Today’s News June 17, 2015

• Goldman Asks, Is The Bundesbank "Ominously" Trying To Sabotage The ECB's QE?

  When the sell-off in German Bunds first got going, it looked like a temporary squeeze, with the largest position in the market – the ECB QE trade – coming under pressure after much weaker-than-expected Q1 GDP on 4/29.

  

   

  However, as (Draghi mouthpiece) Goldman notes, there is something more than supply dynamics or ECB communications going on, as the Bundesbank (Buba) buying has fallen short of its purchases (in average maturity terms) from the very beginning. Goldman warns, ominously, this kind of signal – from the key hawk in the Eurosystem – has the potential to undercut the credibility of ECB QE, since it weakens the portfolio balance channel.

  *  *  *

  Goldman previously argued that the weak activity reading rattled a market that had been operating on a core thesis of strong US growth. The resulting uncertainty caused Bund yields and EUR/$ to rise, with the DAX also selling off on the day. Since then, something more ominous has come into play…

  One clue has been the communications ping pong from the ECB. On May 18, Executive Board member Coeure said “the rapidity of the reversal in Bund yields is worrisome,” citing it as another example of “extreme volatility in global capital markets.”

   

  ECB President Draghi sent the opposite message on Jun. 3, saying “one lesson is that we should get used to periods of higher volatility,” followed on Jun. 10 by Executive Board member Coeure stating that “the ECB does not intend to counter [Bund] volatility in the short term."

   

  Goldman took a dim view of all this in our last FX Views, even if a charitable interpretation is that President Draghi basically sent a dovish message on Jun.10 and simply didn’t want to signal "activism" in the face of short-term volatility.

   

  After all, one goal of ECB QE ought to be to make Europe’s safe haven asset (Bunds) expensive, so that investors get pushed into risky assets like equities and the Euro periphery.

   

  If there is ambivalence, it sends a harmful message to markets that, after all, are still new to ECB QE. This might be one reason why EUR/$ has held up, even as US data (payrolls, retail sales) have picked up.

   

  

   

  There is something more than supply dynamics or ECB communications going on, something that has the potential to undercut the credibility of ECB QE.

   

  As Goldman explains below, the Bundesbank has reduced the weighted-average maturity of its Bund purchases from 8.1 years in March to 5.7 in May, in contrast to the Eurosystem as a whole where this number has stayed around 8.0 years.

  It's not like the Bundesbank is not spending its money (as we noted previously, in fact May – just as ECB telegraphed to its most valuable clients – saw purchases soar)..

  

   

  but it is what it is spending it on, not how much that matters…

  The ECB publishes monthly data for the outstanding stock of bonds bought under its QE program, together with a weighted average for the corresponding number of years to maturity. We use these data to calculate the average maturity of monthly buying by the Eurosystem (Exhibit 3).

   

  

   

  This shows that the average maturity of ECB bond buying is around 8.0 years, in line with what Executive Board member Coeure said in his May 18 speech. However, while Italy and Spain see purchases that have an average maturity above that of the outstanding debt stock, Bundesbank buying has fallen short from the very beginning.

   

  There are obviously many explanations for what is going on (see below).

   

  But this kind of signal – from the key hawk in the Eurosystem – has the potential to undercut the credibility of ECB QE, since it weakens the portfolio balance channel.

   

  After all, it was supposed to be low yields in core Europe into risk assets. If those yields now rise and become more volatile, such portfolio effects will be lessened.

  *  *  *

  What Goldman is implicitly suggesting is:

  Buba is intentionally focusing on shorter-dated maturities, unwilling to throw away its cash on the high prices that bond holders will demand for high cash coupon debt (when in fact the central bank should be price agnostic if it had truly "got ECB religion")

  So is Buba really sabotaging Draghi?

  Or is this a warning to Weidmann to stop being stingy with the bond buying?

  Remember also, Goldman needs low-ish bond yields and low-ish volatility for its QE-driven weak EUR trade to pay off…

  It remains our view that fundamentals will ultimately take EUR/$ lower in line with our forecast. That said, we see recent Bund volatility and what it means for the credibility of ECB QE as the first material challenge to our view.

  So there's ulterior motives for this 'warning' whereever we look.

  *  *  *

  Perhaps it is also the timing of such a note that implies a louder warning… with Grexit around the corner, those "expensive" long-dated Bunds are going to be even more pricey when Buba needs to step in and buy to prove contagion is not there.

  

  

  
  
  

  

• How To Find What Country A Euro Note Is From

  With Greece once again said to be on the verge of exiting the Eurozone, where it has been on and off for the past five years, a move which would demonstrate that an “irreversible” currency is very much reversible and just what happens when Mario Draghi runs out of other people’s “political capital”, here a reminder that despite Europe’s common currency, some European bank notes are more equal than others, courtesy of a post that was written over three years ago. Because sadly, despite all-time record market highs, nothing has changed in over 1000 days of so-called progress.

  From This is Money:

  How to find out what country a euro note is from
  

  As forecasts hit fever pitch of Greece being bundled out of the euro, there was bound to be plenty of wild speculation – and a snippet doing the rounds is that holidaymakers should be worried about holding Greek euro notes.

  Travel firm DialaFlight even posted a blog, swiftly removed, making some fairly bold claims about whether Greek euro notes would prove worthless if the troubled nation fell out of the currency.

  It asked: ‘Will other members of the Eurozone accept them? If not anyone holding Greek Euros may find themselves out of pocket.’

  ‘Greek euro notes,’ I hear you cry. ‘But surely the whole point – of this euro experiment was that everybody has exactly the same money?’

  And that is true. The euro is a common currency, entirely equal across all nations, and while it is printed in individual member countries, wherever your note comes from the design is exactly the same.

  But while the Eurocrats would have you believe that each of those notes is absolutely equal, there is one tiny crucial difference that lets you see where they come from. That involves a little-known trick I learnt about a few years ago.

  

  Every euro note has a serial number on it. And at the start of that serial number is a prefix (usually a letter) – and this is what tells you where it is from.

  Where do my euros come from? The code breaker

  Star pupil German notes begin with an X, while bottom-of-the class Greek notes start with a Y. (It it ironic these letters correspond with the two determining chromosomes?)

  Spain is V, France U, Ireland T, Portugal M and Italy S. Belgium is Z, Cyprus G, Luxembourg 1, Malta F, Netherlands P, Austria N, Slovenia H, Slovakia E and Finland L.

  But there is a crucial point for anyone considering being swept up by talk of Greek euro notes proving to be duds, if it falls out of the common currency.

  While we don’t know what will happen if a country drops out, as cunningly the euro experiment architects didn’t build in an exit strategy, we can be fairly certain it won’t involve a small army of Eurocrats marching around, checking the letters on your banknotes and taking them off you.

  Beyond the fact that this is completely impractical, that’s because notes from different countries end up all over the place.

  Some quick pocket surveys conducted by This is Money readers when I first wrote about how to work out where your euro note came from revealed the extent.

  One reader on the furthest westerly reaches of the Eurozone in Ireland had the following: 5 German, and one each of Greek, Belgian and Irish.

  Another, in Greece, had four notes out of a Greek cash machine that read like the start of a bad joke: Two Germans, a Belgian and an Italian.

  Meanwhile, we also conducted another test today in the This is Money office. Richard Browning has luckily just bought €130 from our very own Arthur Daley, Ed Monk, on his return from an Italian holiday.

  He has five Dutch notes, a Slovakian, a French note and a German.

  Clearly, there are going to be a lot of Europeans and businesses out there, with assets that have no link with Greece, but a stash of notes with a Y on them.

  If Greece does head back to the drachma, one way to make a bad situation worse would be to start randomly cancelling those notes – that makes it highly unlikely to happen.

  In reality, no one knows what will take place. Mainly because the Eurozone authorities seem to have decided that even admitting the possibility that a ten-year-old currency experiment could fail in some way, would be tantamount to triggering its decline.

  That’s unfortunate for Greece, but fortunate for those who love a bit of spurious speculation.

  The best guess is that euro notes would remain as they are, and in order to iron out any problems with money supply, some would be gradually withdrawn. That would most likely mean any Greek holding euro in cash and able to get them out of the country would still be able to spend them.

  Where they would be hit is in their assets. Savings, investments, property values and all the important things that make up their wealth, would somehow be transferred back into drachma (most probably) and greatly devalued compared to their previous euro status.

  So, those checking their pockets and finding a Greek Y in there should have no need to panic, unless they’re playing euro Top Trumps, of course.
  

  

  

  
  
  

  

• What Happened The Last Time The Fed's Balance Sheet Hit 25% Of GDP

  Ever since the Fed launched its unprecedented, unsterilized debt monetization rampage known as quantitative easing, coupled with seven years zero interest rates, there has been much confusion about how the Fed will achieve two gargantuan tasks: i) hike rates, and ii) reduce the amount of holdings on its balance sheet. The quandary, according to conventional wisdom, is magnified because something like this “has never been done before.”

  Conventional wisdom is wrong: something like this has been done before; the reason why nobody wants to talk about it is because it ended in epic disaster.

  The chart below shows the Fed’s balance sheet expressed as a % of GDP: it has grown from its long-term “normal” 5% to just over 25%.

  

   

  Never before has this happened, right? Wrong.

  As the following chart below shows, the Fed’s response to the first (not to be confused with the current) great depression was, drumroll, identical.

  

  Whereas the Fed’s balance sheet expressed as a % of GDP was humming along nicely largely at just over 5% in the period ever since the Fed was created in 1913, things got promptly out of control when the Great Depression hit in 1929. At that point the Fed’s balance sheet grew from 5% to just shy of 25% at its peak. Maybe there is a reason why some call the current period the second great depression…

  More to the point, last night we showed that the first Great Depression period is comparable to the current time period not only in being a mirror image of the Fed’s balance sheet, but also of interest rates, which by necessity had to be virtually zero in a time when the Fed was monetizing assets to stimulate aggregate demand. And so they were… until 1937, when the Fed hiked rates.

  

  As we showed yesterday, what happened next was that a little over a year after the Fed hiked rates for the first time, the Dow Jones tumbled, plunged by 50% in March 1938 (the S&P500 in its current form would not appear for another 20 years).

  But that was the topic of last night’s post. What we want to emphasize here is what happened after. Because as the market crashed and the economy collapsed yet again in the last such acute episode of the Great Depression, something far more historic than a simple market collapse took place.

  

   

  In other words, from the first rate hike by a Fed whose balance sheet as a % of GDP was nearly identical to the current one, to the start of World War II: less than three years.

  We truly hope this time its different, although judging by today’s dramatic return of the nuclear arms race and the countless war zones across the middle east and Africa, slowly all the increasingly militarized geopolitical events are falling into place.

  

  

  
  
  

  

• Prisons Without Walls: We're All Inmates In The American Police State

  Submitted by John Whitehead via The Rutherford Institute,

  “It is perfectly possible for a man to be out of prison and yet not free—to be under no physical constraint and yet be a psychological captive, compelled to think, feel and act as the representatives of the national state, or of some private interest within the nation wants him to think, feel and act. . . . To him the walls of his prison are invisible and he believes himself to be free.”—Aldous Huxley, A Brave New World Revisited

  “Free worlders” is prison slang for those who are not incarcerated behind prison walls.  Supposedly, those fortunate souls live in the “free world.” However, appearances can be deceiving.

  “As I got closer to retiring from the Federal Bureau of Prisons,” writes former prison employee Marlon Brock, “it began to dawn on me that the security practices we used in the prison system were being implemented outside those walls.” In fact, if Brock is right, then we “free worlders” do live in a prison—albeit, one without visible walls.

  In federal prisons, cameras are everywhere in order to maintain “security” and keep track of the prisoners. Likewise, the “free world” is populated with video surveillance and tracking devices. From surveillance cameras in stores and street corners to license plate readers (with the ability to log some 1,800 license plates per hour) on police cars, our movements are being tracked virtually everywhere. With this increasing use of iris scanners and facial recognition software—which drones are equipped with—there would seem to be nowhere to hide.

  Detection and confiscation of weapons (or whatever the warden deems “dangerous”) in prison is routine. The inmates must be disarmed. Pat downs, checkpoints, and random searches are second nature in ferreting out contraband.

  Sound familiar?

  Metal detectors are now in virtually all government buildings. There are the TSA scanning devices and metal detectors we all have to go through in airports. Police road blocks and checkpoints are used to perform warrantless searches for contraband. Those searched at road blocks can be searched for contraband regardless of their objections—just like in prison. And there are federal road blocks on American roads in the southwestern United States. Many of them are permanent and located up to 100 miles from the border.

  Stop and frisk searches are taking place daily across the country. Some of them even involve anal and/or vaginal searches. In fact, the U.S. Supreme Court has approved strip searches even if you are arrested for a misdemeanor—such as a traffic stop. Just like a prison inmate.

  Prison officials open, search and read every piece of mail sent to inmates. This is true of those who reside outside prison walls, as well. In fact, “the United States Postal Service uses a ‘Mail Isolation Control and Tracking Program’ to create a permanent record of who is corresponding with each other via snail mail.” Believe it or not, each piece of physical mail received by the Postal Service is photographed and stored in a database. Approximately 160 billion pieces of mail sent out by average Americans are recorded each year and the police and other government agents have access to this information.

  Prison officials also monitor outgoing phone calls made by inmates. This is similar to what the NSA, the telecommunication corporation, and various government agencies do continually to American citizens. The NSA also downloads our text messages, emails, Facebook posts, and so on while watching everything we do.

  Then there are the crowd control tactics: helmets, face shields, batons, knee guards, tear gas, wedge formations, half steps, full steps, pinning tactics, armored vehicles, and assault weapons. Most of these phrases are associated with prison crowd control because they were perfected by prisons.

  Finally, when a prison has its daily operations disturbed, often times it results in a lockdown. What we saw with the “free world” lockdowns following the 2013 Boston Marathon bombing and the melees in Ferguson, Missouri and Baltimore, Maryland, mirror a federal prison lockdown.

  These are just some of the similarities between the worlds inhabited by locked-up inmates and those of us who roam about in the so-called “free world.”

  Is there any real difference?

  To those of us who see the prison that’s being erected around us, it’s a bit easier to realize what’s coming up ahead, and it’s not pretty. However, and this must be emphasized, what most Americans perceive as life in the United States of America is a far cry from reality. Real agendas and real power are always hidden.

  As Author Frantz Fanon notes, “Sometimes people hold a core belief that is very strong. When they are presented with evidence that works against that belief, the new evidence cannot be accepted. It would create a feeling that is extremely uncomfortable, called cognitive dissonance. And because it is so important to protect the core belief, they will rationalize, ignore and even deny anything that doesn’t fit in with the core belief.”

  This state of denial and rejection of reality is the essential plot of John Carpenter’s 1988 film They Live, where a group of down-and-out homeless men discover that people have been, in effect, so hypnotized by media distractions that they do not see their prison environment and the real nature of those who control them—that is, an oligarchic elite.

  Caught up in subliminal messages such as “obey” and “conform,” among others, beamed out of television and various electronic devices, billboards, and the like, people are unaware of the elite controlling their lives. As such, they exist, as media analyst Marshall McLuhan once wrote, in “prisons without walls.” And of course, any resistance is met with police aggression.

  A key moment in the film occurs when John Nada, a homeless drifter, notices something strange about people hanging about a church near the homeless settlement where he lives. Nada decides to investigate. Entering the church, he sees graffiti on a door: They live, We sleep. Nada overhears two men, obviously resisters, talking about “robbing banks” and “manufacturing Hoffman lenses until we’re blue in the face.” Moments later, one of the resisters catches Nada fumbling in the church and tells him “it’s the revolution.” When Nada nervously backs off, the resister assures him, “You’ll be back.”

  Rummaging through a box, Nada discovers a handful of cheap-looking sunglasses, referred to earlier as Hoffman lenses. Grabbing a pair and exiting the church, he starts walking down a busy urban street.

  Sliding the sunglasses on his face, Nada is shocked to see a society bombarded and controlled on every side by subliminal messages beamed at them from every direction. Billboards are transformed into authoritative messages: a bikini-clad woman in one ad is replaced with the words “MARRY AND REPRODUCE.” Magazine racks scream “CONSUME” and “OBEY.” A wad of dollar bills in a vendor’s hand proclaims, “THIS IS YOUR GOD.”

  What’s even more disturbing than the hidden messages, however, are the ghoulish-looking creatures—the elite—who appear human until viewed them through the lens of truth.

  This is the subtle message of They Live, an apt analogy of our own distorted vision of life in the American police state. These things are in plain sight, but from the time we are born until the time we die, we are indoctrinated into believing that those who rule us do it for our good. The truth, far different, is that those who rule us don’t really see us as human beings with dignity and worth. They see us as if “we’re livestock.”

  It’s only once Nada’s eyes have been opened that he is able to see the truth: “Maybe they’ve always been with us,” he says. “Maybe they love it—seeing us hate each other, watching us kill each other, feeding on our own cold f**in’ hearts.” Nada, disillusioned and fed up with the lies and distortions, is finally ready to fight back. “I got news for them. Gonna be hell to pay. Cause I ain’t daddy’s little boy no more.”

  What about you?

  As I point out in my book Battlefield America: The War on the American People, the warning signs have been cautioning us for decades. Oblivious to what lies ahead, most have ignored the obvious. We’ve been manipulated into believing that if we continue to consume, obey, and have faith, things will work out. But that’s never been true of emerging regimes. And by the time we feel the hammer coming down upon us, it will be too late.

  As Rod Serling warned:

  All the Dachaus must remain standing. The Dachaus, the Belsens, the Buchenwalds, the Auschwitzes—all of them. They must remain standing because they are a monument to a moment in time when some men decided to turn the earth into a graveyard, into it they shoveled all of their reason, their logic, their knowledge, but worst of all their conscience. And the moment we forget this, the moment we cease to be haunted by its remembrance. Then we become the grave diggers.

  The message: stay alert.

  Take the warning signs seriously. And take action because the paths to destruction are well disguised by those in control.

  This is the lesson of history.

  

  

  
  
  

  

• Knife Regulation Arrives: This Is The US Government, Hard At Work

  When it comes to the contents of the TPP, the most important law of Obama’s second term, merely leaking its contents to the press can have result in imprisonment or treason charges, which, considering recent revelations that a substantial portion of the bill was drafted by and for the express benefit of pharmaceutical companies, was to be expected:  when the US population learns that their elected legislators not only don’t read the laws they “pass”, but are merely bribed figureheads that don’t even write them, the resultant collapse of the “democratic” process would be unpleasant.

  And yet, other laws such as S.1315, are perfectly transparent and open. So, with nobody in Congress drafting the TPP (and apparently not even able to pass it, despite corporate backers’ demands), here is a vivid example of the US government, hard at work.

  presenting: S. 1315, Knife Owners’ Protection Act of 2015

  S. 1315 would allow people to possess knives in states where they are illegal if the person is travelling to and from states where the knife is legal, if the knife is secured, or if the knife is a safety blade designed for cutting seatbelts. Based on information provided by the Department of Justice and the Federal Trade Commission, CBO estimates that implementing S. 1315 would have no effect on the federal budget. Because enacting S. 1315 would not affect direct spending or revenues, pay-as-you-go procedures do not apply.

   

  S. 1315 would impose an intergovernmental mandate as defined in the Unfunded Mandates Reform Act (UMRA) by preempting some state and local laws related to possessing and transporting knives. Laws regulating knives vary from state to state. The costs for state and local governments to comply with that mandate would include the cost to change protocols and train law enforcement officers. CBO estimates the total costs for state and local governments would be small and would not exceed the threshold established in UMRA ($77 million in 2015, adjusted annually for inflation).

  Yes, it would cost US taxpayers $77 million to “protect” knife owners, and yes if you own a knife, you too may be considered a threat.

  h/t Bruce Krasting

  

  

  
  
  

  

• Chinese Corporations Become Stock Speculators, Joining Housewives, Banana Vendors

  It’s no secret that things are getting tougher for China’s manufacturing sector as the country embarks on a difficult transition from an investment-driven economy to a model led by services and consumption. Domestic demand for metals has fallen as “idle cranes, empty construction sites, and abandoned buildings” (to quote Bloomberg) betray a sharp economic deceleration. Export growth has slowed, rail freight has collapsed to what look like depression levels, and industrial production remains in the doldrums and will need to fall far further if China is serious about getting its pollution problem under control. 

  Meanwhile, Chinese equities have staged one of the most impressive rallies in recent memory as housewives, security guards, banana vendors, and, more recently, farmers, flock to the SHCOMP and the Shenzhen exchange where, using record margin debt, the semi-literate hordes have driven multiples into the stratosphere and created an environment where umbrella manufacturers post 2,000% gains. 

  

  Given the above, and given the fact that credit is increasingly hard to come by for in the manufacturing sector with China’s largest banks reporting rising NPLs thanks in large part to souring loans to the industrial sector, one could hardly blame the industrialists for wanting to get in on the equity mania. And because nothing surprises us when it comes to China’s stock market miracle, we can’t say we were completely shocked to learn that some manufacturers are laying off everyone and trading stocks from the shop floor while they wait for the economy to recover. WSJ has more:

  Chinese companies are turning to an unlikely source for profits in the soft economy: the country’s red-hot stock markets.

   

  Take Dong Jun, who earlier this year shut down his factory making lighting equipment and electrical wiring and let go some 100 workers. The 50-year-old comes to the plant in the eastern city of Yancheng almost daily, but spends his time trading stocks on behalf of his company, Yanwu Keda Electric Co.

   

  “Manufacturing is a very hard business these days,” said Mr. Dong, chairman of the company. “I want to make some money from the stock market and use the profits to restart my manufacturing business later, when the economy turns for the better.”

   

  Chinese companies are finding stock investing an attractive option as the wider economy struggles with tepid demand, excess industrial capacity, persistently high borrowing costs and other troubles. Their interest poses a challenge for policy makers, who want to nurture markets companies can tap for investment capital, rather than creating a venue for speculation.

  You read that correctly, Dong Jun fired everyone and now goes to his lighting equipment plant everyday to trade stocks. And make no mistake, Dong isn’t alone. In fact, according to the Journal, 97% of profit growth in the manufacturing sector is being generated by stock trading:

  According to the latest official data, profits earned by Chinese manufacturers rose 2.6% from a year earlier in April, a turnaround from a drop of 0.4% in the previous month. Yet nearly all of that increase—97%—came from securities investment income, data from the National Bureau of Statistics show. Excluding the investment income, China’s industrial profits were up 0.09%.

   

  Meanwhile, over the course of 2014, the value of stocks, bonds and other tradable securities owned by listed Chinese companies rose by 946 billion yuan ($152.4 billion), a 60% increase, according to an analysis by Mr. Zhu.

  So Chinese corporates are using their balance sheets to fund stock purchases which is something that US companies are also doing at a record pace but in China, companies aren’t just buying their own stocks, they’re buying anything and everything and they’re doing it on margin:

  The trend is starting to worry Chinese regulators, who have been trying to make sure that banks and the stock markets ultimately channel money into parts of the economy that create jobs. Even more problematic, according to some officials, is that the rush by companies to tap the market for easy gains now—sometimes using borrowed money to purchase stocks—could leave some scrambling for capital if the market turns. 

   

  China Railway Construction Corp. is among the companies that have put more of their funds at work in the stock market. According to its regulatory filings, the state-owned contractor since late last year has bought shares in companies including a liquor maker in Shanxi province, in the north, a retailer in central China, and a property developer near Beijing.

  Better still, some companies are buying shares in Chinese banks — the same Chinese banks which, because lending to manufacturers has lower margins and has become more risky in the downturn, are helping brokers expand margin financing. 

  Bank stocks have proved attractive for China State Construction International Holdings Ltd., the listed arm of state-owned China State Construction Engineering Corp. It has increased its stakes in Bank of Communications Co., a large state-controlled firm, and Huaxia Bank Co., a regional lender, whose shares have been on the rise in recent months, according to data provider Wind Info. The company hasn’t released its first-quarter results. Officials at the firm didn’t respond to a request for comment.

   

  Chinese banks, meanwhile, have been funneling funds to brokerages, helping them to expand their margin-financing businesses, a more lucrative practice than making plain corporate loans, according to banking executives and analysts.

   

  China CITIC Bank Corp. is the most aggressive in lending to brokerages to help them finance their margin-financing businesses, according to an analysis by Reorient Group, a Hong Kong-based investment bank. Loans made to brokerages for that purpose totaled nearly 913 billion yuan in the first quarter, up 92% from a year earlier, the firm’s study shows. “Banks are happy to channel liquidity to brokerages as a way to participate in the stock rally,” said Steve Wang, head of China research at Reorient.

  Essentially, banks are funding the purchase of their own stock by lending money via margin financing to the very same manufacturing sector which can’t service its bank debt. 

  So we can add coporations to the list of Chinese stock speculators buying on margin. This means that if (or perhaps more appropriately “when”) China’s equity bubble does finally burst, corporate defaults (which are already on the rise and would likely occur far more often if the PBoC didn’t pressure lenders into rolling over bad debt) will accelerate meaningfully amid cascading margin calls and frantic attempts to raise capital. 

  Bondholders beware. You were warned.

  

  

  
  
  

  

• "Lehman Weekend" Looms For Greece As Europe Readies "Emergency" Sunday Meeting

  Last week, Greek PM Alexis Tsipras submitted two three-page proposals that were ostensibly designed to close the gap with creditors. EU officials were incredulous, calling the drafts “not serious.”

  Tsipras had effectively resubmitted Greece’s previous proposal (i.e. a proposal that did not include concessions on a VAT hike or pension cuts) only this time, he included a second document that outlined how Athens hoped to tap leftover bank recap funds from the EFSF and bailout money from the ESM. Greece took that same proposal to Brussels over the weekend and it didn’t fly there either, leaving Europe to wonder just how far Tsipras was willing to go with the brinksmanship.

  The problem is simple and it’s been outlined in these pages extensively. The game of chicken can theoretically go on at the political level for some time. That’s because the bundled IMF payment isn’t due for another two weeks and even if it were missed, Christine Lagarde has quite a bit of discretion as it relates to sending an official failure to pay notice to the IMF board and triggering cross acceleration rights for Greece’s other creditors. In other words, a formal default is a matter of politics and it can be put off for at least 30 days past the end of this month.

  What cannot be controlled at the political level is what happens on the ground in Greece. That is, the economy is bleeding jobs and businesses and the banking sector is hemorrhaging hundreds of millions of euros every day. If suppliers cut off credit to the Greek economy and deposit flight turns into a panicked bank run, the glacial pace of political logrolling will prove hopelessly inadequate to contain the situation, meaning the country could descend into chaos while both sides watch in horror from the negotiating table in Brussels. Yesterday, Germany’s EU Commissioner Guenther Oettinger warned of exactly this and suggested that Europe plan for a “state of emergency” in Greece. 

  And plan they did. Midway through US trading on Monday the German press reported that Europe was prepared to implement capital controls over the weekend should Greece fail to table a workable proposal at a meeting of EU finance ministers in Luxembourg on Thursday. We’ve outlined what capital controls could look like in Greece on a number of occasions (most notably here and here), but for those needing a quick reference, consider the following flowchart:

  

  Here’s Open Europe summarizing the drama:

  German daily Süddeutsche Zeitung reports that Eurozone countries have agreed on a contingency plan if no deal between Greece and its lenders is struck by this weekend. According to the paper, if this week’s Eurogroup meeting failed to yield an agreement, Eurozone leaders would hold an emergency summit – potentially as early as Friday evening. The contingency plan would involve imposing capital controls on Greek banks over the weekend.

  As for the Eurogroup meeting and the rumored emergency summit, Greece contends it will not be submitting a new proposal and some EU officials are skeptical about the utility of holding a summit if no progress is made in Luxembourg. FT has more:

  Eurozone officials are discussing holding an emergency summit on Sunday for leaders to tackle the crisis in Greece amid mounting fears a deal to break an ongoing impasse between Athens and its bailout creditors will not be reached at a high-stakes finance ministers meeting on Thursday.

   

  According to two senior officials, the idea of holding a summit of eurozone heads of government was mooted in meetings among representatives of Greece’s creditors on Monday, a day after last-ditch negotiations to reach a deal to release €7.2bn in much-needed bailout aid collapsed.

   

  They said that although the idea was discussed, there is considerable resistance to convening the summit among several creditors since technocratic issues like Greek pension reforms and tax rates are not normally the province of EU presidents and prime ministers.

   

  “If there’s nothing to discuss among finance ministers, there wouldn’t be anything to discuss among heads,” said one official from a Greek creditor institution.

   

  Yanis Varoufakis, Greece’s finance minister, said the country has no plans to present new proposals at the finance ministers meeting, signalling the country won’t make further concessions to unlock bailout funds needed to avoid default.

   

  He told Germany’s Bild newspaper: “The eurogroup is not the forum for presenting positions and plans which have not previously been discussed and negotiated at a lower negotiating level.”

   

  “The next and hopefully decisive step is the eurogroup [on] Thursday,” said the spokesman, Preben Aamann. “Any further steps will be decided in light of the eurogroup outcome. There should be no illusions that an agreement becomes easier or more advantageous over time.”

   

  Alexis Tsipras, the Greek prime minister, has publicly insisted that he will not be presenting any new compromise proposals at the Thursday meeting, and officials said the discussion at the eurogroup of finance ministers on Greece could end up being perfunctory as a result.

   

  In addition, some officials believe Athens’ decision to send Mr Varoufakis, the combative finance minister, to the eurogroup session could preclude a deal being worked on Thursday

  Recall that the last time Varoufakis attended a meeting of EU finance ministers, he ended up eating dinner alone in Riga and tweeting out FDR quotes after his antics at the negotiating table prompted EU officials to phone Tsipras and plead with the PM to sideline his FinMin or risk throwing the entire process into disarray. Varoufakis was soon demoted on the negotiating team.

  All signs thus point to the imposition of capital controls, setting up a potential “Lehman Weekend 2.0” unless all sides suddenly realize what they’ve wrought, convene an emergency meeting among heads of state, and strike some manner of hastily construed stopgap agreement. Whether or not that’s feasible remains to be seen and it appears as though Sunday may be the day of reckoning.

  For now, the official line is that Europe will only restart talks if Greece “submits something new”, and if the last several weeks are any indication, “something new” is not forthcoming. 

  Finally, Bild is reporting that Greece will seek to delay its June 30 IMF payment by six months.

  Via Bloomberg, citing Bild:

  The Greek government is seeking to delay a 1.55b euro payment to the IMF by six months. 

   

  Greece has found technical option to delay IMF payment due at the end of June.

  And because this is Europe, the Greek government has promptly denied the above:

  • GREEK GOVT OFFICIAL DENIES REPORTS SEEKING TO DELAY IMF PAYMENT

  

  

  
  
  

  

• JPM's Walk Through What Greek Capital Controls Would Look Like

  Once upon a time, merely suggesting that a Eurozone country may be kicked out, let alone suffer capital controls, was enough to get one sued by the Hague for crimes against humanity, if not outright droned. Now, and as has been the case for the past 4 months, that it is the Troika’s explicit intent to foment a depositor panic and instigate a bank run in Greece with the hope of overthrowing the Tsipras government, everyone is allowed to chime in.

  So, without further ado, here is what the next steps for Greece may be as well as a walk through of its capital controls, courtesy of JPMorgan.

  Capital controls, ECB rules, and bellicose rhetoric

  There are increasing media reports that capital controls are being prepared for implementation possibly as soon as this weekend should the discussions with Greece not generate a deal. This raises a number of questions about how capital controls would work, and how their imposition would effect the negotiation process.
   
  The practicalities…
   
  On some of the practicalities of capital controls, Cyprus provides a template, and we have written up some of the lessons from that experience in the research note linked to below. The table below, reproduced from an IMF program review, summarises the measures that were put in place in Cyprus and their subsequent removal. In this instance, capital controls should be thought of as a set of administrative constraints which seek to prevent deposits leaving the banking system while still attempting to allow “normal” economic activity to continue. Hence limits are imposed on the ability of households and firms to withdraw their deposits in cash, or to move them out of country concerned. Firms who need to transfer funds abroad as part of their normal business (consider, for example, a Greek auto dealer importing German cars) have to provide documentation to show those movements are indeed related to commercial activity rather than a portfolio shift.
   
  And the politics…
   
  The decision to impose capital controls ultimately lies with the Greek authorities, and would generate a need to pass legislation through the Greek parliament to give those controls the full force of legislative backing. A key issue is the extent to which the Greek authorities would cooperate with the rest of the region on imposing capital controls. Although the decision on capital controls is ultimately taken by Greece, decisions on the provision of funding to the banks are taken by the ECB. If the ECB decides to raise haircuts on collateral significantly, or not to raise ELA to meet deposit outflow, then the Greek banks will find themselves in a position where they cannot meet requests for withdrawals. The banks themselves would then either have to come up with a scheme for rationing access to deposits, or (more likely) shut their doors. The imposition of capital controls can be thought of as trying to make that rationing process orderly, with the denial of unlimited liquidity from the ECB the key force acting in the background. If that makes the ECB look like the bad guy, remember that from the point of view of the central bank and the rest of the region, each increase in ELA facilitates an increase in the region’s exposure to Greece via Target 2.
   
  The ECB’s rules…
   
  Against this backdrop, one can understand why yesterday Draghi was keen to state that the ECB is a rules-based institution and that the key decisions would be taken by politicians, not central bankers. On this, we will simply repeat what we have written before. If one thinks of rules in the sense of vaguely specified guidelines with scope for multiple interpretations at differing points in time, then Mr Draghi is correct that the ECB is rules based. The ECB might have hoped that the accumulation of precedent would create conventions about its behaviour through time. But there has been enough variation in how the ECB has handled specific situations for the idea of settled rules and conventions to be challenged. In the ECB’s defense, it has often had to think on its feet during the crisis, and many of the decisions it has taken have appeared reasonable to us in real time. In this particular instance, however, we doubt that the ECB will do anything without their being clear political backing from both the Eurogroup and from Merkel and other European leaders.
   
  An anti-euro Tsipras?
   
  There are reports that the Greek government is threatening action via the European Court of Justice should the region take action which inhibits bank’s access to liquidity and hence force the imposition of capital controls or the closure of its banks. We very much doubt any such legal action would be successful, and it would take a while before that case came to be heard. But more important is the signal that the Greek authorities may depict capital controls or the closure of the Greek banks as unjustly imposed upon them by the rest of the region. And meanwhile, the rhetoric from Tsipras is increasingly bellicose, with references to the “pillaging” of Greece, and of a need to avoid national humiliation.
   
  One particularly ugly scenario would be if the Greek authorities resist the imposition of capital controls, claim that restrictions on bank access to liquidity have been unjustly imposed, and then seek to use the antipathy that creates among the Greek population to begin to argue toward an exit from the euro. This is a scenario we have accorded a low probability to, on the grounds that it is not clear that the Greek population would follow the script and regard the situation as primarily the responsibility of the rest of the region. But the increasingly hot rhetoric has us more concerned about this than we have been hitherto.

  Note on lessons for Greece from Cyprus

  

  

  

  
  
  

  

• We Might As Well Face It – America Is Addicted To Debt

  Submitted by Michael Snyder via The Economic Collapse blog,

  Corporations, individuals and the federal government continue to rack up debt at a rate that is far faster than the overall rate of economic growth.  We are literally drowning in red ink from sea to shining sea, and yet we just can’t help ourselves.  Consumer credit has doubled since the year 2000.  Student loan debt has doubled over the course of the past decade.  Business debt has doubled since 2006.  And of course the debt of the federal government has doubled since 2007.  Anyone that believes that this is “sustainable” in any way, shape or form is crazy.  We have accumulated the greatest mountain of debt that the world has ever seen, and yet despite all of the warnings we just continue to race forward into financial oblivion.  There is no possible way that this is going to end well.

  Just the other day, a financial story that USA Today posted really got my attention.  It contained charts and graphs that showed that business debt in the U.S. had doubled since 2006.  I knew that things were bad, but I didn’t know that they were this bad.  Back in 2006, just prior to the last major economic downturn, U.S. nonfinancial companies had a total of about 2.6 trillion dollars of debt.  Now, that total has skyrocketed to 5.8 trillion…

  Companies are sitting on a record $1.82 trillion in cash. That might sound impressive until you hear companies owe three times more – $5.8 trillion, according to a new report from Standard & Poor’s Ratings Services.

   

  Debt levels are soaring at U.S. non-financial companies so quickly – total debt outstanding rose $650 billion in 2014, which is six times faster than the $100 billion in added cash.

  So are we in better condition to handle an economic crisis than we were the last time, or are we in worse shape?

  Let’s look at another category of debt.  According to new data that just came out, the total amount of student loan debt in the U.S. is up to a staggering 1.2 trillion dollars.  That total has more than doubled over the past decade…

  New data released by The Associated Press shows student loan debt is over $1.2 trillion, which is more than double the amount of a decade ago.

   

  Students are facing an average of $35,000 in debt, that’s the highest of any graduating class in U.S. history. A senior at University of Colorado, Colorado Springs, Jon Cheek, knows the struggle first hand.

   

  “It’s been a pretty big concern, I work while I go to school. I applied for a bunch of scholarships and done everything I can to try and keep it low,” said Cheek.

  And of course it isn’t just student loan debt.  American consumers have had a love affair with debt that stretches back for decades.  As the chart below demonstrates, overall consumer credit has more than doubled since the year 2000…

  

  If our paychecks were increasing at this same pace, that would be one thing.  But they aren’t.  In fact, real median household income is actually lower today than it was just prior to the last economic crisis.

  So American households should actually be cutting back on debt.  But instead, they are just piling on more debt, and the financial predators are becoming even more creative.  In a previous article,  I discussed how many auto loans are now being stretched out for seven years.  At this point, the number of auto loans that exceed 72 months is at an all-time high…

  The average new car loan has reached a record 67 months, reports Experian, the Ireland-based information-services company. The percentage of loans with terms of 73 to 84 months also reached a new high of 29.5% in the first quarter of 2015, up from 24.9% a year earlier.

   

  Long-term used-vehicle loans also broke records with loan terms of 73 to 84 months reaching 16% in the first quarter 2015, up from 12.94% — also the highest on record.

  When will we learn?

  The crash of 2008 should have been a wake up call.

  We should have acknowledged our mistakes and we should have started doing things very differently.

  But instead, we just kept on making the exact same mistakes.  In fact, our long-term financial problems have continued to accelerate since the last recession.  Just look at what has happened to our national debt.  Just prior to the last recession, the U.S. national debt was sitting at approximately 9 trillion dollars.  Today, it is over 18 trillion dollars…

  

  Our debt has grown so large that we will never be able to get out from under it.  This is something that I covered in my recent article entitled “It Is Mathematically Impossible To Pay Off All Of Our Debt“.  Because of our recklessness, our children, our grandchildren and all future generations of Americans are consigned to a lifetime of debt slavery.  What we have done to them is beyond criminal.  If we lived in a just society, a whole bunch of people would be going to prison for the rest of their lives over this.

  During fiscal year 2014, the debt of the federal government increased by more than a trillion dollars.  But in addition to that, the federal government has more than seven trillion dollars of debt that must be “rolled over” every year.  In other words, the government must issue more than seven trillion dollars of new debt just to pay off old debts that are coming due.

  As long as the rest of the world continues to lend us enormous mountains of money at ridiculously low interest rates, we can continue to keep our heads above the water.  But this can change at any time.  And once it does, interest rates will rise.  If the average rate of interest on U.S. government debt was to return to the long-term average, we would very quickly find ourselves spending more than a trillion dollars a year just on interest on the national debt.

  The debt-fueled prosperity that we are enjoying now is not real.  It is a false prosperity that has been purchased by selling future generations into debt slavery.  We have mortgaged the future to make our own lives better.

  We are addicts.  We are addicted to debt, and no matter how many warnings we receive, we just can’t help ourselves.

  Shame on you America.

  

  

  
  
  

  

• Chinese Iron Ore, Steel Prices Collapse Despite Government Stimulus

  A funny thing happened in the last year since China gave up on its hard-line reforms and folded back to stimulate by all means necessary… the financial economy soared and the real economy sunk. Iron Ore prices are near record lows and Rebar prices are at record lows as stocks spike.. and this should be no surprise since we were told by a rural Chinese chap recently that “making money in stocks is a lot easier than farmwork” or construction or real world activity.

   

  

   

  As Reuters reports,

  “Steel prices in China have continued to fall despite the rally in iron ore prices in the last month, limiting the ability for steel mills to pay increasingly higher prices for ore,” Australia and New Zealand Banking Group analysts said in a note.

   

  With Chinese steel demand expected to wane as hotter temperatures over June and July slow construction activity, the ANZ analysts said they expect iron ore to fall back below $60 per tonne over the coming month.

   

  A sustained decline in stockpiles of iron ore across China’s ports has helped fuel a 40 percent rally in the steelmaking commodity from a decade-low of $46.70 in April.

   

  Shanghai rebar prices in contrast rose only around 4 percent from April lows before pulling back again this week.

   

  Iron ore for immediate delivery to China’s Tianjin port .IO62-CNI=SI dropped 0.8 percent to $64.50 a tonne on Monday, according to The Steel Index (TSI), retreating from a near five-month high of $65.40 reached last week.

   

  “The continuing fall in steel prices in China is beginning to weigh on sentiment, with mills looking increasingly squeezed,” TSI said, citing a further decline in prices of spot steel products in China, including billet and rebar.

   

  A slowing Chinese economy has hit industrial demand with steel consumption continuing to shrink in the first quarter of this year after contracting in 2014 for the first time in more than three decades.

  And for an even clearer example of reality – Rebar prices are hitting record lows…

  

   

  Not a sign of turning demand in the economy… not the lagged pickup in construction actvity that so many believe the stock market surge will bring… instead just more of the same as monetary policy transmission mechanisms are all glued up and fundsa flow directly to financial asset inflation.

  

  

  
  
  

  

• There Is One Problem With Europe's So-Called Austerity

  The one most recurring laments coming out of peripheral European countries which boast near record youth unemployment, in most cases around the 50% area, is that the only reason why there is no growth is due to “evil austerity”, imposed upon them by Germany and other frugal Northern Europe overseerers, who do not permit the rampant issuance of debt to fund domestic spending and fiscual stimulus programs.

  There is one problem with that: the peripheral European countries are not only issuing debt at a pace that is well greater than the “pre-austerity” period…

  

  … as Italian ANSA just confirmed:

  Italy’s public debt hit a new record high of 2.1945 trillion euros in April, up 10 billion euros on the previous high set in March, the Bank of Italy said on Monday. The data was used as ammunition by opposition parties against Premier Matteo Renzi’s government. “Even though interest rates are down, the debt keeps going up vertiginously and it is threatening the stability of the public finances and of Italian people’s savings,” said Elvira Savino, an MP for Silvio Berlusconi’s centre-right Forza Italia.

   

  “Renzi has not just abandoned the young, condemning them to unemployment, but he is also jeopardizing the future of the next generations“. Economy Minister Pier Carlo Padoan rubbished the criticism, saying it was normal for the debt to increase while Italy is running a budget deficit. “This thing about the debt record is really boring,” he said.

  Worse, the so-called structural reforms that these countries are implementing so they can escape from the dreaded austerity have resulted in debt to GDP ratios that, drumroll, have never been higher!

  

   

  In the meantime, without any reform and without any actual changes, the bad debt keeps accumulating and as Italy’s Banking Association reported earlier today, bad loans, aka NPLs, in the country’s financial system rose by 15% from a year ago and hit a record high of €191.5 billion in April, up from the €189.5 billion reported in March, and a total of 10% of all Italian bank assets. One can imagine what the real, unadjusted number is if the reported one rose by €25 billion in one year.

  So to summarize Europe’s plight for the past 5 years: PIIGS creditors and the Troika will pretend to impose austerity on them (with the ECB as a guarantor and buyer of first and last resort), while the PIIGS will pretend to reform.

  In the end, nothing has changed and the pre-crash status quo is still here with the only difference that relative and absolute debt levels have never been higher.

  Or, as Italy’s economy minister called it, “boring”… until such time as the Troika decided to yank its guarantees and the next Greece emerges. Only then does it get “exciting.”

  

  

  
  
  

  

• What's The Real Unemployment Rate In The US?

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  By my reckoning, roughly 60% of the civilian work force is fully employed and 40% are marginally employed or unemployed.

  Officially, the unemployment rate in the U.S. is 5.6%, meaning 5.6% of the work force is temporarily out of a job and actively seeking another one. This low number reflects nearly full employment, as 3% to 4% of the work force is typically in the process of quitting/being laid off and finding another job.

  Typically, periods of nearly full employment are economically good times, as household income is bolstered and employers have to pay a bit more to hire workers when the labor market is tight.

  But these do not feel like good times for most households, despite the low unemployment rate. Earnings are stagnant for 90% of the work force, and employers are only paying a competitive premium for workers in very select fields (programmers adept at Python and mobile user interfaces, etc.)

  This creates a cognitive dissonance between the low official unemployment rate and the real economy, which is behaving like an economy with much higher rates of unemployment, i.e. sluggish hiring, stagnant wages, difficulty in finding jobs, and very little pressure on employers to pay more for typical jobs.

  Let's start by trying to calculate the work force–the number of people who could get a job if they wanted to. This isn't quite as straightforward as we might imagine, because the two primary agencies that compile these statistics use slightly different categories.

  The Bureau of Labor Statistics (BLS) calculates the civilian noninstitutional population as everyone 16 and older who is not in active-duty military service or in prison. The BLS reckons this to be about 250 million people, out of a total population of about 317 million residents: Household Data (BLS)

  The BLS subtracts 93 million people who are not in the labor force, leaving about 157 million people in the civilian work force–roughly half the nation's population.

  Of these, 148.8 million have a job of some sort and 8.6 million are unemployed.

  The Census Bureau calculates the civilian noninstitutional population as everyone who is not in active-duty military service or in prison. (You can download various data on the U.S. population on this Census Bureau website: Age and Sex Composition in the United States: 2012. I am using Table 1 data.)

  The Census Bureau places the civilian noninstitutional population at 308.8 million in 2012. Since roughly 4 million people are born and 2.6 million die in the U.S. each year, we can adjust this upward by roughly 3.5 million to bring it up to date (mid-2015) to 312 million.

  About 74 million people are 17 and younger, and 36 million are 68 and older. Given that the full-benefit retirement age for Social Security is pushing 67, I am using 67 as the cut-off for the work force rather than the traditional 65.

  This is of course a squishy calculation, as many people retire at 62 and others work beyond the age of 70. But given the strong employment trends of the over-65 cohort, I think it fair and reasonable to include everyone between 18 and 67 in the work force.

  Subtracting 110 young people and retirees leaves a civilian work force of around 200 million people. Let's then subtract those who can't work or choose not to work for conventional reasons. There are roughly 8 million people on permanent disability and several million more at any one time on temporary disability, so let's subtract 10 million disabled.

  Next, let's subtract stay-at-home parents. Since there are 20 million children under the age of 5, let's reckon 20 million adults will on average choose to leave the work force to care for their children full-time.

  Should this number be 40 million? What about home-schooling? Given the possibilities for part-time, home-based and free-lance work, I am reluctant to conclude everyone caring for or schooling their children cannot possibly earn some income. But let's consider adding another 10 million adults who may be caring for their families (seniors as well as children) at home full-time.

  While it may seem as if every other hipster in town is a trust funder, i.e. a person who draws upon inherited wealth and doesn't need to work, Internal Revenue Service (IRS) data reports less than 2 million people draw substantial incomes from trusts. Since even those with unearned income can still perform work, I include trust funders in the work force.

  If we subtract 10 million disabled and 30 million stay-at-home parents, we have a work force of around 160 million–not far from the BLS number of 157 million. If we use a smaller number of full-time stay-at-home parents, then perhaps the work force is closer to 170 million.

  The BLS calculates what it calls labor force participation rate–63% of the total civilian noninstitutional population is in the labor force.

  The next issue is what we reckon qualifies as a job. In general, the BLS and the Census Bureau count anyone with earned income as employed. The BLS reckons 148.8 million people have jobs, but this includes 23 million people who earn less than $5,000 annually. The Social Security Administration (SSA) states that 155 million people reported taxable income, which includes not just earnings (wages and salaries) but distributions from retirement funds, IRAs, etc. that are taxable. Wage Statistics for 2013.

  The question boils down to this: should we count someone who earns $1,000 a year as employed? How about someone who earns $5,000? At what point does an income enable a person to support himself/herself? Should we place those earning incomes far below a living income in the same category as those with full-time jobs/incomes?

  This is where I part company from the government agencies' classification of any earned income in any amount as qualifying as a job. If I am a consultant earning less than $5,000 annually, clearly I cannot support myself on this income. If I earn $2,500 annually in part-time free-lancing, this is at best 10% of poverty-level income for a household in a low-cost region; in a high-cost region, it is perhaps 5% of poverty-level income.

  The BLS attempts to define a broader definition of under-employment and unemployment in its categoryU-6 Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force: this is 10.8% of the work force.

  Depending on how we calculate the work force, and if we count everyone with any earnings as employed, we get an unemployment rate of somewhere between 5.6% and 12.5%. If we use the BLS's metric for including under-employment, this is in the range of 10% to 15%.

  Common sense suggests that we calculate employment/unemployment based on earnings, not just any income in any amount. If we reckon that only those with earnings of $15,000 or more annually (roughly speaking, full-time work at minimum wage) are fully employed, then the numbers change dramatically.

  The $15,000 annual earnings are also a rough benchmark of self-supporting households: two wage-earners making $15,000 each would have a household income of $30,000–enough to get by in much of the country.

  About 50 million people earn less than $15,000 annually. This includes roughly 10 million self-employed and 40 million with part-time jobs or other sources of earned income. This suggests that only 100 million of the 160 million work force are fully employed in the sense of not just having a job but making enough to be self-supporting.

  There are many caveats resulting from the way that government social welfare is not included in earnings: thus a household might have two part-time wage-earners making very modest sums monthly who are getting by because they qualify for Section 8 housing, SNAP food stamps, Medicaid healthcare, school lunch programs, and so on. These programs enable the working poor to support a household despite low earnings.

  Should we include those depending on social welfare programs as fully employed?

  By my reckoning, roughly 60% of the civilian work force is fully employed and 40% are marginally employed (i.e. earning less than $15,000 annually) or unemployed. Since full-time workers even at minimum wage earn close to $15,000 annually, I think it is fair to use that as the cut-off for fully employed. The BLS counts 121 million people asusually work full-time, but given only 100 million workers earn $15,000 or more, this doesn't add up unless we include self-employed people earning very little who are counted as full-time workers.

  

  Based on income, I set the fully employed rate at 60%, and the marginally employed/unemployed rate at 40%. If we accept the BLS's 121 million full-time jobs (which once again, this doesn't make sense given even minimum wage full-time jobs earn $14,500, and 50 million people report earnings of less than $15,000), we still get a marginally employed/unemployed rate of 25%: work force of 160 million, 121 million fully employed.

  These numbers align much better with the real economy than the official unemployment rate of 5.6%. It's nonsense to count everyone earning a few hundred or few thousand dollars annually as being employed in the same category as full-time workers or those earning $15,000 or more annually.

   

  

  

  
  
  

  

• The Warren Buffett Economy, Part 5: Why Its Days Are Numbered

  Submitted by David Stockman via Contra Corner blog,

  If Warren Buffett and his ilk weren’t so hideously rich, main street America would be far more prosperous. I must hasten to add, of course, that this proposition has nothing to do with the zero-sum anti-capitalism of left-wing ideologues like Professors Piketty and Krugman.

  Far from it. Real capitalism cannot thrive unless inventive and entreprenurial genius is rewarded with outsized fortunes.

  But as I have demonstrated in Parts 1-4 (Part 1, Part 2, Part 3, Part 4), Warren Buffett’s $73 billion net worth, and numerous like and similar financial gambling fortunes that have arisen since 1987, are not due to genius; they are owing to adept surfing on the $50 trillion bubble that has been generated by the central bank Keynesianism of Alan Greenspan and his successors.

  The resulting massive redistribution of wealth to the tiny slice of households which own most of the financial assets is not merely  collateral damage. That is, it is not the unfortunate byproduct of continuous and extraordinary central bank “stimulus” policies that were otherwise necessary to keep the US economy off the shoals and the GDP and jobs on a steadily upward course.

  Just the opposite. The entire regime of monetary central planning is a regrettable historical detour; it did not need to happen because massive central bank intervention is not necessary for capitalism to thrive. Contrary to the prevailing statist presumption, the free market does not have a death wish; it is not perennially slumping toward underperformance and depressionary collapse absent the deft ministrations of the fiscal and monetary authorities.

  In fact, today’s style of heavy-handed monetary central planning destroys capitalist prosperity. It does so in a manner that is hidden at first—– because credit inflation and higher leverage temporarily gooses the reported GDP. But eventually it visibly and relentlessly devours the vital ingredients of growth in an orgy of debt and speculation.

  To appreciate this we need to turn back the clock by 100 years—-to the early days of the Fed and ask a crucial question. Namely, what would have happened if its charter had not been changed by the exigencies of Woodrow Wilson’s foolish crusade to make the world safe for democracy?

  The short answer is that we would have had a banker’s bank designed to provide standby liquidity to the commercial banking system. Moreover, that liquidity would have been generated not from fiat central bank credit conjured by a tiny posse of monetary bureaucrats, but from self-liquidating commercial collateral arising from the decentralized production of inventories and receivables on the main street economy.

  That is to say, the 12 Federal Reserve Banks designed by the great Carter Glass in the 1913 Act were to operate through a discount window where good commercial paper would be discounted for cash at a penalty spread above the free market rate of interest. The job of the reserve banks was to don green eyeshades and assess collateral based on principles of banking safety and soundness——a function that would enable the banking system to remain liquid based on the working capital of private enterprise, not the artificial credit of the state.

  Accordingly, there would have been no central bank macro-economic policy or aggregate targets for unemployment, inflation, GDP growth, housing starts, retail sales or any of the other litany of incoming economic metrics. The level and rate of change in national economic output and wealth would have been entirely the passive outcome of interaction on the free market of millions of producers, consumers, savers, investors, entrepreneurs, inventors and speculators.

  Stated differently, Washington’s monetary authorities would have had no dog in the GDP hunt.  Whether the macro-economy slumped or boomed and whether GDP grew by 4%, 2% or -2% would have been the collective verdict of the people, not the consequence of state action.

  Likewise, honest price discovery would have driven the money and capital markets. That because there would be no FOMC at the Eccles Building pegging the overnight interest rate or manipulating the yield curve by purchasing longer term public debt and other securities. In fact, under the Fed’s original statutory charter it was not even allowed to own government debt or accept it as collateral against advances to its member banks.

  That is a crucial distinction because it means that the Fed would not have ventured near the canyons of Wall Street nor have had any tools whatsoever to falsify financial market prices. Speculators wishing to ply the carry trades and arbitrage the yield curve—–that is, make money the way most of Wall Street does today—-would have done so at their own risk and peril. Indeed, the infamous “panics” of the pre-Fed period usually ended quickly when the call money rate——the overnight money rate of the day—–soared by hundreds of basis points a day and often deep into double digits.

  Free market interest rates cured speculative excesses. The very prospect of a 27-year bubble which took finance (credit market debt outstanding plus the market value of non-financial corporate equities) from $7 trillion to $93 trillion, as occurred between 1987 and 2015, would not have been imaginable or possible. The great speculators of the day like Jay Cooke ended up broke after 10 years, not worth $73 billion after three decades.

  Notwithstanding the inherent self-correcting, anti-bubble nature of the free market, defenders of the Fed argue the US economy would be forever parched for credit and liquidity without the constant injections of the Federal Reserve. But that is a hoary myth. In a healthy and honest free market, credit is supplied by savers who have already produced real goods and services, and have chosen to allocate a portion to future returns.

  In Part 6, the difference between fiat credit and honest savings will be further explored. It is the fundamental dividing line between bubble finance and healthy capitalist prosperity.

  Needless to say, the claim that the economy would be worse off if it was based on real savings rather than central bank credit conjured from thin air is the Big Lie on which the entire regime of monetary central planning is based. It is also the lynchpin of the Warren Buffett economy.

  It is not surprising, therefore, that free market finance is an unknown  concept in today’s world. All of the powers of Wall Street and Washington militate against it.

  

  

  
  
  

  

• "We're Not All Equal When It Comes To Water" – Rich Californians Blast Conservation Efforts

  Facing an epic drought of Dust Bowl proportions, California is, in AP’s words, “sparing fewer and fewer users in the push to cut back on water usage.” Earlier this week we reported that, for the first time in decades, the state is imposing mandatory cuts for senior water rights holders. “The order applies to farmers and others whose rights to water were staked more than a century ago,” AP noted, adding that “many farmers holding those senior-water rights contend the state has no authority to order cuts.”

  This of course comes on the heels of an executive order from Governor Jerry Brown which went into effect on June 1 and calls for cities and municipalities to cut consumption by between 25% and 36%, cuts which, while feasible for the likes of Santa Rosa, which can afford to give away 50,000 low-flow toilets, are unrealistic for other, more fiscally challenged locales. And while some good samaritans are willing to sacrifice their lawns (albeit with the help of taxpayer subsidies) for the good of the state, other, more affluent Californians contend that while money may not be able to buy happiness, it should damn sure be able to buy water. The Washington Post has more: 

  Drought or no drought, Steve Yuhas resents the idea that it is somehow shameful to be a water hog. If you can pay for it, he argues, you should get your water.

   

  People “should not be forced to live on property with brown lawns, golf on brown courses or apologize for wanting their gardens to be beautiful,” Yuhas fumed recently on social media. “We pay significant property taxes based on where we live,” he added in an interview. “And, no, we’re not all equal when it comes to water.”

   

  Yuhas lives in the ultra-wealthy enclave of Rancho Santa Fe, a bucolic Southern California hamlet of ranches, gated communities and country clubs that guzzles five times more water per capita than the statewide average. In April, after Gov. Jerry Brown (D) called for a 25 percent reduction in water use, consumption in Rancho Santa Fe went up by 9 percent.

   

  So far, the community’s 3,100 residents have not felt the wrath of the water police. Authorities have issued only three citations for violations of a first round of rather mild water restrictions announced last fall. In a place where the median income is $189,000, where PGA legend Phil Mickelson once requested a separate water meter for his chipping greens, where financier Ralph Whitworth last month paid the Rolling Stones $2 million to play at a local bar, the fine, at $100, was less than intimidating.

   

  All that is about to change, however. Under the new rules, each household will be assigned an essential allotment for basic indoor needs. Any additional usage — sprinklers, fountains, swimming pools — must be slashed by nearly half for the district to meet state-mandated targets.

   

  Residents who exceed their allotment could see their already sky-high water bills triple. And for ultra-wealthy customers undeterred by financial penalties, the district reserves the right to install flow restrictors — quarter-size disks that make it difficult to, say, shower and do a load of laundry at the same time.

  In extreme cases, the district could shut off the tap altogether.

  That’s right. Soon, residents of Rancho Santa Fe may be forced to stop watering their personal chipping greens or worse still, could find themselves standing in a brown fairway. And while some might argue that asking the community to cut back by 36% is reasonable, especially considering the hamlet uses 400% more water per capita than the state average, others, like resident Gay Butler (who enjoys trail rides on her show horse and whose water bill averages around $800/month according to WaPo) are outraged:

  “What are we supposed to do, just have dirt around our house on four acres?”

   

  

  (Gay Butler)

  Here’s a look at what’s at stake should California decide to apply the same rules to rich people as they do to everyone else:

  

  

  

  Before anyone loses sleep over what those scenic views would look like if everything that’s green were to suddenly turn brown, rest assured that some wealthy Californians are prepared to take the fight to the bitter end to protect their lawns and fairways and on that note, we’ll close with a quote from Yorba City’s Brett Barbre who, when asked about the possibility that the state could compel him to put down his watering hose, said the following:

  “They’ll have to pry it from my cold, dead hands.”

  
  

  

  

  
  
  

  

• Peak Oil: Myth Or Coming Reality?

  Submitted by Gaurav Agnihotri via OilPrice.com,

  In 1956, a geoscientist named M. King Hubbert formulated a theory which suggested that U.S. oil production would eventually reach a point at which the rate of oil production would stop growing. After production hit that peak, it would enter terminal decline. The resulting production profile would resemble a bell curve and the point of maximum production would be identified as Peak Oil, a point of no return.

  

  The original peak oil curve
  Image Source: Cornell University

  Hubbert first predicted that U.S. oil production would peak in 1970 and then start declining rapidly. His prediction turned out to be partly true, as U.S. crude oil production peaked that same year, not to be eclipsed again until the shale boom began.

  

  Annual crude oil production (in thousands of barrels per year) for entire United States, with contributions from individual regions as indicated.

  “The end of the oil age is in sight, if present trends continue production will peak in 1995 — the deadline for alternative forms of energy that must replace petroleum in the sharp drop-off that follows." This is what Hubbert had to say in 1974, based on 628 billion barrels of proven oil reserves. However, his prediction didn’t turn out to be true, as global oil production continues to surge, thanks to new oilfield discoveries and improved exploration and drilling technology.

  

  World oil and other liquids supply, broken out into crude and condensate, natural gas plant liquids, other liquids (mostly ethanol), and processing gain (increase in volume from refining heavy oil), based on EIA data.

  In fact, the below graph shows that even while U.S. production declined between the 1970s and the 2000s, global crude oil production has increased consistently from 1965 to 2015 and there isn’t any bell curve depicting the peak oil phenomenon.

  

  Image created with data gathered from BP Statistical review2015.

  In short, we have yet to see evidence that we are nearing a peak in oil production. On the contrary, agencies like EIA and IEA have predicted a stable increase in crude oil production for the next few years at least.

  But supplies may not be the only, or even the most important factor when analyzing the end of the oil era. The world is making progress at moving beyond oil. So instead of discussing Peak Oil in terms of supply, perhaps it is now more useful to analyze ‘Peak Demand’.

  

  A supply- demand curve showing the conventional law of demand

  If oil prices followed the conventional law of demand, then low oil prices would result in a higher consumption rate. However, 2014 saw something remarkable happen. BP notes in its 2015 Statistical Review that energy consumption grew at just 0.9 percent in 2014, the slowest rate in almost twenty years. That came even as prices declined.

  

  The 2014 Oil Price Shock did not improve the consumption rates in North America, Europe and Eurasia
  Image Source: FT.com

  What if demand growth keeps slowing? Does this trend indicate that global demand for crude oil will eventually hit a ceiling? "Global oil demand will peak within the next two decades”, said energy expert Amy Mayers Jaffe in a recent article for The Wall Street Journal.

  What could make oil demand peak within the next two decades?

  It is interesting to note that almost 50 percent of crude oil is used for producing gasoline which is mostly used in the automobile industry. So what happens when people stop driving cars that run on gasoline?

  

  Image Source: Curious.org

  Electric Vehicle

  Global sales for electric vehicles (EVs) have risen at an amazing rate in the past few years. The market for electric vehicles in China, the U.S., and Japan, which have the highest number of conventional vehicles, are witnessing EV growth rates of 120%, 69% and 45% respectively. Although growing from a small base, EVs are steadily making progress at becoming a mainstream product.

  Although EVs are priced higher than conventional cars, their lower operating costs would offset their initial purchase price in just few years. Ucsusa.org even concludes that EV owners can save as much as $1,200 annually when compared with a conventional vehicle (27mpg) running on gasoline at $3.50 per gallon.

  If and when EVs become mainstream, demand for gasoline and crude oil will start declining.

  Another noteworthy development comes from auto major Audi, which recently created a ‘blue crude’ which can be converted into a carbon neutral ‘e-diesel’ using a simple three step process. This new technology is getting the full support of the German government as it produces lesser CO2 emissions and could be a potential game changer in the near future.

  Whether or not EVs become the most sought after technology in the future, it is clear that scientists and engineers are developing ways of moving beyond oil for transport.

  Renewables

  There are not a lot countries that still generate electricity using oil, but there are a few. Saudi Arabia stands out. But Saudi Arabia is reportedly planning to add around 54 GW of power by 2032 from renewables, out of the total power around 41 GW would be from solar energy. “In Saudi Arabia, we recognize that eventually, one of these days, we’re not going to need fossil fuels. I don’t know when – 2040, 2050 or thereafter. So we have embarked on a program to develop solar energy. Hopefully, one of these days, instead of exporting fossil fuels, we will be exporting gigawatts of electric power,” oil minister Ali Al Naimi of Saudi Arabia said at a conference in May.

  The biggest factor that supports renewables is their growing affordability. As costs of production continue to decline, renewables will continue to edge out fossil fuels in a variety of sectors. For the few countries that still use oil for electricity, renewables will slash oil demand.

  

  China’s huge demand for oil – It can’t last forever

  Bolstered by strong internal demand and robust economic growth rate, China is the world’s second biggest consumer of oil after the U.S.

  

  China imported around 5.5 million barrels per day in month of May, a steep decline from the record 7.4 million barrels per day in April as its refineries were down for their annual maintenance. However, oil markets could be in for a shock from China soon, as the Asian giant is currently busy filling up its strategic petroleum reserves (SPR) thanks to low oil prices.

  China already has more than 12 SPR sites and it plans to further increase its SPR capacity from 250 million barrels to 500 million barrels by 2020. So what happens once this target is achieved? “We need to understand the dilemma of hidden demand in China, where you have two types of demand – normal demand and strategic stockpiling. The latter won't last forever,” this is what Jamie Webster of IHS had to say in a recent interview with Reuters.

  What happens when China’s huge appetite for oil starts reducing in the coming years? It would bring the world economy even closer to peak oil demand.

  

  

  
  
  

  

• China Completes Island Construction, Will Now Build Military Facilities

  “I’m an amateur student of history and I’m reminded of … how Germany was testing the waters and what the response was by various other European powers… But unfortunately, up to the annexation of the Sudetenland, Czechoslovakia, the annexation of the entire country of Czechoslovakia, nobody said stop. If somebody said stop to Hitler at that point in time, or to Germany at that time, would we have avoided World War II.”

  That piece of revisionist history is brought to you by Benigno Aquino and is excerpted from a speech the Philippine President gave to the Japanese parliament earlier this month. 

  Aquino was of course referring to China’s controversial land reclamation efforts in the South China Sea. Beijing’s construction of some 2,000 acres of new sovereign territory atop reefs in the Spratly archipelago has alarmed the country’s neighbors and drawn sharp condemnation from Washington, with President Obama accusing China of “throwing elbows” and using its size and relative to power to “bully” nations with competing South China Sea claims and Defense Secretary Ashton Carter assuring Asia Pac allies that the US will sail and navigate wherever it pleases. 

  For its part, China has ratcheted up the rhetoric, saying its Navy and Air Force will adopt “offensive” strategies if necessary and claiming that, if threatened, it will establish a no-fly zone over its new islands. The US also claims Beijing had at one point positioned artillery in the Spratlys although it has apparently been either moved or hidden since being spotted by a PA-8 Poseidon spy plane. 

  The Philippines, in an effort to counter a series of Chinese documentary films that aired in 2013, ran a video called “Karapatan sa Dagat” or “Maritime Rights” on Independence Day. Reuters has more:

  “Our objective is to inform our people,” Charles Jose, the foreign ministry spokesman, said adding they hoped to “rally support of our people behind our Philippine government’s policy and action”.

  
  

   

  The Philippines has filed an arbitration case against China, which claims almost the entire South China Sea, believed to be rich in energy resources and where $5 trillion ship-borne trade passes every year. Brunei,

   

  Malaysia, Vietnam and Taiwan also have claims on the sea.

   

  In 2013, China’s state-run CCTV network aired an eight-part documentary called “Journey on the South China Sea”, a rare peak into how Beijing was trying to consolidate its claims in the disputed sea.

   

  The “video war” comes as China rapidly expands its footprint in the South China Sea, constructing at least one airstrip and other military facilities on reclaimed land in the Spratly islands.

  Now, the Chinese foreign ministry is out with a statement indicating the country has nearly completed its construction projects. While this could be viewed as a sign that China has effectively backed down, albeit on its own terms and at its discretion (i.e. saying the project is “complete” is something different than saying the project has been halted due to international pressure), that will likely come as no consolation to the US and its allies because even as China signaled an end to its dredging activities, it also implicitly admitted that it will continue to build military facilities on the islands, although this was buried in the fine print.

  “Apart from satisfying the need of necessary military defense, the main purpose of China’s construction activities is to meet various civilian demands and better perform China’s international obligations,” the foreign ministry said, before saying that “after the land reclamation, we will start the building of facilities to meet relevant functional requirements.”

  Since one of the “relevant functional requirements” is “satisfying the need of necessary military defense,” it seems China will continue to construct just the type of facilities on the islands that have become the subject of intense controversy. WSJ has more color:

  China said it is shifting work on disputed South China Sea islets from the dredging of land to the construction of military and other facilities as it pushes forward with a program that has aggravated tensions with the U.S. and neighbors.

   

  
  

   

  Analysts say the imminent end to China’s island-building work could signal a willingness to seek compromise with Washington and rival claimants in the South China Sea, even as it demonstrates Beijing’s ability to unilaterally dictate terms in the long-standing dispute.

   

  “This is a step toward halting land reclamation, which the U.S. has demanded, and at the same time, China can tell its people that it has accomplished what it wanted to do,” said Huang Jing, an expert on Chinese foreign policy at the Lee Kuan Yew School of Public Policy in Singapore.

   

  “China unilaterally started the land reclamation and now China is unilaterally stopping it,” Mr. Huang said. “China is showing that—as a major power—it can control escalation, that it has the initiative, and that it can do what it sees fit for its interests.”

  
  

  The Philippines’ Foreign Ministry said it is awaiting official confirmation from Beijing on its Tuesday statement, while the Vietnamese and Malaysian foreign ministries and the U.S. Embassy in Beijing didn’t immediately respond to requests for comment.

   

  China’s statement came on the final day for Beijing to submit comments to an international arbitration tribunal that is considering the Philippines’ territorial claims in the South China Sea.

  For its part, China wants nothing to do with arbitration proceedings in The Hague, contends The United Nations has no jurisdiction, and says it will not recognize the tribunal’s verdict.

  In other words, expect tensions to rise over the coming months as the supposed “completion” of Beijing’s “sand castle” building simply means China will now move into the next phase of development which is apparently the installation of military facilities.

  *  *  *

  Full statement from Chinese foreign ministry:

  The construction activities on the Nansha islands and reefs fall within the scope of China’s sovereignty, and are lawful, reasonable and justified. They are not targeted at any other country, do not affect the freedom of navigation and overflight enjoyed by all countries in accordance with international law in the South China Sea, nor have they caused or will they cause damage to the marine ecological system and environment in the South China Sea, and are thus beyond reproach.

  It is learned from relevant Chinese competent departments that, as planned, the land reclamation project of China’s construction on some stationed islands and reefs of the Nansha Islands will be completed in the upcoming days.

  Apart from satisfying the need of necessary military defense, the main purpose of China’s construction activities is to meet various civilian demands and better perform China’s international obligations and responsibilities in the areas such as maritime search and rescue, disaster prevention and mitigation, marine scientific research, meteorological observation, ecological environment conservation, navigation safety as well as fishery production service. After the land reclamation, we will start the building of facilities to meet relevant functional requirements.

  China is committed to the path of peaceful development. She follows a foreign policy of forging friendship and partnership with her neighbours, and a defense policy that is defensive in nature. China remains a staunch force for regional peace and stability. While firmly safeguarding her territorial sovereignty and maritime rights and interests, China will continue to dedicate herself to resolving relevant disputes with relevant states directly concerned, in accordance with international law, through negotiation and consultation on the basis of respecting historical facts, pushing forward actively the consultation on a “Code of Conduct in the South China Sea” together with ASEAN member states within the framework of fully and effectively implementing the Declaration on the Conduct of Parties in the South China Sea. China will continue to uphold the freedom of navigation as well as peace and stability in the South China Sea.

  

  

  
  
  

  

• "Free Labor" Or "Slave Labor" – Hillary's Unpaid Intern Hypocrisy

  What difference does it make? In yet another gross exposure of Hillary hypocrisy, The Guardian reports that the great savior of “everyday Americans”, promising to fight for fairness for working Americans; She who proclaims $15 per hour minimum wage is fair for all, is in the midst of a ‘hiring freeze’ of paid organizing positions, forcing experienced grassroots campaign workers to offer their services for free, unpaid internships.

  As The Guardian reports,

  Experienced, adult political operatives who want to do grassroots work for Hillary Clinton’s presidential campaign currently have no choice but to work as unpaid, full-time interns, raising new questions about how the White House frontrunner runs her own labor force as she prepares to double down on young people’s role in the American economy.

   

  The Clinton campaign is currently in the midst of what multiple Democratic sources described as a “hiring freeze” for paid organizing positions in the early campaign states where the former Secretary of State is laying the foundations of a massive national staff, with few if any paying jobs available for field operations.

   

  Clinton’s camp has made headlines about its frugality and a hard sell on its fellowship program, which allows aspiring politicos between the ages of 18 and 24 to spend this summer as full-time campaign volunteers. The result, however, is the human-resources reality of a campaign – one scheduled to hold at least 26 fundraisers this month alone – that isn’t just taking on college students with political science degrees but expecting political veterans to gamble their careers on her without pay.

   

  Clinton, according to her would-be employees, has left full-time organizers with little choice but to criss-cross the country and work as “free help”.

   

  The Guardian has identified at least five “Organizing Fellows” on Clinton’s current field team in Iowa alone who held paid positions on national political campaigns during the 2014 midterm elections.

  As Reuters reports, social media is not enthused by this mindboggling fact…

  

   

  Kevin Geiken, a longtime Democratic operative in Iowa, said he had tried to hire several former campaign staffers for paid political consulting jobs, only to be turned down by operatives who instead chose to work for Clinton gratis.

  “It boggles my mind,” he told the Guardian in an interview. “From their perspective, they’ve got to put in their time in this campaign now to get hired later.”

   

  Geiken said he understood the Clinton team was taking “great advantage in having free help that is already trained” – just that he “can’t understand why any of them would accept it”.

   

  A veteran Democratic strategist unaffiliated with any presidential campaign said he thought Clinton was sending a mixed message by hiring hundreds of advisers to focus on a policy message around income inequality, only “to hire people as interns and treat people as free labor who have already done the job before”.

   

  “It is a really terrible way to treat the most vulnerable people on campaign staff and makes me question their leadership on everything else,” the strategist told the Guardian.

   

  …

   

  “If Secretary Clinton wants to show she’s serious about economic opportunity for young people, that has to start with her campaign,” said Mikey Franklin of the Fair Pay Campaign.

  “It’s wrong that they are not paid because they are giving their labor and labor should be compensated,” he said.

  *  *  *

  Perhaps, a rephrasing of the campaign slogan should be “do as I say, not as I do.”

  

  

  
  
  

  

• The Economic Alamo

  Submitted by Jeff Thomas via Doug Casey's International Man blog,

  “And it came to pass in those days, that there went out a decree from Caesar Augustus, that all the world should be taxed.” – Luke 2:1, New Testament

   

  “Since the beginning of recorded history, the business of government has been wealth confiscation.” – Ron Holland

  It’s a common assumption that governments exist in order to serve the people of a country and that in order to do so, they must be accorded the necessary evils of power and taxation. I believe that the opposite is true, that in the perception of those who rule, power and the ability to exact tax are the very purpose of government, and service to the people is merely a justification for that pursuit.

  This condition is perennial. Throughout history, rulers have maximised their power over their minions and, likewise, have exacted as much taxation as they have been able to get away with. Consequently (and quite understandably), it’s always been the norm for people to try to protect their wealth, however large or small, from confiscatory taxation.

  Taxation is, of course, legalised theft. It is never collected voluntarily, as it might be with a charity or place of worship; it is taken by force. (If you don’t agree, try refusing to pay.)

  Centuries ago, those who had acquired a measure of wealth might have hidden it under the floorboards or buried it in a field. However, over the last century, as long distance travel became increasingly possible, those who have possessed wealth have developed a more reliable method: store it in another country, one where the laws of confiscation are either not so rapacious, or—better still—don’t exist at all.

  The Era of the Tax Haven Blossoms

  Tax havens are not a new idea, but they didn’t come into their own until the 20^th century—a time when they flourished. Deservedly, they’ve become increasingly sophisticated and serve their clients extremely well. So well, in fact, that they’ve become a threat to those countries (mostly much larger countries) that are oppressive in their tax regimes. Eventually, these countries joined together to form the Organisation for Economic Co-operation and Development (OECD), which, despite its euphemistic name, is charged with the dual goals of ending tax havens and creating forced equalisation of taxation in most of the world’s countries, whilst they allow the primary OECD countries to do as they please (to operate independently of the forced taxation equality).

  In recent decades, the OECD have ramped up their campaign. First, they created propaganda describing tax havens as centres of “money laundering,” suggesting that money that had been obtained through criminal means was being transferred to overseas banks to disguise its source. (An excellent treatise on this subject can be found here.)

  At the same time, the OECD made a concerted effort to avoid discussing the volume of tax-haven business that actually was caused by the fact that OECD member-countries operated oppressive tax regimes, and that tax-haven clients were merely seeking freedom from economic oppression.

  The OECD have made great progress in their effort, with much of the world’s taxpaying public now believing that tax havens are merely for criminals and “tax cheats.” (More recently, the OECD have been working to create the belief that tax havens are linked to terrorism, and I predict that we shall see this effort increase dramatically in the future.)

  But now, the OECD have a greater impetus to crush the economic liberty in the world that tax havens provide. Most of the OECD countries have squeezed their populations to the limit and, wanting still more, have turned to massive, unpayable debt as a solution.

  Just like an addiction to heroin, this dependency on a level of money that’s beyond what can be taxed has led these countries to a desperate impasse: the economic system itself is on the verge of collapse and nearing the end of their ability to maintain the cost of their overreach. They are redoubling their efforts to limit the activities of the world’s tax havens.

  The Last Holdout

  In recent years, we’ve seen one law after another passed in the EU, the US and other First World countries, laws that allow for greater capital controls and the confiscation of wealth by banks and governments.

  In addition, governments are passing legislation that increasingly limit the ability for an individual to make currency transactions. Whether spending, receiving payment, depositing or withdrawing, the freedom to transact is attracting greater scrutiny. (The ultimate stage will be the need to request permission to make any transaction.)

  Since the early 2000s, several associates and I have tracked this development and termed it “The Great Race.” The OECD countries hope to gain total control over tax havens before their over-taxation and debt cause their economies to collapse.

  If they fail to gain complete control prior to that time, they may not economically be able to take control after that. Although we’ve watched developments closely over the years, I must confess, we’re no closer to knowing whether they’ll win the race… It will be close.

  On the surface, it would seem that the outcome wouldn’t matter much one way or the other. After all, the collapse of these economies, although possibly not imminent, is nevertheless inevitable. Sometime in the next few years, one trigger or another will bring down the economic house of cards. So, if the tax havens are destroyed in the meantime, why could they not simply reinvigorate themselves post-crash?

  The problem is that if the OECD nations win the Great Race, the last bastion of economic sanctity—the tax havens—would have fallen, and much of the wealth they now contain might already have been transferred to the dying empires.

  Like gold going down in 17^th century Spanish galleons, it would be a long time before that wealth would be likely to resurface in the hands of those who are productive. It would have been squandered by the rulers of the OECD member-nations in their last gasp of world economic domination.

  This does not mean that the world would never recover. After all, wealth is never destroyed; it only changes hands from time to time. But it could very well mean that, as in the aftermath of the collapse of the Roman Empire, sufficient wealth was not in the hands of those who are by nature productive. Therefore, a return to a productive free market would likely be slow in developing.

  Historically, whenever collectivism has become total, recovery in its aftermath has always been slow.

  And so the race is on—in a very big way. The world’s tax havens are, today, the last bastions—the Alamo—for the free ownership of wealth, and no one can say for certain to what degree the OECD nations will succeed in their quest prior to their economic fall.

  To be sure, many low-tax and no-tax jurisdictions have been taking the position that “The OECD have the biggest guns. If we can only placate them for a bit longer and remain in business in some form until they collapse, we’ll be poised for recovery once the dust has cleared.”

  In the meantime, many residents of OECD countries, who are only now figuring out that their governments are closing in on their wealth, are questioning whether there is any point in moving their money to jurisdictions where the laws are less confiscatory. They tend to say, “But if the OECD are going after the tax havens, what good will it do for me to diversify my wealth? They’ll get it all in the end anyhow.”

  There’s certainly logic in that reasoning, but as any long-term investor who is familiar with the benefits of tax havens will say, “There is no guarantee your government won’t strip you of your wealth, but there never was.

  The whole point has always been to not be the low-hanging fruit. Get your wealth as far removed from countries whose objective is to take it from you. In doing so, you raise the odds that you’ll retain your wealth… At the very least, you’ll be the last to be victimised and you might escape altogether.”

  In essence, the world’s tax havens are the economic Alamo—the last holdout against world economic domination. In a few years, we’ll know whether they’ve succeeded in preserving economic freedom for the future.

  

  

  
  
  

  

• Well That Was Not Supposed To Happen

  The bigger they are the harder they will eventually fail… and the more taxpayer funds will be confiscated to fix them!

   

  

   

  h/t @anatadmati

  

  

  
  
  

  

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