Guest Post: On Corruption And The Status Quo

Tyler Durden's picture

Submitted by Martin Sibileau of A View From The Trenches,

“…The two pillars of the current global financial system are therefore (a) the illusion of the existence of a risk-free asset and (b) the repression of that market which demonstrates that the risk-free asset and its derivatives (stocks, bonds, the Euro, all bred in the repo market) are an illusion….”

During the past weeks I have been on the sidelines, waiting for a relevant event to take place but fully aware that I was wrong. I just wanted to hope. Sometimes, it feels good to hope. But since last September, nothing has really changed. At least not fundamentally and that which seems new, is simply the result of the tectonic shift we had back at the end of the summer (of 2012).

It is vox populi that the rise of Spanish and Italian sovereign yields was triggered by corruption scandals that may be of political consequence. They were not alone, as the Libor affair is still making news. I don’t think scandals by themselves bring consequences, but before I go further, let me discuss the topic of corruption itself, for as I will explain, the ongoing policies will bring nothing else but more corruption.

Corruption in government is simple arbitrage. Whenever governments intervene in a market either by restricting supply or demand, capping or flooring prices, the affected goods will have two prices: The government fixed price and the market price. And because prices are nothing else but critical signals for the process of social cooperation (also known as “market”) to work, markets get confused by two different signals from the same good.

If there is restricted supply of a good, or if the price of a good is capped, the market will be willing to bid more than the current price for that good. That bid will be noticeable and the only economic agent capable of acting on the signalled gap will be someone in power: a government official or a politician. This person’s responsibility will be to allocate scarce resources where they are most needed. The public will call him corrupt, but he will just be an arbitrageur. He will offer an additional quantity of that good which is restricted at a higher price, including his fees (also called “bribes”), of course. He will be simply taking over a function that a repressed market cannot perform at that time.

Government corruption is nothing else but the reflection of a repressed market. The immorality lies not in the act of corruption (i.e. arbitrage), but in the market repression that enables it. And as we all know by now, the repression in the financial markets has only grown exponentially in the past years. This may only mean that more corruption is underway. Above all, the two repressed markets we should all be very familiar with are the ones for US Treasuries and gold.

The US Treasuries market is not really a market. As I understand, about 75% of the issuance expected for February will be purchased by the Fed, whose SOMA account already represents about a third of the stock of Treasuries outstanding, across the curve. How an asset that requires that 3/4ths of its flow be purchased by a central bank to maintain its price can be deemed to have 0% risk and be used as collateral is beyond me! As well, I am completely amazed that we still have analysts from the main banks publishing research notes where they try to assess implied future rates…Implied??? By whom?

This brings me to the gold market. As I mentioned in past letters, Keynesians give a lot of weight to the role of expectations. If they manage expectations to make the public believe that the purchasing power of their salaries has not decreased in real terms, they believe they may get an economic system from recession back to growth. In the same fashion, if they already have a benchmark for real value, say gold, all they need is to suppress the price of this benchmark, to control their expectations. They need not lower the value of the benchmark. Making it volatile enough to discourage any inclination to have that asset used as a store of value is enough. Hence, the endless take down in the price of gold triggered by leveraged sales during thin trading. It has coincidentally taken place ever since the rating on the US Treasuries was challenged by those martyrs at S&P. Below, I show the interventions during the last month (source: Bloomberg).

Feb 10 2013

The two pillars of the current global financial system are therefore (a) the illusion of the existence of a risk-free asset and (b) the repression of that market which demonstrates that the risk-free asset and its derivatives (stocks, bonds, the Euro, all bred in the repo market) are an illusion.

On the subject of a risk-free asset, back on September 16th, I suggested that  “… for all practical purposes (…) the European Central Bank would set the value of the world’s risk-free rate…”. The assumption behind this conclusion was that, thanks to Draghi’s offer to establish Open Monetary Transactions, “…the market (would) arbitrage between the rates of core Europe and its periphery, converging into a single Euro zone target yield…”. The two charts below (source: Bloomberg) help us visualize the status of the predicted convergence, as well as the relative stability in the long-term German sovereign debt vis-à-vis that of the United States.

Feb 10 2013 II

With obvious “noise”, the underlying convergence (shown above left) is clear. On the right, we can appreciate how the yield in the 30-yr Treasuries is on the rise, thanks to in spite of billions being bought by the Federal Reserve, while the yield on the German bunds remains within range. We also still have the usual flags I have been calling collective attention to for the past year, and they are all related to repressed markets. The zero-interest rate policies were going to encourage share buybacks, dividend payments and any method to allow the extraction of whatever real value is still available to extract from corporations/businesses by their owners. This meant leverage was going to increase, unemployment would remain high, capital expenditures were going to decrease and the risk of defaults was to going to rise.

A year later, all these symptoms are starting to surface. One more reason to avoid stocks and be long gold. But in my view, it will take longer than many believe, for these imbalances to burst. This is the point I made at the start of 2013, when I wrote that “…during 2013, I expect imbalances to grow…”. Those who hold a view more bearish than mine point to inconsistencies, gaps between valuations expressed by different asset classes. But how can we point to such dislocations and at the same time sustain that markets are being repressed? We must be consistent: If the signals prices send to us are detached from fundamentals, we cannot at the same time call upon them to make our case! That would only be appropriate in a world where markets are not repressed.  So… If I am not that bearish but still believe that imbalances in the long term will burst, what will make them burst? On this point, I stick to what I said at the start of 2012:

…As long as the people of the EU put up with this situation and the EU Council (…) effectively kills democracy at the national level AND as long as the Fed continues to extend US dollar swaps, this status quo will remain…(…)…Whenever the political sustainability of the EU is challenged, we will see a run for liquidity…(…)…The trend is for asset inflation, and will last as long as the people of the EU and the US do not challenge the political status quo…” . Unemployment and the tolerance of those unemployed will tell us when the time has come. If it is not that, it will be the wave of defaults the same unemployment produces. There will still be corrections in between, but they will be just that: corrections. That tolerance, of course, is always tested by corruption cases made public. And as I explained above, the more repressed markets become, the higher the number of corruption cases we will learn from.

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Banksters's picture

Between the NSA and secret dossiers on innocent Americans, who needs watergate.   At this point the Constitution has been regulated down to a meaningless word scramble and nearly every politician is behind this denegration.   Regulatory laws for Wall st. are simply an exercise in jumping rope and paying fines.  Are we really that naive, to think that these fuckos are going to investigate, prosecute and imprison themselves?

'Everyone in US under virtual surveillance' - NSA whistleblower — RT

The only solution is revolution.  Hopefully, in a humane way...

Banks Must End 'Brazen, Flagrant' Manipulation: CFTC's Chilton

Who Decided U.S. Megabanks Are Too Big to Jail?


‘Pursuing Justice’

“Well, I think I am pursuing justice,” he said. “And I think the entire responsibility of the department is to pursue justice. But in any given case, I think I and prosecutors around the country, being responsible, should speak to regulators, should speak to experts, because if I bring a case against Institution A, and as a result of bringing that case, there’s some huge economic effect -- if it creates a ripple effect so that suddenly, counterparties and other financial institutions or other companies that had nothing to do with this are affected badly -- it’s a factor we need to know and understand.”


CH1's picture

Are we really that naive, to think that these fuckos are going to investigate, prosecute and imprison themselves?

Well said.

bank guy in Brussels's picture

Re 'Watergate' as you mention -

Watergate is another fake 'story' whose true facts Americans don't know. Watergate was another US coup, less bloody than the JFK killing in 1963. The supposed 'hero', Washington Post's Bob Woodward - still selling lies and propaganda today - is a fraud and fake as 'brave reporter', working for the military and CIA.

In the late 1960s Bob Woodward was in the US Navy working for Naval Intelligence under Admiral Thomas Moorer. In 1970 Admiral Moorer became head of the US Joint Chiefs of Staff - head of the whole US military - and Woodward left the US Navy to become a planted Washington Post 'reporter'. -

Also in 1970, Admiral Moorer started running a spy ring against the Nixon White House, with the US military thinking Nixon and Kissinger were getting 'soft on Communists' etc. Navy Yeoman Charles Redford stole many White House documents and so on for the joint chiefs, US Admiral Elmo Zumwalt getting some of the documents.

The spy ring - US military against the White House - was discovered at the end of 1971. But just like with the military 'business plot' planned coup in the 1930s against US President Franklin Roosevelt, exposed by US Marine General Smedley Butler ('War is a Racket'), and Roosevelt's agreement not to prosecute the American elite (including grand-pappy Bush) ... Nixon agreed to cover-up the military spy ring.

Likely fearing to end up dead like JFK, Nixon always feared to publicly denounce it for the rest of his life, tho did not deny it.

Despite Nixon's agreement to shut up and not prosecute, the military remained unhappy, along with the American elite, who wanted Nixon out  ... Nixon, for all his flaws, had come to the same conclusions as Jack Kennedy ... in other words, make some peace with the commies, and try to build a better life for Americans ... Amazingly, Nixon even tried to give everyone in the US European-style health insurance (his 'CHIP' programme - much better than Obamacare.)

So Watergate was magnified into a scandal for a coup, the Washington Post brave 'reporters' Woodward and Bernstein - with Woodward still loyal to his old boss Admiral Moorer ... they took Nixon down.

A major ally was the manipulative John Dean, Nixon's lawyer in the White House, working his own angles, and betraying Nixon to the coup plotters, and made a 'media darling' from among the Nixon gang, tho Dean maybe was the worst snake among the bunch.

And ever since, Bob Woodward's fake Washington Post - John Dean version of the Watergate 'story' has dominated. ... and the truth still basically squashed today, by the dominant media framework ... Nearly everybody believes Watergate was some kind of pro-populist 'exposé'.

A lot of the Watergate facts has come out from investigators Len Colodny and Robert Gettlin, a book 'Silent Coup' ... more detail on a website associated with them

lunaticfringe's picture

Ok, so another year of imaginary free markets and metal price suppression. Same as last year. Since May of 2011 as I recall. 

Anything new here?

Obama4Ever's picture

At least since 2008, that's when I started watching...

youngman's picture

Yes but think how many real tonnes of gold have moved to the East...and India..since then....i would think there are some vaults in the West getting very empty...if countries start to bring back their gold....and I think they will....this will blow up the vaults and exchanges...and the truth will come out...but I bet they try some real wierd stuff passing a few laws that make holding gold expensive or illegal

Sudden Debt's picture

People believe that as long europe is united that there will be peace.
and we've got history to back it up.
confidence in the euro remains very high, despite inflation. Also don't forget that european countries have a big history in inflation and it doesn't scare people that much anymore. also because our socialist governments, despite the american, have linked wages to inflation.
And whatever the south does, isn't important for northerns. for the south the recover they should leave the euro and for as long as they don't there's no problem.

Ghordius's picture

if you were the PM of a southern european country, would you now really propose to leave the EUR? in the middle of a currency war where small currencies are eaten for breakfast?

this without mentioning the fact that the majorities of the electorate are against it

LawsofPhysics's picture

"Government corruption is nothing else but the reflection of a repressed market. The immorality lies not in the act of corruption (i.e. arbitrage), but in the market repression that enables it. "


Bull fucking shit, especially when the repressor and the arbitrageur are the same entity or person.  Want an example of how one can benefit from causing represssion and the corruption that follows?  Just ask the owners and members of The Federal Reserve.

Ghordius's picture

"“…As long as the people of the EU put up with this situation and the EU Council (…) effectively kills democracy at the national level AND..."

How? How can the Council "kill" democracy?" or, even better, "at national level"? This is the culmination of this great propaganda move, the reduction to absurd

How can Merkel vote against the wishes of the German parliament? How can Cameron vote in Council against the wishes of the British parliament? Without getting thrown out and exchanged with a new Bundeskanzler or Prime Minister?

26 members of the eu council are head of government ON SUFFERANCE of their elected parliaments. The only one that has more leeway is the directly elected Hollande, all the others have to keep their majorities or they are OUT. As when Berlusconi got his "distrust" and his government fell

sheesh, this is really too idiotic - and again, absurd

From Germany With Love's picture

How can Merkel vote against the wishes of the German parliament?

Okay, slight reality check for you. The German members of the Bundestag of the ruling CDU/CSU and FDP factions are basically forced to support the executive policies blindly. That is because

a) the German voters have punished dissent within parties at the polls in the past .
b) (more importantly) if you deviate from the party line you will fall from grace, harm your own career and even have trouble getting to be put up as a candidate for the Bundestag at the next election. Such is the dangers of having only career politicians who have no other ambitions besides a life in politics. They are totally dependent on the benevolence of their party leadership. Aka Angela Merkel.

So in short: the German legislative has become completely dependent on the policies of the executive. Only a few dissidents like Frank Schäffler or Wolfgang Bosbach put public well-being before their own career. It might be different if the CDU had an alternative to Merkel. However, it doesn't.

Ghordius's picture

yes, the reality of German politics, with those pesky voters that FORCE the parties to stick to their proclaimed ways and intents

how democratic do you find it? particularly since you probably noticed how consensus-seeking those parties are?

don't tell me you haven't noticed how Germans like their leaders to be, or how quickly they replace one that is not popular

nope, you might accuse 'em of Teutonic Groupthink, but not of being undemocratic, imho

I find your reply confirms mine or you have to explain how this isn't, because it truly escapes me

From Germany With Love's picture

Because we have a party olligarchy. We can't vote new guys in because noone except for the established parties has the experience to run a country. And every new anti-Euro party will simply not get heard are get portrayed as basket-cases.

The voters here are anti-Euro but have resigned. They have resigned to the fact that, for now, nothing can be done. So the politicians will have it their. But god forbid Germany comes into economic crisis. Germans are slow to revolt but when the pain level gets high enough, they do. We're not there.

Ghordius's picture

All parties form oligarchies, always and everywhere. The trick is that the voter must be able to vote others. Nobody ever said politics entails a free, easy lunch

"The voters here are anti-Euro but have resigned"

in my impression you are either too young or since too litttle time in Germany. You seem to have missed the German ReUnification, how badly the UK wanted to prevent it, how France, Italy and others proposed support to Germany in exchange to support to the EUR, and many other "matters of agreement"

and additionally, you paint a picture of a substantial anti-euro sentiment, with a side dish of "And every new anti-Euro party will simply not get heard are get portrayed as basket-cases."

How? Are the Pirates being stigmatized? Why should an anti-euro party be?

seriously, for my understanding. how old are you? Less than 25? I hope my question isn't against netiquette or something, in which case I beg your pardon

Ghordius's picture

a pity my previous remark was so clumsy - I'll try again

"We can't vote new guys" - I disagree, see the Pirates

"The voters here are anti-Euro..." - based on what do you make this assertion? Do you really mean that a majority of Germans are anti-Euro? There were some anti-Euro movements that tried to become parties, but they lacked popular support. How is a democracy supposed to work without popular interest?

"for now, nothing can be done" - that's an important point: what could be done? Let's say Germany reneges it's ReUnification support for EUR support deal and goes back to the DEM. What would happen? Everybody and their grandmother's dog would be betting on a stratospheric rise of the DEM. And then? This currency war has deep, deep pockets. Just look how the CHF had to hide under the skirts of the EUR, just look how many others are grateful for an anchor

all in all, if you read ZH you'll note that many EUR articles are based on the assumption that Germany is getting the best of the EUR deal

we are all in a deep economic and monetary crisis - my German contacts all agree in this, and you somehow sound miffed that you don't notice this too much in Germany, with your comment "But god forbid Germany comes into economic crisis" - I don't understand your position but I'd seriously would like to

Atomizer's picture

In the US, the slow process to weed out is under way. Don’t lose hope. We will restore your Republic. Not for me, but for your children’s future.

We never grew up in this type of society, nor should you.

Grin Bagel's picture

Now, I can combine this with Cog Diss's 3 essays and dream that it will be a little easier 4 me 2 time the something, whatever it may be, a faux crash, or a faux crumble, or a faux pas.

I've waited this long what's another 3 or 4?

Being Free's picture

They need not lower the value of the benchmark. Making it volatile enough to discourage any inclination to have that asset used as a store of value is enough.


Herdee's picture

Tyler crossed paths with one very smart dude.Martins site is worth bookmarking and reading on a regular basis.

davidsmith's picture

It doesn't seem to occur to Martin that perhaps the middle class is itself corrupt.  That's what has to die: the middle class.

AlphaHunter001's picture


These arguments of central bank intervention in gold are complete BS. Are people trying to move the price around? Well duh, EVERYONE tries to do that in EVERY market! That's not a secret for someone who's worked at a financial institution.


If gold was really worth more than it was selling for, large investors would be buying it like crazy. The latest news that Russia is buying a ton and the price of gold is FALLING tells you there are far more sellers in the market - this is a classic bearish sign.


This arguement is similar to if someone was selling a car worth $50k for $30k and you were telling me, it's a scam to keep car prices down. Well fine, but I would still buy it, since it was worth $50k. If no one buys it, especially large players, then you know that the 'real' price is $30k, or $20k less than what you 'believe' the car is worth.


Price is truth in the long-run. Short-run, sure, someone could move the market around, not over days, weeks, months otherwise 'in the know' large players would scoop up such a 'deal'. It's not a deal if the price keeps puking in your face