Mwah-hahahahahaha!

As gold is the ultimate fetish object it holds to reason that those who own gold or pitch it online are pigmen and that those who don’t, aren’t … they are the chaste and proper ‘Anti-Pigmen’ such as those who grace the pages of the Financial Times.

… if irony cannot be found here it does not exist anywhere in the universe.

Man walks into a gold bar. Au!

By the lovely and brilliant Izabella Kaminska,

Part of the Cash-for-Gold series:

FT Alphaville participated in a “Gold Bulls vs Bears” event hosted by the Association of Mining Analysts (AMA) on Wednesday.

The motion being discussed was:

Is gold’s role as a safe haven asset in the global financial system outdated and redundant and if the ubiquitous QE programs have been successful and the global economic upturn is confirmed, the price of gold will continue to struggle?

FT Alphaville was on the bear team with Tyler Broda, from Nomura, and Robin Bhar from Societe Generale.

On the bull team there was Sharps Pixley’s Ross Norman, MoneyWeek’s Dominic Frisby and Edison Research’s Charlie Gibson.

The bears lost the motion.

Mwaa-hahahaha! Frisby is a stand-up comic … the bears lost a highly technical finance argument to a television personality! How embarrassing … like losing a courtroom argument to Fred Davis … or the Italian establishment doing very much the same thing.

This was the consolation price, Izzy drank it all. What the winners received is not mentioned. Probably cases of beef jerky.

Sez Izzy:

Since we (the Alphaville side) now have the platform, we’ll unashamedly reiterate the bears’ case. Any gold bull rebuttal that actually makes logical sense (you’ll be working to convince independent adjudicator Jamie Chisholm) has a chance to win the Goldschlager.

SocGen’s Robin Bhar made three stellar points:

– Where is the inflation?

Simply put, the current gold price appears to be discounting a huge, sustained increase in inflation over the coming years. For example, we can calculate the required annual US inflation rate over the next five years that would justify the current gold price (using 1968 as the starting point): US inflation would have to run at an overwhelming 45% per annum for the next five years.

But inflation is subdued. Gold prices have soared in recent years despite the fact that US CPI has stayed below 4% for the bulk of the time.

– The dollar’s strength and US growth:

The US economy currently offers the best potential for stronger-than-expected growth. This suggests a stronger US dollar in such a scenario with its obvious impact on gold.

– The end of QE:

And now we are beginning to see: 1) the economic conditions that would justify an end to the Fed’s QE; 2) fiscal stabilisation that has passed its inflection point; and 3) a US dollar that has begun trending higher. Ot seems unlikely that investors would want to add much to their long gold positions in this context. If so, the gold price would trend lower at pace as the physical gold market is seriously oversupplied without continued large-scale investor buying. Selling by investors would add fuel to the fire.

The inflation argument has just torpedoed itself! The pigmen score! “Gold prices have soared despite!” There is no direct relationship between gold prices and inflation only a correlation. The gold price discounts all sorts of risks including inflation … which in its virulent form is a default or a policy choice of managers … as was unloaded upon sleeping Cypriot bank depositors a few weeks ago.

Ask Bank of Cyprus depositors whether they would have rather had their now-severely-diminished or unavailable bank accounts or gold instead. “Gold is too expensive!” howl the bearish anti-pigmen, but how expensive was not having any? Sometimes people cannot see the current lessons being given right under their noses.

The ‘inflation-is-kaput’ argument presupposes the United States or the EU make up the entire economic world. There is deflation in Europe and Japan, at the same time there is inflation in China, India, Argentina and Iran and elsewhere. This is due to hot-money flows and restrictions leading to foreign exchange arbitrage, that is, there are different exchange rates between the public- and private sectors within these countries in addition to wage pressures. The consequence of the harder dollar is more arbitrage in these countries rather than less, more and stronger inflation … along with increased demand for gold.

Bhar’s second argument assumes US ‘growth’ is meaningful and is re-pricing the dollar rather than deflation, fuel shortages and the flight-to-safety. Growth in the US is disconnected from physical reality. The US is the healthiest patient in the cancer ward. Graded on its own curve: labor force participation, gasoline- and electricity consumption, goods imports have all declined; the demand for government supports such as food stamps and disability relief has increased. The remaining ‘growth’ component to the US economy is the debt-supercharged stock market … a rise that suggests currency weakness rather than strength, by the way …

The physical economy offers investors little- or nothing in the way of returns, only non-stop capital destruction and fleets of creditors demanding repayment-or-else. What remains is speculation in finance markets where gains are cheaply bought with moral hazard.

Meanwhile, the economic conditions on the ground in the US and elsewhere are unrelated to QE which is an exchange of assets between banks. What is pounding the world’s economies to rubble is not the cost of credit but rather the relentlessly increasing real cost of petroleum fuel. It’s hard to find fiscal stabilization anywhere, governments are playing catch-up trying to bail out bank investors and themselves at the same time they encourage more petroleum consumption which makes everything worse.

Bhar suggests there is excess gold inventory.

Figure 1: Gold disappears from the Comex metal vaults/JP Morgan, (Tekoa Da Silva-Nick Laird-Sharelynx): maybe it’s not seriously over-supplied after all (click on for big).

Keep in mind, the amount of gold does not change except for small increases year over year due to mine output, less what is lost in boating accidents. What changes is ownership, from merchant pigmen to whom gold is another transferable good to hoarders who are resistant to selling pressures. In order for an investor to gain gold he must either trade with another … or he must borrow. Bhar suggests that increased private sector lending renders QE unnecessary. More credit is just as likely to support the price of gold … as it would any other asset. Bhar argues gold prices will collapse, why should they? A rising tide lifts all boats including those made from solid gold.

Enter Nomura’s Tyler Broda. According to Izzy, he is … “focused on flows and changing tastes:”

… he said it’s unlikely that the gold market can continue to sustain the investment demand needed to take the price higher:

Figure 2: Investment demand (FT Alphaville-Izzy Kaminska-Nomura): Whom to believe, Broda or his own chart? His only possible argument favors one asset class over another. If overall investment demand collapses as suggested by the chart there will certainly be solicitous central banks offering more cheap credit. Remember, pigmen always come first!

There was also a question of evolving tastes. Who really would want to be seen in the same shirt as their father?

James Bond’s Nehru jacket … Why not?

Sez Broda:

– In the scenario of a US recovery, and an associated appreciation of US dollar, most gold demand categories could weaken after 12 years of bull market growth.

Just as there are other investment reasons to own gold besides dollar depreciation.

– Investment comes under pressure (and even puts supply back on the market as is happening now) with normalising interest rates.

Broda can’t have it both ways, either gold is an investment or it isn’t. If it is, there is no reason for gold investors to behave differently than other investors. Under the hide, all investors are pigmen, even if the investments are cases of 9mm ammo, canned beans or composting toilets. Meanwhile, normalized interest rates are unaffordable, credit has painted itself into a corner.

– Commodity currencies weaken thereby lowering the cost curve support.

Commodity currencies are repriced relative to each other for many different reasons that often have little to do with interest rates. For instance, supply and demand — currency float/liquidity during a particular period — as well as marketplace momentum chasing and front-running effect currency prices.

– Lower gold prices mean less equity market interest in gold production, so debt and private equity financing increases which could lead to a return of hedging (adding to current supply).

Hedging adds to the supply of claims against gold, it cannot add the gold itself. Problems begin when the hedges are unwound and the claims are exercised. When there is less gold then claims are either worthless and extinguished in bankruptcy or they become bidding licenses.

– US dollar strength, reshoring and lower energy imports, reduces the size of EM trade surpluses, which could see EM central banks not accumulate gold at as fast as recent levels.

Exporters have currency reserve positions that are illiquid due to their size. There is little to buy with these reserves other than different currencies, debt or resources (capital). Gold is appealing because it’s different: it’s the resource that isn’t burned up for nothing.

There are lower energy imports in the US and elsewhere is because customers in these places are going broke and becoming ex-pigmen. This in turn adversely effects money supply, the EM’s forex reserves become stranded. This is not a problem with gold, instead the issue is EMs finding enough of it to buy … to do so without blowing the price sky high.

– Longer-term, jewellery demand could be negatively influenced by increasing sophistication within the emerging market economies.

Then again, it might not …

– The further adoption of globalised tastes means the affinity towards gold could ebb.

Tastes change in unpredictable ways, however, the Pharaohs 3,000 years ago wore gold jewelry like brides in India do today. A difference: there are far more brides now than there were Pharaohs, then.

– Gold’s dynamics are cyclical in nature. In this scenario, after these trends take hold, there will come a time where lower mined grades, continued nominal income growth (especially in Asia) and a return to investment demand push gold prices higher. However, with the market having built up $250 billion in investment demand alone over the past 4 years, supply and demand suggest the risks are still to the downside.

With respect to any increase in hedging, he added this would naturally bring forward tomorrow’s selling pressure to today, adding to current liquidation pressure.

Today’s selling pressure looks to be the result of margin calls by massively over-leveraged European banks as best-collateral is liquidated first.

– FT Alphaville pointed out that gold’s time as a safe asset had come and gone mostly because of technological evolution.

Add buzzwords here … ‘fill-in-the-blank technology’ … is going to save us all, blah, blah, blah …

– Gold certainly used to fulfill a store of value role in deepest darkest history because at that time there weren’t many other means to independently verify and record social liabilities. Gold was often the only common denominator between communities that did not know each other due to its fungible state and relative global scarcity.

2013: a ‘mark to fallacy’ world filled with shaggy-haired, moth eaten debts, most of which will never be repaid … what are the social liabilities worth, exactly? Nobody can verify what institutions hold on their balance sheets now; only a form of self-interested desperation is what is keeping the various components of the establishment knit together under enormous strains.

– But its value always lay in what it represented: a social liability. Debts and favours have always come before commodity money.

Broda says gold is poor quality money … compared to what? Keeping accounts straight is never the issue, for the purpose all forms of money work the same.

– Gold was an obvious token to be used to represent social wealth because only a wealthy society could justifiably waste its time doing something so pointless as digging up gold.

Somehow, digging up a trillion barrels of oil … then burning them all for nothing … by driving aimlessly in circles … poisoning the atmosphere at the same time … is not pointless!

– In that sense gold was naturally associated with free time and social standing.

So are a lot of other things … Goldschlager, vacation homes, mega-yachts, Rolls-Royces … so is finance in general. This is Financial Times for crying out loud, the discussion is about rentier assets not alms for the poverty stricken! At issue is relative pig-mannishness … or is it relative pig-mannery?

– But even in Roman times gold was mostly used as a last resort settlement option between strangers and foreigners only. The Romans actually had a very evolved debt-based system, with coins representing a memory device for social debts in an age when liabilities could not be verified with electronic ledgers.

Broda just torpedoes his own argument over and over. Gold did indeed exist as a tradable asset alongside credit … as it does so today. Markets have not changed, there are same funding sources, same pigmen, some of wallow more comfortably than do others.

– Those who believe gold has value beyond what a gold coin represents in the context of a wider “paper” liability based system suffer from the “Emperor’s New Clothes” delusion.

That’s another hole under the waterline. As a natural resource, gold has value, it is capital.

Unlike money, gold is non-reproducible. Our industrial money is value-negative, that is, it destroys value. Money is capital’s residue: it annihilates capital so as to substitute worth in the place of resource value. Or money creates perverse incentives: it enables those humans who destroy capital to live better than those who do not. Here is our ongoing crisis … economic suicide that is taking place right now! The human race requires capital not its residue, credit brings capital destruction forward. We congratulate ourselves for our cleverness: we have destroyed our grandparents’ capital and our parents’ … we are devouring our grandchildren’s and theirs in turn. What will be left for them besides empty promises?

It is not gold … nor is it the perception of gold’s abstract characteristics … that argues against liability money, rather it is the ordinary operation of our money every day which does all the heavy lifting. We sit back and watch the destruction taking place all around us helpless to do anything about it because of the hold our swinishness — and our creditors — have on us!

– Unless gold turns out to hold the key to eternal life, its utility is non-existent (outside of some small use dentistry or the chemical industry).

How hyperbolic! Gold is expected to transcend physics in order for it to outperform credit even as credit is unable to outperform itself. If it were otherwise — if credit could simply meet credit’s costs for longer than a few measly years — there would be no finance crisis. Instead, we are enduring the abysmal success of credit money, the ordinary operation of which has pitched our economies at the edge of the pit

– As Warren Buffett famously reflected about the absurdity of the gold market: we take something out of the ground only to immediately rebury it.

Buffett, the Ultimate Pigman …

I am Pigman, hear me roar (Yahoo)

– Which is why in a crisis people defer to objects of real utility for social exchange: cigarettes, favours, food, shelter, medical services and medicine.

… when they don’t have any gold. This last remark could be rephrased, “in a crisis people prefer real objects over airy abstract promises from con-pig-men”.

– If gold has value it’s because its abundant supply is being constantly manipulated by hoarders who suffer collectively from the same gold delusion.

Don’t start with central banks’ currency tricks and moral hazard, the pot calls kettle black!

– Roman gold hoards are a good example of this absurdity. They exist mainly because the Romans who buried those hoards never rediscovered them. The hoards were hardly a good insurance policy for them.

Nobody knows about the Roman gold hoards that were dug up by the Romans themselves …

– A social obligation authenticated by peers, however, cannot be lost as easily.

Another self-torpedoing: Peers authenticating credit is okay, but the same peers authenticating gold is not okay … enter the pigman attempting to appear to be something other than what he is! Gold = Pig. AAPL also = Pig.

– Thus if gold’s value went up during the crisis, it was only because temporarily people were reburying gold more quickly than they were unburying it.

Hmmm … that one sounds vaguely … Keynesian …

– But even at this time, the key trade was cash for gold, not gold for cash. The real commodity being demanded was in fact the cash. This created a delayed liquidation effect, as more gold became financialised and hedged by the industry lifting the price of the free-float.

“A man has two reasons to do anything, a good reason and the real reason.” __ J. P. Morgan

– In conclusion, we commented that gold’s value rests entirely on a belief system as zealous and subjective as any fundamentalist religion …

… like every other asset including credit money. All money is a mutually agreeable understanding with the past predicating the future. Gold has as good a record in this regard as any other form of money … or any other asset, for that matter.

The anti-pigman argument is that gold isn’t as ‘efficient’ an investment asset as others that pay dividends … that is, unearned income. The pigman counter-argument is gold carries less risk than other dividend-paying assets such as shares. Anti-pigs cannot argue that dividend-paying assets or other asset regimes carry little risk, even as least-risky of these assets are being crushed by policy on one hand, energy depletion-driven deflation on the other. Religion has nothing to do with behavior of money and money-users, rather it’s a very reasonable disillusion with religion.

– What’s more it’s a belief system that is driven by selfish and anti-social instincts, obsessed with concentrating wealth among the few on the arcane notion that gold’s value is somehow a constant in a world of variables.

The stock, bond, real estate markets are belief systems driven by selfish and anti-social instincts, obsessed with concentrating wealth among the … Pigmen!

… But there is no constant value system in a social system. Everything is relative.

When everything is relative, the anti-pigman argument vanishes, it can only take form where there is at least one constant as a reference point. One is either pregnant or not. The anti- constant is GDP growth in industrialized economies … a slender string indeed.

A few other things to keep in mind:

– On Ebay gold is ±$1,800/oz. More or less the same as it has been since end of 2011.

– Gold will depreciate when Picassos depreciate and not before: both are collected by Pigmen who can afford them regardless of price. Whatever is said about the investment worth of Picassos can be said about gold, after all, they are nothing more than bits of paint smeared onto pieces of cloth.

– Unlike petroleum where the high price is economically destructive, a high price for gold is economically irrelevant. $5 gasoline in the US = a severe recession or depression, $50,000/oz gold would not trigger anything but celebration among pigmen.

– Gold offers zero-returns, negative when cost of carry is added … the world’s risk-free securities offer nothing better.

– Gold can be exchanged directly for goods such as real estate. These sorts of barter trades occur outside of ordinary finance markets, traders therein cannot gain their accustomed percentage, the traders do not like these trades and they don’t like gold.

– At the same time, gold is held largely by the wealthy pigmen and central banks. Do they know something the rest of us don’t?

– Choice: do you keep wealth in gold … or as cash in a bank where it can be ‘bailed in’? There are more kinds of risk outside that of inflation. Unlike a national currency that is specific to a country, gold is portable, fungible and readily exchangeable everywhere in the world.

– The folks promoting OECD economic recovery are pro liars and media propagandists. Europe is in another recession and the US economy is misrepresented by ‘official’ figures. Even China is hiccuping.

– Japan’s trade deficit is deadly poison for Japan and for those who hold its paper. The yen is on a knife edge, JGB yields look to increase, the next step is a funding crisis both inside and outside of Japan. Inside; funding of the government’s interest burden and ordinary citizens’ purchases of imports, outside; to fund the yen carry trade (hedge). There will either be a flood of yen in circulation due to Abenomics’ success or too few due to its failure. Either one- or the other will occur, Japan’s trade deficit requires it.

Japan’s customers are now too broke to subsidize Japan’s mercantile economy any longer, they cannot subsidize themselves and their own wasteful consumption.

– What are (sovereign) securities really worth? (A: what Jim Cramer says they are!)

– The alternative collateral to gold is … what exactly? Non-gold collateral includes shiploads of bad loans spirited from the private sector onto the central banks’ balance sheets. Nothing is improved, nothing ever has been improved only papered over with new loans: finance is insolvent.

– The German government asked the US and France to return … something. Was it lederhosen? Cuckoo clocks? Porsche hub caps? Pigmen within the German government set their gold-retrieval process in motion: ‘Law of averages’ suggests not all the German government pigmen are daft.

– Market call: gold is a natural resource, like the others, it’s real price — that relative to other goods and services — will relentlessly increase.

There is more … more always more. More is the nature of Pigmen to always require more. Izzy can send the bottle of Goldschlager over here, at her convenience.
 

NOTE: All the non-book comments on the previous post will be brought forward over here.

Max Beckmann ‘Temptation of St. Anthony’ (Detail).

This is a list of recommended reading material for those looking for more background on this site: This list will be upgraded frequently so check often.
 

WALTER BAGEHOT: Lombard Street (1873) Everything you need to know about central banking and the management of hard currencies can be found here. (e-book)

JING CHEN and JAMES K. GALBRAITH Institutional Structures and Policies in an Environment of Increasingly Scarce and Expensive Resources: A Fixed Cost Perspective (2011) Effect of resource scarcity on industrial economies. ALSO:

JING CHEN and JAMES K. GALBRAITH A Biophysical Approach to Production Theory, Working paper (2009).

CHARLES EISENSTEIN: Sacred Economics: Money Gift & Community in the Age of Transition (2011) This is a book is the counterpoint to David Graeber’s ‘Debt, The First 5000 Years’. “He proposes demurrage currency and prefers Silvio Gesell’s leasing of the commons approach to George’s land tax (Eisenstein calls Gesell’s 1906 book ‘The Natural Economic Order’ a “masterwork”). (Sandor)

IRVING FISHER The Debt Deflation Theory of Great Depressions (1933) Debt repayment = extinguished currency = deflation. Seminal paper written after Fisher lost all his money in the Depression. (Online economic paper)

HENRY GEORGE: Progress and Poverty, An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth: The Remedy (1879) A parallel critique of industrial capitalism to Karl Marx’s ‘Capital’. (e-book) George’s suggestion of a land tax high enough to remove incentive to land rents is central to much of current economic thinking by Michael Hudson and others.

SILVIO GESELL: The Natural Economic Order (1918) Gesell’s attempt to undo the system of rents, unearned income and thereby liberate labor from bondage (e-book, highly recommended.)

JOHN MAYNARD KEYNES: The Economic Consequences of the Peace (1920) Arguably Keynes’ most accessible writing; his critique of European policy after Versailles. (e-book) ALSO:

JOHN MAYNARD KEYNES: The General Theory of Employment, Interest and Money (1935) Arguably Keynes’ response to equilibrium economic theory, his (incomplete) masterwork: “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist”. (e-book and PDF)

AXEL LEIJONHFVUD: The Unstable Web of Contracts (2012) From Institute for New Economic Thinking, paper describing 2008 crisis: string economy, overcomplexity, the absence of good choices. Everything by Leijonhufvud is a) brilliant, b) worth reading, he makes the most complex ideas simple!

FRIEDRICH LIST: The National System of Political Economy(1841) List is economic father of modern Germany as well as intellectual force behind the EU. (e-book)

THOMAS MALTHUS: An Essay on the Principle of Population (1798) Increased population cause an increase in poverty due to increased competition for jobs. (e-book)

KARL MARX – FRIEDRICH ENGELS Capital (or ‘Das Kapital’ 3 volumes last two from Marx’s notes by Engels) (1867 and later) Vilified in the West and referenced repeatedly but almost never read; an insightful critique of industrial capitalism (e-book).

HYMAN MINSKY The Financial Instability Hypothesis (1992) Periods of economic stability by themselves tend to undermine stability (Downloadable economic paper)

WARREN MOSLER: 7 Deadly Innocent Frauds (2009) An alternate view of contemporary economic theory from a finance company insider (download).

JOSEPH SCHUMPETER Capitalism, Socialism and Democracy (1942) Intended as a critique of Marx and his business cycles: analysis extends to include degrading of capitalism into corporatism. (e-book)

ADAM SMITH: An Inquiry into the Nature and Causes of the Wealth of Nations (1776) Influential description of division of labor within industrial economies (e-book)

THE ECOLOGIST Vol. 2 No. 1 Goldsmith et. al. A Blueprint For Survival (1970) One of the seminal works of modern environmentalism. (Online economic paper).

KNUT WICKSELL: The Influence of the Rate of Interest on Prices (1907) From Economic Journal 17: 213–220 One of the seminal economists of the late- 19th and early 20th centuries. The radical Wicksell developed a more fully-formed quantity of money theory of prices, the first step down the road toward Keynes’ theories. (Online economic paper)

BENJAMIN BERNANKE: Essays on the Great Depression (2000) A series of more-or-less conventional observations about the Great Depression.

WILLIAM BLACK: The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry (2005) Description of savings and loan crisis and banking crimes in general.

WILLIAM BOBBITT: The Shield of Achilles: War, Peace, and the Course of History (2007) Corporations and globalization have created the nation-transcending ‘market state’ (Kevin Cunneen).

RON CHERNOW: The House of Morgan, An American Banking Dynasty and the Rise of Modern Finance (1990) Everything you wanted to know about the banking business of Morgan and Co. (This might also be available as a free audiobook.)

JAMES S. DONNELLY, JR. Captain Rock: The Irish Agrarian Rebellion of 1821-1824 (2009) History of Irish rebellion in early 19th century (K. Cunneen).

JOHN KENNETH GALBRAITH: The Great Crash 1929 (1954) Arguably the best of the stock market crash narratives.

JOHN KENNETH GALBRAITH: The New Industrial State (1967) Influential observation that industrial states all become very much the same regardless of politics.

STEVE KEEN: Debunking Economics, The Naked Emperor Dethroned (2011) Illuminates where conventional ‘rational actors’ go wrong. (MATH)

NAOMI KLEIN: The Shock Doctrine, the Rise of Disaster Capitalism (2007) The establishment uses crises for its own ends, both inadvertent and self-created crises. Highly Recommended.

CHARLES A. S. HALL and KENT A. KITGAARD: Energy and the Wealth of Nations, Understanding the Biophysical Economy (2012) Textbook description of the relationship between our fabulous economy and its energy cost. Expensive but worth it. (SOME MATH)

ANNA SCHWARTZ – MILTON FRIEDMAN: A Monetary History of the United States (1960) Reduces economics to the proper or otherwise management of the money supply: incorrect but ambitious and political: the monetarists’ bible.

PHILLIP SLATER: The Pursuit of Loneliness: America’s Discontent and the Search for a New Democratic Ideal (1990) Examines social tendencies in the US toward individualism, violence and addiction to technology. (Josh)

L. RANDALL WRAY: A Primer on Macroeconomics for Sovereign Monetary Systems (2012) An overview of Modern Monetary Theory (MMT).

CHARLES DARWIN: The Origin of Species (1859) Oft referred to be rarely read study of natural selection. (e-book)

THOMAS HAGER The Alchemy of Air: A Jewish Genius, a Doomed Tycoon, and the Scientific Discovery That Fed the World But Fueled the Rise of Hitler (2009) The story of the discovery of the Haber-Bosch process to produce nitrates, useful for both fertilizer and explosives. Ellen Anderson

E. O. WILSON Success and Dominance in Ecosystems: The Case of the Social Insects (1987) General observations about social insects primarily ants (e-book)

E. O. WILSON: On Human Nature (1978) Explanation of biology and human behavior by an evolutionary biologist.

MIKE AND NANCY BUBEL: Root Cellaring: the simple no-processing way for store fruits and vegetables (1979) Another Rodale product. (J. B.)

BRIAN HALWEIL: Still No Free Lunch: Nutrient Levels in U.S. Food Supply Eroded by Pursuit of High Yields (2007) High-yield strains and industrial inputs have increased gross farm output at a cost: diminished nutrition from the food that is produced (download).

F. H. KING: Farmers of Forty Centuries, Or Permanent Agriculture in China, Korea, and Japan (1911) Examination of traditional (pre-industrial) agriculture. (e-book)

RODALE PUBLISHING: Encyclopedia of Organic Gardening Multiple reprints and updates with variations on the title: all kinds of information on growing plants.

STEVE SOLOMON: The Intelligent Gardener: Growing Nutrient Dense Food (2012) How to add missing nutrient base to your soil to grow nutrient dense food.

CAROLE B. TURNER: Seed Sowing and Saving: Step-by-Step Techniques for Collecting and Growing More Than 100 Vegetables, Flowers, and Herbs (1998) Avoiding the Home Depot tomato plant by growing your own. (J. B.)

JOHN VIVIAN: Wood Heat (1976) In depth look at heating and cooking with wood. A Rodale Press product. (J. B.)

JOE BAGEANT: Deer Hunting with Jesus: Dispatches from America’s Class War (2008) Observations of American working class.

JARED DIAMOND ‘Guns, Germs, and Steel’ (1997) History of modernity and its methods is surprisingly available online at no cost (.pdf document) No mention of Keynes in this work (Sandor)

OTTO FRIEDRICH: Olympia: Paris in the Age of Manet (1993) A look a 19th century France during the period of Napoleon III and the Franco-Prussian War.

EDWARD GIBBON: Decline and Fall of the Roman Empire (1776) Immense examination of Romans from the Antonines to the capture of Constantinople in the 16th century. (both e-book and download) There are other studies including Toynbee but this is the best and most entertaining.

DAVID GRAEBER: Debt: The First 5,000 Years (2011) Another skewering of conventional economic thinking that does not accurately account for debt.

CHALMERS JOHNSON: Blowback: The Costs and Consequences of American Empire (2001) Seminal critique of US post-WWII overseas policies and consequences.

CHARLES P. KINDLEBERGER: Manias, Panics and Crashes; a History of Financial Crises (1989) Classic and insightful look at historical finance crises including overviews of competing theories.

WILLIAM KLINGAMAN: 1929, The Year of the Great Crash (1989), a look at the stock market crash and the beginning of the Great Depression.

WILLIAM MANCHESTER: The Glory and the Dream, A Narrative History of America, 1932 – 1972 (1992) An epic overview of late-twentieth century US history, useful as a reference. Susan Grigsby @ Daily Kos: “Books That Changed My Life”.
C. WRIGHT MILLS: The Power Elite (1956) Scathing criticism of the US power structure made up of corporate, military and political bosses.

LEWIS MUMFORD: Myth of the Machine (1970, in two volumes: ‘Technics and Human Development’ and ‘The Pentagon of Power’) Mumford dissects this ‘thing’ we have created in order to enslave ourselves.

JACK LONDON: People of the Abyss (1903) Lives in East London slums at the turn of the 20th century (e-book).

GEORGE ORWELL: Down and Out in Paris and London (1933) Another perspective on live in the slums.

VANCE PACKARD: The Waste Makers (1960) Along with The Hidden Persuaders and The Status Seekers: critiques of planned obsolescence, advertising and US consumer economy.

JACOB RIIS: How the Other Half Lives, Studies Among the Tenements of New York (1890) Lives of the poorest in 19th century urban New York City (e-book).
OSWALD SPENGLER Decline of the West (in 2 volumes) (1922) Historical comparative analysis of international conflict.

OSWALD SPENGLER: Man and Technics (1932) Discussion of the (Available as a download) Critique of industrial civilization (Christian Gustaffson)

JOSEPH TAINTER: The Collapse of Complex Societies (1990) Observes diminished returns to administrative and social complexity.

BARBARA W. TUCHMAN: A Distant Mirror, The Calamitous 14th Century (1978) A classic study of the period that in many ways parallels our own distressed 20th century.

BARBARA W. TUCHMAN: The Proud Tower: A Portrait of the World Before the War, 1890-1914 (1996) A look at primarily Europe during the decades before the First World War.

VACLAV HAVEL: The Power of the Powerless (1978) Essay regarding totalitarian states and how citizens can respond to them. (J.B. Sties) (Online document)

VACLAV HAVEL: Open Letters, Selected Writings, 1965 – 1990 (1991) More from Havel can be found @ Havel Czech Republic website. (J. B. Sties)

MIKE DAVIS City of Quartz (1990- updated in 2006) A look at Los Angeles and its metamorphosis into dystopian megalopolis.

MIKE DAVIS Planet of Slums (2006) Hard look @ ad-hoc urbanization around the world.

JANE JACOBS Death and Life of Great American Cities (1961) Analysis of American cities: what works and what hasn’t.

JAMES HOWARD KUNSTLER Geography of Nowhere, The Rise And Decline of America’s Man-Made Landscape (1994) Critique of US suburbia and auto-centric development.

MIKE REISNER Cadillac Desert: The American West and Its Disappearing Water, Revised Edition (1993) Water flows uphill toward money …

 
NOTE: PLEASE LIMIT COMMENTS TO BOOK- AND PAPER RECOMMENDATIONS, THANK YOU.
 

‘The End is Near’, David Sipress (The Phoenix) … when you realize it is impossible for anyone to take you seriously. You are beating your head against the wall, others laugh at you or they hate you because you are exposed and an easy ‘hate target’. You cannot accomplish anything, you are a boat beating against the current … borne back ceaselessly into ridicule, you are spitting into the wind, up a creek without a paddle, betting the wrong horse. Think of the others who have been pounding that same wall for decades … Nothing changes … the speculators always win, you are a muppet.

Dow Reaches 15,000 as Jobs Growth Exceeds Forecasts!

Inyoung Hwang – Lu Wang – May 3, 2013 (Bloomberg)!

U.S. stocks rose, sending the Dow Jones Industrial Average above 15,000 for the first time, as employment picked up more than forecast in April and the jobless rate unexpectedly declined to a four-year low!

!!!!!

So much for any crash, Happy Days are Here Again! White is the ‘New Black’: unemployment decreases because citizens stop looking for work. Ex-workers are removed from the unemployment relief rolls … they are then deemed to have ‘left the labor force’ or have retired. Being unemployed in this fashion is counted the same as being employed … That this is a fraud doesn’t matter: the unemployment number goes down for whatever reason, the stock market number goes up. This latter is the only number in America that matters. Indeed, we all live for the right number: Tigers 7, Astros 3 … Yay, Tigers! Because Americans live vicarious, derivative lives, the victory of the Tigers is our victory. When the Tigers lose we all die a little inside.

We should feel good about ourselves because some house flippers in California, Florida and Arizona have been brought back from the dead like vampires. This is courtesy of trillion$ in Federal government subsidies, central bank- crammed down interest rates and easy to obtain low-doc and no-doc guaranteed mortgages. Even beaten-down Detroiters have been able to garner a (small) piece of the house-flipping action. Clearly the animal spirit of unearned success and boundless avarice has refused to flicker out in the Motor City: (from Realtytrac).

It doesn’t matter that college graduates are unable to find work in their chosen fields or that 48 million of our countrymen require government assistance in order to afford to eat … it is the success of gamblers in different finance casinos, to whom everything- and everyone else is sacrificed.

Figure 1: US gasoline sales volume declines to levels not seen ten years ago. National Public Radio says the reason is because we are buying expensive new cars, instead of being too broke to buy gas.

Howard Gruenspecht, the EIA’s acting administrator says there are many reasons for the declining demand for gasoline. They include government mandates for the use of biofuels, like ethanol; and some demographic changes -— for instance, the graying of America (older people tend to drive less). The main factor, though, is the increasing efficiency of new cars and trucks.

Rebecca Lindland, director of research for IHS Automotive, says 27 percent of the new vehicles sold in 2011 were smaller, lighter, car-based versions of the SUV, called “crossovers.”

“Those tend to get significantly better fuel economy than our traditional truck-based SUVs that used to account for 20 percent of all the vehicles we bought,” she says.

How the addition of a fewer than ten million new vehicles with slightly better than mediocre gas mileage within a three-year period can effect the overall consumption of a 255 million vehicle fleet is not explained by NPR or the EIA. Keep in mind that the vehicles the new crossovers replace are not the ‘traditional truck-based SUVs’ … these remain in service as used cars with new owners. Rather, crossovers replace the much older vehicles that are wrecked or retired from service. A percentage of these retirees were very small cars that happened to get much better mileage than do any of the newer vehicles. Of course, this does not matter … what is important is (blind) faith in progress working properly and (unjustified) business confidence.

Selling out is so easy: ex-hippie Stewart Brand pimps ‘squatter cities’ along with nuclear reactors: prosperity is on the march, resistance is futile! It is a far, far better thing to ask, “Where’s mine?” than to criticize. The critic becomes nothing more than another brick in the Wall of Worry that the hard-nosed American Business Man must climb over in order to ‘innovate’ (MIT-Sloan).

As the expression goes, stocks are climbing a wall of worry. And by our estimates, despite economic malaise, the stock market hasn’t peaked, and we’re still on the way up. Here are some reasons why:

– The market largely reacts early in the cycle (and just remember: We are largely no higher than we were at the 2000 peak);

– We’re stimulating the market fiscally with low interest rates for some time to come;

– Businesses have cleaned up their balance sheets after the financial crisis and are now liquid (in fact many are sitting on huge cash reserves); and

– Companies are finding ways to achieve higher earnings despite a difficult political and regulatory environment.

Don’t fight the Fed. Dow 46,000! It’s never too late to jump in! Interestingly, MIT-Sloan does not mention slums as a means to prosperity, nor do they mention reactors, they must have made a spreadsheet error.

The world’s ‘Progress Economies’ have so far swallowed management outrages such as the depositor theft in Cyprus and the repeated bailouts of the Giant Banks by pensioners and others. Consequences have so far been iffy. There have been no market crashes or runs out of the banks, no additional reactor meltdowns or cities drowned by climate change, no bubbles are reverting to mean, no insurrections or violent government overthrows. The children have vanished into their parents’ basements and X-boxes. Occupy and similar social movements have enjoyed their fifteen-seconds of fame and have retreated into well-deserved obscurity; there are no replacements lurking over the horizon. The liberalizing impulses that once flared across the Middle East and North Africa have faded into power-politics-as-usual in places where open warfare has not broken out. Without consequences more outrages are certain to come. This state of affairs will remain in force as long as the promise of material plenty tomorrow remains more credible than the promise of it all unraveling.

“Poverty is therefore a most necessary and indispensable ingredient in society, without which nations and communities could not exist in a state of civilization. It is the lot of man — it is the source of wealth since without poverty there would be no labour, and without labour there could be no riches, no refinement, no comfort and no benefit to those who may be possessed of wealth — inasmuch as without a large proportion of poverty surplus labour could never be rendered productive in procuring either the conveniences or luxuries of life.”

… from Patrick Colquhoun; ‘A Treatise On Indigence:
Exhibiting a general view of the national resources for productive labour; with propositions for ameliorating the condition of the poor, and improving the moral habits and increasing the comforts of the labouring people … (1806)

A single person gains from the losses and efforts of the multitude; modernity offers the Invisible Thumb permanently on the balance of human affairs … as well as a collection of ‘seriously good reasons’ why this should always remain so.

” — Historian Niall Ferguson says he was “doubly stupid” for suggesting British economist John Maynard Keynes did not care about the future because he was gay.

Ferguson — Laurence Tisch professor of history at Harvard University and author of a number of historical works, including a history of money — made the remark in response to a question at an Altegris Strategic Investment Conference in Carlsbad, Calif., The Boston Globe reported.

He had been asked about one of Keynes’ most famous remarks talking about long-run investment strategies: “In the long run, we are all dead.”

Ferguson responded that Keynes, presumed to be a homosexual, did not have children and was therefore presumably not interested in the “long run” effects of the economic policies he advocated.

What comes after cliché? The Void: there is little incentive for the establishment to buy from the cliché what can be had for free everywhere else. Clichés are not dangerous. First they ignore you, then they fight you … then they go back to ignoring you some more! The establishment doesn’t have to out-perform clichés, it has only to frame every element in every discussion in terms that serve its own — extremely short term — interests: clichés are part of the frame.

The only alternative the establishment offers to individuals at this moment is to be a victim — that is, to be ‘surplus labour’ or a market fool. Far better to cliché oneself out of the line of fire … the system is too gigantic, reflexive and insensitive. It is too committed to the status quo to accept- or even understand directions that do not continually reinforce the same status quo. Resistance is futile, indeed!

Opting out is not just an expedient to avoid pesky non-linearities, it is a sea-change, a fundamental and voluntary realignment of interests away from the cannibalistic regime. By doing so the individual short-sells the status quo, at the same time he- or she fleshes out a marketplace where such short sales become meaningful … where a marketplace currently exists only in outline.

Keep in mind, the establishment itself is nothing more than an abstract idea, it is not a concrete ‘thing’. It is not formidable even though it puffs itself up in order to appear to be so … our business- and management enterprises are suicidal, they devour themselves and do so faster whenever the chance appears. Carried along with the idea are all the mechanical wind-up ‘things’ that the idea brings into being … however, every element or increment is dependent upon all of the other elements functioning predictably and providing necessary subsidies. The establishment is a very long chain masquerading as a four-dimensional lattice. This chain has no substance, only shared prejudices and fantasies. The concrete ‘things’ are fetishes, they cannot pay for themselves. As has been seen throughout our period of crisis, individuals are the unwitting bankers to the never-finished enterprises that once-upon-a-time made up modernity and that now make up its demise. Without the deluded citizen eagerly and greedily playing along there is nothing but a shell; what remains are empty promises, junk and circus tricks.

Even if the industrialists are able to make good on some of their fantasies such as pocket-sized nuclear reactors, by opting out, you will escape becoming the subsidy-of-last-resort for them. Let those who offer fantasies as ‘goods’ pay for them out of their own pockets, not borrow then demand for others to retire the resulting debts.

Strategies are:

– Get simple. The establishment is complexity made material: the system’s response to complexity’s shortcomings is to add to it. Becoming independent from- or less dependent upon interconnected engineered systems is a way to avoid others’ costs.

– Get Small! Ditch the growth idea starting at home. Size = vulnerability, giant size = collapse. Steve’s First Law of Economics: The costs of managing any surplus increase with it to the point where costs ultimately exceed the worth of the thing itself.

– Get Free. Pay off debts and flee from the Giant Banks! Stay out of the casino(s): hold onto your money and starve the tycoons: holding increases money’s worth at the same time the rich are denied access to it. They are unable to repay their own monstrous debts and are thereby ruined.

– Get close to food! Grow some yourself, patronize farmers’ markets or start one. Most communities in the United States are nowhere near able to feed themselves … even in rural areas! Industrial mono-agriculture produces ‘crops’ which are not human food. At the fringes, growing human food is making a comeback with real invention and perseverance on the part of a growing percentage of farmers. The ‘wild card’? Climate change …

– Get real! Disconnect from the mediastream: throw away the television, cancel the NetFlix subscription, use a real telephone and ditch the smartphone and its endless ‘connectivity’. What comes your way is advertising.

– Get creative. The establishment is a naked emperor. Make fun of it, tweak it, laugh at it, annoy it, make it bleed money defending its precious ‘prestige’. The use of screen-printing is encouraged.

– Get rid of the car. If you have two, sell one of them. If you have a big one, get a smaller one. If you can, become car free and enjoy life.

– Learn a skill or trade even if it seems silly. For example, learning how to sew or make hats — and buying the necessary tools — appears dumb where clothing can be had for a few dollars at a store. Learning a practical skill is an investment in yourself. The market for such things is always there, perhaps bubbling under the surface. Everyone on Planet Earth wears clothing. The current regime of cheap goods from China and elsewhere is not guaranteed over the longer term.

– Find a place to live where you are comfortable: that is, a place that has friendly people and is appealing; that is not overly expensive, dangerous, contaminated, decrepit or badly managed.

– Learn how to entertain yourself … and others. Draw, write, paint, fiddle, sing, act … garden, volunteer, carpenter, become a fire fighter, feed the hungry and destitute, become politically active … once removed from the mediastream the time must be filled with something else. Make hooked rugs.

– Be flexible. Non-linear = unpredictable. Learn to avoid rigid, doctrinaire approaches … to everything.

– Think toward nature’s parsimonious ‘economy of needs’. These are simple: food and water, clothing, shelter along with delight – love, sex and a stimulating and beautiful environment. Compare this to the industrial regime of robots and furnaces; capital consumption, waste, and profits … of material excess alongside the artificial scarcity of abstract ‘money’; of toxic contamination, greed and violence and their tyranny over all things and the extinguishing of life itself.

Over the course of hundreds of millions of years … nature has learned how to provide sustenance to our planet’s inhabitants within the boundaries of what is freely available in the form of material resources along with energy from the sun and from within the Earth. We refuse to learn, we insist there are better, more expedient ways conceived over the past fifteen-minutes, ways that ignore everything that has gone before. The river does not borrow money in order to flow. The tree does not need a permit or plan to grow; the bird flies as it will when it feels the urge to do so.

Nature builds without furnaces or plans, without debts or money, without pointless destruction. To change, we must become more like nature and less like our precious selves. Time to do so is running short: the End is Near.

Events emerging from the murk of crisis bring to mind Billy Batts.

Billy who?

Murder of William “Billy Batts” Bentvena, Wikipedia (Edited)

In Nicolas Pileggi’s book ‘Wiseguy’, Henry Hill describes a 1970 “welcome home” party held at a lounge called ‘The Suite’, in Queens, NY, for William “Billy Batts” Bentvena, 49, a mid-level soldier in New York’s Gambino crime family. The Suite was a mob hangout owned by Hill, an associate of Lucchese family gangster James ‘Jimmie the Gent’ Burke, who later became notorious for the December, 1978 Lufthansa Heist of $5.8 million dollars in cash-plus valuables from JFK International Airport. Bentvena had just been released from prison after serving a six-year term for drug possession. Hill states that Bentvena saw Burke enforcer Tommy DeSimone and asked him if he still shined shoes … DeSimone took this as an insult. Hill also stated that Bentvena provoked DeSimone to impress mobsters from another crime family.

Shortly afterward, intoxicated Bentvena was ambushed in the bar, pistol-whipped repeatedly and stomped by DeSimone and Burke. Believing he was dead, the three placed Bentvena’s body into the trunk of Hill’s car and removed him to rural Connecticut. During the trip — with a stop at DeSimone’s mother’s house to obtain a shovel — the three men discovered Bentvena was still alive in the trunk. Hill claims, after stabbing the wounded Bentvena ‘thirty or forty times’, Burke and DeSimone finished him off by beating him with a tire iron and the shovel. The men later buried him under a dog kennel.

There are several versions of the Batts killing, which put the beating in different bars with different resting places for Batts. While he was incarcerated, Batts’ drug- and loan-sharking operations had been taken over by Burke and his crew, Burke was loathe to give them up which was his motivation for killing Batts. In 1979, DeSimone was lured to a Gambino hideout on the pretext of ‘being made’ and summarily executed — presumably by John Gotti or Thomas Agro — for the brutal killing of Bentvena and other transgressions against the Gambino hierarchy. Bentvena was a ‘made man’ — that is, an Italian by blood who had performed at least one contract killing at the orders of the organization — as such, Batts was an untouchable to common criminals such as the psychopath DeSimone.

Like Bentvena’s, DeSimone’s body was never recovered.

Another made man? … or a man unmade? Come to your own conclusions …

Figure 1: (TFC Charts), In two trading days gold is whacked: “Where’s the shine box … Bernanke?” (New York Times)

“We’ve traded gold for nearly four decades and we’ve never … ever… EVER… seen anything like what we’ve witnessed in the past two trading sessions,” Dennis Gartman, a closely followed gold investor, wrote to clients on Monday.

The shift in gold’s fortunes presents a moment of reckoning for many so-called gold bugs, who had expected their financial lodestar to continue moving up in response to the Federal Reserve’s effort to stimulate the economy through bond-buying programs.

The assumption among gold bugs was that the flood of new money would cause inflation, making hard assets like gold more attractive. So far, though, there have been few signs of inflation taking root even as central banks in Japan and Europe have begun their own aggressive bond-buying programs.

“Gold has had all the reason in the world to be moving higher — but it hasn’t been able to do it,” said Matt Zeman, a metals trader at Kingsview Financial. “The situation has not deteriorated the way that a lot of people thought it could.”

The recent drop in gold prices has been partly attributed to signals from powerful members of the Fed that the central bank may begin to wind down its bond-buying programs. But the list of reasons to sell gold grows longer by the day. European politicians have indicated that Cyprus may need to sell off some of its gold holdings to pay for its bank bailout, which could lead other countries to do the same.

Selling the modest gold-holdings in marginal Euro-states — or threatening to do so — would not move the futures’ market 20% over the course of four days. If forced to sell, the Cypriots would do so carefully rather than dumping gold in such a way as to crush the price … anyone making repayment demands on Cyprus would want them to obtain a high price as well. The suggestion that other countries or large holders would senselessly dump their gold … or gold derivatives in advance of such sales … just to do so … does not make sense.

The suggestion that the price-dive is a response to economic improvement in the US and elsewhere is also complete nonsense. Economic improvement removes the immediate urgency to exit perceived-as-risky long positions. During upswings prices tend to inflate, supported by organic credit expansion and willing buyers. It is hard times and panic — deflation and credit contraction — that initiates runs out of assets, not bull markets.

A real recovery might indeed result in a decline in the gold price over time … then again it might not. Gold is a hedge against systemic risk: not always and at all times. If risk diminishes gold does not become instantly worthless. In any event, hedgers and speculators would act out of self-interest and close their positions incrementally so as to minimize loss. At no point would they simply jettison positions out of any kind of market context, losing collectively millions- or billions by doing so.

Is there a deflationary panic in gold? Possibly, as gold is an asset artificially supported by credit that is now eroding. At the same time, gold is an asset that hedges against the sort of systemic monetary risk that is the form that deflation is now taking. A ‘run’ out of gold is a run out of the lifeboat back onto the Titanic.

Figure 2: Is gold a deflating ‘bubble’ … or something else? (Gold Price UK, click on for big.) Gold prices are influenced by central banks which are largest holders of the metal. Prices have increased since the early 2000′s largely because of central bank purchasing just as they were flat from 1980 to 2000 due to central bank selling. There are also other large private purchasers besides the banks.

Extraction of gold has become less profitable due to rising costs. Given further declines in profitability there will be less gold on the physical marketplace. As with petroleum, supply and demand indicates support for higher price for gold relative to other goods and services: even if the nominal price of gold declines. Unlike petroleum, gold tends to be the property of the wealthy who can afford gold at any price, persons who — unlike gasoline consumers — are unaffected adversely by price increases.

There is no indication that central bankers decided over the past weekend to dump large holdings at once, although it is possible that the banks have made large forward sales in the futures markets so as to reduce the cost of their own physical purchases. They may also have leased their gold holdings and cannot now recover them and must now bail out the bullion banks or COMEX. The strategy would be to drive ‘gold bulls’ from the marketplace allowing the banks to obtain the needed gold at an affordable price. If this is so the central bankers have outwitted themselves as physical sellers are not selling at the low futures’ price or are inundated with bargain hunters who are crowding aside the banks.

Central bank fundamentals have not changed since 2009: banks are expanding their balance sheets and taking on more dubious assets as collateral … edging toward insolvency as a result. They have become the world’s credit providers of last resort. Direct purchase of gold by the banks is not to be confused with liquidity provision or bond ‘purchases’. In a world filled with dubious- and redundant abstract claims gold is not an asset, rather it is a natural resource and as such, capital.

The finance shills paint a picture of marketplaces (re)acting rationally and impartially: the ‘Invisible Hand’ at work. Look instead to the tire-iron-to-the-head beat-downs of the mafia crews … to the economic high-jackings in Spain, to the bludgeoning of Cyprus, of Greece, Ireland, … to the theft-without-end in China, the ‘Flash Crashes’ on Wall Street, the Libor manipulation, the in-your-face MF Global heist, Morgan’s ‘London Whale’, Bruno Iksil … The flash crash in gold is more of the same, another finance crime.

Where’s the shine box, Columbia University professor Jeffery Sachs, Director of the Earth Institute? (HT: Jesse’s Café Américain).

I believe we have a crisis of values that is extremely deep, because the regulations and the legal structured need reform. But I meet a lot of these people on Wall Street on a regular basis right now. I’m going to put it very bluntly. I regard the moral environment as pathological. And I’m talking about the human interactions that I have. I’ve not seen anything like this, not felt it so palpably.

These people are out to make billions of dollars and nothing should stop them from that. They have no responsibility to pay taxes, they have no responsibility to their clients, they have no responsibility to people… counterparties in transactions. They are tough, greedy, aggressive, and feel absolutely out of control, in a quite literal sense. And they have gamed the system to a remarkable extent and they have a docile president, a docile White House and a docile regulatory system that absolutely can’t find its voice. It’s terrified of these companies.

If you look at the campaign contributions, which I happened to do yesterday for another purpose, the financial markets are the number one campaign contributors in the U.S. system now. We have a corrupt politics to the core, I’m afraid to say… both parties are up to their necks in this.

… But what it’s led to is this sense of impunity that is really stunning and you feel it on the individual level right now. And it’s very very unhealthy, I have waited for four years… five years now to see one figure on Wall Street speak in a moral language. And I’ve have not seen it once. And that is shocking to me. And if they won’t, I’ve waited for a judge, for our president, for somebody, and it hasn’t happened. And by the way it’s not gonna happen any time soon, it seems.

Where’s the shine-box Nigel Farage? As the rotting enterprise of industrial modernism sinks beneath the waves nothing remains but pillage … The fact that the thefts are blatant and that the establishment makes no excuses … speaks voluminously for itself:

There is no difference between how the Establishment manage their affairs and the wiseguys …

Paulie is Paul Vario, a capo in the Lucchese crime family associated with James Burke and Henry Hill. Vario controlled activities in and around JFK International Airport in the 1960s and 70s, activities included truck hijackings, cargo thefts and extortion. Vario’s crew also controlled gambling, drug trafficking, business shakedowns, loan-sharking, embezzlement and other crimes in the Brownsville-East New York area of Brooklyn and the Ozone Park/Howard Beach area of Queens.

In the clip, Vario becomes a silent partner of a restauranteur (Greece) in exchange for a favor (bailout): his crew (Troika) strips it of every worthwhile asset then burns what’s left for the insurance.

Assets are sold out the back door … “Paulie can do anything … especially run-up bills on the joint’s credit. And why not? Nobody’s going to pay for it anyway! and soon as deliveries are made in the front door, you move the stuff out the back and sell it at a discount. You take a $200 case of booze (a hotel in Athens) and sell it for a hundred. It doesn’t matter … it’s all profit!

And then, finally … when there’s nothing left … he can’t borrow another buck from the bank or buy another case of booze … you bust the joint out … you light a match.”

This is how the ‘partnership’ works when expanded to the national scale, when the Troika uses Greece to pillage Cyprus and vice-versa, (John Ward):

‘On 10 December 2009, Mr Kypri [the Chairman of the Bank of Cyprus] informed the market that BoC had sold €1.7 billion of GGBS [Greek government bonds], stating that from the beginning of the year, the Bank had decreased its exposure of GGBs to €o.1 billion. On 10 December 2009 (ie, the same day), BoC began repurchasing GGBs, with a rapid increase in the Bank’s GGB portfolio to almost €2.4 billion by June 2010.’

Clearly Yiannis Kypri, he being not entirely dumb, lied to the markets in order to avoid a run-panic about buying Greek bonds. The big unknown here is WTF he bought them in the first place.

Ask Paulie!

Two separate sources have told me over the last three months that Kypri was ordered to support Greece by person or persons as yet unsubstantiated. That belief is widespread among the business community here in Athens. As he had nothing personal to gain from this insanity, I can only conclude the sources are probably right. It might have been Venizelos, might have been Lagarde, might have been Schäuble, and probably was Trichet. But whatever: as a result of this patriotic hari-kiri, BoC lost just shy of a billion euros in the lender subordination later ordered by your friend and mine, Mario Draghi.

Within a short period of time after the Berlin-am-Brussels smash-and-grab raid on Nicosia, the Troika “terminated the services” of Kypri as well as the board of directors at the Bank of Cyprus, the country’s largest lender. The report cited sources who said the action is “necessary” due to the legislation approved by Cypriot lawmakers to restructure the country’s financial sector by having the Bank of Cyprus absorb the “good” assets of Laiki Popular Bank. These assets would not, however, have needed good ones without the forced purchase of Greek bonds in the first place.

The outcome of the process is the same, everywhere: survivors searching through the debris, looking for something to eat (Ward in Greece):

Today, in April 2013, everything in Greece is for sale. Two days ago a small girl – aged no more than ten I would estimate – came up to me, playing her violin in a main market thoroughfare close to the Acropolis. She wasn’t much of a violinist, but after finishing the piece, she said something to me … and of course, I didn’t understand. A man watching nearby, resigned of expression, said “She is saying she costs very little for your pleasure”.

I gave the kid a small coin and asked the bloke if this was commonplace. “Not common,” he replied, “but not rare either. These bastards will reduce us to an animal state”. I wanted to ask him more, but he waved me away. I don’t blame him; imagine how I’d feel in my own country, being asked by a passing Swede if all English prepubescent kids now whored on the streets.

In a Telegraph piece posted last night from Rhodes by Harriet Alexander, she notes that a Mr. George Georgas told her, “We are like a bankrupt housewife forced to sell the silver, to save the family,” he said. “Greece has no choice.” On the island of Rhodes, the 1,850-hectare Afandou estate, on the peninsula of Prasonisi – a paradise for windsurfers – is up for grabs … and grab (as in land) is the operative word.

Antonis Samaras the Greek Prime Minister knows only too well that flogging off bits of Greece is vital in order for his country to get the lifeline monies from the Troika. These monies, of course, zoom from an escrow account straight into the copious pockets of various lending institutions anything up to 9000 miles from Athens. The Greek people – his electorate – are left manage on their own. The ‘Government’ headed by Samaras offers them less and less help while demanding more and more of their money.

It is becoming clear that the sure way to succeed in post-petroleum world is not to become an organic farmer or an artisan but to become a criminal. The opportunities are without end. By doing so one takes the side of one’s betters who are also criminals: the bankers, the ‘leadership cadres’ and ‘business managers’, the public economists and the other rationalizers. What is there to lose?

Instead of putting in cabbage, backyard chickens and goat cheese, far better to put in some machine guns, dope, ‘rigged’ gaming tables and truckloads of cigarettes; use some of the proceeds to pay off the police. Burglarize houses, steal cars and money, sell the loot in your own black market offering a share to the more powerful crooks. In a society that offers diminished opportunities … to be a slave and to give thanks for the chance to be one … criminality offers a harsh and uncertain path to self-determination and dignity … but a path, nevertheless.

Being a criminal also offers to become notorious and immortal thereby: here is fashionable determinism run to its logical conclusion, the unnatural war of all against all, with the Pyrrhic winner taking everything that remains … of the pile of corpses … of a world that has been destroyed.

NOTE: this is a repost of an older article which can be considered an Economic Undertow primer.

The science- fiction ‘Singularity’ concept suggests a period when (washing) machine capability or ‘progress’ reaches a point where machine intelligence and intentions become self- sustaining and supersede those of humans. This will happen because machine intelligence will amplify itself exponentially: smart machines will build smarter machines which will in turn build even smarter versions until the process takes on its own form. Writers who promote the idea put its taking place somewhere in the near future. We will become aware of its arrival when the future becomes non-linear and unpredictable – like now!

Ordinary humans can still outwit the refrigerator, nevertheless the self- creating singularity ‘event’ – along with peak oil – took place a long time ago! It all starts with the ‘American Way of Life’:

• Peak oil as a concept is very easy to grasp. If you can understand a leaky bucket, you understand Peak Oil.

• Nobody ever asks, “What are we doing with the oil, or with the energy we produce”? The assumption is that increasing production will allow consumption to sort itself out. This is the marketing message that our culture promotes.

• Culture is fashion, ‘trends’, fads, appearances and descriptions and vice versa.

• Our culture is a creature of inexpensive energy but our energy consumption is a creature of fashion and nothing else.

• The Establishment is also a creation of culture, not the other way around. Our culture is self- generated and its imperatives supersede those of its putative masters. Welcome to the singularity, you are in it.

‘Peak Oil must compete with these interests on the interests’ own terms in a marketing context that created the interests in the first place!’

What is happening in the economy right now is the intersection between resource depletion and increased consumption. This is a cultural rather than an economic problem because our economies are also products of fashion. People don’t really look at things this way because they see how much power the world’s economies represent and compare this to the ‘triviality’ of fashion. By means of swapping present money for future returns economies engage labor and ‘rent’ time. Fashion appears incapable of doing so because it appears too ‘faddish’ and topical.

People don’t realize the economic actors are following cues that are the product of fashion. Economies behave certain ways because participants are stage- managed to behave within fashion dictates rather than within economic logic. Culture sez that the money- money swap has value. Nothing in nature or the ‘real world’ makes that suggestion.

The triumph of the fake over the real.

Creating energy demand is fashion’s primary function, the rest of the culture is fiction rationalizing that demand. Its instruments are the products it wheedles into existence along with the supposed benefits use of the goods is intended to provide. The bulk of culture exists to promote the benefits which in turn are theatrical roles to which participants adhere to closely. This is a positive feedback loop: adhering to the roles acknowledges the participant’s place in the culture while reinforcing culture’s supremacy at the same time.

The marketing culture is created by advertising managers and commercial artists. The highest form of art on 21st century Planet Earth is advertising, the highest form of that being the self- referential or self- advertising scam. As described by economist Hyman Minsky, the Ponzi schemes that make up much of the modern world’s economies are self- referential scams. They thrive and prosper simply because they exist.

At the same time the output or physical production which gives shape to our world and demands more and more energy use follows the same fashion dictates. Products have no real function other than to be. Humans have existed comfortably without cars,  iPads or lawn furniture for tens of thousands of years. The mechanisms grinding the world and its inhabitants are vacant, self- referential abstractions which have no meaning outside the context of fashion: ‘growth’, ‘prosperity’ and ‘progress’.

Our ‘Niewe’ culture is intolerant of other forms and hegemonic. All of what passes for ‘modernity’ is contained within itself. This is true in the United States where the culture was invented. It is also true everywhere in the world there is a television. There is no other American product with the reach and grasp of the narcissistic American Way. It subsumes all other forms and tilts all values toward the industrial, the commercial and the materialistic.

Both the singularity that is our culture and the science- fiction version are self- referential scam- creations of  fashion. Most of what passes for ‘policy’, ‘education’, ‘economics’ or ‘management’ are cultural ‘goods’ and self- referential scams. So are ‘capitalism’, ‘religion’, ‘democracy’ and ‘liberalism’. These endeavors have been stripped of whatever potency or effect they might possess on their own. They have permutated into outgrowths of cultural expectations which are in turn the products of marketing.

Unlike previous cultures which ‘sold’ permanence and stability, the culture of modernity markets a narrative of perpetual progress and material development. Implicit in the narrative is that what has preceded the present has no value and is being superseded.  Modernity is destabilizing along with its institutions. What is useful and worthwhile on day one is disposable on day two. The goods produced by modernity reflect the marketing requirements the culture makes on itself. Since fashion is false what modernity markets is its own false-ness. As such the primary narrative is another self- referential scam.

For it to be otherwise would be undermining: it would imply something outside of fashion has value and put an end to the narrative. The scam consequently markets itself as ‘Ironic’, with irony set forth as a central virtue of modernity. The ‘modernity narrative’ paints itself as an imperfect work ‘in- progress’ whose defects will be cured when one more ‘advancement’ gives rise to another -then another, and another. This concept gives ‘growth’ moral supremacy.

Because growth is a moral imperative it is difficult to address by way of economics or politics which are both marketing tools of culture. It is fashion — not economics — that demands growth.

The form of employment that acquires the greatest cultural status is to manage the Ponzi schemes. Managers are employed strictly by how they conform to the expectations created by marketing. Conforming includes how managers look, dress, speak, where certified and whom they ‘know’; where they live and work and how they travel. Forms that require labor, skill, difficulty or do not present a marketing opportunity are penalized with diminished status. Because the scams are divorced from reality the scam managers are expected to be incompetent even as they are fashionable! There is no penalty for stupidity in America.

Competence is intolerable except where it allows for the proper internal functioning of the enterprise. The ostensible scam- masters are thievish buffoons but those who tend the boilers must know what they are about.

Actual or ‘real’ phenomena which take on some of culture’s forms are treated by culture as if they are scams irrespective of logic: “Buy the fiction, sell the fact.”

Because our institutions are acknowledged to be fraudulent and this is winked at it is not hard for marketing to promote what it wishes as frauds. This is how energy companies can falsely accuse climate science of being a scam and have a large part of the public accept it.

Marketing creates products by first creating the need or expectation for firms or companies to emerge which then create the goods. This is an unremarked aspect of modernity, the requirement for the large organization first, then the product. This process delineates the role products play within culture regardless of the products’  ‘real’ utility. The cultural role of any good is what matters. Cultural necessity creates demand which sets the entire production cycle into motion. Production takes place within a form or set of expectations, created by marketing.

Marketing requires gigantism as a form of validation: it is also essential to support the marketing. No good – no matter how ‘innovative’ – can support itself but instead needs the massive organization or company to validate it.

Following along, the marginal utility of a good or service is irrelevant. What matters is the marginal utility of the goods’ marketing relative to other goods’ marketing. Well ‘positioned’ useless goods have value in culture whereby economic value follows. This may appear self- evident, but goods and services that cannot be effectively validated may as well not exist regardless of any other virtues

This is why the peak oil message is not heard. Marketing by peak oil theorists must be more marginally ‘useful’ than that of energy companies, auto companies, construction contractors, FIRE; finance, insurance and real estate companies along with the government agencies which putatively ‘regulate’ these industries. That is, the marketing of Peak Oil must compete with these interests on the interests’ own terms in a context that created the interests in the first place!

Peak oil as a concept is very easy to grasp. If you can understand a leaky bucket, you understand Peak Oil. 

Fashion requires the creation of a ‘Peak Oil Company’ or corporation to bring the peak oil ‘good’ to market to answer the demands marketing makes for its existence. The military has become the ‘large business entity’ that does so. This is by default, because peak oil itself cannot create a company and there are no other entities willing to speak. Reports published by military groups worldwide serve as the marketing campaign. Without the military there is no validation for peak oil.

Even so, the military adheres to the role that culture assigns to it.  Fashion does not allow any change in doctrine which would reduce fuel consumption. Here is modernity in action: the monolithic entity has its own goods to sell which have been brought into existence by advertising and gigantic business interests: cyber- warfare, terrorism, WMDs, etc. All of these ‘threats’ require products and a range of scripted activities. As part of its product line, the military markets peak oil … while its activities amplify peak oil’s baleful effects at the same time. How ironic.

Meanwhile, fashion grants the military moral supremacy for its wasteful fuel guzzling and institutionalized child abuse. This is ‘progress’.

An Economic Strategy.

Peak oil and other snatching resource constraints pose a existential challenge for modernity. Modernity must either be altered or events will annihilate it. The promoters of modernity itself acknowledge this. At the same time, roles institutions play within modernity make it difficult to effect the changes necessary to do more than salvage modernity’s ruins.

The nature of the narrative as a self- reinforcing Ponzi scheme and the high status afforded to Ponzi managers makes finding individuals capable of effecting outcomes within the cultural hierarchy a daunting challenge. Managers who succeed because of how they look, dress and whom they know are not able to make real changes. At the same time, the ‘boiler tenders’ who know how to shut down the machines before they blow up lack the status to do so! The progress narrative has become a trap for the culture that invented it. The choice peak oil presents to modernity is to abandon the narrative before events render it obsolete, This is not the kind of dilemma fashion was intended to solve.

An obvious remedy is substitute conservation – and conservation ‘values’ – for consumption. Doing so would more than likely allow economic theory to follow along and rationalize conservation in ways that allow gains for its promoters, the same way gains follow those who currently promote consumption. Ponzi structures would be erected to provide a supply of lent ‘funds’ as money ‘wealth’ proxy for the conserved fuel.

The marketing and economic mechanisms that support fuel consumption are finance inventions not acts of God. The petroleum pricing structure that makes fuel an ‘economic loss- leader’ was contrived by John D. Rockefeller in the 19th century as a means to monopoly. He undersold his competition and by doing so supported the nascent automobile industry with very cheap fuels. There is certainly no reason why a successful economy cannot be devised that requires very expensive fuels, after all our current economy thrives on very expensive diamonds, very expensive gold and very expensive Picassos.

The decline of very expensive real estate worth is an outcome of the shift in fuel prices from ‘rock bottom’ to ‘slightly more expensive’. The outcome of this shift has been a ‘collateral worth’ crisis. What if real estate worth could be directly swapped for fuel value in the ‘hierarchy of goods’? The impediment to this swap is not economic – a decent economic argument can be made for almost free housing in place of almost free gasoline. The objections are cultural. Housing and ‘development’ are part of the progress narrative. The future of the human race holds the promise of Ivy- league educated refrigerators in every human ‘home’. Fashion – not economics – determines the hierarchy of goods: somewhat capable appliances, more capable cars and most capable houses … all of which cost a lot more than gas!

… Which of course is silly! Inputs are being repriced by the markets which will invert the hierarchy of goods. Why not make use of the collateral worth of natural resources which are increasing? All that is needed to make this work is to peg a currency to the worth of land, water, trees, oil, uranium, wind, etc. and let the games begin. The markets would sort things out and make themselves relevant again at the same time.

A Strategy of Needs

Modern culture fences participants in with ‘product anxiety’; advertisers insist we are sub- human due to our lack of certain goods such as chess-playing clothes driers. If we already have one we must run out and buy another. We are beaten down by the insistent demand for more energy servants. The hierarchy of goods is broad: there are categories for all  rooms in fashion’s many mansions: ‘working class’,  ‘middle class’, ‘outlaw’, ‘Admiral’, ‘beggar’. ‘college student’. ‘nerd’ etc. This ‘dictatorship of wants’ runs at cross purposes to nature’s parsimonious ‘economy of needs’. These are simple: food and water, clothing, shelter along with delight – love, sex and a stimulating and beautiful environment. I submit the greatest shortage of the now is not fuel but interesting, remunerative forms of work.

Given good, healthy nutritious food and good wine, to live in a delightful place and wear beautiful clothes, to be surrounded by friends and family and to have creative lifelong tasks … what could be better?

This is a good question! How is life improved by slavery to products, the regimes their manufacturers dictate, the drear and drudgery that the rationalizing economic system imposes on our lives? Our auto- friendly car habitat is hostile and inhumane. The time- demands products make on us are absolute. Culture’s incentives are perverse; dissipation and waste are rewarded. Thrift and restraint are penalized.. How does the product cycle which renders ruin to people and nature on either end represent progress? No wonder modernity is awash in drugs, disease, mental illness and suicide! Gimme the dope or get me out of here! The product cycle ‘end zone’ for more means living in a wasteland!

Fashion claims these are temporary shortcomings solved with more and more ‘growth’. These are the same claims and promises that have been made by growth’s promoters since the beginning of the industrial revolution. This has been over 200 years! When are we going to wise up?

We can keep indoor plumbing, rail trams and telephones along with the gourmet food, good wine (beer) and nice clothes. We can spend our time making for ourselves and our children a built environment that delights us rather than makes us dumb machine operators and bookkeepers. We can create art as a lifetime endeavor that can be handed over to future generations. We can be farmers, artisans, artists, designers, builders, shipwrights, writers: we can pursue a thousand other things that are valuable and interesting. We can build Florence and Eguisheim in a hundred thousand places and live in them. We can leave the best to nature and begin to enjoy ourselves. We can build a real civilization rather than the grinding fake that  modernity foists on us. We can relegate the material progress fantasies to comic books where they belong.

Instead of smart washing machines and dumb people we can bring quality back into our lives. Skills and mastery abandoned for gambling gains can be rediscovered. Delight can be found in learning and dignity rediscovered within labor.

There have been many fabulous prior civilizations in every part of the world under every sort of circumstance All of them existed without our energy waste. It’s a simple matter is to pick some that we like and adopt them! All culture is fashion, ‘trends’, fads, appearances and descriptions. What is needed is the ‘(wo)manpower’ to effect the change.

A Force Majeure Strategy

John Michael Greer suggests a future ‘salvage society’ which mines the carcass of modernity, presumably for its useful detritus including creaky but semi- functioning institutions. This seems as grim and nasty as what we have now. Why not stand up and fight! What kind of future can we take for ourselves if we try harder? A salvage society represents a a failure of imagination.

If we are lucky and smart, our future is Tuscany rather than Congo or Chechnya. We cannot be passive. Enough competent people in the right places can make a difference. What is likely to come is a continuation of the age- old struggle between finance and and the ‘little people’. When this emerges from behind its veil of public apathy and ennui, fashion will flee:

In the 1930′s the developed world was torn between continuing community- level economic activities that had sustained the United States for 150 years – and the rest of the world for centuries – or embrace the ‘New’ Big Business commercial/industrial model that had emerged at the turn of the 20th century and from which was spawned the current form of modernity. By 1929, the excesses of capitalist monopolies had shattered the virtuous self- funding cycle that promised unlimited prosperity on one hand, but delivered it with the other to the monopolists’ themselves. The outome was a smoldering revolt of the public vs. the rentiers. This was the ‘real’ great depression; a revolution that has continued in fits and starts to this very day.

The community- level economic model that sustained human endeavors for prior years may or may not emerge. No matter, the unraveling itself will leave a blank slate. It is only (the corpse) of fashion and machine culture that insists that modernity is ‘All or Nothing’.

Oh well, another trendy lie!

It’s more, ‘Lead, follow or get out of the way!’ Ends are to recapture the political system and drive the charlatans from it and economics by whatever means come to hand. The process is ‘reality- based politics’ within established institutions and applied economics of thrift. Such along with truth, respect, justice, fairness and sacrifice have wide appeal if not viewed through the lens of fashion and its corrupt enablers. Beating the system is worth a try, particularly as fashion’s institutions corrode into uselessness.

You have nothing to lose but your (store) chains.

A difference between now and the ‘good old days’ is that management has already deployed its reserves, its props to support key men. There is little left to deploy: policy rates around the world are near zero and cannot be effectively lowered. Torrents of cheap credit flow from central banks toward commercial finance. Bad loans have been shifted from the private sector to the public’s accounts. Trillions in all currencies have been borrowed and spent by governments … largely to benefit finance. Every one of these are rear-guard efforts, behind them there is nothing, only desperate flailing, arbitrary confiscation, stealing what remains to steal … capitulation to reality … and ruin.

Figure 1: What a fuel price hedge looks like along with its collapse, the Incredible US Housing Recovery compared to the monumental surge in housing churn that took place from 1990 to 2007. The ‘recovery’ is the tendril on the far right. Realtors want Americans to believe what is underway right now is the start of another ramp-up in house building and selling. This is a lie: Americans are broke, suburbia is too expensive to duplicate. A palatable alternative to suburbia in 2013 does not exist.

What would make a ‘recovery’ sustainable? Fuel prices returning to sub-$20 per barrel of crude oil. Otherwise, most of what is seen on the chart is a stranded ‘investment’.

What would derail any hope of recovery and leave the world a sustainable ruin? Fuel prices returned to sub-$20 per barrel of crude oil. At that price there would be very little crude oil available, there would be insufficient buying power to lift the hard-to-reach petroleum that now remains.

Energy Commodity Futures

Precious and Industrial Metals

Bloomberg commodities: precious metals and US petroleum were hammered on Friday. Metals have been leading indicators, petroleum is declining to the price level where drilling becomes unprofitable. Without new drilling there is no replacement for rapidly depleting existing reserves.

As reserves are exhausted so is the ability pay for them. The fuel waste process is collateral for fuel extraction, not the fuel itself. The reason for this should be obvious: as soon as fuel is extracted it is destroyed, it is useless as collateral. Instead, the fuel wasting implements become collateral for the funds used to waste more. As credit expands, it first becomes more costly then unaffordable. Industrial output — which is nothing more than non-remunerative waste — becomes impossible to finance. Ultimately, credit contracts, the nominal prices decline … as the ability to meet prices declines faster … we are entering into the credit contraction phase now.

This is a dynamic that escapes conventional analysis, which assumes an economy running normally in the background and providing credit … even as its fuel supply is depleted. Meanwhile, the economy runs down in real time, credit is diminished and analysts are perplexed.

Figure 2: (Click for big), Brent crude @ $118 in February accompanied the robbery/crash of Cyprus, panic in Japan and deflation. Brent crude today is $103.11, nearing the marginal level where extraction becomes unprofitable. Chart by TFC Charts.

Since 2008 the world has been in the grip of deflation which reflects facts on the ground. With depleting resources, multiplying claims against these same resources or adding wasting implements does not create anything new but depletes what we have access to, faster. Deflation exposes claims as worthless, the fuel extraction process itself is stranded. We have so successfully cannibalized ourselves that it is becoming too late to do anything useful about it.

Figure 3: (ZeroHedge) Japan 20 year bond yields have become massively volatile: bonds are offered for sale driving up yields which retreat as the Bank of Japan steps up to buy. For Japan’s central bank to meet its targets it must flood the world’s markets with … more credit. This credit-for-credit exchange is a charade, it cannot alter the trajectory of Japan’s fuel- and resource reality, it cannot even change Japan’s finance reality … it is capitulation, the wheels finally coming off in Japan.

Bond-holders ‘sell’ their holdings for yen then swap these for dollars or euros in forex markets. Volatility is increased because of the enormity of the trades required to move the generally liquid bond markets. Large lenders to Japan such as banks and insurance companies appear to be dumping bonds, exiting their positions. These lenders become yen sellers as well: because there are more sellers than buyers, the currency is depreciated. There is no real increase in the overall supply of money. Sean Corrigan @ Diapason Commodities Management, (ZeroHedge):

Net new debt issues are currently being penciled in at around the Y42 trillion mark a year and, with the BOJ scheduled to buy Y70 trillion p.a., it might seem that JGBs offer a one-way bet even here, but with a current overhang of Y942 trillion as we write, the possibility is not to be overlooked that while the Bank may be comfortably able to mop up the new flow, it might have its work cut out if others decide to use its resting bid to get rid of some of their enormous existing stock of claims.

Prime candidates would be foreigners (with Y87tln to hand and steep currency losses to hazard), the banks (which, we have seen, hold Y425tln in government claims, of which Y360tln in JGBS per se), and insurance companies (with Y222 trillion in debt and Y184 trillion in JGBs & TBs combined). In its last concerted attempt at re-inflation, conducted in 2002-3, the BOJ briefly pushed up both the monetary base and overall M1 by around 30%. The response of prices was modest to say the least: CPI moved from -1.4% to +0.5% three years later. If the same thing were to happen again, all that would have been achieved would be to have introduced an unnecessary disturbance of the pricing structure between inland and foreign trade and, at the margin, between those living off current income and those reliant upon stored past income. Debt would, of course, have climbed inexorably skyward, as would the debt/nominal income ratio.

The reason for the gambit is Japan’s vanished trade surplus which had overseas customers subsidizing resource waste by the Japanese. Exports never provided any return for Japan’s customers: they are now broke, they cannot subsidize anyone. The depreciation is a futile attempt to retrieve the irretrievable.

There are two potentially market moving sections in the report. The Treasury Department planted a “dirty bomb” at the Bank of Japan, and tossed a grenade at the Swiss National Bank. I’m thinking of all the folks who are big long USDJPY. They are going to have to sweat the next 50 hours. They have to hold their cards and wait. I suspect that quite a few FX players will have their weekends ruined.

The key words on Japan (from US Treasury Secretary Jack Lew):

“We will continue to press Japan to adhere to the commitments agreed to in the G7 and G 20, to remain oriented towards meeting respective domestic objectives using domestic instruments and to refrain from competitive devaluation and targeting its exchange rate for competitive purposes.”

“I think we just had the Jack Lew moment that I was anticipating. I believe that Jackie Boy has made a mistake. He picked a public fight with Japan that he can’t win. Having picked the fight, he can’t back off. When the BOJ and the markets make him look silly (USDJPY = 110+) there is going to be pressure on him. Jackie has set himself up for a fall.

In all my years of watching (and participating) in the FX markets I have never once seen a situation where “talk” accomplished a damn thing. In fact, idle talk often creates the opposite reaction to what was intended. So for those who are having sphincter problems this weekend over a long USDJPY book, and the 50 hours you have to wait to find out what happens, I say relax. By the opening in NY on Monday, you will be okay again. In a few weeks you’ll be buying hot cars and houses.”

Keep in mind, the Treasury Secretary doesn’t act by himself, he has a fleet of ‘associates’ at the Big Banks pulling his strings. If he makes a mistake they lose and they don’t like to lose = they pull the strings as needed.

Meanwhile, the fundamentals are ignored: the effects of Japan’s maneuvering are likely to be negligible. Management has already deployed its reserves, its props to support key men. There is little left to deploy: policy rates around the world are near zero … torrents of cheap credit flow, etc. Things cannot be improved, only be made worse.

Japan — like all the other countries — has no independent monetary policy. This is because the price of money has nothing to do with interest rates or trades on forex markets. Rather, it’s priced at gasoline stations around the world by millions of motorists every single day. If gas prices are too high — because of currency depreciation or some other reason — drivers buy less and economies deflate. This undoes the efforts of the money-managers.

Enter the post-1998 peak oil paradigm shift: when gas prices fall drivers buy more fuel but there is quickly less available, prices either increase again or shortages occur. The real price of fuel — that relative to other goods and services — increases relentlessly. Eventually, this real price bankrupts countries like Japan!

Think of the old-fashioned ‘gold standard’ constraining the money supply as well as industry and commerce as it did during the 1930s. With the ‘gasoline standard’ there are the same constraints except it is impossible to go off petroleum and grow the economy as could be done by ‘going off gold’. The only way to escape the gas standard is to jettison cars and other fuel-guzzling gadgets, this also annihilates economic growth which is dependent upon more and more of these things being sold. Meanwhile, in the background where the analysts pretend not to notice, the gasoline standard strands cars and other fuel guzzling gadgets anyway: at the end of the modernity’s ever-shortening gangplank there is no room to maneuver.

Fiddling with nominal prices is pointless: any possible currency-driven export gains are offset exactly by currency-driven import costs. Because Japan is nothing more or less than a car factory with radioactive beaches it cannot gain anything by depreciating its currency. Its export prices are determined entirely by what it pays for imports … including fuel! The only effect of so-called monetary ‘policy’ is steal funds from workers and shift them to plutocrats. Everything else remains the same.

The blowup in Japan is part of the de-carring process which is underway right now everywhere in the World. Depreciating the yen does not bring one drop of petroleum fuel onto the market. The only question is how soon the ‘Abenomics’ experiment will fail and what form the failure will take. As holders of yen and yen-denominated bonds reduce their ‘exposure’ and dump their bonds there is less credit available rather than more. Prices for fuel decline … as they are doing so now! This does not help the Japanese exporters because their customers are still broke … regardless of the price of credit.

When the price of crude declines below the cost of extraction there will be physical shortages. These will reduce credit further which will in turn shut in more crude in a vicious cycle. There will be a return to recession with no way to end it: conservation by other means.

What sort of country does Japan become? A place to look is Egypt which has its own currency but depends upon foreign exchange same as Japan:

Short of Money, Egypt Sees Crisis on Fuel and Food

David D. Kirkbpatrick (NY Times)

A fuel shortage has helped send food prices soaring. Electricity is blacking out even before the summer. And gas-line gunfights have killed at least five people and wounded dozens over the past two weeks.

The root of the crisis, economists say, is that Egypt is running out of the hard currency it needs for fuel imports. The shortage is raising questions about Egypt’s ability to keep importing wheat that is essential to subsidized bread supplies, stirring fears of an economic catastrophe at a time when the government is already struggling to quell violent protests by its political rivals.

The establishment insists that the fuel shortage is the result of a money-credit shortage. Instead, the reverse is true: there is a shortage of fuel; there is no useful collateral for new credit, only (obsolete) waste enablers.

Japan can also become Portugal:

Portugal’s elder statesman calls for ‘Argentine-style’ default

Ambrose Evans-Pritchard (Telegraph UK)

Mario Soares, who steered the country to democracy after the Salazar dictatorship, said all political forces should unite to “bring down the government” and repudiate the austerity policies of the EU-IMF Troika.

“Portugal will never be able to pay its debts, however much it impoverishes itself. If you can’t pay, the only solution is not to pay. When Argentina was in crisis it didn’t pay. Did anything happen? No, nothing happened,” he told Antena 1.

The former socialist premier and president said the Portuguese government has become a servant of German Chancellor Angela Merkel, meekly doing whatever it is told.

“In their eagerness to do the bidding of Senhora Merkel, they have sold everything and ruined this country. In two years this government has destroyed Portugal,” he said.

Raoul Ruparel from Open Europe said Portugal had reached the limits of austerity. “The previous political consensus in parliament has evaporated. As so often in this crisis, the eurozone is coming up against the full force of national democracy.”

The rallying cry by Mr. Soares comes a week after Portugal’s top court ruled that pay and pension cuts for public workers are illegal, forcing premier Pedro Passos Coelho to search for new cuts. The ruling calls into question the government’s whole policy “internal devaluation” aimed at lowering labour costs.

A leaked report from the Troika warned that the country is at risk of a debt spiral, with financing needs surging to €15bn by 2015, a third higher than the levels that precipitated the debt crisis in 2011. “There is substantial funding risk,” it said.

To operate its massive fleet of cars, Portugal must compete with China and America for fuel. These countries’ can generate their own credit, Portugal cannot, in fact none of the eurozone nations are able do so. Right now Portugal must borrow from Wall Street by way of EU banks, so as to repay Wall Street. Portugal has borrowed to buy fuel, it must borrow additional amounts to buy more fuel at the same time service and repay its dead-money debts.

The end result for all these countries is the same: there are debts that cannot be retired, industrial obligations that cannot possibly be met. As during the early years of the 20th century, the wheels are falling off all over the world … we shall not see them turn again in our lifetime …

There is more of the same thievery on the part of the establishment, everywhere in the world. There is more of the same poverty, there is more of the same denial … There is more of the same advertising for unlimited resources, more of the same consumer sales, more of the same real estate rebounds, more of the same freeway lane-miles added to more of the same freeways …

More of the same hollow, pointless ‘progress’.

More of the same, the management systems the world has relied upon since the end of World War Two are breaking down but more applications of the same failed management approaches are underway. To support more of the same failures there is more of the same moral hazard, more of the same credit provision, more of the same propaganda and lies. There is more of the same breakages with more of the same exponentially increasing consequences. There is more of the same corruption, more of the same outright pillage and bullying.

There more of the same indifference and refusal to face reality. There is more of the same flight out of banking deposits into risky currency traps even as there is more of the same flight into banking deposits! There is more of the same sense of foreboding, that there is no way out of the traps that we have built for ourselves, that the end of the ‘good old days’ is right around the corner. At the same time, there is more of the same begging/wishing for more of the same ‘good old days’.

With more of the same taking place right now, less of the same will certainly be a whole lot worse. Pray thee Lord for more of the same.

More or the same makes life easy for the analyst even as it makes it more difficult. More of the same becomes very hard to become outraged about. More of the same evil: how do Alex Jones or Yves Smith remain enraged at the highest pitch day after day about more of the same perfidy? The government will be just as conniving next year as it was ten years ago, the big Wall Street banks will still shove more of the same blood funnels seeking more of the same easy payoffs and more of the same bonuses. Who really cares?

The market can offer more of the same a lot longer than you can remain solvent!

At the same time, more of the same analysis becomes very simple: readers can turn to older articles to see how the same really was when it first emerged. It’s more of the same now! It can’t get any easier!

Singularity = self-writing analytical articles!

Unknown photographer: Dr. Edward Chapotin house and his medical practice next door in 1915, on Woodward Avenue @ Woodbridge Street, from the Burton Historical Collection, Detroit Public Library- University of Michigan. Note the streetcar tracks on Woodward. This business/residence was located within a few blocks of the Detroit River.

More of the same lurks on both sides of the political divide from Richard Alford by way of Yves Smith, (Naked Capitalism):

Richard Alford: Fed Policy – (more of the same) Old Wine in New Bottles

Yves here. This is an important post, in that it describes how the Fed, despite the unconventional look of some of its measures, is using more extreme variants of traditional policy approaches, and why that is not such a hot idea.

One place where I quibble with Alford is in attributing the way Greenspan dropped short term rates dramatically in the early 1990s recession as driven by unemployment policy. At the time, there was considerable concern about the health and stability of banks in the US. It wasn’t just savings and loans that were hemorrhaging losses. Citibank nearly went under. Some major commercial banks in Texas and the Southwest had lent heavily to spec commercial real estate projects at just the wrong time. And although it was mainly foreign banks that hoovered up participations in LBO financings, like Campeau, that came a cropper, US financial firms had exposures as well. Greenspan’s driving short term rates to the floor created an extremely large spread between short and long term interest rates, enabling wounded banks to borrow short and lend long, and rebuild their capital bases out of artificially high profits.

Another quibble is at the very end, where Alford is correctly concerned about our sustained trade deficits, but also is unduly exercised about our fiscal deficits. They are in fact necessary and desirable as long as the business sector keeps net saving, which it did even in the years immediately preceding the crisis. If capitalists refuse to play their proper role and loot rather than dedicate resources to future growth, government has to step in. But as we are seeing now, what is unsustainable about this arrangement is the politics much more than the economics.

Here’s Alford:

But Have We Seen It All Before?

For all their differences in perspective and emphasis, most of the opposing evaluations of the merits of Fed policy have one element in common: They all appear to be largely prisoners of a Phillips Curve mentality. Policy is set based only on the current levels of unemployment and inflation. Policymakers, economists and pundits do not look beyond near-term changes in unemployment and inflation when evaluate the risks and returns of alternative policy responses.

However, there may be a more troublesome risk attached to current monetary policy. The risk is that the current policy stance – low interest rates as well as QE- is reducing the probability of a return to self–sustaining economic growth … “

Alford is a very bright guy and he’s paid his dues within the money management ‘racket’. Yves = ditto. Nevertheless, it’s impossible to take either one seriously. What does ‘sustainable’ mean? More of the same tract houses? More of the same auto sales? More of the same insurance and finance? More of the same strip malls and Pizza Huts? More of the same F-35 fighter jets? More of the same coal mines, gas pipelines, VLCCs … how about more of the same airports? What is sustainable about any of this? How about those tens- of thousands of tombstone-like concrete towers in China? How many more-of-the-same vacant apartments are needed before the Chinese get to sustainability heaven?

How does everyone get there? There are seven billion of us meat-bags right now on Planet ‘E’ and only 15% have automobiles. Do we ‘arrive’ when 30% become automotive? How about 50%? Where do we put the 800 million or so extra cars? Where do we get the fuel for them? Does the US build another 55,000 mile interstate highway system to go along with the 55,000 mile system we already have? We cannot afford to fix our roads now! How is more of the same sustainable again?

‘Sustainable’ is gross abuse of the language. In order to ‘have’ our desired industrial goodies we must borrow. Our machines do not pay their own way. If they did there would be no debts as deploying machines would retire them. That they do not do so is self-evident. With thousands of millions of machines there is an exponential increase in debt required to assemble them and provide them with fuel. This is debt that even the entire world’s bloated finance establishment cannot provide.

Credit is a resource in the sense that it is a means to allocate other resources: with less of these other resources to allocate, adding credit becomes pointless and unaffordable. US recessions from 1970- onward were the result of fuel shortages- and price shocks including the current version. Even the modest credit demands of the earlier time periods … were breaking. Today’s high real credit requirements are destructive in and of themselves without the added blows of high fuel prices.

People must understand: the Glory Days are gone and never coming back … ! Santa Claus is not going to come down the chimney with some kind of industry … to take the human race by the hand and lead it into the Promised Land. Our collective future is binary: we are either joint-and severally destroyed by shortages and inability to adjust to them … or we escape destruction by the skin on our noses.

Watch what the plutocrats are doing right now! They know what’s going on because they can afford ‘intelligence’ and are ruthless enough to take advantage! They use the time remaining … to steal … then leave the rest of us to Mad Max.

It will take every single inner resource the human race possesses … clarity, honor, courage, perseverance, helpfulness, strength, wisdom … the willingness to endure tremendous suffering and hardship for decades and perhaps centuries … what is absent in popular culture particularly among finance analysts … it will take all of these things and more to escape our self-constructed annihilation.

Right now, this isn’t happening. There is too much fantasy thinking and denial about redistribution … what is there to redistribute, exactly? Deck chairs on the Titanic?

Here is another variation on the theme … from Bill Buckler @ ZeroHedge:

The Puppet Master – Government

For hundreds if not thousands of years of human history, the vast majority were all too well aware that the government “lives” on the backs of the people. Today, that long-held knowledge has been astonishingly, successfully reversed. Today, the perceived “wisdom” is that the people live on the back of the government. In the realm of the history of ideas, it took many centuries to bring forward the idea that a life might be lived without constant kowtowing to government. It has only taken one century – the time since World War One – to all but totally submerge that legacy in a new wave of government dependency.

The old and tired phrase – “I’m from the government and I’m here to help you” – is met by as much derision as it has ever been when people bemoan the impositions of their rulers. But those same people rely on the government to insulate them from the consequences of any action they may choose to undertake.

The great myth is that our industrial economy is ‘productive’, that it is saddled temporarily by parasitic governments (fascists) or bankers (socialists). Get rid of one or the other and the industrial economy will spread its wings and fly off to consumer good paradise, taking the American Worker along with it.

This is false: the product of industrial economies is waste. Because waste is not a good there are no organic returns for industrial activities. Instead, the cost of the activities must be met with credit. To provide the needed credit there are bankers, to service the debts there are governments.

That this is so is self-evident: if industry was productive — if there was any product at all other than waste — there would be no crisis and no debts. Any shortfalls would be met by deploying additional machines, which would pay for themselves, thereby retiring their own debts … and ours besides.

The intersection of Woodward Avenue and Woodbridge Street is long-gone, so are Doctor Chapotin’s restrained yet whimsical houses. All of them are replaced by the urban equivalent of the place-mat, the concrete pad and grassy area(s). Note the occasional tree.

Forsaken and bleak … the backdrop for a homicide, here is the adjacent 1 Civic Center Plaza. Perhaps Chernobyl is more soulless, then again … perhaps not.

Today, there are more and more machines, these do not pay anything. Instead these machines must be subsidized by robbing from savers, retirees, workers and business customers. Meanwhile, the world’s economies are burdened by hundreds of trillions of dollars worth of non-repayable debt … taken on to build and run the machines.

Without credit, there is no industry. Meanwhile, our precious fleet of machines strip-mines the world of credit along with resources. This stripping process is underway right now in Europe and elsewhere … coming soon to your town! (It’s already happened if you live in Detroit.)

The underlying cause is centuries’ long destruction of resource capital. The consequence is diminishing resource throughput, diminished capital with a large and increasing scarcity premium attached to it. There is simply no more (of the same) capital to waste affordably. What capital remains is too valuable: the cost of retiring debts is greater than the worth of debts themselves. Whether the managers admit it or not, the markets right now are pricing the true costs of waste beyond the reach of today’s wasters … also tomorrow’s.

Because ‘more of the same waste’ is a physical process, it doesn’t matter who manages it, Austrian or Marxist, neo-Liberal or Friedmanite, salt-water or fresh-water. All of them will fail. Regardless of who is in charge there will always be less.

Don’t let the common sense baffle you! It’s not that hard to figure out. If prosperity = waste, nobody can promise prosperity any longer.

The ONLY solution is stringent energy- and resource conservation. There is no other solution, only evasions: to do nothing or to attempt more of the same waste means conservation will occur ‘by other means’. See ‘Cyprus’ as the latest example.

The relative scale of the European economic enterprise compared to Cyprus is the same as the gigantic balloon relative to the tiny pin … any hole the pin might cause has consequences to the balloon wildly out of proportion to its size.

The Russians can simply refuse to accept euros, they will accept only dollars, instead!

The David Whitney house in winter, 1955, on Woodward and Canfield Street in Detroit, Michigan, from the Burton Historical collection, Detroit Public Library, University of Michigan. In our shiny new zero-sum post-petroleum world, some places succeed because other places are disposable. Detroit is the way Detroit is because New York City is the way New York City is.

Germany is the way Germany is because Spain, Portugal, Ireland, Greece — and Cyprus — are they way they are. The worse it is for them, the better it is for Germany.

There are references to Archduke Ferdinand and the cold war all over the Internet. Somewhere in abeyance the gauntlet has been thrown down. What is absent is any understanding of … why.

Bruce Krasting channels Barnum instead of Armageddon:

On the Circus in Europe

I’m flabbergasted that Cyprus is the cause of the circus in Europe. Cyprus was an avoidable problem in my opinion. That view is supported by the fact that all of the words, actions (and threats) by the deciders in Northern Europe have been decidedly negative. There was no “Can Do” talk. All I heard was, “We won’t do” or “Here is a deadline” – “Here’s a gun to your head”.

Two possibilities – Either this was a completely bungled effort in Brussels. Or this this was a deliberate effort to weed out the weak members of the EU. If the intent was the latter, this will not stop with little Cyprus.

Next week there will some broad confusion following the resolution in Cyprus. Either Cyprus is out of the Euro zone by Wednesday, or the +E100k depositors are going to get whacked big. There is no soft landing potential any longer. If the folks in Brussels and Berlin who are pulling the strings are really serious about stabilizing the Euro zone they will respond with a series of “positive” measures next week. Things that might be considered to ring-fence Cyprus include:

- Doubling the deposit guaranty to E200.

- Creating a Transaction Account Guarantee. This would insure all accounts that were related to the settlement of goods and trade. (protect the economy)

- Financial measures – From some minor stimulus stuff, to monetary measures like LTRO or a cut in % rates.

These would be “calming” steps. They would be proactive in that the intent would be to get ahead of any contagion. We could also see “nothing” from Brussels. That silence would be a “tell” that “they” don’t want to resist gravity any longer. The most significant sign would be if capital controls were established more broadly in Europe over the next few weeks. These will scare the crap out of folks, especially those in Spain and Italy.

If the EU was serious about managing the currency/credit flows there would be some discussion of the foregoing already. In fact there would have been discussions along these lines long before last weekend.

Instead there is noise about confiscating deposits in Italy and Europe-wide capital controls. In a currency union, capital controls are a death sentence. The ‘natural’ form of control is different currencies for each state. Under the condition of currency controls there are de-facto independent ‘euros’ with different prices for each. The next step — toward independent currencies — is a very small one.

What is underway is beyond the reach of language to adequately describe. Not only have best practices for deposit banking for 200 years been undone but so has long-standing management policy of money-capital flows across national boundaries. It can be inferred that every euro sent to Russia since 2000 has been a fraudulent instrument. Why would Russia sell more fuels to Europe under current uncertain circumstances? If the Russians do not accept euros, why would Saudi Arabia or any other oil producer?

Apoplectic Steve Keen says the Russians can cut off European natural gas supply.

Steve from Virginia says the Russians can simply refuse to accept euros, they will accept only dollars, instead! How retro! How … 1990!

Why would the Russians accept euros when they are subject to confiscation? Why would they accept French francs or Spanish pesetas? It’s the same bunch of thieves … the same bankrupt national economies!

The entire euro-as-energy-hedge is undone in an instant. By stiffing bank depositors, the EU has defaulted. There are no two ways around it.

The Chinese bosses are reaching for those Maalox bottles right now. China holds a trillion in euro-denominated debt instruments, so does Japan. Germany appears not to have thought this through. Regardless of what happens in/with the eurozone, Germany is on the hook for the overseas euro-trillions. Germany is the only EU country with money: it is responsible for all those Target 2 liabilities as well — this is another trillion euros. If not Germany, who picks up the tab?

Germany is declaring that overseas holders of euro currency are going to pick it up — starting with the Russians! Off the hook is the euro-establishment itself and its pet tycoons. High-level finance acumen is not necessary to understand how outrageous and destabilizing such an arbitrary action is: head-loppage was never part of the euro sales pitch! The euro was to be a ‘better, sounder’ dollar, always ‘good as gold’. Now, its fairy money, worthless in the hands of ‘not-quite-special friends’ who only discover they are so after the fact.

Exposure to currency derivatives presently denominated in euros is another liability. According to the Bank for International Settlements, the current derivative exposure including options and futures is twenty-four trillion euros. Who is on the hook for that? If the answer is ‘nobody’ then the entire edifice comes crashing down.

From here is looks like a lot of agony to come around the world: if Germany doesn’t default it is ruined by its ‘share’ of EU liabilities. If Germany defaults then China’s finance system is bankrupted along with Japan’s.

Don’t be surprised to see the European ‘bank run’ materialize over the next few weeks in the foreign exchange markets as countries seek to offload their euro risk onto suckers and market fools as quickly as possible. Unlike the bond and equities markets, F/X markets are difficult to manipulate. One reason is because they are too large: trillions of dollars and other currencies are exchanged every day. Who would volunteer to be the sucker? Not even the Fed is large enough — or dumb enough — to take over China’s or Japan’s massive euro positions.

Who is going to take over these positions? If the answer is nobody China and Japan — along with Russia — are left with with massive, instant F/X risk.

One outcome of this risk would be an increase in interest rates! Such a rate increase in the US and elsewhere would be very unpleasant: there would be instant hits to government spending as borrowing would become less affordable. Government bond holders would face immense losses. Eventually, the governments would be forced to bail out their bond markets simply to function!

Sacre Bleu! Capital flight to support the dollar and bond prices would only last as long as the euro was a viable currency. If the euro fails there is no readily available substitute for it. If Germany made good euro liabilities with d-marks … it would be for show only. The European euro-liabilities are simply too enormous. The end-game would be Germany refusing all non-German liabilities and restricting d-mark circulation to native Germans within Germany. Euro-credit everywhere would be re-denominated into (worthless) local currencies. There would be intense competition for international dollars, a massive deflationary contraction as these dollars vanish from circulation.

Believe it or not the Fed cannot ‘print money’. It can only make loans against ‘good’ collateral. The demand for US dollar currency would become overwhelming … Congress would have to act … in the highly complex, interconnected finance universe, the smallest perturbation effects everything else.

All of this could take place next month week! Look to the world’s money authorities to start leaning on the eurozone to put the genie back into the bottle. Matters could spiral rapidly out of control.

The motive behind this nonsense is presumably ‘bailout fatigue’: to spare the Germans the minuscule cost of keeping Cyprus banks functioning until after the German elections in September. There is no reason why the ECB could not continue to fund these banks by way of ELA and use the time to craft a solution that leaves depositors intact.

Export of petroleum consumption is the real reason behind the onrushing European default. When countries fail their allotment of petroleum is exportable. There is no substantial difference between the thievery underway in Cyprus and that in Libya or Egypt. Ultimately, all of Europe’s petroleum consumption is exportable leaving the various citizens in distress. The hope is to default on the small scale and hive Cyprus’ petroleum consumption toward the rest of Europe. With luck the default is contained and the losses in Cyprus can be offset by more affordable fuel elsewhere.

Cyprus is a test case. If the Cypriots can be jettisoned from the EU energy hedge then other countries can be safely ejected such as Spain and Italy. These countries can fend for themselves in the fuel-for-dollar market while the ‘core’ uses the hard euro to gain that fuel price discount and a guaranteed supply.

Europe’s strategy can only work if the euro-establishment is able to convince the Russians there are currency gains to offset depositor losses. The problem is that deflation follows its own rules: harder currencies cut into consumption which in turn presses the fuel suppliers. When customers hoard hard currency they do not buy fuel, the fuel suppliers go out of business. This is the reason why fuel prices have been declining since February.

Figure 1: Brent spot crude from yCharts (click on for big). Along with consumption export is the recent rise in fuel price to near $120 per barrel on Brent market. $120 is the new $147: the fuel price is too high, there are the ugliest of all possible noises coming out of Europe …

Cyprus imports 95% of its fossil fuel energy. The euro- and euro denominated credit have been the means by which Cyprus could afford fuel and the thousands of cars needed to waste it. Cyprus earned exactly nothing by driving those cars: nothing remains to retire the multi-billion-euro debts taken on to facilitate the waste. Meanwhile, the country fashioned itself into a mercantile (banking) state so as to arbitrage fuel like Japan. Its banking products have now been deemed redundant and expendable to the European mercantilists. Cyprus’ arbitrage has been devoured by the greater European version. Cyprus was a poor relative to the rest prior to the euro, it is on the way to becoming a poor relative again.

What is occurring in Cyprus is destruction of purchasing power by administrative fiat: this is, conservation by other means. Cyprus’ consumption is exported, its citizens will drive less because they will have less money, what money remains will be hoarded. Fuel not purchased in Cyprus will be available elsewhere so that others can drive in the Cypriots’ place.

Right now it is clear that the establishment will sacrifice anything — good relations with other countries and peoples, economic stability and predictability and best financial practices — to enable automobile use.

– One casualty of default is the media-promoted pseudo-recovery in America and elsewhere. This farce is now a child’s fantasy that can be safely dumped into the trash. Economies that required more easy credit last month now require human sacrifices. Today Cyprus gets the Black Spot, next month’s fall guy is France. Who’s next?

– Bernanke could come up with the ten-billion-or-so euros needed by the EU and end the panic. If he was smart he would do so — very publicly — tomorrow morning. This would buy some time and allow a chance for a comprehensive … etc. round of can kicking.

– If there is an EU ‘handshake’ with Russia => Panic in Southern Europe => contagion and derivatives implosion. This does not have to happen, but avoiding it will require extraordinary efforts, that will cost much more than anything gained at Cyprus’ — and Russia’s — expense.

– If there is no handshake — which seems likely as the European establishment is incompetent — Default in Cyprus is part of generalized euro default => failure of the euro, contagion in China and Japan => severe worldwide recession => collapse of fuel prices and physical shortages.

– Right now, Europeans are busy, opening new bank accounts in Norway, UK, Miami, Panama City and even Switzerland … It takes time to set up yr bank run, there has to be a place to run to.

– The Cypriots are trying to figure out how to evade the capital controls sure to come. Russians are trying to figure out how to remove their funds … Greeks are figuring out how to emulate the Cypriots who in turn are reading about the Icelanders. There is a lot of scheming — and fretting — going on right now.

– Nobody on Planet Earth wants a Greater Depression, everyone knows the score, this is the ‘Big One’ and people have their game face on. If a crisis can be avoided with a small payment most people will make the payment and not complain. It is the analysts who are upset about the consequences of the past few days. Most of the analysts are wrong about which consequences matter the most. They are wrong b/c they ignore the big energy story right under their noses.

– Citizens generally aren’t libertarians and they don’t take ideological positions, they are flexible. Right now the system does not appear to be ruined. That it is indeed ruined has to be proven by events.

The David Whitney house in Detroit in 2013. Out of the current wreckage some fragments will survive.

The only possible exit from currency death by energy strangulation is stringent conservation. Europe needs to cut its fuel bill in half right now. So does the rest of the world. This word ‘conservation’ is never mentioned, the conservationist is excluded from the management dialog. The conservationist offers options that are unhappy for the capital wasters. What the system managers refuse to understand is this: if nothing is done to conserve voluntarily there will be conservation by other, ongoing, extremely unpleasant means.

Figure 1: Does the crude market unravel due to hoarding of funds or is there a ferocious price spike followed by a crash? The EU plays with fire. Chart comparing costs for replacement crude oil to what the customer can afford to pay: by TFC Charts (click on for big). The time remaining to adjust or make positive changes in policy direction has become shorter and more uncertain. The window of roughly two years until fuel supply shocks presumed no policy errors on the part of the establishment.

Welcome to the new, improved bank run!

The European Union bosses have levied a tax against bank depositors in Cyprus, the purpose being to maintain the drive-first status quo. By doing so they appear to have stepped off the end of the gangplank (NY Times):

Facing Bailout Tax, Cypriots Try to Get Cash Out of Banks

Liz Alderman, NY Times

ATHENS — In a move that could set off new fears of contagion across the euro zone, anxious depositors drained cash from automated teller machines in Cyprus on Saturday, hours after European officials in Brussels required that part of a new 10 billion euro bailout be paid for directly from the bank accounts of ordinary savers.

After Negotiations, Cyprus Agrees to a Euro Zone Bailout Package (March 17, 2013)

The move — a first in the three-year-old European financial crisis — raised questions about whether bank runs could be set off elsewhere in the euro zone. Jeroen Dijsselbloem, the president of the group of euro area ministers, declined early Saturday to rule out taxes on depositors in countries beyond Cyprus, although he said such a measure was not currently being considered.

This is naked confiscation of funds from ordinary citizens, there is no correlating increase in worth of the remaining funds or expansion of the Cypriot economy. It is simply shoveling more good money down the euro rat hole to save senior secured creditors to the banks from loss … as well as support the automotive waste status quo.

Athens, Greece is flooded with rainwater as well as with endless streams of traffic. Europeans do not realize that as long as one car is running in Europe and elsewhere, there will be economic decline. Globalization at work: the Europeans are subsidizing fuel demand in China which increases competitive cost pressure in Europe. This decline is spread to Cyprus by way of its banks, an afterthought to the crisis that has engulfed Greece and the other euro-states.

Under an emergency deal reached early Saturday in Brussels, a one-time tax of 9.9 percent is to be levied on Cypriot bank deposits of more than 100,000 euros effective Tuesday, hitting wealthy depositors — mostly Russians who have put vast sums into Cyprus’s banks in recent years. But even deposits under that amount are to be taxed at 6.75 percent, meaning that Cyprus’s creditors will be confiscating money directly from pensioners, workers and regular depositors to pay off the bailout tab.

Problems in Cyprus are not new, the country’s banks have loaned large amounts to Greek businesses and banks, the loans are multiples of Cypriot GDP. As Greece falls further into bankruptcy, so do the Cypriot banks.

Cyprus is also in the cross-hairs of European bank regulators as Russian ‘investment’ funds flow into Cypriot banks from Russia … then back out again. Regulators accuse Cypriot bankers of laundering funds of Russian gangsters and oligarchs. The source of particular funds is unclear but in aggregate, all euros in the hands of Russian depositors are from European energy consumers buying Russian non-renewables including natural gas and crude oil.

The Washington Post says:

Why today’s Cyprus bailout could be the start of the next financial crisis

Neil Irwin

It is a bad day to have your money deposited in a bank in the Mediterranean island nation of Cyprus. And it may just mean some bad days ahead for the rest of us.

Early Saturday, the nation reached an agreement with international lenders (IMF, European Central Bank and European Union) for bailout help. Part of the agreement: Bank depositors with more than 100,000 euros ($131,000) in their accounts will take a 9.9 percent haircut. Even those with less in savings will see their accounts reduced by 6.75 percent. That’s right: Anyone with money in a Cypriot bank will have significantly less money when the banks open for business Tuesday than they did on Friday. Cypriots have reacted with this perfectly rational reaction: lining up at ATM machines to try to get as much money out in the form of cash before the money they have in their accounts is reduced.

The idea that emerges is that banks — like real estate — are currency traps, that there is no ‘safety’ for funds … anywhere. - A bank run has been underway in Europe for several years. Part of this is the foreign exchange aspect of the eurozone and is structural.

Figure 2: The God-like Unholy Trinity which determines the course of foreign exchange for all countries including those in Europe. A country can have an independent monetary policy, it can maintain a currency peg with another country or countries and it can enjoy the free flow of capital across its borders. It can effect two of these, or two can be denied, but never all three at once.

The worth of money is determined — not by central banks — but by its voluntary exchange for a valuable physical good on demand … at gasoline stations around the world millions of times a day. Even with policy rates set to zero and the all-out lending to governments by central banks there is no independent monetary policy … anywhere. The worth of money is determined by its exchange for crude and crude products and nothing else. The only policies that central banks can effect are those that make matters worse.

The euro is not a currency in the sense that it is the product of a nation named ‘Europe’, rather it is the collection of currencies of individual European nations that all happen to be called the euro. These currencies are all pegged to each other, a source of Europe’s misery as there is no way for the individual euros to be repriced independently of the others. Europe has the pegged currencies and no independent monetary policy: all that remains is the free flow of capital or not across European borders … that is, bank runs.

Bank runs are baked into the cake to some degree because of the use of the European Stability Mechanism (ESM) which is a credit-laundering machine to allow the ECB to make unsecured loans. This is fatal to the central bank because it has insufficient capital and its assets are the same assets that have bankrupted the various commercial banks. Once implemented — due in April — here is no effective lender of last resort in Europe. The ECB is simply another insolvent European commercial lender.

 
Keep in mind, if states impose capital controls — to restrain the free flow of capital — there is no more peg which means no more euro!
 

The system is clearly worth more to the Europeans than the funds it contains. The system is embodied in the euro which = gasoline. Stripped to essentials, the Europeans are choosing to drive over maintaining a functioning economy. Granted, the economy has depended upon driving to maintain cash flows, but this waste-based approach is unraveling. Cash flows will be interrupted regardless of what the Europeans choose to do. It would be best for the Europeans to jettison the driving and use the money to re-capitalize a less wasteful economy.

When the euro system fails it will be as a result of eurozone countries being bankrupt, not defects of the euro itself. When a country is bankrupt to the degree it torpedoes the euro that country cannot do better with any other currency! In other words, these countries in Europe could dollarize and they would still be bankrupt.

At this point in the five-year decline in Europe, policy errors are unavoidable. Bank assets in Europe are worthless. They are essentially car loans … along with loans to enable the Europeans to buy fuel which has been burned up for absolutely no return. This is why the countries are bankrupt, not because of the euro which is simply a currency.

Europe has made itself vulnerable to push-back from Russians who are large depositors to Cypriot banks. Russia will pay itself at the front end of the natural gas pipeline: 10% less deposits, 10% less gas. All Putin has to do is order pet Gazprom to turn a valve and the Europeans freeze inside their houses.

Not the first time depositors have been ravaged in Europe: Spanish depositors have been made into stockholders of combined banks after smaller home-loan banks failed. When the combined banks failed in turn the new shareholders were completely wiped out.

From the ‘shooting oneself in the foot and liking it’ department: the entire euro banking system collateral is the same system’s deposits. European banks need more deposits not less! Instead of stifling contagion in Europe as is claimed by the managers, this action looks to be the trigger for Continent-wide bank runs.

It will be very hard for the establishment to put this particular genie back into the bottle. Even discussions about withdrawing the action will be destabilizing as every word will be freighted with consequences to depositors, not just in Cyprus but elsewhere.

The strategy to solving money laundering is to deal with it directly, by prosecuting criminals rather than penalizing ordinary bank customers. It isn’t the customers’ fault that Russian- and other overseas criminals use Cypriot banks, there is nothing ordinary bank customers can do about it, either.

Whatever the Troika hopes to gain by annexing deposits will be lost by the European Central Bank and the banking system as a whole.

Notice that the action took place on a weekend, as was the case during the ‘Lehman breakdown’. Also notice that Cypriot banks are now to be closed on Tuesday as well (Monday is a Cypriot national holiday).

Financial Times:

“(Cyprus President Nicos) Anastasiades explained that Cyprus gave way after the ECB threatened to push the island into a disorderly default by withdrawing liquidity support for Laiki, its second-biggest bank, on Tuesday.

He said Cyprus had a choice between “a catastrophic scenario of disorderly bankruptcy, or a scenario of a painful but controlled management of the crisis”.

According to Cyprus sources, the IMF and German managers wanted a 40% haircut. 7-10% is only the first installment. The Cyprus bank insolvency cannot be cured, only the money interests made whole by the rest.

All EU depositors — in countries with similar finance problems as Cyprus or not — are facing theft of funds. In Cyprus, funds are stolen from depositors and handed to senior secured creditors of the Cypriot banks, preferred shareholders, lenders to the Cyprus state and depositors to Cypriot banks outside of Cyprus. The establishment is afraid the bondholders won’t lend any more. The EU system is broken, nobody knows what to do, there is no reason to lend, anyway.

With the cost of new fuel rising due to geological constraints, with access to credit diminishing due to high energy prices, there has been a rapidly shrinking window of opportunity for the managers to take appropriate actions to strengthen the money- system and to conserve resources/capital. That window is now being slammed shut by foolish managers.

Notice how the ‘system’ works, nothing really changes except the scale: from, “Hiding in plain sight”:

It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

Henry Ford

Q: How would you describe the economy?

A: It is a system that allows a select few to borrow immense fortunes. The rest of us … you, me, everyone else … repay the debts.

…

Q: That’s it?

A: That’s it.

 
The face of Peak Oil. [1]

We are in the middle of a crisis that has been ongoing for almost five years now: the managers demand the economic system be bailed out. Of whom do they make demands? Entrepreneurs? Innovators? The finest minds of a generation?

A: Pensioners. (Bank depositors.)

The economies must become more productive which means increasing the efficiency of output. Consequently, pensioners are called upon to sacrifice their retirements in the UK, Greece, Ireland, Portugal, in the US … in cities and states pensions everywhere are under attack.

Why not more machines? If machines are productive, wouldn’t deploying more machines solve the economic problems around the world rather than deploying pensioners (and bank depositors)? Technology is supposed to save us but the raiding of pensions — and bank accounts — insists otherwise: the scraping of the bottom of the barrel in real time. It’s an admission that technology won’t work, from the people who are in a position to know.

What happens after the retirements (and bank accounts) are pilfered? Who knows? Nobody has a plan.

The world is shocked to discover a shortage of capital, not for investments but to prop sagging balance sheets. Who could have guessed as capital has been shoveled into the furnaces of ‘development’ for decades? Only economists and bureaucrats believe that we never run out of inputs.

China’s Biggest Banks Are Squeezed for Capital

Neil Gough (NY Times)

China’s banks are among the biggest and most profitable financial institutions in the world. But the state-backed banks are also starved for capital after an aggressive lending spree that was encouraged by the government.

Maybe they are profitable and maybe not. “Starved for capital,” suggests not. The operating idea is that capital is money rather than material inputs. These inputs are mispriced so that the money-equations used by industrialists add up to something ‘positive’. Cheating works until it doesn’t any more: substituting debt for unaffordable inputs doesn’t produce anything. Debt isn’t capital and self-delusion isn’t capitalism. Maybe we should call our economic system ‘Delusionism’ and be done with it.

Within the last year (2011), seven of the biggest Chinese banks tapped the markets for 323.8 billion renminbi ($51.4 billion ) in new funds, according to Citigroup estimates. Several financial firms are expected to raise another $17.7 billion in the next few months, with China’s fifth-biggest lender, the Bank of Communications, accounting for $9 billion.

Banks around the world have been tapping investors for new funds as they struggle with slumping share prices and waning profits. But Chinese firms have maintained that their profit growth is strong and their balance sheets are solid, raising red flags among some analysts about the banks’ persistent capital needs.

Chinese bankers and business tycoons, each more corrupt than the last: raise that Red Flag high! The Chinese need capital because so many are stealing it and removing themselves overseas.

The problem is that paying out high dividends blows holes in their base capital. Thus, banks need to continue tapping the markets for fresh funds, often diluting minority shareholders by issuing new shares. The finance ministry, the banks’ ultimate controlling shareholder, always buys in, keeping its stakes topped up.

Somebody at the bottom always takes it in the neck. Today, it’s the minority shareholders, tomorrow it will be the junior bondholders or the pensioners or the schoolchildren forced to eat radioactive school lunches. This is part of an ongoing process, not a new feature within delusionism. It was invisible when everyone was busy getting rich: now that the abuses are visible it can only be on account that fewer are getting rich. The endgame heaves into view.

The journey from ATM to ATM to withdraw money is just beginning in Europe, as it was years ago in Argentina. After that comes the banging of pots and pans in the streets, then come bomb attacks on police stations. This is not a good journey for the Europeans to be embarked upon.

ADDENDUM: One of Mish’s correspondents breaks down the liabilities of the Cyprus banks involved in the ongoing fiasco and brings some info to light, (Jeff Baryshnik, Baryshnik Capital Management Inc.):

Hi Mish

I read with interest your article on the Cyprus bailout deal. After a quick review of the most recent financial statements of the four publicly listed Cypriot banks as shown on their websites, it is notable that a simple alternative proposal could protect the country from bankruptcy and make its depositors whole.

By wiping out 100% of the equity, 100% of the bondholders, and 17% of the banks’ liability to central banks, the Cypriots could stabilize their banking system (based on the 5.8Bn EUR figure being discussed) without penalizing local savers.

Instead of raising 5.8Bn EUR from depositors, it could raise 1.4Bn from combined market cap, 2.0Bn from bondholders and preferred shareholders, and 2.4Bn of the 14.3Bn in combined Central Bank loans (Cypriot and ECB) it has on its books. This assumes zero contribution from the Cypriot subsidiaries of foreign banks so it may be conservative.

If the banking system is bankrupt, anything other than an Alice-in-Wonderland recovery system suggests that the order of liquidation is shareholders, preferred shareholders, debt holders, Central Bank creditors, and THEN depositors. If 10Bn or even 17Bn EUR is truly required, then coincidentally up to 17.7Bn EUR is available from equity holders, debt holders, and Central Bank creditors without impairing a euro cent from depositors.

Ed Harrison suggested that there were insufficient senior creditors and attaching depositors was necessary. This does not appear to be the case.

[1] Unidentified cinematographer, ‘The Character Humongous from the film, Road Warrior’.

It’s hard to miss the Big Idea that the wheels are coming off the grand twentieth-century capitalist experiment; waste for its own sake, or waste for the sake of moving all-important ‘economic indicators’, waste for the purpose of enriching the even-more-important ‘entrepreneurs’ and ‘innovators’. The list of falling wheels would have to include China, Japan and Europe, but there are many more on a long list. It’s hard to think of a country in this world that doesn’t have major problems, the countries are interconnected by trade, treaty or finance so all are infected with each others’ problems in addition to their own: (Washington Post):

CDC says ‘nightmare bacteria’ a growing threat

Lena H. Sun

Federal officials warned Tuesday that “nightmare bacteria” — including the deadly superbug that struck a National Institutes of Health facility two years ago — are increasingly resistant to even the strongest antibiotics, posing a growing threat to hospitals and nursing homes nationwide.

Thomas Frieden, director of the Centers for Disease Control and Prevention, said at a news conference: “It’s not often that our scientists come to me and say we have a very serious problem and we need to sound an alarm. But that’s exactly what we are doing today.”

He called on doctors, hospital leaders and health officials to work together to stop the spread of the infections. “Our strongest antibiotics don’t work, and patients are left with potentially untreatable infections,” he said.

Just like the finance economy, the biosphere, the political economy; there are “potentially untreatable … infections”. The treatments remaining in the pharmacy are the same treatments that spawned the problems in the first place: repeat applications of MORE, everywhere in the world. If MORE cannot be had immediately there are earnest promises of MORE to come … tomorrow!

A ‘Big Idea’ that is making the rounds has the various countries engaged in a currency war. Nations actively depreciate their own currencies so that they might gain export trade advantage at the expense of others.

Instead, the nations are engaged in a war for petroleum that is being waged with currency. As in all wars there are the winners who will gain fuel imports, the losers will have limited access to petroleum, their domestic fuel consumption will be exported to the winners.

In this war all the countries are engaged, to do otherwise would be to give up claims on petroleum in the future. To have a seat at the table or have any chance of winning, the countries must waste as much- as fast as possible, as waste is the collateral for the needed (depreciated) currency. The advantage lies with the United States, not only does it waste more than the others, but it produces as a consequence much of the world’s credit. The waste of other countries such as China is collateral for American credit, that is, collateral for even more American waste.

Figure 1: China crude oil imports vs. exports from Mazama Science (click on for big). So far, China is winning, it must waste or be left behind: China currency is tethered to the dollar, its fate is intertwined with ours. To run in place the Chinese must waste more than the Americans, adding to both countries’ prodigious waste- costs.

As in America, China’s waste is promoted to the citizens as ‘progress’. These ‘improvements’ never acknowledge China’s multi-thousand-year traditions or even meet any real human needs. Instead, grandiose follies are heaped upon monstrous excesses … the process serves to rationalize the excesses’ so-called ‘value’. As with the other developed countries, sunk capital has the country by the neck. China’s vast waste is collateral for China’s vast debts, to service the debts it must add to collateral. The country devours energy today so that it might devour even more tomorrow. It’s always tomorrow, good or ill, China must devour otherwise the hated Americans will do so in its place.

The bravado of the xenophobic industrialism rings hollow, to win this war over resources is to lose: permanent smog, water pollution, desertification, land theft, an out of control loan-shark economy and high level capital flight. China growth is gained by constructing buildings rather than using them: ‘growth’ is thousands upon thousands of gigantic stone heads concrete towers.

Credit-driven speculation in apartments and office towers in China is intended to be a hedge against rising energy costs, just like recent credit-speculation in tract houses in the US and Tokyo office buildings twenty years ago. The Big Idea is that building prices will rise faster than the credit-inflated fuel prices. By this way of thinking, fuel is always affordable because what sets the price — credit — is the means to meet the price — credit driven momentum-chasing in asset markets. Fuel is simply another asset, rationed by access to credit.

These kinds of hedges arbitrage stupidity, they live in the hedgers’ minds and nowhere else. On Planet Earth fuel is either plentiful or not: what sets the price of fuel is the credit-cost to pull it from the ground plus a supply-and-demand driven scarcity premium. The real cost of fuel increases relentlessly over time because of depletion, meanwhile, the internal costs of the hedges increase as well. Even when fuel costs remain low, as they were from the mid-eighties to the end of the millennium, the hedges become unprofitable and collapse.

For hedgers to gain their fuel, the asset(s) must be sold to others more effectively greedy than the hedger. Whether they sell to actual customers or take out loans against their investment doesn’t matter. The selling reduces the number of potential customers: sooner or later they run out, even in populous China! That is the end of the hedge.

The Chinese who buy these buildings are unwitting conscripts in the great global currency war over petroleum. Millions of relatively prosperous Chinese have invested the life-savings of generations in future energy waste. In a world with diminishing energy supplies, the investments are stranded. The Chinese cannot afford to make use of all the currently empty buildings and the cities that contain them, otherwise they would be doing so! The Chinese would have been much better served to invest in conservation, instead they have invested in ‘conservation by other means’.

Another reason for the Chinese building frenzy is to literally set in concrete the claims of developers and urbanites over prior occupants of China’s countryside. This Big Idea is no different from Anglo-American claims that were perfected on native lands in the 19th century with farms and mines, railroads, towns and barbed wire cattle fences. There are certainly less costly ways that are equally effective and more equitable than the Big Stone Head approach.

Keep in mind, when the Chinese property bubble unravels like all the others, the banking system will be ruined. So too if one of the major currencies such as the euro, sterling or yen fails … that is, if China wins the currency war. China holds hundreds of billions- or trillions of these currencies as reserves, its positions are far too large to unwind. A currency failure, a run out of banks or a bond market hiccup would bankrupt China finance … which in turn would bankrupt the rest of the world’s finance.

Mercantilism is another Big Idea energy hedge. A country obtains petroleum at a price and uses some of it to make high-worth goods such as (fake) Gucci handbags or Lexuses which are sold to customers overseas. The gains from the sale pay for the country’s fuel plus profits to the manufacturers.

The mercantile country and its firms borrow against the overseas trading partners’ accounts. Exporter’s fuel consumption grows larger than what it ordinarily would be without the trade. This is the presumed intent of today’s currency combatants, for each become successful mercantilists and have ‘others’ subsidize their fuel waste.

Figure 2: Japan is going broke because its fuel imports are too costly to be met by export of its goods to increasingly broke customers. The reason the customers are broke is high fuel prices! They cannot find any countries to subsidize their own fuel waste.

If Japan doesn’t depreciate its currency it cannot export or win the petroleum war. At the same time, if it depreciates any gains from exports will offset by increased fuel cost. If the yen is sufficiently beaten down the world’s fuel suppliers will not accept it and demand dollars instead.

Japan has large foreign currency reserves but these are collateral for domestic debt. Like China, Japan has few options to free up its collateral: whatever collateral it can access is over-committed.

Japan is orbiting the drain, the recent trade deficit is the last straw, the country has too many obligations to meet … all of them coming due at once. The inflow of overseas funds into Japan and the carry trade have been the means by which the country has endured deflation without the associated depression. Japan now needs more waste — growth — or a return to the inflow of overseas funds.

Depreciating the yen is a symptom of Japan’s “potentially untreatable infection” — its past success is now killing the country. Japan is beyond desperate: on deck is nominal GDP (NGDP) targeting. This is the Bank of Japan making unsecured loans (because the Japanese private sector finance is not making any).

Sadly, the Japanese establishment does not understand why the private finance does not lend … they are in denial like the rest of the industrialized world. The private sector is bankrupt, it cannot borrow! So are Japan’s overseas customers, they just aren’t announcing it. Instead, they pretend and hope nobody is paying attention.

Deflation feeds on remedies designed to defeat it. All avenues here lead to entropy: if the private sector delevers, the government itself becomes insolvent. If Japan’s central bank leverages itself, it too becomes insolvent and there is no lender of last resort. The result is a run on Japanese banks and out of yen.

Around the world, various finance markets are pressurized, the Big Idea is to wring out volatility and create a Potemkin market that can pass as the real thing; ditto commodities, particularly gold, copper, foodstuffs and petroleum.

Time marches on and costs of volatility suppression are added to other ex-market costs, volatility emerges where the suppression forces are weakest. Right now, this is the currency markets. Switzerland can peg its currency to the euro at an affordable cost, just like the Chinese can peg its currency to dollars. Today’s question is where and how does Japan fit in particularly with its new trade deficit?

Japan has its own currency, unlike Europe, its treasury can issue yen to retire debt, extinguishing the self-created currency along with the debt. However, this remedy is likely too late to apply b/c the Japanese banking system is insolvent. An issue of government notes sufficient to effect Japan’s debt market would cause the banks to collapse.

Meanwhile, the Big Idea in Europe is the purposeful absence of any ideas at all! The technocrats are disappearing leaving a vacuum, to be filled by demagogues.

Figure 3: Europe produces about twenty-percent of its own petroleum fuel from rapidly depleting native sources, the rest must be imported. The mercantile states Germany and Italy export energy waste to others to meet their expenses, however, these customers cannot use the exporters’ waste to meet theirs. Like Japan, Europe is bankrupt.

The big difference between Europe and Japan the euro non-currency. Factionalism suggests Europe is set to lose the currency war and have its petroleum consumption shifted to others such as China and the United States. In other words, Europe cannot afford the euro, any currencies it can afford are nut suitable for the petroleum import trade. Because the euro is the currency of none of Europe’s states, there is no real issuer nor any lender of last resort, only a pretender.

Europe’s approach to the euro has been typical of the humans’ approach to everything else: to grasp what is immediately wanted then ignore life-cycle consequences. Europe wanted the euro as an energy hedge: it gave smaller countries the means to import waste from both Germany and OPEC. Now, these small countries cannot pay for the imports and the currency does not allow for the transfer of these costs to ‘others’. The waste — of course — is worthless, it cannot be ‘repossessed’.

The outcome is a Europe frozen on the spot. If it tries to pay for the expensive euro the entire continent will be ruined and unable to afford petroleum. This is the ‘austerity’ dynamic in force currently. If any country abandons the euro, the entire enterprise falls apart and there is nothing left to the Europeans with which to gain fuel. It is hardly likely that any petroleum supplier will accept a national currency from a bankrupt nation if the same nation’s bankruptcy has fatally undermined the euro! Of course, if the euro fails so will China finance, which holds massive amounts of euro-denominated debt as reserves, far too many to be readily rid of … without precipitating the disaster that it so desperately seeks to avoid.

Like so many other countries, Europe has an unraveling property bubble/energy hedge that also failed.

Meanwhile, the exit of the technocrat is the last step in post-petroleum down escalator toward chaos. After the technocrat comes zero-government, factionalism or abdication of governing authority. This is not to say that political and administrative reform is not possible; without new resources or an ‘upside down’ approach that husbands capital there is no foundation for reforms. The factions all promise MORE and a return to waste: the broken government is able to export fuel consumption elsewhere more efficiently and with less cost than do the factions, technocrats or ineffective government.

The problem in Europe and elsewhere is at the end of the everyone’s driveway. Every single day the Europeans must import twelve million barrels of crude oil at staggering cost, they must borrow from New York and London financiers to do so, as they have for ever day since the end of World War Two. Europe’s pathetic car industries cannot pay their own way much less the wasteful continent’s gigantic fuel bill. Europe is beyond insolvent, beyond broke, by rights it should never borrow again, ever, from this point in time until the sun consumes itself and balloons to fill the solar system. Europe’s bosses believe with this bit- or that bit of beautifully embellished central bank promises it can claim a good that is vanishingly rare and valuable … so that this good might be burned up for time-wasting entertainment purposes and economists’ reputations only.

This is the real Big Idea, it has not materialized in the imagination of the modern world … yet. It emerges from a concrete Big Reality that the modern human works hard to ignore. Modernity is intrinsically dysfunctional, its products are entropy and ruin. Its managers defend their right to waste as they please at the expense of the rest, the non-managers demand the right to waste along with the managers: this is madness! That a war might be waged with competitive waste as a tactic speaks to the inherent moral and physical bankruptcy of the ‘modern’ idea: it has hollowed itself out. At the end of the day the competitors are all smashed, together. There can realistically be no other outcome.

The next Big Idea must be an economy that rewards conservation and the husbandry of capital by every and all means, that treats all of capital as precious, rather than a substitutable ‘input’. It isn’t such a hard idea to grasp, its application is becoming a desperate necessity. Stewardship is less difficult than competitive depreciation financed by increased resource waste. In a well-functioning conservation economy shepherds of capital become rich and by so doing the others would become rich along with them. There is still entropy, but not the Hammer of Thor.

Time is running out … we adapt or else.