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If the World Knew What BoomBustBlogger’s Know, Would Ireland Default Today?
Credibility! It is truly the only “stuff” that underpins the various global economies in this new age of fiat monetary regimes and secretive trading of 3rd order derivatives with proprietary and oft arcane pricing mechanisms,
suspended by nanosecond deals in markets that are the deepest and most
of vast of their kind, yet still suffer from bouts of illiquidity. These
bouts find their genesis not in a dearth of market participants, nor a lack of
technology, depth or breadth – but do to a lack of CREDIBILITY! This is a
concept that, unfortunately, still befuddles both sovereign governments
and multi-national banks alike. This is a concept that is so basic as
to be sacrosanct to my four year old daughter as she both impresses and
cements the respect of her father with her abject honesty, yet
apparently so complex that the most respected scholars, central bankers
and CEO apparently fail to grasp. It is the concept that both drives and
supports the economies of the superpower nations. It is what Ireland
currently lacks!
Credibility, whose absence can easily cause nations’ fiat-based economies to collapse. It is the absence of credibility that has cast
doubt in and on both Ireland and Greece. It is much much less fungible
and more ephemeral than many of today’s leaders apparently were led to
believe. It is a concept that cannot be traded, for it be present and
stand on its own if it is to be! To be absolutely honest (and
credible!), I believe that if the global financial media and the
majority of the world’s investors simply had access to what was behind
the BoomBustBlog firewall, it (with it being credibility) would be what
would flee most of Europe and a considerable amount of the US banks and
REITs like a fly from a mutant frog factory. Alas, I digress.
Ireland’s current problem is, in our opinion, that of credibility.
Since it does not have a sovereign currency in which the markets can
reflect their opinion on Ireland’s credibility, they have turned to the
next best thing, Irish sovereign debt! Ireland alleges that it has its
banking problems under control. There is apparently some doubts in the
market regarding the accuracy of that assertion thus the spiking in that
country’s cost of capital. The core issue at hand is whether Ireland is
telling the truth, or whether they are attempting to paper over a
problem that is currently out of their control. If Ireland truly does
have the matter under control, then it is really an issue of
communication and marketing. In what is probably the country with the
most intense marketing engines known to man, the US, sales and marketing
managers are taught that to convey a message to a mass audience, one
has to satisfy several major tenants of persuasion. Two of those tenets
are almost universally used, and they are the tenets of Social Proof and
Authority:
Social proof
Using the opinions of others to reach a conclusion. To determine what
is correct by finding out what other people think is correct. I
actually use the concept of social proof to market my blog (or at least I
intend on using it). I post the comments of casual, yet loyal readers,
retail subscribers and institutional investors/subscribers. Here are
examples of each…
Non-paying readers
Hey Reggie, Just
thought I’d drop you a note and compliment you on your great blog and
excellent views. Being a smalltime FX trader, I’m not a subscriber to
your service, but the information you provide is very valuable and
intensely appreciated.Thanks a million.
Grad student
from an Ivy leagues school – Reggie, I have been following your posts
for several months now and I want to let you know I think you are doing a
great job. From your analysis, I have seen the truth behind all the BS
that wall street feeds us (insert Mad $$, CNBC and the MSM here). I
think everyone should read your posts and learn the REAL story!
Bank employee: Reggie, Huge fan of yours. Just wanted to drop by and say that I am so thankful that you are out there. You are shining the light on the people in the cave. Learned so much from your site. Funny story, I used to work at smells fargo, and they have your site blocked. I thought you might take a slight degree of satisfaction from knowing that. Keep shining the light. One love.
Retail Subscriber
I am more then
happy to pay for your services. Are there any pair trades that you have
been actively trading? I use to be a very successful pair trader. I
could really use you help. I hear you are the man who has made some of
my friends alot of money.
Institutional Subscriber
“His work is so detailed, so accurate, it’s among the best in the world,” says Eric Sprott, CEO of Sprott Asset Management,
a Toronto firm that manages about $6 billion, is the largest
independent Canadian asset management firm, and the proprietor of the
innovative Gold and silver physical investment trusts. Mr. Sprott has
subscribed to my research for several years now, and is well known in
the investment world.
As you can see, through the use of social proof,
one determine that BoomBustBlog a) has a decent following and b) is
well respected by at least a small coterie of loyal followers. This
tends to make the decision to read, subscribe to
and/or pay for the blog easier since it can be justified by the actions
of others. The US and China currently have a decent inventory of social
proof which they are currently putting to use. This, despite what I
believe to be egregious policy errors that are guaranteed
to come back and bite the respective countries populace in the arse, is
being put to use in an attempt glaze over the effects of the credit
bubble, consequent burst, and the inevitable financial and economic
contagions that follows. Ireland currently has no such cache. There was
the attempt to manufacture such in the first quarter of this year, as “Many Institutions Believed Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ!“.
It was this (thought by some to be draconian) implementation of
austerity upon the populace that led to my construction of the
proprietary BoomBustBlog Sovereign Debt Contagion model, and also what
leads us to the next precept of marketing and persuasion below.
Contagion reading can be found here: Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter? Monday, March 8th, 2010 and Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight! Tuesday, May 4th, 2010
You see, the implementation of austerity
measures and drastic cuts to government budgets will do not to bring
about better economies if the disease that cause the economic meltdown
to begin with is not excised from the system. All financial institutions
must have their assets accurately marked to market and those entities
that are invariably insolvent must be dismantled and replaced with new,
competitive ones. China and the US have, at least until now, gotten
away with playing hide the banking NPA sausage, and as a result have
social proof of their actions being workable and as a result have been
able to spare their banks’ senior bondholders from taking losses and
instead have stuck the taxpayers with said losses – a perversion of the
hierarchy of risk that is embedded in the capital structure of said
institutions. This capital structure perversion is best described by the
new age adage, “Privatization of profits and socialization of losses”.
The global banking system has assumed tremendous economic losses that
are being both hidden by accounting shenanigans and regulatory capture
and assumed by sovereign states who in turn force the losses upon the
taxpayer through austerity measures – all still while attempting not to
officially recognize the losses. The reality of the matter is that this
will not work long term, and the Japanese 20 year macro experiment in
quantitative easing that resulted in a 2 decade slide in real asset
prices and the elimination of practically all Japanese banks from global
competition is apparently lost on many, if not all. In addition, the
mass application of austerity amounts to a severe punishment of the
taxpayer for the wrongs of the corporate class – all implemented by
government officials. This is the lead in to the next the next tenet of
marketing… Why anyone inflict such economic pain upon one’s own
citizens???
Authority
The precept of Authority dictates that humans will follow the
instructions and lead of those they believe to be authority figures,
even if it is in direct contradiction to their own ethics, precepts and
beliefs. This does not justify the infliction of pain and discomfort
upon others by what can be seen as a fairly large group of authority
figures, but it damn sure goes a long way in explaining it. Thus, when a
large body of government officials from several sovereign nations
implement severe austerity measure on their constituencies, even to the
extent that it drastically reduces the standard of living, but fail to
address the favoritism given those entities that have created, marketed,
traded and now house much of the depreciating toxic assets that caused
the malaise, they are most likely succumbing to the “authority” effect.
Let’s delve deeper into this intriguing concept.
The experimenter (E) orders the teacher (T), the subject of the |
The Milgram experiment on obedience to authority figures
Professor Milgram’s experiment on obedience to authority figures (sourced from Wikipedia) was a series of social psychology experiments conducted by Yale University psychologist Stanley Milgram, which measured the willingness of study participants to obey an authority figure who instructed them to perform acts that conflicted with their personal conscience.
The subject was given the title teacher, and the confederate,
learner. The participants drew slips of paper to ‘determine’ their
roles. Unknown to them, both slips said “teacher”, and the actor claimed
to have the slip that read “learner”, thus guaranteeing that the
participant would always be the “teacher”. At this point, the “teacher”
and “learner” were separated into different rooms where they could
communicate but not see each other. In one version of the experiment,
the confederate was sure to mention to the participant that he had a heart condition.[1]
The “teacher” was given an electric shock
from the electro-shock generator as a sample of the shock that the
“learner” would supposedly receive during the experiment. The “teacher”
was then given a list of word pairs which he was to teach the learner.
The teacher began by reading the list of word pairs to the learner. The
teacher would then read the first word of each pair and read four
possible answers. The learner would press a button to indicate his
response. If the answer was incorrect, the teacher would administer a
shock to the learner, with the voltage increasing in 15-volt increments for each wrong answer. If correct, the teacher would read the next word pair.[1]
The subjects believed that for each wrong answer, the learner was
receiving actual shocks. In reality, there were no shocks. After the
confederate was separated from the subject, the confederate set up a
tape recorder integrated with the electro-shock generator, which played
pre-recorded sounds for each shock level. After a number of voltage
level increases, the actor started to bang on the wall that separated
him from the subject. After several times banging on the wall and
complaining about his heart condition, all responses by the learner
would cease.[1]
At this point, many people indicated their desire to stop the
experiment and check on the learner. Some test subjects paused at 135
volts and began to question the purpose of the experiment. Most
continued after being assured that they would not be held responsible. A
few subjects began to laugh nervously or exhibit other signs of
extreme stress once they heard the screams of pain coming from the
learner.[1]
If at any time the subject indicated his desire to halt the
experiment, he was given a succession of verbal prods by the
experimenter, in this order:[1]
- Please continue.
- The experiment requires that you continue.
- It is absolutely essential that you continue.
- You have no other choice, you must go on.
If the subject still wished to stop after all four successive verbal
prods, the experiment was halted. Otherwise, it was halted after the
subject had given the maximum 450-volt shock three times in succession.[1]
Results
Before conducting the experiment, Milgram polled fourteen Yale
University senior-year psychology majors as to what they thought would
be the results. All of the poll respondents believed that only a few
(average 3 out of 100) would be prepared to inflict the maximum voltage.
Milgram also informally polled his colleagues and found that they,
too, believed very few subjects would progress beyond a very strong
shock.[1]
In Milgram’s first set of experiments, 65 percent (26 of 40)[1]
of experiment participants administered the experiment’s final massive
450-volt shock, though many were very uncomfortable doing so; at some
point, every participant paused and questioned the experiment, some said
they would refund the money they were paid for participating in the
experiment. Only one participant steadfastly refused to administer
shocks below the 300-volt level.[1]
Milgram summarized the experiment in his 1974 article, “The Perils of Obedience”, writing:
The legal and philosophic aspects of obedience
are of enormous importance, but they say very little about how most
people behave in concrete situations. I set up a simple experiment at
Yale University to test how much pain
an ordinary citizen would inflict on another person simply because he
was ordered to by an experimental scientist. Stark authority was pitted
against the subjects’ [participants'] strongest moral imperatives
against hurting others, and, with the subjects’ [participants'] ears
ringing with the screams of the victims, authority won more often than
not. The extreme willingness of adults to go to almost any lengths on
the command of an authority constitutes the chief finding of the study
and the fact most urgently demanding explanation.
Ordinary people, simply doing their jobs, and without any
particular hostility on their part, can become agents in a terrible
destructive process. Moreover, even when the destructive effects of
their work become patently clear, and they are asked to carry out
actions incompatible with fundamental standards of morality, relatively
few people have the resources needed to resist authority.[3]
The original Simulated Shock Generator and Event Recorder, or shock box, is located in the Archives of the History of American Psychology.
Real World Examples of the Social Science Concepts Above
The similarities between “Teachers” referenced above and the leaders
of the sovereign nations in Europe, as well as the implications of
considering the “authority figures” referenced above as being the
defacto heads of mulit-national agencies such as the ECB and IMF are
literally inescapable to anyone who approaches this with a clear,
autonomous and objective mind. In other words, anyone not bound by the
straps of “authority”!
This is page 2 of our Subscription only Ireland Public Finances Projections Document, available to all paying subscribers – 
Ireland public finances projections.
If one were to exercise one’s imagination, one could cast the EIU and
the IMF as authority figures, and the Irish government as the “teacher”.
As you can see, Ireland’s (the teacher’s) view of their prospects are
much, much rosier than both the EIU and the IMF’s. So rosy as to be
probably unbelievable in many a context, including the current one.
What makes this so bad is that the authority figure’s, the EIU and
the IMF’s forecasts throughout this crisis have been so optimistic as to
have been downright laughable. I am offering this single page sbove to
those who do not subscribe to our services to fully drive the point
home that was so graphically illustrated in “Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!”
(which is a definite “must read” in and of itself). Of course, our
internal team of analysts have come up with numbers nowhere as rosy as
the EIU, the IMF, nor Ireland’s. Go figure. Oh year, while you are
figuring, you should wonder who has been the most accurate over the last
three years – the IMF, EIU, banking analysts or BoomBustBlog. Here’s a cheat sheet.
As a hint to exactly why we would be more bearish than the EIU and the
IMF (despite the fact they have been consistently wrong to the
optimistic side since the beginning of the crisis) is a careful forensic
glance at how they (the authority figures), and Ireland (the teacher),
calculate Ireland’s debt. It is the farce as follows…
The Farce!
The government has set up an asset management agency – NAMA,
which will buy toxic assets from banks at a discount and will in turn
issue government-guaranteed securities. NAMA was expected to buy about
$81 billion of toxic assets at a price of $43 billion and issue
government-guaranteed securities in return. Since these securities have
collateral backing and are likely to be repaid through pay back of
underlying loans, these securities are considered off-balance-sheet and
are not part of general government debt by Eurostat. According to Davy
research, while the projected gross government debt excluding the impact
of promissory notes and NAMA bonds is 84.8% in 2012, including the
impact of promissory notes and NAMA bonds (in other words, including the
truth), the gross government debt can rise to 117.4% of GDP. This
either competes with or bests Greece, 2010’s poster child of flagrant
spending.
This means that the teacher has created a very harsh
austerity plan for its “learner”/student/tax paying populace that has
materially lowered the standard of living – all based upon numbers that
were bogus to begin with. In other words, it ain’t gonna work!
The original austerity plan was based upon pie in the sky numbers
planted in pure optimism, and those numbers themselves were based upon
an incomplete picture of the countries true debt. This has now come to
light as the country faces the prospect of having to again turn to
outside entities to assist in the bailing out of their banks. This also
wraps up all of the concepts described above in one fell swoop:
credibility – none, social proof – lacking, authority – acting in lock
step to the ECB/IMF.
It is not as if BoomBustBlog subscribers didn’t see this coming a mile and a year away – Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ! We, at BoomBustBlog, have delved into this concept in exquisite detail in our Pan European Sovereign Debt Crisis series, particularly as it concerned nations such as Ireland.
I will continue this Irish “mini-series” with a forensic look at the
likely haircuts to be taken by holders of Irish debt, a snippet of our
Irish public finances model, and then follow it up with a post on the
likely contagion and knock-on effects as we have calculated them.
In the meantime, I suggest that paying Subscribers review our Irish analysis and related contagion material:
- Ireland public finances projections
- Sovereign Contagion Model – Retail (961.43 kB 2010-05-04 12:32:46)
- Sovereign Contagion Model – Pro & Institutional
- Irish Bank Strategy Note
- Euro Bank Sovereign Debt Exposure Final -Retail
- Euro Bank Sovereign Debt Exposure Final – Pro & Institutional
- Sovereign Debt Exposure of European Insurers and Reinsurers (Empty 2010-05-19 01:56:52)
There is plenty (and I do mean plenty) of material for those who
don’t subscribe to see how the current Irish situation was essentially
manifest destiny (Euro-toxic asset edition), as excerpted from Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ! Wednesday, April 14th, 2010
We have performed a cursory overview of the risks inherent in Ireland though previous “preview” posts: Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe and Reggie Middleton on the Irish Macro Outlook.
For the most part, Ireland has considerable embedded risk through both
foreign claims on troubled countries (ex. PIIGS) and significant
bank NPAs as a percent of its GDP.
In addition, Ireland (like practically every other country in the EU, see Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!) unrealistically optimistic in their GDP growth projections.
Additional and ample publicly disseminated opinion and research that illustrated the true conditions and prospects of Ireland:
- Many Are Still Underestimating the Damage That Can Be Done By Ireland’s Bank Troubles Wednesday, September 8th, 2010
- I
Suggest Those That Dislike Hearing “I Told You So” Divest from
Western and Southern European Debt, It’ll Get Worse Before It Get’s
Better! Friday, August 27th, 2010 - Here’s
More Proof of the Sheer Lunacy of the European Bank Stress Tests:
Passed Banks are Already Trying to Collect on Defaulted Claims of
European Nations Tuesday, July 27th, 2010 - Death
by a Thousand Irish Cuts: The Poster Child of Austerity Measure
Success Gets Downgraded After Several Devastating Expenditure
Reductions That Really, Really Hurt the Irish People! Monday, July 19th, 2010 - BoomBustBlog Irish Research Becomes Reality Wednesday, May 12th, 2010
- Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight! Tuesday, May 4th, 2010
- Beware of the Potential Irish Ponzi Scheme! Thursday, April 29th, 2010
- Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ! Wednesday, April 14th, 2010
- Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe Tuesday, March 30th, 2010
- Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! Tuesday, March 23rd, 2010
- Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter? Monday, March 8th, 2010
- The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries Tuesday, February 16th, 2010
- What Country is Next in the Coming Pan-European Sovereign Debt Crisis? Tuesday, February 9th, 2010
- The Coming Pan-European Soverign Debt Crisis Sunday, February 7th, 2010
- Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
For those of you who don’t know, this is the answer to the question “Who is Reggie Middleton???!!!”
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RE: Authority Figures, Belief Structures => Milgram => "Consensus Trance"
Credo quia absurdum is a Latin phrase of uncertain origin. It means "I believe because it is absurd" It is derived from a poorly remembered or misquoted passage in Tertullian's De Carne Christi defending the tenets of orthodox Christianity against docetism, which reads in the original Latin:
"Natus est Dei Filius, non pudet, quia pudendum est; et mortuus est Dei Filius, prorsus credibile est, quia ineptum est; et sepultus resurrexit, certum est, quia impossibile" (De Carne Christi V, 4)......
"The Son of God was born: there is no shame, because it is shameful. And the Son of God died: it is wholly credible, because it is unsound. And, buried, He rose again: it is certain, because impossible."
The phrase is sometimes associated with the doctrine of fideism, that is, "a system of philosophy or an attitude of mind, which, denying the power of unaided human reason to reach certitude, affirms that the fundamental act of human knowledge consists in an act of faith, and the supreme criterion of certitude is authority....[Wikipedia]
Tertullian => Martin Luther => Hitler => Milgram => Credibility=>Credit
http://en.wikipedia.org/wiki/Ericksonian_Hypnosis
http://en.wikipedia.org/w/index.php?title=Special%3ASearch&search=consen...
http://www.zerohedge.com/article/week-neuroplasticity-data-stream-waves-how-music-moves-us
I want to know more about the one person that stood up to the expirement and how we all can be more like him or her...resistant to culture, authority whatever than tells we should harm someone else, someone who is doing no harm to others...what a better world we would live if we could all be more like that person.
The strange thing is there seems to be so many people that are willing to rail about govt tyranny, stand up to taxation, loss of liberty, and yet people willing to let a researcher convince them to hurt another..
Trust comes from honesty of which there is non in the Financial and Political world.Until honesty becomes the norm Gold and Silver seem a far better investment.Whilst we see double digit profit increases year after year,wages fail to show real increases and interest rates stay at 0.25 % people logically assume that there is no honesty and therefore no trust.Here in England for Cuts and Austerity to seem honest we would need to see a huge unemployment problem caused by the removal of Bloated High Paid Government jobs in London and the South East,as that has not happened we can assume the cuts are not honest therefore there is no trust.
Reggie,
I'll go you one further, and probably more important - TRUST.
The most of the investing public and all of the pro's know that the financial system is corrupt, and beyond repair as currently constructed, therefore the record outflows from mutual funds.
As was posted here on ZH last week, the economy and our financial system can't recover until the covenant of trust is rebuilt. That starts with financal fraudsters and banksters being indicted, convicted and sent to jail for a long time.
It extends to government official, at all levels, who should be impeached and remove from office for facillitating the frauds.
Any debt issuance by any govt immediately converts that govt - in a bid to pay the interest - effectively into a "for profit" enterprise. I mean to say, it now has to take in more than is needed, since the "benefit" was realized in a prior period.
The world considers itself lucky....
Sometimes the lack of ignorance is blissful.
The capitalist market participants, Lloyd Blankfein, for instance, approximate the jailers in Milgram's, Jailer-Prisoner experiment.
The situation is quickly accepted as "the way things are" and there is enthusiastic brutality inflicted, based on role-playing.
We are all subject to this behavioral modification, based on our perceived role in "the order".
Excellent analysis of " the Irish Problem" Reggie - it seems to ring through.
A very disturbing day yesterday in Ireland with multiple murder of children here with subsequent suicide of the murdering parents - things are sinking fast.
Nice infomercial Reggie!
The problem in this little authority experiment is that the subject is him- or herself wired to the battery, with a delayed shock.
Authority: Accept public liability for private debt default! You have no other choice, you MUST proceed!
Citizen: Uh, OK...OW! Hey!
Authority: Accept more public liability for rich bankers' bonuses! You have no other choice, you MUST proceed!
Citizen: But...that is a fatal shock to myself...
Authority: Pay no attention to the naked midget pervert behind the curtain! TEOTWAWKI! Push the button!
Citizen: [to be written....what will YOU do?]