with latrines and a security wall, would allow children to go to school regularly and provide a “tangible source of community pride and legitimacy” for local elders and the Afghan government, the records say.
But Deh-e-Bagh Primary School has never seen a single student. Only partially completed in 2012, its doors have never opened. There are no latrines, no running water. Without a security wall surrounding it, the building has deteriorated. Windows are smashed. Rooms are littered with construction materials.
That same year, 2012, a military unit distributed supplies to the Sher Mohammad Hotak Primary School, located just a few miles down Highway 1 from DeNenno’s base. Fifty girls attended the school, according to the unit’s records. In photos the unit posted to Facebook, both girls and boys are seen smiling and collecting new backpacks. Together, USAID and the Pentagon have pumped more than $200,000 into the school.
But in an unannounced visit to the school this March, not a single girl was in attendance. Instead, the seven tents that made up the school were filled with boys, some of whom had no chairs or desks. They sat on rocky ground, fading backpacks emblazoned with the Afghan flag next to them.
It was that way across Afghanistan, with school after school visited by BuzzFeed News showing fewer students than were on the books. In 2011 and 2012, USAID sent monitors to many of the schools it had funded to check the number of students and other key information. Since then it has relied almost exclusively on data provided by the Afghan Ministry of Education to determine how many students and teachers are in schools. But no matter who came up with the official count, it often exaggerated the reality on the ground.
At the USAID-funded Mujahed Sameullah Middle School in Kunar province, for example, there were fewer than 50 boys, sometimes sitting two per classroom. That’s only about a fifth of the 274 boys USAID’s quality assurance monitors recorded in 2011 or the 264 the Afghan government told BuzzFeed News are currently enrolled. Overall, in the schools BuzzFeed News visited for which comparison data was available, official figures overcounted students by an average of nearly a fifth — and girls by about two-fifths.
In response to questions, USAID said that it takes seriously any allegations of falsified data and “will continue to work with the ministry to improve reliability.” It also said that beginning in 2012, the agency and other donors recommended that the ministry tighten that standard from three years to one. To date, the ministry has not done so. Still, USAID told BuzzFeed News that while it could not “be absolutely sure of all attendance numbers in all Afghan schools at all times,” in general it “is confident in overall attendance numbers provided by the MoE.”
But Elizabeth Royall, a U.S. liaison to the ministry in 2011 and 2012, said, “There was a lack of scrutiny. I would just report MOE numbers, and that’s what we went with.”
The U.S. just went with the ministry’s numbers for teachers, too. And those numbers were used to pay salaries — even when the teachers weren’t teaching.
BuzzFeed News obtained internal Ministry of Education data for 2011 that has never before been made public. For Afghanistan overall, the data showed 1,174 schools — almost 1 in every 12 — was a ghost school, an educational facility that the Afghan government publicly claimed was open but that was, in fact, not operating. In the provinces that are the most dangerous to monitor — and into which the U.S. poured the most aid money — that proportion soared. In Kandahar province, where DeNenno served, a full third of the 423 schools the Ministry of Education publicly reported as open in 2011 were not functioning, and in Helmand, it was more than half.
But teacher salaries continued to go to these ghost schools — and still do, according to numerous Afghan and U.S. sources. While the Afghan government puts in some of its own money to pay teachers, more than two-thirds of teacher salaries are provided through a World Bank fund, to which the United States is the biggest donor. The World Bank fund did not respond to requests for comment, but USAID said that World Bank financial controls guard against salaries going to ghost teachers.
And just as with ghost students, the U.S. government has known about ghost teachers for years. Back in 2005 and 2006, an internal education ministry task force calculated that at least $12 million in salaries were going to so-called ghost teachers annually, according to several former employees of the USAID contractors embedded in the ministry. A scathing, confidential 2013 USAID audit of the Afghan education ministry obtained by BuzzFeed News reveals that the United States had been injecting hundreds of millions of dollars for more than a decade into a ministry marred by an “inadequate payroll system” and lacking even the most basic auditing practices.
In some areas, the belief that ghost schools have enriched fat cats at the expense of Afghan children has stoked such widespread ire that American education aid is actually doing the opposite of what the U.S. intended: It’s turning locals against the government.
At one point, the provincial police chief shouts out who he thinks are commandeering the payments: “Everyone knows the salaries of teachers come to the province, and then they go to the Taliban.”
Military spending under the CERP program required very little paperwork for most projects. The point was to help win a war. But that flexibility means, quite literally, that the military does not know what it spent on education in Afghanistan, or what it got for its money. The military conceded that many CERP projects were not entered into “procurement database systems” but said it “does maintain extensive project records.” Last year, however, the Defense Department told the special inspector general for Afghanistan Reconstruction just how little it knew: For more than 40% of CERP projects, the Pentagon could not say who ultimately received its money.
Pressed by BuzzFeed News, the Pentagon said it could not provide an exact number of schools it actually built. It also could not say how the more than $250 million in CERP funding earmarked for education was actually spent. To try to drill down on those figures, BuzzFeed News filed a Freedom of Information request and obtained CERP funding records — but found that entire projects were missing, including Joe DeNenno’s permanent school.
“The CERP database was an absolute mess, literally a disaster,” one government official familiar with the records said. “Saying disaster doesn’t even do it justice.”
Since 2002, the United States has invested more than $1 billion to provide education to Afghan children. But the American government does not know how many schools it has built, how many Afghan students are actually attending school, or how many teachers are actually teaching. What’s certain is the numbers for all of those are far less than what it has been peddling.
While it’s bad enough U.S. taxpayer’s were sent a bill for $1 billion to fund education in Afghanistan when we have so many enormous domestic problems of our own, it’s downright criminal that so much of this money was irresponsibly wasted in political schemes, not to mention some of it going to directly to murderous warlords. Then again, none of this should surprise you. We are all familiar with the seemingly endless list of humanitarian disasters created by inept U.S. foreign policy since 9/11, such as:
More Foreign Policy Incompetence – U.S. Humanitarian Aid is Going Directly to ISIS
Afghan President Hamid Karzai Slams U.S. Foreign Policy in Farewell Speech
America’s Disastrous Foreign Policy – My Thoughts on Iraq
The Forgotten War – Understanding the Incredible Debacle Left Behind by NATO in Libya
- Chinese Big Cap Stocks Continue To Slide; Bridgewater Warns, "Typical Of Market Dominated by Unsophisticated Investors"
As $170 billion hedge fund Bridgewater noted, "new participants are now discovering that making money in the markets is difficult," and sure enough, as WSJ reports, Asian hedge funds have suffered steep losses in June. Several hedge funds were hit with losses on longs (unable to square positions due to suspensions) as well as a dearth of effective tools to short, or bet against, Chinese stocks as they dropped, highlighting the downside of investing in an environment where managing risks is difficult and government actions are unpredictable.As the world anxiously awaits tonight's Retail Sales, Industrial Production, and crucially #goalseeked GDP, Chinese big cap stocks are continuing losses from the last 2 days. The CSI-300 – China's S&P 500 – is now down over 7% from post-intervention highs on Monday.
Rather stunningly, as Bloomberg reports, more than 52 percent of the past six months' buy transactions by major shareholders and management in China companies happened in the past week. So it seems that after selling to the farmers on the way up they are no forced to buy the shares back from them…BUT these 4 were selling (off with their heads!!!!)
It looks like China is going to need a bigger boatload of intervention (though we note that ChiNext and Shenzhen continue to rise). After opening modestly in the green, CSI-300 is fading…
- *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.3% TO 3,874.97
- *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 1.1% TO 4,068.88
or we are going to see a lot more of this…
Only a third of Asian hedge funds tracked by Credit Suisse Group AG posted gains in June, and the group saw an average loss of 1.6%.
“Up until the end of last month, most people thought it was a healthy correction,” said Richard Johnston, Asia head for alternative-investments consultancy Albourne Partners Ltd. “I think it went a lot further than many people thought.”
…
Highflying hedge-fund managers aren’t big players in China, which has only recently allowed foreign investors to freely buy mainland stocks through the Shanghai-Hong Kong trading link opened in November. Mom-and-pop investors in the country drive the market and have taken the brunt of the recent rout.
“The Chinese market’s price action is typical for a newly developing equity market that is dominated by unsophisticated speculators,” said Bridgewater Associates LP, the world’s largest hedge-fund manager with about $170 billion under management, in a July note to clients. “New participants are now discovering that making money in the markets is difficult.”
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But all eyes will be pinned to China at 2200ET when the data drops…
in all it's "manipulated" wonder.
* * *
In other news: Golden Throat, the company with the best comb-over in town, starts trading today in Hong Kong pic.twitter.com/tq8kTW3b2N
— Richard Frost (@frostyhk) July 15, 2015
- Gold And The Silver Stand-Off: Is The Selling Of Paper Gold And Silver Finally Ending?
Submitted by Paul Mylchreest of ADM Investor Services Intl. (pdf version)
Gold and the Silver stand-off: Demarketing and Deep Value
The demarketing (in the 1971 Harvard Business Review, Kotler and Levy defined demarketing as “discouraging customers in general or a certain class of customers in particular on either a temporary or a permanent basis.” This is normally done when there is a shortage of supply or desire to promote other products) of gold may be close to running its course as it seems that sellers of paper gold instruments are attempting to induce one more sell-off to fully cover their diminishing short positions. Indeed, signs are emerging that the long Nikkei/short gold trade, which has done so much damage to gold’s price, is becoming problematic.
This could be due to one or more of: less desire to run large paper short positions by some banks/funds; rising cost of repo funding; larger bids emerging for physical bullion below $1,200/oz; and/or a view that the BoJ is reluctant to engage in ever greater stimulus. The gold basis and four major identifiable sources of gold demand (Shanghai Gold Exchange withdrawals, Indian imports, net ETF changes and net central bank changes) are indicating strong physical demand right now.
Anomalies in the silver market, such as large positive divergences in open interest and ETF holdings versus gold, suggest that entities which have been shorting gold may have been hedging (at least partly) in silver. What appears to be a stand-off in this much smaller market means that enormous volatility in the silver price is probably inevitable, especially with physical supply drying up.
It could be argued that a deep value case for gold, silver and related equities is becoming more and more apparent. For example gold, the HUI (NYSE Gold Bugs Index) and the GDXJ (Junior Gold Miners ETF) have underperformed the S&P 500 by 66%, 87% and 91%, respectively, since their peaks.
The gold price is still performing poorly in US dollars.
That said, it is close to being in a bull market in Yen, now 18.2% above its 2013 low…
…which says something about gold’s value (even in today’s seriously flawed gold market) in the face of a currency which has been deliberately and cynically debased by the BoJ (QQE running at 17% p.a. of GDP).
Price discovery in the gold and silver markets remains misunderstood by an overwhelming majority of financial market participants. It was been hijacked by two factors.
- The extreme domination of “paper gold” trading vis-à-vis a comparatively tiny amount of physical bullion; and
- Gold has been on the “wrong” side of a long/short trade since about September 2012.
In a January 2013 report “Report of the Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs”, the Reserve Bank of India estimated that the ratio of paper gold trading to physical gold trading is 92:1. That is a lot of unbacked paper gold instruments.
This has almost entirely separated the “gold price”, such as it is (the clearing price for vast volumes of paper gold “representations” with a fractional backing) from the fundamental supply and demand dynamics for actual physical gold bullion.
As Mr L. famously quipped.
“Ever get the feeling you’ve been cheated?“
Using the net short position of the Commercials (mainly banks) on the COMEX as a proxy for paper gold supply, the chart below shows how on the three occasions during 2006-11 that more paper gold was NOT supplied into a rising gold market, the gold price went parabolic.
In terms of the long/short trade, we outlined a thesis in late-2014 which drew together a complex web of interactions between the gold price, Japan’s Nikkei index, repo financing, BoJ policy meetings and anomalies in the silver market.
In brief, our thesis was as follows.
The interactions began forming in late-2012, specifically around September, which was a pivotal period in recent financial history, when central banks (notably the Fed and BoJ) embarked on a new phase of aggressive credit creation.
We believe that at the centre of these interactions is a large, leveraged long/short trade which we think is long the Nikkei index and short paper gold. The more the Nikkei rose, the more the gold price was pushed down and, in many cases, major price moves in both were closely tied to BoJ policy meetings, especially announcements of (even) more aggressive monetary policy under “Abenomics”.
We began to suspect that gold might be the short in a long/short trade when we noticed a reasonably close correlation between gold and interest rates in the repo market. In particular, the gold price tended to decline with the cost of repo funding. The repo market is a major part of the “shadow banking” sector and is the nexus for investment strategies involving leverage and short selling.
Controlling the short gold/long Nikkei trade may have become more problematic in recent months. For example, repo rates have been on the rise since late-2014. As funding costs increased, the downward pressure on gold has eased somewhat— they may be related.
Suspecting that gold was the short in a long/short trade is one thing, finding the corresponding long was another. When we first looked at the charts of gold and the Nikkei, there was nothing to see…
…until we inverted the Nikkei axis. Now can you see it?
Then the almost perfect correlation between the two was visible from September 2012 until the beginning of 2015.
And one that wasn’t there beforehand…either in the previous year (see chart below) or earlier.
As we’ve said before, the long/short could be Yen/gold, rather than Nikkei/gold, although the correlation is not quite as good.
Since late-2014, the gold price has traded sideways while the Nikkei continued to rise. We can only speculate on why this is, but four possible explanations come to mind.
- The rising cost of repo funding; and/or
- Solid bids emerging for physical bullion, around US$1,200/oz and below; and/or
- A decreasing desire to maintain large short positions by some of the Commercials (banks); and/or
- A view that the BoJ is reluctant to implement even more monetary stimulus with QQE already running at an annualised rate of 17% of GDP – although we wouldn’t rule it out given the lunacy demonstrated so far.
Before the renewed gold sell-off in recent days, gold volatility had fallen to a level which was close to a 10-year low.
Gold was/still is due for a significant price move, one way or another. In a free market, this would most likely be up since the Greek crisis led to reports of a strong pick-up in demand from bullion dealers. For example, Torgny Persson, CEO of BullionStar, noted.
“Precious metals demand in the last week leading up to the Greek referendum has been about 150 % higher than normal both in terms of order quantity and order volume…Based on my conversations with the western world’s leading refineries and precious metals wholesalers, they have experienced similar increases in the last week.”
In contrast, Bitcoin, a perceived “gold substitute”, safe haven (maybe) with finite supply (although lacking any kind of “tangible” value and track record down the millennia, has performed much better.
However, a surging gold price is the last thing that anybody who’s concerned with maintaining the veneer of financial stability wants to see.
We suspect that the Commercials are hoping that a renewed bout of weakness will attract additional shorting by the Non-Commercials. This would allow further reduction in the Commercials’ own net short position – which has been kept on a tighter leash since 2013 (and was facilitated by the price smash in April that year).
Our guess is that this is the final shakeout in gold’s sell-off which has been in progress ever since the gold price peaked on 6 September 2011 – when the Swiss franc, i.e. one of the few safe havens, was pegged to the Euro (and common sense suggests should have been gold positive).
Kotler and Levy, in “Demarketing, Yes, Demarketing” published in the Harvard Business Review in 1971, defined demarketing as.
“discouraging customers in general or a certain class of customers in particular on either a temporary or a permanent basis.”The academic literature argues that this is normally done when (our emphasis).
- There is a shortage of supply; and/or
- There is a desire to promote other products; and/or
- A product is unprofitable in a particular region.
A demarketing campaign is usually undertaken via increasing prices, restricting availability or cutting back on advertising.
But…how is this relevant to the gold and silver markets?What if gold and silver naturally (in free markets) act as Giffen Goods in the latter stages of a global debt bubble? To recap, a Giffen Good is one that violates the normal laws of supply and demand with people buying more of the good as its price increases.
Intuitively, this makes sense. Rising gold and silver prices should naturally reflect increasing risk to the financial system— especially counterparty risk since gold and silver bullion are the only financial assets which have none (i.e. they are not somebody else’s liability).
Following this argument, if gold has Giffen Good characteristics, the best way to reduce demand from western investors (eastern investors have a natural affinity for gold) would be to reduce the gold price. The point being that any sustained demand for physical bullion from the enormous pools of capital in the western world would hasten the inevitable onset of supply shortage.
It’s reminiscent of what happened in the prelude to the end of gold’s bear market in the 1990s. This was from a famous (in gold market circles), but anonymous, source on western tactics at the time.
“(They) needed to keep the price of gold down so it could flow where they needed it to flow. The key to free up gold was simple. The western public will not hold an asset that is going nowhere.”
This discussion about demarketing in conditions of limited supply raise another point which seems to have gone unnoticed.
It’s become alarmingly clear in recent months how liquidity on the downside is drying up in many markets, with Chinese equities being the most grotesque of many examples. In physical gold and silver, we believe the polar opposite is the case, i.e. there is very little liquidity to the upside.
It is impossible to model supply and demand for gold due to the extreme stock-to-flow ratio which renders it entirely different from any commodity (although gold is money not a commodity).That doesn’t stop most gold analysts, however. Nevertheless, there are ways to gauge the strength of the physical gold demand.
Firstly, by comparing the spot price with the near-month future, i.e. what’s known as the gold basis. Given its stock-to-flow ratio, the gold price should always trade in contango, i.e. with the near-month future at a premium to spot (positive basis). If gold is in backwardation (negative basis), there is a “free profit” for speculators from selling spot gold and buying the near-month future and taking delivery (SINCE SUPPLY SHOULD NEVER BE A CONSTRAINT).
Backwardation in gold should be arbitraged away unless speculators are nervous about the availability of physical supply (IF OFFERS OF PHYSICAL GOLD ARE WITHHELD AT A PREVAILING PRICE WHICH IS DEEMED TOO LOW BY MARKET PARTICIPANTS). The chart below shows that gold has spent much of the time in backwardation since 2013.
This was Professor Antal Fekete of Fekete Research writing in 2006.
“We may grant that gold futures trading has materially added to the longevity of the regime of irredeemable currency. But while the central bankers are buying time, sand in the hour-glass of the gold basis keeps trickling down. When it runs out, the trickle of cash gold from warehouses will have become an avalanche that could no longer be stopped.”
The run on gold has not reached avalanche scale yet, but it’s picking up. While physical gold demand can’t be measured in aggregate, we track four major identifiable indicators of physical gold demand to get a sense of demand conditions.
These are.
- Gold withdrawals on the Shanghai Gold Exchange;
- Gross gold imports into India;
- Net change in gold holdings of all-known ETFs; and
- Net change in central bank gold holdings.
The chart below shows that in aggregate these four sources of gold demand alone have exceeded the output of every gold mine in the world on a monthly basis during most of the last year.
Suddenly, the negative gold basis starts to make sense. It’s also important to remember that the PBoC has not disclosed its purchases since 2009 (an update is due this year) and does not acquire gold on the SGE. So PBoC purchases would be additional.
We should take a moment to explain the significance of withdrawals on the Shanghai Gold Exchange. Under Chinese law, all gold either mined domestically or imported has to be sold through the SGE, which allows the Chinese authorities to monitor non-government gold reserves. Once bars are withdrawn from the SGE, they are not allowed to be redeposited (Article 23 of the SGE rule book). Withdrawn SGE bars which are resold have to be recast and assayed as new bars. This gold is counted as scrap supply.
Consequently, SGE withdrawals are a close proxy for incremental Chinese demand. The aggregate of SGE withdrawals was 2,197 tonnes in 2013 and 2,100 tonnes in 2014, which is equivalent to more than 70% of the world’s newly mined gold. We just want to emphasise that this is Chinese demand EXCLUDING the PBoC.
When China’s purchases of copper and other metals were ramping up 50-60% of world supply in the “go-go” years of 2003-07, the investment world was transfixed by the potential of commodity investing in all its forms. This author was a Mining sector analyst at the time. Fast forward today and gold advocates like us are as rare as hen’s teeth in today’s financial markets.
Chinese demand of c.2,000 tonnes was higher than the World Gold Council figure, but was confirmed by official Chinese sources. The China Gold Network reported a speech by the Chairman of the Shanghai Gold Exchange (SGE), Xu Luode, on 15 May 2014 in which he stated.
“Xu pointed out that the current gold market, especially the physical gold market, is actually in the East, mainly in China. Last year China’s own gold-enterprises produced 428 tons; at the same time China imported 1,540 tons of gold, adding up to nearly 2,000 tons.”
BullionStar’s Torgny Persson attended the LBMA forum in Singapore in July 2014. He reported on comments made by Xu Luode in another speech which Koos Jansen published on the “In Gold We Trust” website.
“In the speech Mr Xu mentioned and I quote from the official translation in the headphones ‘as the Chinese consumption demand of gold hit 2,000 tonnes in 2013.”
So, in summary, physical gold demand remains strong while the screen price of gold is being shorted into the ground…which brings us to anomalies in the silver market.
We don’t mean price anomalies…yet.
Instead…
Look at how open interest in silver diverged from gold from late-2012 onwards – which is when we believe the short gold/long Nikkei trade was put on. Silver open interest is at an all-time high and note that the scales of the axes on the chart below are (almost) identical.
The open interest of about 200,000 contracts is equivalent to 1.0 BILLION ounces of silver, which is approximately 114% of all silver mined worldwide in 2014. In contrast, the open interest in gold is equivalent to approximately 49% of all gold mined last year.
Since almost all the gold ever mined remains as inventory (potential supply) while the majority of silver is consumed in industrial fabrication, there appears to be huge instability coming in the silver market.
The second anomaly in the silver market relates to ETF holdings of silver versus gold. Gold peaked at the end of 2012 (!) while silver holdings have remained at high levels despite the sharp fall in the silver price, even more than gold in percentage terms.
It’s not easy to reconcile these anomalies, but one explanation is that some entity/entities is/are building a long position in silver.
If so, why? What if the “somebody” who is shorting the gold market is hedging themselves in silver, knowing that when these metals turn, the silver price moves like gold on steroids.
Let’s speculate for a moment. If the silver market had to be “controlled” for as long as possible… a long hedge built up in silver would need an equally large and offsetting increase in short positions by another “controlling” entity. This might explain the “blow out” in silver open interest.
Let’s look at the long and short positions of the Commercials since QE3 in September 2012. Until (very) recently, they had both increased by about 40,000 contracts, i.e. 200 million oz. or nearly a quarter of the world’s annual silver supply.
It looked like a stand-off was developing. Now it looks like the shorts are using the price weakness to cover their positions.
A third anomaly in the silver market was highlighted by Zero Hedge in its analysis of the latest report on the US derivatives report from the Office of the Comptroller of Currency. In the precious metals segment, gold derivatives were excluded and placed in the foreign exchange category instead (without explanation). The remaining precious metals derivatives are primarily silver. At the end of the first quarter of 2015, Citigroup’s precious metals derivatives exposure rose from US$3.9bn to US$53bn, a nearly fourteen fold increase.
It’s far too opaque to discover what Citibank is actually doing but, if we assume that 90% of it is silver, the notional derivatives value is equivalent to 3.06bn oz, or three and a half years of world silver mine output, every single ounce of it. As a percentage of total precious metals derivatives outstanding, Citibank increased its market share from 17% to 70%.
Calling the regulators…
This was Zero Hedge’s comment.
“there is just one word for what Citigroup has done to what the Precious Metals ex Gold (i.e., almost exclusively silver) derivatives market. Cornering.”
Silver is volatile at the best of times, but enormous volatility in the silver price is probably inevitable.
In our opinion, we are in the latter stages of gold and silver price discovery which is (almost) entirely dominated by related paper substitutes. The emergence and recognition of supply shortage will begin to alter the balance of price discovery, slowly at first, then rapidly.
Having looked at trends in the gold market, what about indications of the strength of physical silver demand? Like gold, there is evidence that physical silver supply is getting increasingly tight.
The silver basis has been in almost continuous decline in recent years and has recently moved into backwardation.
Nobody knows the volume of above ground silver inventory although it is believed to be about 1.0 billion ounces (over 30,000 tonnes). Three points are worth considering in terms of the emerging tightness in physical silver supply:
- There is considerably less above ground silver inventory compared with gold inventory (approx. 6.0bn oz.);
- Central banks do not have silver reserves that can be leased into the market; and
- Unlike gold, the majority of silver is consumed in industrial applications with silver being unique in terms of its dual nature of being both a monetary metal and an industrial metal.
Finally…
There is a deep value argument for gold and silver and the related equities. In a debt crisis, as we saw in 2007-08, counterparty risk becomes critical.
Physical gold and silver are the only financial assets with no counterparty risk at all.
Gold has underperformed the S&P 500 by 65.8% since the peak.
Banks, in contrast, epitomise counterparty risk. Gold has underperformed the BKX banks index in the US by 70.6% since the peak in 2011.
Silver has underperformed the BKX banks index in the US by 83.2% since the peak in 2011.
Gold (and silver) equities have suffered far worse than the respective metals. The HUI Gold Bugs Index, for example, has fallen 80.3% versus the gold price since the peak more than a decade ago now.
Relative to the S&P500, the HUI has underperformed by 87.1% since the peak.
The GDXJ ETF of small cap. gold mining shares has underperformed the S&P 500 by 91.4%.
The quote below is from (in our opinion) one of the best road movies of all time, but one that is masquerading as a war movie. It’s the story of American soldiers in World War Two who travel deep behind German lines to recover $16m of gold from a bank. When they get close to their goal, they find that the gold is guarded by three Tiger tanks while they only have one Sherman. It reminds us of how it’s felt to be a gold investor during the last few years.
Kelly: Well Oddball, what do you think?
Oddball: It’s a wasted trip baby. Nobody said nothing about locking horns with no Tigers.
Big Joe: Hey look, you just keep them Tigers busy and we’ll take care of the rest.
Oddball: The only way I got to keep them Tigers busy is to LET THEM SHOOT HOLES IN ME!
Crapgame: Hey, Oddball, this is your hour of glory. And you’re chickening out!
Oddball: To a New Yorker like you, a hero is some type of weird sandwich, not some nut who takes on three Tigers.
Kelly: Nobody’s asking you to be a hero.
Oddball: No? Then YOU sit up in that turret baby.
Kelly: No, because you’re gonna be up there, baby, and I’ll be right outside showing you which way to go.
Oddball: Yeah?
Kelly: Yeah.
Oddball: Crazy… I mean like, so many positive waves… maybe we can’t lose, you’re on!
From Kelly’s Heroes (1970, MGM, Kelly = Clint Eastwood, Oddball = Donald Sutherland, Big Joe = Telly Savalas, Crapgame = Don Rickles)
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Full report
- Varoufakis: Greek Deal Is "Coup", Turns Greece Into "Vassal" State, And Deals "Decisive Blow" To European Project
Yanis Varoufakis, fresh off a few relaxing days at his island getaway, will be back in the Greek parliament this week to weigh in on the “compromise” deal his successor Euclid Tsakalotos and PM Alexis Tsipras struck in Brussels over the weekend.
Considering the eyewitness accounts of the highly contentious Eurogroup meeting – out of which came the exceedingly punitive term sheet which would serve as the basis for Greece’s agreement with creditors – one can only imagine what might have unfolded if Varoufakis had been present for the “crazy kindergarten” finance minister free-for-all which reportedly took place on Saturday night.
For those curious to know what Yanis thinks about the deal, below are some “impressionistic thoughts” from the man himself. Highlights include the characterization of the Greek deal as a “decisive blow against the Euorpean project”, a “statement confirming that Greece acquiesces to becoming a vassal of the Eurogroup”, and the “culmination of a coup”.
* * *
On the Euro Summit’s Statement on Greece: First thoughts via Yanis Varoufakis
In the next hours and days, I shall be sitting in Parliament to assess the legislation that is part of the recent Euro Summit agreement on Greece. I am also looking forward to hearing in person from my comrades, Alexis Tsipras and Euclid Tsakalotos, who have been through so much over the past few days. Till then, I shall reserve judgment regarding the legislation before us. Meanwhile, here are some first, impressionistic thoughts stirred up by the Euro Summit’s Statement.
- A New Versailles Treaty is haunting Europe – I used that expression back in the Spring of 2010 to describe the first Greek ‘bailout’ that was being prepared at that time. If that allegory was pertinent then it is, sadly, all too germane now.
- Never before has the European Union made a decision that undermines so fundamentally the project of European Integration. Europe’s leaders, in treating Alexis Tsipras and our government the way they did, dealt a decisive blow against the European project.
- The project of European integration has, indeed, been fatally wounded over the past few days. And as Paul Krugman rightly says, whatever you think of Syriza, or Greece, it wasn’t the Greeks or Syriza who killed off the dream of a democratic, united Europe.
- Back in 1971 Nick Kaldor, the noted Cambridge economist, had warned that forging monetary union before a political union was possible would lead not only to a failed monetary union but also to the deconstruction of the European political project. Later on, in 1999, German-British sociologist Ralf Dahrendorf also warned that economic and monetary union would split rather than unite Europe. All these years I hoped that they were wrong. Now, the powers that be in Brussels, in Berlin and in Frankfurt have conspired to prove them right.
- The Euro Summit statement of yesterday morning reads like a document committing to paper Greece’s Terms of Surrender. It is meant as a statement confirming that Greece acquiesces to becoming a vassal of the Eurogroup.
- The Euro Summit statement of yesterday morning has nothing to do with economics, nor with any concern for the type of reform agenda capable of lifting Greece out of its mire. It is purely and simply a manifestation of the politics of humiliation in action. Even if one loathes our government one must see that the Eurogroup’s list of demands represents a major departure from decency and reason.
- The Euro Summit statement of yesterday morning signalled a complete annulment of national sovereignty, without putting in its place a supra-national, pan-European, sovereign body politic. Europeans, even those who give not a damn for Greece, ought to beware.
- Much energy is expended by the media on whether the Terms of Surrender will pass through Greek Parliament, and in particular on whether MPs like myself will toe the line and vote in favour of the relevant legislation. I do not think this is the most interesting of questions. The crucial question is: Does the Greek economy stand any chance of recovery under these terms? This is the question that will preoccupy me during the Parliamentary sessions that follow in the next hours and days. The greatest worry is that even a complete surrender on our part would lead to a deepening of the never-ending crisis.
- The recent Euro Summit is indeed nothing short of the culmination of a coup. In 1967 it was the tanks that foreign powers used to end Greek democracy. In my interview with Philip Adams, on ABC Radio National’s LNL, I claimed that in 2015 another coup was staged by foreign powers using, instead of tanks, Greece’s banks. Perhaps the main economic difference is that, whereas in 1967 Greece’s public property was not targeted, in 2015 the powers behind the coup demanded the handing over of all remaining public assets, so that they would be put into the servicing of our un-payble, unsustainable debt.
- 'Wanted' Obama "Hope" Artist Has None Left, Turns Himself In To Police
World-renowned street artist Shepard Fairey – infamous for creating Obama's "Hope" image during the 2008 presidential campaign and more recently the "obey" street art – has apparently run out of it.
He was arraigned today, after turning himself into Detroit police, on felony charges that he illegally tagged public and private property in the city. Detroit Police last month said Fairey set a bad example for other artists when he plastered his signature Andre the Giant posters on buildings in and near downtown.
As Detroit Free Press reports,
Fairey, 45, took a flight from Los Angeles — where he was initially detained last week — to Detroit on Monday evening.
He is accused of causing about $9,000 in damage to nine illegally tagged properties while he was in Detroit in May. He was invited here for commissioned work that included an 18-story mural on One Campus Martius for Dan Gilbert's Bedrock Real Estate Services and others.
Fairey faces two counts of malicious destruction of property, which carry a maximum penalty of five years in jail, plus fines that could exceed $10,000.
Approached after the flight, Fairey declined to speak on the issue: "Can't talk about anything," he said.
He didn't speak at his arraignment Wednesday morning, and his attorney Bradley Friedman declined to comment on the charges.
Doug Baker, attorney for the city of Detroit and a retired Wayne County prosecutor, is taking graffiti cases through an arrangement with the Wayne County Prosecutor's Office. He said there are about eight to 10 other cases the city is working to "vigorously" enforce laws against defacing property.
Asked what Baker thinks of people treating Detroit as a place they can get away with graffiti, he replied:
"That is an attitude that we run into, because we get people coming into the city that view it as a free-fire zone, that view at as a place where no one cares," Baker said. "And that's what we'er changing. We're changing that culture of belief."
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Just lucky he is not a young black "hope"-less "thug" or things could have got serious.
- (Not So) Elementary My Dear Watson: The Problem With Pension Plans
Submitted by Keith Dicker of IceCap Asset Management
Elementary my Dear Watson
If you’re into mysteries, there’s certainly no shortage of them around the world. Enjoying them is one thing, solving them is quite another.
In the mystery solving world, Sherlock Holmes was clearly heads, hands and feet above everyone else. His unorthodox thinking was the key to solving the mystery behind the Hounds of Baskerville, while shrewd decision making always proved valuable when up against the maniacal Moriarty.
Lieutenant Columbo meanwhile, was also a sharp cookie. Whereas Sherlock dove straight into a mystery and aggressively confronted his foes, the affable Columbo excelled at bumbling around the problem which caused his foes to underestimate him. Which of course, always helped everyone’s favourite detective gather more clues and crack the case.
Mysterious hounds and mysterious criminals certainly help keep our minds razor sharp as well as entertained. Yet, perhaps the biggest mystery in the world today involves – pension plans.
Many people have them, and most people fully know what their eventual pension payout will be. Unfortunately, the average person doesn’t know how their pension plan is actually taped together, and fewer still, appreciate that the “promise” of their “eventual pension payout” is not as guaranteed as they may believe.
Let’s leave no doubt – considering the mysterious complexity of these plans, to understand them one must certainly be a sharp cookie – that’s the easy part.
However, to fully understand them, one must use unorthodox thinking and make shrewd analytical decisions. Last but not least, never underestimate how today’s financial environment is about to leave many pension plans scratching their heads with confusion and despair.
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Pension Plan AssetsEveryone knows their pension plan owns stocks and bonds. What few know is how they are actually valued.
Because stock and bond markets can be very volatile in the short-term, and pension plans provide benefits over the long-term, many argue that it is unfair to determine the financial health of a pension plan based upon short-term, recent market performance.
Unless of course, the short-term market performance is exceptionally good – then the above doesn’t apply.
However, if markets whipsaw around like they did in 2012, 2009, 2008, 2002, 2001, 1998, 1994 (we could go on but…), then pension plan consultants prefer to smooth out these return fluctuations when reporting their financial check-up.
The main tool used for smoothing returns is called the Expected Rate of Return. It isn’t the actual rate of return, but rather, it is an estimate of what the pension plan will earn over the long-term.
Now, here’s the trick – the higher the expected rate of return, the higher the expected value of plan assets.
The higher the expected plan assets, the lower the expected deficit.
And, the lower the expected deficit, the lower the expected contributions that is required by the employer.
Note: these expected returns are theoretical – not actual.
In a nutshell – high expected rates of return are good. But only good if they retain a semblance of reality. And since most people live in reality, the expected rate of return used by pension plans should also resemble reality.
And this brings us to the very big problem for pension plans today. Theoretical or expected returns used by pension funds today are no where close to what may be earned in reality.
60% Stocks + 40% Bonds
In order to better appreciate reality, one must first understand that most pension funds typically hold about 60% in stocks and 40% in bonds. The popularity of DBP pension funds really surged in the 1980s only to plateau in the 1990s. And during that time, a diversified portfolio with a roughly 60-40 split almost always produced a really nice return experience, which made everyone really happy.
And since all of today’s consultants cut their teeth during this period, or learned from people who worked during this period – then a balanced 60-40 split will do just fine for everyone today. After all, the 80s and 90s happened over 25 years ago. For any investment strategy to endure over that amount of time, it must be good.
Unfortunately, due to high expected rates of return, many pension funds are actually living in a fantasy world.
Case in point, consider the Expected Rate of Returns for:
- Ohio Police & Fire Pension Fund = +8.25%
- California Public Employees Retirement System = +7.50%
More conservative Expected Rates of Return can be found with:
- Nova Scotia Public Service Superannuation Plan = +6.50%
- Healthcare of Ontario Pension Plan = +6.34%
To the naked eye, these return expectations may appear quite reasonable – after all, we’ve always been told that over 100 years, the stock market always averages 10% annual returns or higher.
However, our regular readers know that it isn’t the stock market that worries us. Instead, it’s the bond market that should be keeping people awake at night.
Yet, even long-term stock market returns have a major flaws. For starters, the 10% number comes from the well-known Ibbotson/Morningstar studies which show that since 1926, the US stock market returned 10% annually.
With almost 90 years of history, this must be pretty darn accurate. However, if the Ibbotson study started 20 years earlier, the annual return declines to about 7% a year (source: Crestmont Research).
Think about this; a 90 year study shows a 10% annual return, but a 110 year study shows a 7% annual return. That’s a pretty big difference, and certainly throws doubt on what exactly is the long-term average.
Better still, Chart 1 (this page) shows the 10% average return is actually rarely achieved. Since 1900, 44% of the time the average 10-year return was < 8%.
Think about that one – whether you exceed an 8% return has effectively become a flip of the coin.
While that describes the challenges of using long-term returns from the stock market, our real concern is actually with the bond market. We’ve written, presented, interviewed and even web-casted many times before about the bubble in the bond market. It’s a very big deal, and when it bursts it will have cascading effects in every market, all over the world.
And considering that the average pension plan has 40% of its investments in the bond market – this is a BIG deal.
To fully appreciate how big of a deal this is, one needs to appreciate the complete picture of:
- expected rates of return
- stock market returns
- bond market returns
Since most pension plans hold about 60% in stocks and 40% in bonds, the pension plan’s total return is simply:
60% * Stock Market Return + 40%*Bond Market Return
As an example, if Stocks increased 10% and Bonds increased 5%, the pension plan’s total return = 60%*10% + 40%*5% = 8% Total Return.
Simple enough and in theory, that’s how it works. However, it’s reality that has us concerned.
To demonstrate exactly why pension funds are in trouble, note the above calculation. Due to the way the bond market works, it is fairly easy today to accurately predict the maximum return achievable – we’ll get to the minimum return in a moment.
Today, the yield or interest received on a 10 year US Government Treasury Bond is about 2%. This means if you buy the bond today, the best return possible is 2% a year for the next 10 years.
This is where our technical readers point out that bond investors also hold corporate bonds, junk bonds and emerging market bonds which will increase the yield further. As a result, even using the Barclay’s US Aggregate Bond Index as a different return proxy still only increases the yield to 2.2%. For this example, we’ll simply round down to 2%.
Putting it all together: below we show using a 6.5% Expected Rate of Return and a 2% Bond Market return, the pension plan would need a 9.50% return from the stock market to meet it’s return objective.
Most people would agree that over the long-run stocks will produce a 9.50% return.
This is true for a 6.50% Expected Rate of Return. Watch happens to the poor folks at the Ohio Police & Fire Pension Fund who has elected to use a 8.25% Expected Rate of Return.
Whoa – this pension plan needs a +12.45% return from the stock market to meet it’s return objective. And considering everyone swims in the same stock market, the probability of the Ohio Police & Fire Pension Fund meetings its return objectives are next to 0%.
And that’s assuming a +2% return from the Bond Market.
Next, and this is the most critical aspect of the pension mystery and why we are writing about it – what happens to pension funds when (not if), the bond bubble breaks?
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The full note can be read in the pdf below (link)
- IMF Rips Pandora's Box To Shreds, Demands Greek Debt Relief "Far Beyond What Europe Has Been Willing To Consider"
Earlier today, Reuters first leaked that just two weeks after the IMF released its first revised Greek debt sustainability report, one which the Eurogroup desperately tried to squash as it urged for a 30% debt haircut and came hours before the Greek referendum vote giving the Oxi camp hope and crushing Tsipras’ carefully laid plan to lose the vote and capitulate with integrity instead of having to capitulate a week later after 17 hours of “mental waterboarding” and have his reputation torn to shreds, the IMF would release a follow up report updating its view on the Greek economy which in just two short weeks of capital controls has utterly imploded.
Just like the first IMF report, which we correctly compared to the opening of a Pandora’s box, and with which the IMF also obliterated the careful plans of the Troika, so with this follow up the IMF effectively crushes the glideslope of the latest Greek bailout process barely scraped together on Monday morning and has torn Pandora’s box to shreds with the following summary assessment: “Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.”
Yes, debt relief… just the others’ debt: not the IMF’s, please.
So what just happened?
As of this moment the IMF is telling Greece that if nothing changes, it will die of cancer with 100% certainty; on the other hand the Eurogroup is telling Greece it will die of a heart attack also wih 100% certainty if anything changes.
Good luck with the choice.
Here are the report punchlines:
- Greece’s public debt has become highly unsustainable. This is due to the easing of policies during the last year, with the recent deterioration in the domestic macroeconomic and financial environment because of the closure of the banking system adding significantly to the adverse dynamics. The financing need through end-2018 is now estimated at Euro 85 billion and debt is expected to peak at close to 200 percent of GDP in the next two years, provided that there is an early agreement on a program. Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.
- … significant shortfalls in program implementation during the last year led to a significant increase in the financing need—by more than Euro 60 billion—estimated only a few weeks ago. As a result, debt-to-GDP by 2022 was projected to increase from an estimate less than a year ago of about 105 percent to a revised estimate of 142 percent, significantly above the target of 110 percent of GDP. This would under the November 2012 agreement have implied significant additional measures to reduce the face-value of debt.
- Greece cannot return to markets anytime soon at interest rates that it can afford from a medium-term perspective.
- The events of the past two weeks—the closure of banks and imposition of capital controls—are extracting a heavy toll on the banking system and the economy, leading to a further significant deterioration in debt sustainability relative to what was projected in our recently published DSA. A full and comprehensive revision of this debt sustainability analysis can only be done at a later stage, taking into account the deterioration in the economic situation as a result of the closing of the banking system and the details of policies yet to be agreed. However, it is already clear at this stage that there will be a significant increase in the financing need. The preliminary (mutually agreed) assessment of the three institutions is that total financing need through end-2018 will increase to Euro 85 billion, or some Euro 25 billion above what was projected in the IMF’s published DSA only two weeks ago, largely on account of the estimated need for a larger banking sector backstop for Euro 25 billion. Adjusting our recent DSA mechanically for these changes, and taking into account the agreed weaker growth path for the next two years, gives rise to the following main revisions:
- Debt would peak at close to 200 percent of GDP in the next two years. This contrasts with earlier projections that the peak in debt—at 177 percent of GDP in 2014—is already behind us.
- By 2022, debt is now projected to be at 170 percent of GDP, compared to an estimate of 142 percent of GDP projected in our published DSA.
- Gross financing needs would rise to levels well above what they were at the last review (and above the 15 percent of GDP threshold deemed safe) and continue rising in the long term.
In other words, for every week that the Greek capital controls remain , the total cost of the Greek bailout (the funding needs) increases by €10 billion.
Another way of putting it: with every passing day, another 1% of Greece’s €210 billion in bank loans becomes “non-performing.”
It gets worse: “these projections remain subject to considerable downside risk, suggesting that there could be a need for additional further exceptional financing from Member States with an attendant deterioration in the debt dynamics.”
- Medium-term primary surplus target: Greece is expected to maintain primary surpluses for the next several decades of 3.5 percent of GDP. Few countries have managed to do so. The reversal of key public sector reforms already in place— notably pension and civil service reforms—without yet any specification of alternative reforms raises concerns about Greece’s ability to reach this target. Moreover, the failure to resist political pressures to ease the target that became evident as soon as the primary balance swung into surplus also raise doubts about the assumption that such targets can be sustained for prolonged periods. The Government and its European partners need to address these concerns in the coming months.
- Growth: Greece is still assumed to go from the lowest to among the highest productivity growth and labor force participation rates in the euro area, which will require very ambitious and steadfast reforms. For this to happen, the Government— which has put on hold key structural reforms—would need to specify strong and credible alternatives in the context of the forthcoming program discussions.
- Bank support: the proposed additional injection of large-scale support for the banking system would be the third such publicly funded rescue in the last 5 years. Further capital injections could be needed in the future, absent a radical solution to the governance issues that are at the root of the problems of the Greek banking system. There are at this stage no concrete plans in this regard.
The conclusion:
The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date—and what has been proposed by the ESM. There are several options. If Europe prefers to again provide debt relief through maturity extension, there would have to be a very dramatic extension with grace periods of, say, 30 years on the entire stock of European debt, including new assistance. This reflects the basic premise that debt cannot be assumed to migrate back onto the balance sheet of the private sector at interest rates close to the current AAA rates before debt levels have been brought to much lower levels; borrowing at anything but AAA rates in the near term will bring about an unsustainable debt dynamic for the next several decades. Other options include explicit annual transfers to the Greek budget or deep upfront haircuts. The choice between the various options is for Greece and its European partners to decide.
Actually, it is no longer Greece’s: Greece is about to hand over its sovereignty to Brussels on a silver platter. The choice is now all up to the European “partners” to decide.
Full report (pdf)
- "Everybody Benefits By Avoiding Defaults": Citi Explains How To Goalseek Student Loan ABS Ratings
We last checked in on America’s $1.2 trillion student debt bubble a little over two weeks ago.
At the time, we noted that Moody’s had just placed 106 tranches in 57 securitizations backed by student loans on review for downgrade. It was the second such warning Moody’s had issued in the space of just 3 months.
Meanwhile, Fitch was getting worried as well and had also moved to place dozens of tranches in FFELP-backed paper on watch. Our takeaway: The fact that Moody’s and Fitch are beginning to reevaluate student loan ABS is indicative of an underlying shift in the market. Between the proliferation of IBR and the Department of Education’s recent move to open the door for debt forgiveness in the wake of the Corinthian collapse, financial markets are beginning to see the writing on the wall. Perhaps Bill Ackman said it best: “there’s no way students are going to pay it all back.”
Moody’s concerns revolve around the likelihood of rising defaults attributable to “low payment rates … persistently high volumes of loans in deferment and forbearance, and the growing popularity of the Income-Based Repayment and extended repayment programs.” We’ve discussed all of the above at length and have taken a particular interest in IBR, which we recently dubbed “the student loan bubble’s dirty little secret.”
Facing shifting market dynamics, Moody’s last week called for comments on its methodology for rating FFELP-backed paper:
Moody’s Investors Service has published a Request for Comment (RFC) proposing changes to the cash flow assumptions the agency uses in its approach to rating US Federal Family Education Loan Program (FFELP) securitizations.
Low prepayment rates, persistently high rates of deferment and forbearance, and the growing use of IBR and other similar programs have increased the risk that some tranches will not pay off by their final maturity dates, which would trigger an event of default for the securitizations.
Since the recession, many student loan borrowers have struggled to make their monthly payments. This has resulted in historically low rates of voluntary prepayments, high volumes of loans in deferment and forbearance, and the growing popularity of IBR and other similar programs.
“These trends have persisted despite the economic recovery and improving employment picture, and some levels of deferment, forbearance and IBR will be sustained through the life of the FFELP loan pools. Some repayment plans can extend loan repayment periods significantly, from the standard 10-year term for non-consolidation loans.”
And here’s more from Bloomberg:
Top-rated securities backed by U.S. government-guaranteed student loans face cuts to as low as junk that may further roil the market for the debt, according to Citigroup Inc…
In terms of ratings on the bonds, Moody’s said that any cuts could lower bonds to either low investment grades or speculative rankings. Fitch said in a June 26 statement that it could also lower top-rated debt to junk as a result of its review over the next three to six months.
“Many triple-A investors would not be able to tolerate downgrades, and barring a cure of the possible maturity default, downgrades would present a significant market disruption,” Kane and Belostotsky wrote in the report.
Rating analysts are likely to attach little-to-no value for future buybacks from a non-investment grade company” such as Navient, the Citigroup analysts wrote.
Got that? No? That’s ok. Here’s a summary. Some of these student loan-backed deals are going to experience technical defaults in the collateral pool because people aren’t paying off the loans in time, which means Moody’s needs to downgrade some of the tranches, but downgrades would be bad, and Moody’s can’t use projected future servicer buybacks as an excuse not to downgrade because the servicers aren’t rated as highly as the securitizations themselves (which is of course absurd and suggests the paper never should have been investment grade in the first place). Therefore, someone needs to find another way to make this paper look less risky, and the best option may be to “cure” maturity default (i.e. extend the maturities). Here’s Citi with more on how Moody’s might go about goal seeking its FFELP-backed ABS ratings:
Controversy endures in the FFELP ABS market amidst another rating agency voicing concern about breaching legal final maturities and some secondary selling activity.
The rating agencies assign ratings based on legal final maturity date. Without additional sponsor buybacks, certain SLMA classes are likely to extend beyond the legal final maturity if they continue paying at a slow rate. Rating agency analysts are likely to attach little value for future buybacks from the double-B rated Navient, thus the cash flow delays that are inherent in FFELP structures are problematic from a ratings perspective.
Yes, “cash flow delays” in the collateral pool are definitely “problematic” and really, it’s not a problem that should be “solved” by tinkering with ratings methodology, because after all, if you just adjust the methodology instead of downgrading the securitizations… well, then what good is the rating? Citi continues:
Ironically, it was the rating agencies that required the sponsor to initially assign presently defined legal final maturities. Yet the numerous moving parts endemic to FFELP student loans make setting prepayment assumptions and setting legal maturity dates a virtually impossible task. At cutoff, almost every deal had about 50% of the loans in-school. The pricing prepayment estimates had to incorporate numerous moving parts, including the borrower’s graduation date, payment type (conventional, graduated payment or income-based payment) loan maturity and proportions of loans in grace, deferment or forbearance. In our view, the legal final maturity is meaningless.
See how that works? There are a lot of factors that make it “virtually impossible” to figure out when students might pay back their loans, so really, any estimate of when ABS investors might get their principal back is “meaningless,” and because one can’t really default on a loan with an indeterminate maturity date, “curing” the legal maturity problem, and thus eliminating the need for downgrades, is as simple as “amending” the bond indentures. “The sponsor could approach bondholders to formally extend the legal maturity date,” Citi happily notes.
What’s clear from the above is that billions in student loan-backed paper probably should be downgraded because as Citi correctly notes, there’s really no telling when or even if any of these loans are going to be paid off given the proliferation of IBR and the prevalence of deferement and forbearance.
But rather than risk a “market disruption,” Citi thinks it might be better for Moody’s to consider doing away with definitive maturity dates because in the end (and this is the actual subheader for Citi’s concluding paragraph), “everyone benefits by avoiding default.”
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- IMF May Walk Away From Greek Bailout
Earlier today, a “secret” IMF paper surfaced in which the Fund reiterates the need for EU creditors to writedown their holdings of Greek debt.
According to Reuters, who broke the story after reviewing the document, “the updated debt sustainability analysis was sent to euro zone governments late on Monday, and argues that ‘the dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date – and what has been proposed by the ESM.'” The IMF goes on to say that Greece’s debt will likely hit 200% of GDP over the next two years and will sit at a still-elevated 170% of output in 2022.
As a refresher, here’s a (very) brief recap of the IMFs position on haircuts for Greece:
A divide between the IMF and Europe (read: Germany), regarding writedowns on Greece’s debt to the EU has been brewing for quite some time and recently returned to the international spotlight when, a few months back, the Fund indicated debt relief was a precondition for its participation in any further aid for Athens. More recently, the IMF released a report on Greece’s debt sustainability just prior to the referendum. The timing appeared to be strategic and may have helped secure the “no” vote for Tsipras. Today, another “secret” IMF document on the sustainability of Greece’s debt burden has surfaced and not surprisingly, the Fund is once again pounding the table on a haircut.
Although Tsipras had resisted IMF involvement in the country’s third program, Germany made it clear that the Fund’s participation was mandatory. Now, FT says Chrsitine Lagarge may consider pulling out of the deal in light of the fact that Athens’ debt is not seen as sustainable. Here’s more:
The International Monetary Fund has sent its strongest signal that it may walk away from Greece’s new bailout programme, arguing in a confidential analysis that the country’s debt is skyrocketing and budget surplus targets set by Athens cannot be achieved.
“Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far,” the memo reads. Under its rules, the IMF is not allowed to participate in a bailout if a country’s debt is deemed unsustainable and there is no prospect of it returning to private bond markets for financing. The IMF has bent its rules to participate in previous Greek bailouts, but the memo suggests it can no longer do so.
IMF involvement in Greece’s rescue has been critical to a German-led group of eurozone hardliners who believe the European Commission, one of the other Greek bailout monitors, is not sufficiently rigorous in its evaluations.
The issue became one of the major sticking points during all-night negotiations between Alexis Tsipras, the Greek prime minister, and Angela Merkel, his German counterpart, at the weekend, with Mr Tsipras repeatedly refusing to accept IMF participation in a new bailout.
According to EU officials, Ms Merkel stood firm on the issue, telling the Greek premier there would be no bailout — and therefore “Grexit” from the eurozone — without a formal request made to the IMF for participation in a new programme. The final bailout deal states that “Greece will request continued IMF support” once its current IMF programme expires.
What happens if the IMF walks away you ask? Well, the entire “deal” could fall apart, as the Fund is expected to put up a not insignificant portion of the bailout money, and in the absence of that funding, the gap would have to be filled with “privitization proceeds” which the IMF itself has projected will come to just €2 billion over the next three years. Furthermore, German lawmakers, already exasperated with the protracted negotiations, would likely pull their support altogether. Here’s FT again:
If the IMF were to walk away from the Greek programme, it could cause significant political and financial problems for Berlin and other eurozone creditors. Without the IMF’s imprimatur, German officials have said they would struggle to win approval for any new bailout funding in the Bundestag. German MPs must approve both the reopening of new talks and the final terms of the third bailout.
In addition, an EU official said that of the €86bn in Greek financing requirements, the European Stability Mechanism — the eurozone’s €500bn bailout fund — was expected to put up only €40bn-€50bn.
The current IMF programme, which still has €16.4bn in undisbursed funds and runs through March 2016, is expected to make up some of the difference, and eurozone officials had been assuming a follow-on IMF programme would contribute as well.
Any shortfall would have to be made up through Greek privatisation proceeds, which have repeatedly fallen short of expectations, or through Greek borrowing on the bond market, which has dried up since the Syriza-led government took power in Athens in January — and which the IMF memo said was highly unlikely to materialise.
“Greece cannot return to markets anytime soon at interest rates that it can afford from a medium-term perspective,” the IMF wrote.
So in addition to a parliamentary revolt and uncertainty surround urgently needed bridge financing, Greece also faces the possibility that the IMF may walk away, throwing the entire “deal” into question. Here’s The Telegraph’s Ambrose Evans-Pritchard summing up the ramifications of the IMF’s analysis and reinforcing our contention that the US (and its IMF veto power) are pulling the strings behind the scenes and orchestrating “leaks” at opportune times.
The findings are explosive. The document amounts to a warning that the IMF will not take part in any EMU-led rescue package for Greece unless Germany and the EMU creditor powers finally agree to sweeping debt relief.
This vastly complicates the rescue deal agreed by eurozone leaders in marathon talks over the weekend since Germany insists that the bail-out cannot go ahead unless the IMF is involved.
It claimed that capital controls and the shutdown of the Greek banking system had entirely changed the picture for debt dynamics, an implicit criticism of both the Greek government and the eurozone authorities for letting the political dispute get out of hand.
Debt forgiveness alone would not be enough. There would also have to be “new assistance”, and perhaps “explicit annual transfers to the Greek budget”.
This is the worst nightmare of the northern creditor states. The term “Transfer Union” has been dirty in the German political debate ever since the debt crisis erupted in 2010.
The backdrop to this sudden shift in position is almost certainly political. It follows an intense push for debt relief over recent days by the US Treasury, the dominant voice on the IMF Board in Washington.
Should the Fund threaten to pull its support, Germany would face a tough decision: remain belligerent in the face of pressure from IMF (and tacitly from the US), or concede to writedowns which could open the door for Italy, Spain, and Portugal to demand debt relief.
Imf Greece Sustainability Analysis
- Systemic Risks Surge As Correlation Among Stocks Shoots Higher
Despite everyone saying "it's a stock-picking market" (notably one of Cliff Asness' pet peeves) recent co-movements in global equities suggests once again that there is just one factor driving returns as systemic codependence surges…
Over the past several weeks, correlations among stocks have been increasing which makes it increasingly difficult for stock pickers to outperform. The most dramatic example of this is happening in Europe. The 20-day moving average correlation of European equities stands at 82%, the highest level since July 2012, which not coincidently was another period when the European economic crisis was escalating. The 65-day moving average correlation has increased to 69%, which is the highest level since the end of 2012 and the 200-day moving average also increased over 60% to 62%. This is the highest level since June 2013.
In North America, the 20-day moving average correlation has also shot above 60% for the first time since April and to the highest level since January. The 65-day moving average correlation has increased recently from 46% to 51%.
Asia-Pacific remains the best environment for stock pickers. However, even there, we have seen the 20-day moving average correlation increase to 55% from a low of 34% in June.
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And forward-looking market implied estimates of correlation suggest this will remain the case…
Charts: Bloomberg
- Trump Tramples Trends, Dominates National Poll For Second Week
Despite losing marquee PGA and LPGA events, a bankruptcy at his Puerto Rico golf course, and the lowest ratings for Miss USA pageant ever, Donald Trump has topped the rest of the GOP presidential field in polls for the second time in as many weeks…
Among voters who identify either as Republicans or independents and who plan to vote in their states’ Republican primaries or caucuses, 17 percent named Trump as their first choice for the GOP nomination in the 2016 presidential race.
Trump was followed by former Florida Gov. Jeb Bush (14 percent), Wisconsin Gov. Scott Walker (8 percent), Texas Sen. Ted Cruz (6 percent), Florida Sen. Marco Rubio (5 percent), retired neurosurgeon Ben Carson (4 percent), Kentucky Sen. Rand Paul (4 percent), former Arkansas Gov. Mike Huckabee (4 percent) and New Jersey Gov. Chris Christie (3 percent).
Receiving less than 2 percent each were former Texas Gov. Rick Perry, former Pennsylvania Sen. Rick Santorum, Louisiana Gov. Bobby Jindal, businesswoman Carly Fiorina, Ohio Gov. John Kasich, South Carolina Sen. Lindsey Graham, and former New York Gov. George Pataki.
As the Suffolk University/USA Today poll also showed, among self-identified conservative or very conservative Republican likely voters, Trump led Bush 17 percent to 11 percent, with all other candidates in single digits.
However, among voters of all parties, Trump’s negatives were the highest, at 61 percent.
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Finally, Trump appears to be the most-searched Presidential candidates in the last six months in several regions…
“United” States of America indeed.
- Exclusive: The Inside Story Of How Deutsche Bank "Deals With" Whistleblowers
Back in May we brought you “The Real Story Behind Deutsche Bank’s Latest Book Cooking Settlement,” in which we detailed the circumstances that led the bank to settle claims it mismarked its crisis-era derivatives book to the tune of at least $5 billion.
Deutsche Bank settled the issue with the SEC for the laughable sum of $55 million a few months back.
The SEC inquiry was prompted, in part, by Dr. Eric Ben-Artzi who was fired from Deutsche Bank in 2011 after expressing his concerns about the bank’s valuation methodology.
What follows is the real, play-by-play account of Ben-Artzi’s dismissal from Deutsche Bank, told in its entirety for the first time.
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Your Services Are No Longer Needed
On November 7, 2011 Dr. Eric Ben-Artzi walked into a conference room at Deutsche Bank’s U.S. headquarters in lower Manhattan. Seated at a conference table was Sharon Wilson from the Human Resources department. Lars Popken, DB’s head of market risk methodology and Ben-Artzi’s manager, was videoconferenced in.
Ben-Artzi had just returned from FMLA paternity leave and although things had gotten tense just prior to his time off, he certainly didn’t expect what came next. Ben-Artzi’s job, Popken said, was being moved to Germany.
Ben-Artzi thought back to the summer when, in response to rumors that some U.S. positions were likely to be moved overseas, he had mentioned he’d be happy to relocate to Berlin. No such luck. Minutes later, he was terminated and Wilson hurriedly ushered him out of the building. Ben-Artzi wasn’t even allowed to collect his personal belongings.
The (Brief) Backstory
The events that ultimately led Deutsche Bank to boot Ben-Artzi from 60 Wall without so much as a cardboard box for his pictures, pens, and legal pads date back to 1998 and for the sake of brevity, we won’t recount the whole story but encourage anyone interested in the entire narrative to review it here.
In short, Deutsche Bank was heavily involved in every single aspect of the market for third-party asset backed commercial paper in Canada prior to the financial crisis. They had an equity stake in the parent of at least two issuers, they served as a liquidity provider on over half of all Series A commercial paper issued by Canadian conduits, they sold the paper through their securities division, and perhaps most importantly, they structured the programs (e.g. LSS deals) that backed the paper. But in the simplest possible terms: Detusche Bank was deeply embedded in a market that collapsed in August of 2007.
As mentioned above, the events that unfolded between June and October of that year are a story in and of themselves, but suffice to say that the market for commercial paper issued by the Canadian conduits imploded on August 13, 2007 (BNP’s move to freeze three ABS funds four days earlier sparked a panic) imperiling retail investors, small- to mid-size corporations, and pension funds and triggering a massive (and incredibly messy) restructuring effort.
Most of this drama had ended by the time Eric Ben-Artzi arrived at Deutsche Bank in June of 2010 and the former Goldmanite likely had no idea what he was about to uncover when he began to look at how Deutsche went about accounting for their exposure to the Canadian conduits during the crisis.
Deutsche Bank played an outsized role in the market for LSS deals in the years leading up to the crisis. In fact, Deutsche Bank accounted for between $120 and $130 billion of the $200 billion (notional) in total LSS deals between 2005 and 2007.
When Ben-Artzi, who has a PhD in applied mathematics from NYU Courant, began to look at how the bank was valuing the gap option on the LSS trades, he made a rather disconcerting discovery.
As a refresher, here’s a simple explanation of the gap option problem with LSS deals:
The laughable thing about LSS deals was that they were effectively non-recourse, meaning that the protection seller was allowed to sell protection on a notional amount that was multiples of the collateral posted, but in the event the market moved against the seller enough to chew through that collateral and a margin call was made, that seller could just say “to hell with it” and walk away from the deal. More simply, I, the seller, insure $100 million in debt, but only post $10 million up front. If there’s a credit market meltdown and my $10 million is no longer sufficient and you, the protection (insurance) buyer, call me looking for more money to compensate you for the elevated risk, I can politely tell you to piss off. The risk that I tell you to piss off is called “gap risk.”
To be a bit more specific, the seller of protection (in this case the Canadian conduits) had the option to walk away from the deal without posting additional collateral (this is the “gap option”), and the value of that option changed depending on a number of factors including credit spreads and correlation.
As it turns out, Deutsche Bank began making these trades without even having a model to value the gap option — standard models (e.g. a copula model) cannot be used for LSS trades. Not only that, the bank’s credit correlation desk didn’t even bother to consult the market risk methodology department (where Ben-Artzi worked and which was responsible for verifying the appropriateness of valuation models) and instead decided to simply discount the value of the trades by 15%. Sensing that this was likely inadequate, Deutsche briefly attempted to determine the actual value of the gap option on the trades, but when the numbers came back looking rather nasty, the bank did what any pre-crisis sell side firm worth its salt would do: they scrapped that model and went with something that made the results look more favorable. In this case, Deutsche simply set up the equivalent of a loan loss reserve for the entire book and called it a day. At the time (i.e. between 2007 and 2009), other players in the industry valued the gap option at between 2% and 8% of notional. Taking the midpoint there, and taking the midpoint between Deutsche’s estimated $110 and $120 billion in notional exposure, the value of the gap option for the bank would have been nearly $6 billion.
How Deutsche Bank Deals With ‘Problem’ Employees
Sometime around October of 2010, Ben-Artzi began to ask questions, starting with the Director and Head of Risk Research and Development. Discussions with management continued into the new year until finally, fed up with what he perceived to be an attempt to sweep the issue under the rug, Ben-Artzi contacted the SEC on March 7, 2011 and called Deutsche Bank’s employee hotline four days later.
On March 17, Ben-Artzi met with Robert Rice, then Deutsche’s Head of Governance, Litigation & Regulation for the Americas who said there was an ongoing investigation into some of the issues Ben-Artzi had raised. Later that month, Ben-Artzi suffered through a lengthy meeting with Rice and William Johnson, Deutsche’s outside counsel.
What’s important to note here is that Bob and Bill (as Rice and Johnson are known to their friends) weren’t exactly strangers. As it turns out, they both worked in the U.S. Attorney’s Office for the Southern District of New York with Mary Jo White and Robert Khuzami.
After his first stint in public service, Khuzami went on to become General Counsel to the Americas at Deutsche and by the time Ben-Artzi reported his concerns to the government in 2011, Khuzami had moved on to become Director of Enforcement for the SEC. Mary Jo White would of course become SEC Chair in 2013, and almost two years to the day after Ben-Artzi first met with Rice, Bob would be named Chief Counsel to White.
As such, Ben-Artzi was (and still is) essentially squaring off against a tight-knit faction of former attorneys for the Southern District of New York who have managed to turn the SEC into an extension of Deutsche Bank, much as Goldman has turned the Fed into an extension of the Vampire Squid. As an aside, Deutsche’s General Counsel Richard Walker worked at the SEC for a decade and served as Director Of Enforcement from 1998 until his move to join the bank in 2001.
On May 12, 2011, Ben-Artzi sat down to discuss the issue further with Rice and Matt Spaulding (then global head of finance for Deutsche). Also in attendance were two employees from the corporate and investment bank, Stefan Schafer and Andreas Kodell, both of whom had come over from London.
Maybe it was the jet lag, or maybe it was the fact that Ben-Artzi was essentially threatening to expose a multi-billion dollar “error” in the way the bank was valuing its LSS book, but whatever the case, Schafer and Kodell weren’t happy. The two proceeded to give Ben-Artzi a rather sharp tongue-lashing for questioning the bank’s valuation of the trades.
In the process, Schafer and Kodell did shed some light on Deutsche’s previous attempts to evaluate their exposure to the gap option. Unfortunately, they were unable to explain why Ben-Artzi’s calculations were incorrect and Spaulding was similarly unable to justify the bank’s initial use of a 15% haircut or explain how the subsequent decision to adopt a reserve against the trades was in any way sufficient. Lars Popken, who was also in attendance, remained surprisingly quiet.
On May 23, in a meeting that included Sharon Wilson from HR, Rice said Deutsche Bank would be providing no further information into how it valued the trades and suggested Ben-Artzi contact an SEC attorney.
At the end of that month, Popken assured Ben-Artzi that despite the controversy, no retaliatory action would be taken by the bank.
Ben-Artzi began his leave of absence on June 30 and returned to work on October 19.
Less than three weeks later, he was fired.
* * *
Epilogue
If ever there was a story that exemplified virtually everything that is wrong on Wall Street surely this is it. Here we had one of the largest banks in the world by assets agreeing to facilitate leveraged bets in synthetic credit by Canadian special purpose entities which had virtually no equity whatsoever on their books. Deutsche knew the collateral for these bets came from the sale of commercial paper to clueless retail investors and pension funds, and not only did the bank not care, Deutsche actually encouraged the conduits to pile leverage on top of the posted collateral, creating an enormous amount of risk not only for the holders of the commercial paper, but for the bank itself. Deutsche then proceeded to guarantee the commercial paper in the event the market ceased to function only to refuse payment to noteholders when the market finally did collapse in August of 2007, leaving retail investors and pension funds out in the cold.
Meanwhile, the bank intentionally underreported its exposure by systematically refusing to model the gap option built into the trades and when someone honest finally came along and called them on their obfuscation, they summarily dismissed him.
Of course the punchline here is that convincing the SEC to acknowledge the sheer absurdity of the entire ordeal has been, and will continue to be well nigh impossible for the following reasons: 1) Robert Khuzami, the agency’s head of enforcement when Ben-Artzi’s complaint was filed, was Deutsche’s General Counsel to the Americas the entire time the bank was mismarking its LSS book, 2) Bob Rice, the SEC’s current Chief Counsel, was Deutsche’s Head of Governance, Litigation & Regulation during Ben-Artzi’s tenure at the bank, 3) the current SEC Chair, Mary Jo White, goes way back with both Rice and Khuzami as well as with Bill Johnson, Deutsche’s outside counsel at time of Ben-Artzi’s complaint, and 4) Deutsche’s current General Counsel worked at the SEC for 10 years, including a stint as chief enforcement officer.
In the end, all the boxes are checked. This story truly has it all: risky derivatives, leverage, the destruction of retail investors’ savings, hidden risk, the termination of honest employees, and the revolving door between Wall Street and the U.S. government.
- Beware: The "Made In China" Global Recession Is Coming, Morgan Stanley Warns
The next global recession may come with a label that reads “made in China” Morgan Stanley’s Head of EM Ruchir Sharma, says.
As regular readers are no doubt aware, decelerating economic growth in China has been a major drag on worldwide demand and is one of the main reasons why global trade is in the doldrums.
Flagging export growth (June’s “strong” 2.1% showing notwithstanding), a painful transition from an investment-led model to a consumption and services-driven economy, and an industrial production-sapping war on pollution have all conspired to bring the Chinese economic growth engine to a virtual halt, with some independent estimates putting output as low as 3.8% (which would constitute a blistering pace in the West but might as well be 0% if you’re China), far below the “official” headline figure which you can bet will remain at or above the Politburo-mandated 7%.
Here’s Bloomberg with more from Sharma on the “Made In China” recession:
Forget about all the shoes, toys and other exports. China may soon have another thing to offer the world: a recession.
That is the prediction from Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, who says a continuation of China’s slowdown in the next years may drag global economic growth below 2 percent, a threshold he views as equivalent to a world recession. It would be the first global slump over the past 50 years without the U.S. contracting.
“The next global recession will be made by China,” Sharma, who manages more than $25 billion, said in an interview at Bloomberg’s headquarters in New York. “Over the next couple of years, China is likely to be the biggest source of vulnerability for the global economy.”
While China’s growth is slowing, the country’s influence has increased as it became the world’s second-largest economy. China accounted for 38 percent of the global growth last year, up from 23 percent in 2010, according to Morgan Stanley. It’s the world’s largest importer of copper, aluminum and cotton, and the biggest trading partner for countries from Brazil to South Africa.
Yes it is, which explains why, as we noted on Monday evening, commodity producers which levered up in anticipation of a perpetual bid from China are now buried under hundreds of billions in debt amid slumping prices and a global deflationary supply glut.
And while the country’s shifting economic model undercuts global trade, the sharp decline in Chinese stocks poses a threat to the country’s presumed new engine for growth: the consumer.
China’s $6.8 trillion equity market roiled global investors over the last few weeks after a yearlong rally accompanied by record borrowing and surging valuations ended in a bear market.
“What happened in China last week was so significant in that for the first time, you’ve got this sign that something is out of control,” Sharma said. “Confidence damage is going to last for a while.”
Indeed it will, and as we’ve argued on several occasions of late (here for instance), the equity market sell-off has caused irreparable damage to retail investors’ collective psyche, which could well have knock-on effects for consumer spending.
This means that just as the world begins to come to terms with the new Chinese reality wherein shifting priorities and more importantly, shifting demographics (the fabled “Lewis Turning Point“), transfer the burden of economic growth from the industrial sector to the consumer, the propensity for everyday Chinese citizens to spend may be constrained by the psychological effects of watching trillions in margin-fueled paper gains vanish into thin air.
So yes, Mr. Sharma, we agree with your assessment – we only hope you realize how right you are and position your clients accordingly.
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- What's Wrong With Our Monetary System (And How To Fix It)
Submitted by Adrian Kuzminski via Club Orlov blog,
Something's profoundly wrong with our global financial system. Pope Francis is only the latest to raise the alarm:
“Human beings and nature must not be at the service of money. Let us say no to an economy of exclusion and inequality, where money rules, rather than service. That economy kills. That economy excludes. That economy destroys Mother Earth.”
What the Pope calls “an economy of exclusion and inequality, where money rules” is widely evident. What is not so clear is how we got into this situation, and what to do about it.
Most people take our monetary system for granted, and are shocked to learn that the government doesn't issue our money. Almost all of it is created by loans made “out of thin air” as bookkeeping entries by private banks. For this sleight-of-hand, they charge interest, making a tidy profit for doing essentially nothing. The currency printed by the government – coins and bills – is a negligible amount by comparison.
The idea of giving private banks a monopoly over money creation goes back to seventeenth century England. The British government, in a Faustian bargain, agreed to allow a group of private bankers to assume the national debt as collateral for the issuance of loans, confident that the state would be able to service the debt on the backs of taxpayers.
And so it has been ever since. Alexander Hamilton much admired this scheme, which he called “the English system,” and he and his successors were finally able to establish it in the United States, and subsequently most of the world.
But money is too important to be left to the bankers. There is no good reason to give any private group a lucrative monopoly over the creation of money; money creation should be the public service most people mistakenly believe it to be. Further, privatized money creation allows a few large banks and financial institutions not only to profit by simply making bookkeeping entries, but to direct overall investment in the economy to their corporate cronies, not the public at large.
Ordinary people can get the financing they need only on burdensome if not ruinous terms, leaving them as debt peons weighed down by mortgages, student loans, auto loans, credit card balances, etc. The interest payments extracted from these loans feed the private investment machine of Wall Street finance, represented by the ultimate creditor class: the notorious “one percenters.”
There are two main critics of our privatized financial system: goldbugs and public banking advocates. The goldbugs would return us to a gold standard, making gold our currency. The problem is that it would become almost impossible to borrow money since the amount of gold which could be put into circulation is relatively miniscule and inelastic. They is no way easily to expand the supply of gold in the world
Credit—the ability to borrow money—is vital to any economy. If we cannot borrow against the future for capital investment—roads and infrastructure, housing, businesses, hospitals, education, etc.—then we cannot fund essential services. To that end, we need an elastic money supply.
Public banking advocates—like Stephen Zarlenga and Ellen Brown–appreciate the need for credit. Their aim is to transfer the monopoly on the creation of credit from private to public hands. Unfortunately, there is no guarantee that this form of "progressive" state finance would be any better than private finance.
If we had a truly democratic government actually accountable to the public, such a system might work. But in fact governments in the United States and most developed countries are oligarchies controlled by special interests. A centralized public bank—without a political revolution–would likely favor government contractors and continue to squeeze borrowers for interest payments, now supposedly directed to “the public good.”
This is curiously reminiscent of the system in the old Soviet Union and today's China, where a political nomenklatura ends up calling the shots and enriching itself. Our current system of centralized private finance, as well as the "progressive" proposal of centralized public finance, are no more than twin versions of top-down financial control by an elite.
Fortunately, there is another model available. There is a long tradition in America, beginning with colonial resistance to “the English system,” and continuing with anti-federalists, Jeffersonians, Jacksonians, and post-Civil war populists. This tradition opposed any kind of centralized banking in favor of some kind of decentralized issuance of money.
The idea they developed is to prohibit any kind of central bank—public or private—and instead have money issued exclusively locally on the basis of good collateral to individuals and businesses. It's a grassroots, ground-up approach. Priority is given to local citizens and businesses, who can get interest-free loans from local public credit banks to finance what they need to do.
Such a system would have to be publicly regulated to ensure fair and uniform standards of lending at the local level. It would, in that sense, be a public banking system. The absence of a centralized issuing authority, however, would prevent any concentration of financial power, public or private.
Any top-down system of financial control – private or public – presupposes some kind of control by elites, that is, some kind of central planning, whether in corporate board rooms or in the offices of government agencies, or some combination of both. The historical record suggests that such top-down decision-making is inevitably self-serving, distorted, and socially counter-productive.
Indeed, whether public or private, it is the love of money empowered by centralized finance which creates the “economy of exclusion and inequality” which Pope Francis decries.
The decentralized system of populist finance would operate with no central planning. Instead, countless local decisions about lending and credit-worthiness would function as a genuine “hidden hand” of finance, one which would be self-regulating. Here the love of money would find no way to leverage its power. Instead it would be dispersed among the general population, as it should be, without burdensome interest charges, to the benefit of all.
- Crude Extends Gains After API Reports Large Drop In Inventories
After a brief respite of 2 weeks of inventory builds, API just reported a major 7.3 million barrel inventory draw (far bigger than the 1.2mm barrel expected) and the biggest since July 2014…
WTI Crude has jumped back above $53 on the news…
Charts: Bloomberg
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