Great Depression

As if last week's bought and paid for by JPMorgan media circus in the Senate was not enough, in which Jamie Dimon played several bribed muppets like a fiddle, today we get part two. Momentarily, the Committee on Financial Services will pick up the baton where the Senate left off, and confirm to everyone that the people who lead this country, at least on paper, are some of the most incompetent, and outright clueless when it comes to financial matters. The same matters that have led America to the Second great depression, which has so far been prevented from wiping out 20% of the economy only courtesy of Bernanke's relentless money printing. Dimon's testimony, which is a replica of last week's, can be found here. In other news, Jamie Dimon is furious he never bribed Maxine Waters before. Now he will have to explain introductory math for absolute idiots. Karma is a bitch.

"Private Debt Doesn't Matter" Because "Banks Can't Create Money Out of Thin Air"

All you need to know.

When you hear two politicians in the US going toe to toe arguing about public finances (i.e. money that isn’t theirs), they’ll often cite numbers published by the Congressional Budget Office (CBO). In political circles, the CBO is considered an honest broker - an objective referee that simply presents the facts without taking a position on the numbers. Today they’ve released an infographic showing America’s debt to GDP ratio over the last 100-years, through World War I, the Great Depression, World War II, the Nixon Gold shock, and the Global Financial Crisis. For what it’s worth, both of the CBO’s scenarios for future debt growth seem absurd  underpinned by an even larger assumption– that the status quo is maintained, i.e. the United States remains the world’s most powerful economic force, can print currency at will without consequence, and can inspire foreigners to buy Treasuries. Rather than relying on some bureaucrat, though, history is really the best indicator for what will happen in the future. It may not repeat, but it’ll certainly rhyme. And history shows that the long-term likelihood is financial repression, severe inflation, and/or default.

In today’s world, there are many who want government to regulate and control everything. The most bizarre instance, though — more bizarre even than banning the sale of large-sized sugary drinks — is surely central banking. Why? Well, central banking was created to replace something that was already working well. Banking panics and bank runs happen, and they have always happened as long as there has been banking. But the old system that the Fed displaced wasn’t really malfunctioning — unlike what the defenders of central banking today would have us believe. Does central banking retard the economy by providing liquidity insurance and a backstop to bad companies that would not otherwise be saved under a free market “bailout” (like that of 1907)? And is it this effect — that we call zombification — that is the force that has prevented Japan from fully recovering from its housing bubble, and that is keeping the West depressed from 2008? Will we only return to growth once the bad assets and bad companies have been liquidated? That conclusion, we think, is becoming inescapable.

A month and a half after the SEC took a much-deserved break from watching taxpayer-funded pornography, and stumbled on the scene with its latest pathetic attempt to scapegoat someone, anyone, for its years of gross incompetence, corruption, and inability to prosecute any of the true perpetrators for an event that wiped out tens of trillions in US wealth, by suing Egan-Jones for "improperly" filing their NRSRO application in what was a glaring attempt to shut them up, the only rating agency with any credibility has done what nobody else in the history of modern crony capitalist-cum-socialist America has dared to do: fight back. We have only three words for Sean Egan: For. The. Win.

Now that stocks are back to reflecting nothing more than expectations of how many times the Chairsatan dilutes the existing monetary base in a carbon copy replica of not only 2011 but also 2010... and 2009 (because contrary to what purists may believe, the only way to inflate away unsustainable debt in a growth-free economy is by destroying the currency), and manic pattern chasers have crawled out of their holes proclaiming the death of the bear market after a two day bounce, what is happening in the actual economy, no longer reflected by the market, has once again been pulled back to the backburner. Which is sad, because while ever fewer people reap the benefits of artificial, centrally-planned S&P rallies, the rest of the population suffers, and what is worse: hope for a quiet, middle-class life is now an endangered species. Nowhere is this more evident than in the following list from David Rosenberg which summarizes how, quietly, the US labor force slipped back into a full-blown depression.

All you need to read and some more.

10 Questions ...

I am a child of an age laden with illusory wealth, and have benefitted (for a short time at least) from the financial fakery of our economic system, as have many Americans.  Most of us have not had to suffer through the unmitigated poverty, hopelessness, and relentless fear that are pervasive in harsher days.  All our problems could be cured with money, especially government money, and as long as the greenbacks were flowing, we didn’t care where they came from.  Ultimately, though, the ease of our well-to-do welfare kingdom has set us up for a cultural failure of epic proportions.  Anytime a society allows itself to be conditioned with dependency, its fate is sealed. We do not know what crisis really is.  Many Americans barely have an inkling of what it entails.  We imagine it, in films, in books, and in our own minds, but the fantasy is almost numbing.  We lose sight of the tangible grating salty rawness of the worst of things, while imagining ourselves to be “aware”.  Most people today are like newborns playing merrily in a pit of wolves. Preppers, on the other hand, are those who seek to understand what the rest of the public goes out of its way to ignore.  They embrace the reality and inevitability of disaster, and suddenly, like magic, they are able to see its oncoming potential where others cannot (or will not).  The price they pay for this extended vision, however, is high… 

Short of the complete destruction of a fiat currency, there is nothing that can demonstrate beyond doubt the shallowness of the promise to protect purchasing power that is being made on any day. There is no bright line separating performance from talk. With a gold standard, deception is much more difficult. Creating too much money will lead to redemptions that drain away the official gold stockpile. Everyone can see the inventory shrinking. If it shrinks to zero, then the managers of the system have failed, period. There is no ambiguity about it, and the politicians in charge at the time have little room for denial. The formal adoption of a gold standard holds no magic. It's just another promise. But it is a promise that carries an assured potential for egg-on-face political embarrassment if it is broken, and the only way for the people in charge to avoid that embarrassment is to refrain from recklessly expanding the supply of cash. That's why a gold standard protects the value of a currency, and that is why the politicians don't want it.

Empire Interrupted: Short-Selling Europe - How Far Will This Empire Fall?

It is becoming clearer and clearer that some new policy option is required in Europe - but as JPMorgan's Michael Cembalest excellent cartoon description of the never-ending circular arguments among European leaders would put it - you would have to be a wide-eyed optimist to believe it will be a decisive one. Comparing the progress of the European Monetary Union with structural changes in the US around the end of the 19th century, it is arguable that more time is needed before judgment is passed but they may not get the chance. The resolution of a staggering EUR10 trillion in peripheral sovereign, household, and corporate debt may not wait. Durable unions are signaled by signs of wage convergence and unilateral transfers of wealth to smooth regional income difference - while a lender of last resort appears to be most people's solution, it likely will not be enough given the competitive divergences.

A reminder of the sharp increase in demand for gold and silver, particularly store of wealth demand, in recent years was seen in the figures released by the China Nonferrous Metals Industry Association in Shanghai today. China’s gold consumption rose 33% to 761 tons in 2011 and China’s silver consumption rose 6.8% to 6,088 tons last year. China’s gold consumption rose 190 metric tons last year to 761 tons, Wang Shengbin, China Gold Association Vice Chairman, said in a speech in Shanghai as reported by Bloomberg. China’s jewelry consumption jumped 28 % to 456.7 tons last year, gold bar consumption surged 51% to 213.9 tons and gold coin consumption gained 25% to 20.8 tons, Wang said. China’s silver consumption, including industrial use, jewelry and coins, rose 6.8% to 6,088 metric tons last year, the vice chairman said. The amount shows a surplus given China’s output of 12,348 tons last year, which gained 6.3%, Wang said.

"Just when we think the worst is over - and let's face it we have been in this crisis for five years - we get the second half; are the Europeans about to start the second half our Great Depression with massive bank runs" are the Jaws-music-inspired words that recent media-favorite (yes, us too) Niall Ferguson uses in an interview with CBC. His main concern is that this kind of (bank-run) event can quickly spiral out of the control of even the ECB as he uncomfortably conjures the image of the initial US stabilization that occurred in 1930 to May 1931 only to be knocked back into a greater depression by the failure of Credit-Anstalt, which set off bank failures and eventually defaults in 1932 on many government debts. The deposit run potential is the single-biggest reason to care about Greek-exit - in itself it is not large enough economically to interfere with global growth but it is the message and contagion that it sends that is critical in bringing forth a pan-European banking crisis and implicitly spilling over to the US and Asia via global trade and banking transmission channels. An excellent brief interview that summarizes the exact fears that face Europe and implicitly the US, explains the rather simple solution of fiscal federalism and the fact that today's German politik is very different from 1989's Helmut Kohl-era with regard to their commitment to the Federal outcome. His conclusions are worrisome. Germany is the key - and there is not a good understanding of financial markets in Berlin.