On Monday, May 14, something happened that hasn’t happened since Dec of 2008. Two successive near-month precious metals futures contracts were in backwardation at the same time. To oversimplify, backwardation is when the price of a futures contract is lower than the price in the spot market. It should not be possible for it to happen in gold and silver.... Because the next successive contracts are not in backwardation (in silver, all contracts from Jul 2015 on are backwardated), it is not a collapse of trust. I think that it is a lack of unencumbered metal. The markets for precious metals, silver more than gold, have become quite tight.
The dollar was a median step towards a newer and more corrupt ideal. Its time is nearly over. This is open, it is admitted, and it is being activated as you read this. The speed at which this disaster occurs is really dependent on the speed at which our government along with our central bank decides to expedite doubt. Doubt in a currency is a furious omen, costing not just investors, but an entire society. America is at the very edge of such a moment. The naysayers can scratch and bark all they like, but the financial life of a country serves no person’s emphatic hope. It burns like a fire. Left unwatched and unchecked, it grows uncontrollable and wild, until finally, there is nothing left to fuel its hunger, and it finally chokes in a haze of confusion and dread…
Thucydides was probably born about 460BC and was for a time a General on the side of democratic Athens against aristocratic Sparta in what is known as the Peloponnesian War in which most of Greece took a side. After being exiled he wrote his famous history. The passage that we’ve quoted here, in our opinion, one of the finest passages of classical antiquity, describes the breakdown of civil society and in doing so it perfectly describes every civil war and revolution that has taken place in the almost two and half thousand years since it was written. We bring it to your attention in the vain hope that those who have blindly pursued the policies which have brought Greece to the brink and risks plunging the whole of Europe into the abyss, might consider more keenly the consequences of their actions and change course before it’s too late.
At various stages in the last two years everyone from China, to Germany, to the Fed to the IMF, to Martians, to the Imperial Death Star has been fingered as the latest saviour of the status quo. And so far — in spite of a few multi-billion-dollar half-hearted efforts like the €440 billion EFSF — nobody has really shown up. Perhaps that’s because nobody thus far fancies funnelling the money down a black hole. After Greece comes Portugal, and Spain and Ireland and Italy, all of whom together have on the face of things at least €780 billion outstanding (which of course has been securitised and hypothecated up throughout the European financial system into a far larger amount of shadow liabilities, for a critical figure of at least €3 trillion) and no real viable route (other than perhaps fire sales of state property? Sell the Parthenon to Goldman Sachs?) to paying this back (austerity has just led to falling tax revenues, meaning even more money has had to be borrowed), not to mention the trillions owed by the now-jobless citizens of these countries, which is now also imperilled. What’s the incentive in throwing more time, effort, energy and resources into a solution that will likely ultimately prove as futile as the EFSF?
The trouble is that this is playing chicken with an eighteen-wheeler.
What we have is a system where the full-time worker to beneficiary is already 1-to-1 and the system pays out 10 times more per person than it collects in taxes. The Medicare system would need about 10 workers for every beneficiary to be sustainable. Right now the ratio is just above 2-to-1. That simply is not sustainable. Tweaking the payouts doesn't change the basic math: "pay as you go" entitlements are not sustainable when the number of recipients equals the number of full-time workers. Programs that pay out $400,000 per person (many of whom did not work a lifetime) and collect $40,000 per lifetime of full-time work are not sustainable.
Wishing the math were different does not make it different.
From the 2008 financial crisis to Bernie Madoff, federal regulators have consistency proven too incompetent or too in-the-pocket to actually catch big disasters before they happen. Their interests, like all government employees, are politically based. State bureaucracies seek more funding no matter performance because their success is impossible to determine without having to account for profit. There is never an objective way to determine if the public sector uses its resources effectively. The news of JP Morgan’s loss has reignited the discussion over whether the financial sector is regulated enough. The answer is that regulation and the moral hazard-ridden business environment it produces is the sole reason why a bank’s loss is a hot topic of discussion to begin with. Without the Fed, the FDIC, and the government’s nasty history of bailing out its top campaign contributors, JP Morgan would be just another bank beholden to market forces. Instead it, along with most of Wall Street, has become, to use former Kansas City Fed President Thomas Hoenig’s label, a virtual “public utility.” Take away the implied safety net and “too big to fail” disappears. It’s as simple that.
One of the few things we know with certainty is that which is unsustainable will go away and be replaced by another more sustainable arrangement. Whether we like it or not, or are willing to accept reality or not, unsustainable public pensions will go away. What makes "defined benefit" pensions unsustainable? 1) Promised cash/benefits packages that are not aligned with the fiscal realities of what can be contributed annually to the pension funds 2) New Normal low yields on low-risk investments and 3) skyrocketing costs of healthcare benefits.
This is easily illustrated with basic math.
How would Obama supporters feel if they learned that their beloved President was running far-to-the-authoritarian-right of arch-hawk Charles Krauthammer on one particular civil liberties issue? Sadly, the answer is that the most Obama supporters probably wouldn’t feel very much at all, because support for Obama has always predominantly been emotion-driven (he promised change “you can believe in”, not “change that I can logically convince you will be beneficial“).
It’s 1933 and the country has undergone several years of painful Depression following the 1920s speculation that crashed in the fall of 1929. Investigations into the bank related causes began under Republican President, Herbert Hoover and continued under Democratic President, FDR. Okay, that’s pretty common knowledge. But, here’s something that isn’t: of all the giant banks operating their trusts schemes and taking advantage of off-book deals, and international bets in the late 1920s, it was an incoming head of Chase (replacing Al Wiggins who shorted Chase stock in a network of fraud) that advocated for Glass-Steagall. Indeed, despite all pedigree to the opposite (his father was Senator Nelson Aldrich architect of the Federal Reserve and brother-in-law, John D. Rockefeller), Chase Chair, Winthrop Aldrich, took to the front pages of the New York Times in March, 1933 to pitch decisive separation of commercial and speculative activity arguments. Fellow bankers hated him. His motives weren’t totally altruistic to be sure, but somewhere in his calculation that Chase would survive a separation of activities and emerge stronger than rival, Morgan Bank, was an awareness that something more – permanent – had to be put in place if only to save the banking industry from future confidence breaches and loss. It turned out he was right. And wrong. (much more on that in my next book, research still ongoing.) Financial history has a sense of irony. JPM Chase was the post-Glass-Steagall repeal marriage, 66 years in the making, of Morgan Bank and Chase. Today, it is the largest bank in America, possessing greater control of the nation’s cash than any other bank. It also has the largest derivatives exposure ($70 trillion) including nearly $6 trillion worth of credit derivatives.
"Sex" and "Money" are probably two of the most powerful words in the English language. First, those two words got you to look at this article. They also sell products, books and services from "How To Have Better Sex" to "How To Make More Money" — ostensibly so you can have more of the former. Unfortunately, they are also the two primary causes of divorce in the country today... The problem for American families today, despite media commentary to the contrary, is simply the inability to maintain their current standard of living. When income remains stagnant or falls, due to job loss or reduction in pay, the impact on the budget at home is significant when there are already very low saving rates and the inability to access a tight credit market. The recent surge in consumer debt, with little relative increase in overall personal consumption expenditures, shows this to be the case. For Main Street the economy remains mired at sub-par growth rates three years into a post-recessionary environment. These financial strains are pervasive and continue to weigh on families and their relationships. While it is true that "money can't buy happiness" try asking a couple who are living on food stamps and working two part-time jobs just to "get by" about how "happy" they are. Even as the media trumpets that the Fed has saved the economy from a "depression," it might just be a statistical victory at best. The government may say this is not the 1930's where bread lines formed outside the corner soup kitchen, however, for many American's the only difference is that they are found at the mailbox and online instead.
If the establishment is to be believed — it’s in the interests of “long-term financial stability” that creditors who stupidly bought unrepayable debt don’t get a big haircut like they would in a free market. And it’s in the interests of “long-term financial stability” that bad companies who made bad decisions don’t go out of business like they would in a free market, but instead become suckling zombies attached to the taxpayer teat. And apparently it is also in the interests of “long-term financial stability” that a broken market and broken system doesn’t liquidate, so that people learn their lesson. Apparently our “long-term financial stability” depends on producing even greater moral hazard by handing more money out to the negligent. The only real question is whether or not it will just be the IMF and the EU institutions, or whether Bernanke at the Fed will get involved beyond the inevitable QE3 (please do it Bernanke! I have some crummy equities I want to offload to a greater fool!)
Anyone who worked in finance in the decade before Glass-Steagall was repealed knows that prior to Gramm-Leach-Bliley the megabanks just took their hyper-leveraged activities offshore (primarily to London where no such regulations existed). The big problem (at least in my mind) with Glass-Steagall is that it didn’t prevent the financial-industrial complex from gaining the power to loophole and lobby Glass-Steagall out of existence, and incorporate a new regime of hyper-leverage, convoluted shadow banking intermediation, and a multi-quadrillion-dollar derivatives web (and more importantly a taxpayer-funded safety net for when it all goes wrong: heads I win, tails you lose). I fear that the only answer to the dastardly combination of hyper-risk and huge bailouts is to let the junkies eat dirt the next time the system comes crashing down. You can’t keep bailing out hyper-fragile systems and expect them to just fix themselves. The answer to stupidity is not the moral hazard of bailouts, it is the educational lesson of failure. You screw up, you take more care next time. If you’re bailed out, you just don’t care. Corzine affirms it; Iksil affrims it; Adoboli affirms it. And there will be more names. Which chump is next?
Here is the 3-point plan:
- Renounce all debts denominated in the euro, i.e. a 100% writedown.
- Accept the U.S. dollar as the national currency of Greece.
- Engage in a transparent national dialog and reach a consensus about taxation and the role of the state in the Greek society and economy.
We might add a fourth point: renounce scams and kicking problems down the road rather than addressing them directly, sweeping dysfunction under the rug, etc.
That is the only way to express this author’s utter bewilderment that former Federal Reserve chairman Alan Greenspan is still given an outlet to speak his mind. Actually, I am surprised Mr. Greenspan has the audacity to show his face, let alone speak, in public after the economic destruction he is responsible for. It was because of Greenspan, of course, that the world economy is still muddling its way along with painfully high unemployment. His decision to prop up the stock market with money printing under any and every threat of a downtick in growth, also known as the Greenspan Put, created an environment of easy credit, reckless spending, and along with the federal government’s initiatives to encourage home ownership, the foundation from which a housing bubble could emerge. It was moral hazard bolstering on a massive scale. Wall Street quickly learned (and the lesson sadly continues today) that the Federal Reserve stands ready to inflate should the Dow begin to plummet by any significant amount. Following his departure from the chairmanship and bursting of the housing bubble, Greenspan quickly took to the press and denied any responsibility for financial crisis which was a result in due part to the crash in home prices.
Many, if not most, people would agree with the general use of subsidies in a vertical equity fashion, or the efficient redistribution of wealth for a common social purpose: social justice to provide shelter for those who need it. It is subsidies in housing designed to support a political and not a socioeconomic purpose that bother me. Subsidies as they continue to exist in the US in housing follow in this category – much in exclusivity these days to the subsidies in other developed nations the world over, at least in quantifiable terms.