Prediction: Things May Unravel Faster Than You Think...

Chris Martenson PhD

Part l
By my analysis, we are not yet on the final path to recovery, and there are one or more financial 'breaks' coming in the future.  Underlying structural weaknesses have not been resolved, and the kick-the-can-down-the-road plan is going to encounter a hard wall in the not-too-distant future.  When the next moment of discontinuity finally arrives, events will unfold much more rapidly than most people expect.  
My work centers on figuring out which macro trends are in play and then helping people to adjust accordingly.  Based on trends in fiscal and monetary policy, I began advising accumulation of gold and silver in 2003 and 2004.  I shorted homebuilder stocks beginning in 2006 and ending in 2008.  These were not 'great' calls; they were simply spotting trends in play, one beginning and one certain to end, and then taking appropriate actions based on those trends. 
We happen to live in a non-linear world; a core concept of the Crash Course.  But far too many people expect events to unfold in a more or less orderly manner, with plenty of time to adjust along the way.  In other words, linearly.  The world does not always cooperate, and my concern rests on the observation that we still face the convergence of multiple trends, each of which alone has the power to permanently transform our economic landscape and standards of living. 
Three such trends (out of the many I track) that will shape our immediate future are:

• Peak Oil
• Sovereign insolvency
• Currency debasement

Individually, these worry me quite a bit; collectively, they have my full attention.
History suggests that instead of a nice smooth line heading either up or down, markets have a pronounced habit of jolting rather suddenly into a new orbit, either higher or lower.  Social moods are steady for long periods, and then they shift.  This is what we should train ourselves to expect. 
No smooth lines between points A and B; instead, long periods of quiet, followed by short bursts of reformation and volatility.  Periods of market equilibrium, followed by Minsky moments.  In the language of the evolutionary biologist Stephen Jay Gould, we live in a system governed by the rules of "punctuated equilibrium."

Complex Systems

Our economy is a complex system.  The key feature of such systems is that they are inherently unpredictable with respect to the timing and severity of specific events.  For the uninitiated, they can look enormously fragile and prone to flying apart at any minute; for the seasoned observer, there is an appreciation that the immense inertia of the economic system will almost always delay and dampen the eventual adjustments. 
Like everybody else, I have no idea exactly what's going to happen, or precisely when.  Anybody who says they do know should be greeted with a furrowed brow and a frown of suspicion.  As my long-time readers know, I prefer to assess the risks and then take steps to mitigate those risks based on likelihood and impact.
Which means that although we cannot predict the size (exactly how much) or the timing (precisely when) of economic shifts or world-changing events, we can certainly understand the risks and the dimensions of what might happen.  Just as we cannot predict when an avalanche will release from steep slope, or even where or how big it will be, we can readily predict that constant snowfall coupled with the right temperature conditions will lead to an avalanche sooner or later, and more likely in this gully than that one.  Given certain conditions, we might expect one that is larger or smaller than normal.  Although we don't know exactly when or how much, we do know that when snow accumulates, so do the risks of more frequent and/or larger avalanches.
Such is the nature of complex systems.  While inherently unpredictable, they can still be described.  The most important description of any complex system is that it owes its order and complexity to the constant flow of energy through it.  Complex systems require inputs.  This is one way in which we can understand them. 
Given this view, one easy "prediction" is that an economy without increasing energy flows running through it will stagnate.  To take this further, an economy that is being starved of energy becomes simpler in the process - meaning fewer jobs, less items produced, and a reduced capacity to support extraneous functions.

Accepting "What Is"

The most important part of this story is getting our minds to accept reality without our passionate beliefs interfering.  By 'beliefs' I mean statements like these:

• "Things always get better and are never as bad as they seem."
• "If Peak Oil were 'real,' I would be hearing about it from my trusted sources."
• "Dwelling on the negative is self-fulfilling."

While each of these things might be true, they also might be false and therefore misleading, especially during periods of transition.  Our job is to remain as dispassionate and logical as possible.  
Let's now examine more closely the three main events that are converging - Peak Oil, sovereign insolvency, and currency debasement - using as much logic as we can muster.

Peak Oil

Peak Oil is now a matter of open inquiry and debate at the highest levels of industry and government.  Recent reports by Lloyd's of London, the US Department of Defense, the UK industry taskforce on Peak Oil, Honda, and the German military are evidence of this.  But when I say "debate," I am not referring to disagreement over whether or not Peak Oil is real, only when it will finally arrive.  The emerging consensus is that oil demand will outstrip supplies "soon," within the next five years and maybe as soon as two.  So the correct questions are no longer, "Is Peak Oil real?" and "Are governments aware?" but instead, "When will demand outstrip supply?" and "What implications does this have for me?" 
It doesn't really matter when the actual peak arrives; we can leave that to the ivory-tower types and those with a bent for analytical precision.  What matters is when we hit "peak exports."  My expectation is that once it becomes fashionable among nation-states to finally admit that Peak Oil is real and here to stay, one or more exporters will withhold some or all of their product "for future generations" or some other rationale (such as, "get a higher price"), which will rather suddenly create a price spiral the likes of which we have not yet seen. 
What matters is an equal mixture of actual oil availability and market perception.  As soon as the scarcity meme gets going, things will change very rapidly.
In short, it is time to accept that Peak Oil is real - and plan accordingly.

Sovereign Insolvency

Once we accept the imminent arrival of Peak Oil, then the issue of sovereign insolvency jumps into the limelight.  Why?  Because the hopes and dreams of the architects of the financial rescue entirely rest upon the assumption that economic growth will resume.  Without additional supplies of oil, such growth will not be possible; in fact, we'll be doing really, really well if we can prevent the economy from backsliding.
Virtually every single OECD country, due to outlandish pension and entitlement programs, has total debt and liability loads that Arnaud Mares (of Morgan Stanley) pointed out have resulted in a negative net worth for the governments of Germany, France, Portugal, the US, the UK, Spain, Ireland, and Greece.  And not by just a little bit, but exceptionally so, ranging from more than 450% of GDP in the case of Germany on the 'low' end to well over 1,500% of GDP for Greece. 
Such shortfalls cannot possibly be funded out of anything other than a very, very bright economic future.  Something on the order of Industrial Age 2.0, fueled by some amazing new source of wealth.  Logically, how likely is that?  Even if we could magically remove the overhang of debt, what new technologies are on the horizon that could offer the prospect of a brand new economic revival of this magnitude?  None that I am aware of.
In the US, the largest capital market and borrower, even the most optimistic budget estimates foresee another decade of crushing deficits that will grow the official deficit by some $9 trillion and the real (i.e., "accrual" or "unofficial") deficit by perhaps another $20 to $30 trillion, once we account for growth in liabilities.  This is, without question, an unsustainable trend.
It's time to admit the obvious:  Debts of these sorts cannot be serviced, now or in the future.  Expanding them further with fingers firmly crossed in hopes of an enormous economic boom that will bail out the system is a fool's game.  It is little different than doubling down after receiving a bad hand in poker. 
The unpleasant implication of various governments going deeper into debt is that a string of sovereign defaults lies in the future.  Due to their interconnected borrowings and lendings, one may topple the next like dominoes. 
However, it is when we consider the impact of the widespread realization of Peak Oil on the story of growth that the whole idea of sovereign insolvency really assumes a much higher level of probability.  More on that later.
For now we should accept that there's almost no chance of growing out from under these mountains of debts and other obligations.  We must move our attention to the shape, timing, and the severity of the aftermath of the economic wreckage that will result from a series of sovereign defaults. 

Currency Wars

We could trot out a lot of charts here, examine much of history, and make a very solid case that once a country breaches the 300% debt/liability to GDP ratio, there's no recovery, only a future containing some form of default (printing or outright).
In a recent post to my enrolled members, I wrote:

The currency wars have begun, and the implications to world stability and wealth could not be more profound. Fortunately, all of my long-time enrolled members are prepared for this outcome, which we've been predicting here for some time.

When pressed, the most predictable decision in all of history is to print, print, print.  So I can't take credit for a 'prediction' that was just slightly bolder than 'predicting' which way a dropped anvil will travel; down or up?

The only problem is, widespread currency debasements will further destabilize an already rickety global financial system where tens of trillions of fiat dollars flow daily on the currency exchanges.

You can be nearly certain that every single country is seeking a path to a weaker relative currency. The problem is obvious: Everybody cannot simultaneously have a weaker currency. Nor can everybody have a positive trade balance.
If a country or government cannot grow its way out from under its obligations, then printing (a.k.a. currency debasement) takes on additional allure.  It is the "easy way out" and has lots of political support in the home country.  Besides the fact that it has already started, we should consider a global program of currency debasement to be a guaranteed feature of our economic future. 

Conclusion (to Part I)

Three unsustainable trends or events have been identified here.  They are not independent, but they are interlocked to a very high degree.  At present I can find no support for the idea that the economy can expand like it has in the past without increasing energy flows, especially oil.  All of the indications point to Peak Oil, or at least "peak exports," happening within five years. 
At that point, it will become widely recognized that most sovereign debts and liabilities will not be able to be serviced by the miracle of economic growth.  Pressures to ease the pain of the resulting financial turmoil and economic stagnation will grow, and currency debasement will prove to be the preferred policy tool of choice. 
Instead of unfolding in a nice, linear, straightforward manner, these colliding events will happen quite rapidly and chaotically.
By mentally accepting that this proposition is not only possible, but probable, we are free to make different choices and take actions that can preserve and protect our wealth and mitigate our risks.
What changes in our actions and investment stances are prudent if we assume that Peak Oil, sovereign insolvency, and currency debasement are 'locks' for the future? 
I explore these questions in greater depth in Part II of this report 
Dr. Chris Martenson is an independent economist and author of a popular website, ChrisMartenson.com. His Crash Course video series explores the intertwining significance of the "three E's" - the economy, energy, and environment and offers articulate, dynamic insight into the workings of our monetary system.
Chris earned a PhD in neurotoxicology from Duke University, and an MBA from Cornell University. A fellow of the Post Carbon Institute, Chris's work has appeared on PBS and been cited by the Washington Post. He is a contributor to SeekingAlpha.com.
Chris is an accomplished presenter who has offered the Crash Course seminar all over the United States. The online course has been translated into several languages, and been viewed over 1.5 million times. His website offers both daily free content as well as a newsletter service for enrolled members. His goal is to help as many people understand that we are in the midst of a profound economic shift and that equally profound risks and opportunities lie in our future. For those that can see them coming, tremendous advantages exist.

www.chrismartenson.com

Rampant Inflation In 2011? The Monetary Base Is Exploding, Commodity Prices Are Skyrocketing And The Fed Wants To Print Lots More Money

The Economic Collapse

Are you ready for rampant inflation? Well, unfortunately it looks like it might be headed our way. The U.S. monetary base has absolutely exploded over the last couple of years, and all that money is starting to filter through into the hands of consumers. Commodity prices are absolutely skyrocketing, and it is inevitable that those price increases will show up in our stores at some point soon. The U.S. dollar has already been slipping substantially, and now there is every indication that the Fed is hungry to start printing even more money. All of these things are going to cause a rise in inflation. Not that we aren’t already seeing inflation in many sectors of the economy. Airline fares for the holiday season are up 20 to 30 percent above last year’s rates. Double-digit increases in health insurance premiums are being reported from coast to coast. The price of food has been quietly sneaking up even at places like Wal-Mart. Meanwhile the U.S. government insists that the rate of inflation is close to zero. Anyone who actually believes the government inflation numbers is living in a fantasy world. The U.S. government has been openly manipulating official inflation numbers for several decades now. But we really haven’t seen anything yet. As increasingly larger amounts of paper money are dumped into the economy, we are eventually going to see the worst inflation in American history. The only real question is how far down the road are we going to get before it happens.
Take a few moments and digest the chart below. It shows just how dramatically the U.S. monetary base has been expanded recently....

Up to this point this dramatic expansion of the U.S. monetary base has not caused that much inflation because U.S. government borrowing has soaked most of it up and U.S. banks have been hoarding cash and have been building up their reserves.
However, this situation will not last forever. Eventually all this cash will make its way through the food chain and into the hands of U.S. consumers.
But what is even more troubling is the dramatic spike in commodity prices that we have seen in 2010.
Wheat futures have surged 63 percent since the month of June. Wheat has recently been selling well above 7 dollars a bushel on the Chicago Board of Trade.
But wheat is far from alone. In his recent column entitled "An Inflationary Cocktail In The Making", Richard Benson listed many of the other commodities that have seen extraordinary price increases over the past year....

*Agricultural Raw Materials: 24%
*Industrial Inputs Index: 25%
*Metals Price Index: 26%
*Coffee: 45%
*Barley: 32%
*Oranges: 35%
*Beef: 23%
*Pork: 68%
*Salmon: 30%
*Sugar: 24%
*Wool: 20%
*Cotton: 40%
*Palm Oil: 26%
*Hides: 25%
*Rubber: 62%
*Iron Ore: 103%

Now, as those price increases enter the chain of production do you think that there is any chance that they will not cause inflation?
Do you think there is any chance at all that producers and retailers will not pass those costs on to consumers?
It is time to face facts.
Those cost increases are going to filter all the way through the system and your paycheck is soon not going to stretch nearly as far.
Inflation is coming.
Many savvy investors understand what is going on right now. That is one reason why gold and silver are absolutely soaring at the moment.
The price of gold set another record high on Friday for the sixth straight day.
Silver has also experienced extraordinary gains recently, and the U.S. Mint has officially raised their wholesale pricing above spot on American Silver Eagles from $1.50 to $2.00.
Meanwhile, there are even more rumblings that the Fed wants to print lots more money. On Friday, the president of the Federal Reserve Bank of New York, William Dudley, stated that the high unemployment and the low inflation that the United States is experiencing right now are "wholly unacceptable"....

"Further action is likely to be warranted unless the economic outlook evolves in such a way that makes me more confident that we will see better outcomes for both employment and inflation before long."

During his remarks, Dudley even mentioned what the effect of another $500 billion increase in the Fed’s balance sheet would be.
Now keep in mind, this is not just another "Joe" who is making these remarks.
This is the president of the Federal Reserve Bank of New York – the most important of all the regional Fed banks.
In recent weeks it is almost as if you can hear Fed officials salivate as they consider the prospect of flooding the economy with even more money.
Up to this point, very little has worked to stimulate the dying U.S. economy. The Federal Reserve and the Obama administration are getting nervous as the American people become increasingly frustrated about the economic situation.
So will flooding the economy with even more money and causing even more inflation do the trick?
Well, no, but what inflated GDP figures will do is enable Obama and the Fed to say: "Look the economy is growing again!"
But if a flood of paper money causes the value of goods and services produced in the U.S. to go up by 5 percent but the real inflation rate is 10 percent, are we better off or are we worse off?
It doesn’t take a genius to figure that one out.
So don’t get fooled by "economic growth" numbers. Just because more money is changing hands doesn’t mean that the U.S. economy is doing better.
In fact, many American families are going to be financially shredded by the coming inflation tsunami.
Just think about it.
How far will your paycheck go when a half gallon of milk is 10 dollars and a loaf of bread is 5 dollars?
Already, it is incredibly difficult for the average American family of four to get by on $50,000 a year.
So how much money will we need when rampant inflation starts kicking in?
And do you think that your employers will actually give you pay raises to keep up with all of this inflation?
Not in these economic conditions.
In fact, median household incomes are declining from coast to coast all over the United States.
Earlier this year, Ben Bernanke promised Congress that the Federal Reserve would not "print money" to help the U.S. Congress finance the exploding U.S. national debt.
Did any of you believe him at the time?
Did any of you actually believe that the Federal Reserve would act responsibly and would attempt to keep the money supply and inflation under control?
The reality is that the entire Federal Reserve system is predicated on perpetual inflation and a perpetually expanding national debt.
Whatever wealth you and your family have been able to scrape together is going to continue to be whittled away month after month after month by the hidden tax of inflation.
And unfortunately, as discussed above, inflation is about to get a whole lot worse.
So is there any room for optimism? Is there any hope that we will not see horrible inflation in the years ahead? Please feel free to leave a comment with your opinion below....

theeconomiccollapseblog.com

Shocking: How Your Political System Works *Video*

Mac Slavo

D.C. lobbyist Jimmy Williams joins Dylan Ratigan to discuss what most of us already know - the political system is flawed and the current model of how our Congressional Representatives do business must be stopped:

The great news is, is that everybody’s writing a check.
It’s a bad system and it’s got to stop.
You write those checks because that’s the price of playing politics in Washington today…This is a system that has to stop.
Money is so invasive in every single thing that we do in this city.

It really is amazing, though not surprising, that our so-called representatives, once they arrive in Washington, throw ethics, morals and even the fundamental principles of this nation out the window just to make a buck.
There can be absolutely no postive and constructive change in this country until:

1. We throw all incumbents out of Congress and reset the Legislature. This can be accomplished by either a) voting them all out district by district, or b) forcing bills through Congress that will enact #2 below.
2. Enact term limits on all federally elected representatives and appointed federal judges. While this may not be a perfect solution, it offers some level of insurance that no single individual will be in Congress (or the courts) long enough to adversely impact this country in the long-term. With the current system as it is, we end up with lifetime politicians, rather than representatives of the people, most of whom spend decades in their positions.
3. Ethics violations are dealt with swiftly and severely. If you are arrested as a citizen for a criminal act from possession of marijuana or drunk driving to assault on another person, you’re crime is prosecuted in an open court, with all evidence being made publicly available. If you are guilty as charged, you pay the fines, go to prison, do the probation or serve whatever penalty the judge declares. The same should hold true for Congress. Since these are our law makers, they should, at the very least, be held to the same standards as the plebes that elect them.

The current system is setup so that only deep pocketed individuals or corporations can make changes happen, and generally, those changes are to the detriment of the people. Money makes the system go ’round, which obviously leads to corruption and a culture of favoritism. Unless this is eliminated, we can expect that no meaningful change will happen in America until the entire system comes crumbling down.
It is important that individuals like Mr. Jimmy Williams discuss their lobbying experiences on news outlets, and we commend him for his efforts. But the only real solution to these problems are the ones that will leave Mr. Williams and those in similar lines of work unemployed.
Watch the video:

www.SHTFplan.com

"A Financial Coup d'Etat"

European Neoliberals Raise Ante in War on Labor; Fateful Struggle Will Set Course for a Generation

By MICHAEL HUDSON

Most of the press has described Europe’s labor demonstrations and strikes on Wednesday in terms of the familiar exercise by transport employees irritating travelers with work slowdowns, and large throngs letting off steam by setting fires. But the story goes much deeper than merely a reaction against unemployment and economic recession. At issue are proposals to drastically change the laws and structure of how European society will function for the next generation. If the anti-labor forces succeed, they will break up Europe, destroy the internal market, and render that continent a backwater. This is how serious the financial coup d’etat has become. And it is going to get much worse – quickly. As John Monks, head of the European Trade Union Confederation, put it: “This is the start of the fight, not the end.”

Spain has received most of the attention, thanks to its ten-million strong turnout – reportedly half the entire labor force. Holding its first general strike since 2002, Spanish labor protested against its socialist government using the bank crisis (stemming from bad real estate loans and negative mortgage equity, not high labor costs) as an opportunity to change the laws to enable companies and government bodies to fire workers at will, and to scale back their pensions and public social spending in order to pay the banks more. Portugal is doing the same, and it looks like Ireland will follow suit – all this in the countries whose banks have been the most irresponsible lenders. The bankers are demanding that they rebuild their loan reserves at labor’s expense, just as in President Obama’s program here in the United States but without the sanctimonious pretenses.

The problem is Europe-wide and indeed centered in the European Union capital in Brussels, where fifty to a hundred thousand workers gathered to protest the proposed transformation of social rules. Yet on the same day, the European Commission (EC) outlined a full-fledged war against labor. It is the most anti-labor campaign since the 1930s – even more extreme than the Third World austerity plans imposed by the IMF and World Bank in times past.

The EC is using the mortgage banking crisis – and the needless prohibition against central banks monetizing public budget deficits – as an opportunity to fine governments and even drive them bankrupt if they do not agree roll back salaries. Governments are told to borrow at interest from the banks, rather than raising revenue by taxing them as they did for half a century following the end of World War II. Governments unable to raise the money to pay the interest must close down their social programs. And if this shrinks the economy – and hence, government tax revenues – even more, the government must reduce social spending yet further.

From Brussels to Latvia, neoliberal planners have expressed the hope that lower public-sector salaries will spread to the private sector. The aim is to roll back wage levels by 30 per cent or more, to depression levels, on the pretense that this will “leave more surplus” available to pay in debt service. It will do no such thing, of course. It is a purely vicious attempt to reverse Europe’s Progressive Era social democratic reforms achieved over the past century. Europe is to be turned into a banana republic by taxing labor – not finance, insurance or real estate (FIRE). Governments are to impose heavier employment and sales taxes while cutting back pensions and other public spending.

“Join the fight against labor, or we will destroy you,” the EC is telling governments. This requires dictatorship, and the European Central Bank (ECB) has taken over this power from elected government. Its  “independence” from political control is celebrated as the “hallmark of democracy” by today’s new financial oligarchy. This deceptive newspeak evokes Plato’s view that oligarchy is simply the political stage following democracy. The new power elite’s next step in this eternal political triangle is to make itself hereditary – by abolishing estate taxes, for starters – so as to turn itself into an aristocracy.

It is a very old game indeed. So it is time to put aside the economics of Adam Smith, John Stuart Mill and the Progressive Era, to forget Marx and even Keynes. Europe is ushering in an era of totalitarian neoliberal rule. This is what Wednesday’s strikes and demonstrations were about. Europe’s class war is back in business – with a vengeance!

This is economic suicide, but the EU is demanding that Euro-zone governments keep their budget deficits below 3 per cent of GDP, and their total debt below 60 per cent. On Wednesday the EU passed a law to fine governments up to 0.2 per cent of GDP for not “fixing” their budget deficits by imposing such fiscal austerity. Nations that borrow to engage in countercyclical “Keynesian-style” spending that raises their public debt beyond 60 per cent of GDP will have to reduce the excess by 5per cent each year, or suffer harsh punishment. The European Commission (EC) will fine euro-area states that do not obey its neoliberal recommendations – ostensibly to “correct” budget imbalances.

The reality is that every neoliberal “cure” only makes matters worse. But rather than seeing rising wage levels and living standards as being a precondition for higher labor productivity, the EU commission will “monitor” labor costs on the assumption that rising wages impair competitiveness rather than raise it. If euro members cannot depreciate their currencies, then they must fight labor – but not tax real estate, finance or other rentier sectors, not regulate monopolies, and not provide public services that can be privatized at much higher costs. Privatization is not deemed to impair competitiveness – only rising wages, regardless of productivity considerations.

The financial privatization and credit-creation monopoly that governments have relinquished to banks is now set to pay off – at the price of breaking up Europe. Unlike central banks elsewhere in the world, the charter of the European Central Bank (ECB, independent from democratic politics, not from control by its commercial bank members) forbids it to monetize government debt. Governments must borrow from banks, which are create interest-bearing debt on their own keyboards rather than having their national bank do it without cost.

The unelected members of the European Central Bank have taken over planning power from elected governments. Beholden to its financial constituency, the ECB has convinced the EU commission to back the new oligarchic power grab. This destructive policy has been tested above all in the Baltics, using them as guinea pigs to see how far labor can be depressed before it fights back. Latvia gave free rein to neoliberal policies by imposing flat taxes of 51 per cent and higher on labor, while real estate is virtually untaxed. Public-sector wages have been reduced by 30 per cent, prompting labor of working age (20 to 35 year-olds) to emigrate in droves. This of course is contributing to the plunge in real estate prices and tax revenue. Lifespans for men are shortening, disease rates are rising, and the internal market is shrinking, and so is Europe’s population – as it did in the 1930s, when the “population problem” was a plunge in fertility and birth rates (above all in France). That is what happens in a depression.

Iceland’s looting by its bankers came first, but the big news was Greece. When that nation entered its current fiscal crisis as a result of not collecting taxes on the wealthy, European Union officials recommended that it emulate Latvia, which remains the poster child for neoliberal devastation. The basic theory is that inasmuch as members of the euro cannot devalue their currency, they must resort to “internal devaluation”: slashing wages, pensions and social spending. So as Europe enters recession it is following precisely the opposite of Keynesian policy. It is reducing wages, ostensibly to “free” more income available to pay the enormous debts that Europeans have taken on to buy their homes and pay for schooling (hitherto provided freely in many countries such as Latvia’s Stockholm School of Economics), transportation and other public services. Manly such services have been privatized and subsequently raised their rates drastically. The privatizers justify this by pointing to the enormously bloated financial fees they had to pay their bankers and underwriters in order to get the credit to buy the infrastructure that was being sold off by governments.

So Europe is committing economic, demographic and fiscal suicide. Trying to “solve” the problem neoliberal style only makes things worse. Latvia’s public-sector workers, for example, have seen their wages cut by 30 per cent over the past year, and its central bankers have told me that they are seeking further cuts, in the hope that this will lower wages in the private sector as well, just as neoliberals in other European countries hope, as noted above.

About 10,000 Latvians attended protest meetings in the small town of Daugavilpils alone as part of the “Journey into the Crisis.” In Latvia’s capital city, Riga, Wednesday’s Action Day saw the usual stoppage of transportation and an accompanying honk concert for 10 minutes at 1 PM to let the public know that something was happening. Six independent trade unions and the Harmony Center organized a protest meeting in Riga’s Esplanade Park that drew 700 to 800 demonstrators, relatively large for so small a city. Another union protest saw about half that number gather at the Cabinet of Ministers where Latvia’s austerity program has been planned and carried out.

What is happening most importantly is the national parliamentary elections this Saturday (October 2). The leading coalition, Harmony Center, is pledged to enact an alternative tax and economic policy to the neoliberal policies that have reduced labor’s wages and workplace standards so sharply over the past decade. A few days earlier a bus tour drove journalists to the most visible victims – schools and hospitals that had been closed down, government buildings whose employees had seen their salaries slashed and the workforce downsized. 

These demonstrations seem to have gained voter sympathy for the more militant unions, headed by the hundred individual unions belonging to the Independent Trade Union Association. The other union group – the Free Trade Unions (LBAS) lost face by acquiescing in June 2009 to the government’s proposed 10per cent pension cuts (and indeed, 70per cent for working pensioners). Latvia’s constitutional court was sufficiently independent to overrule these drastic cuts last December. And if the government does indeed change this Saturday, the conflict between the Neoliberal Revolution and the past few centuries of classical progressive reform will be made clear.

In sum, the Neoliberal Revolution seeks to achieve in Europe what the United States has achieved since real wages stopped rising in 1979: doubling the share of wealth enjoyed by the richest 1 per cent. This involves reducing the middle class to poverty, breaking union power, and destroying the internal market as a precondition.

Latvia’s Harmony Center program shows that there is a much easier way to cut the cost of labor in half than by reducing its wages: Simply shift the tax burden off labor onto real estate and monopolies (especially privatized infrastructure). This will leave less of the economic surplus to be capitalized into bank loans, lowering the price of housing accordingly (the major factor in labor’s cost of living), as well as the price of public services. (Owners of monopoly utility services would be prevented from factoring interest charges into their cost of doing business. The idea is to encourage them to take returns on equity. Whether or not they borrow is a business decision of theirs, not one that governments should subsidize.) The tax deductibility of interest will be repealed – there is nothing intrinsically “market dictated” by this fiscal subsidy for debt leveraging. This program may be reviewed at rtfl.lv, the Renew Task Force Latvia website.

No doubt many post-Soviet economies will find themselves obliged to withdraw from the euro area rather than see a flight of labor and capital. They remain the most extreme example of the Neoliberal Experiment to see how far a population can have its living standards slashed before it rebels.

But so far the neoliberals are fully in control of the bureaucracy, and they are reviving Margaret Thatcher’s slogan, TINA: There Is No Alternative. But there is an alternative, of course. In the small Baltic economies, pro-labor parties are pressing for the government to shift the tax burden off employees and consumers back onto property and financial wealth. Bad debts beyond the reasonable ability to pay must be scaled back. It may be necessary to let the banks go under (they are mainly Swedish), even if this means withdrawing from the Euro. The choice is between who will be destroyed: the banks, or labor?

European politicians now view this as being truly a fight to the death. This is the ideology that has replaced social democracy.

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy. He can be reached via his website, mh@michael-hudson.com

Il default greco? Solo questione di tempo

Il Fmi sta valutando di elargire un nuovo prestito alla Grecia per scongiurare il rischio di un default nazionale. Ma proprio a questa ipotesi sembrano credere ormai in molti. E per qualcuno c'è solo da aspettare Il Fondo Monetario Internazionale sta valutando l’ipotesi di garantire un nuovo sostegno finanziario alla Grecia una volta esaurito il programma tuttora in corso. Notizia confermata anche dal Wall Street Journal che ieri ha citato una fonte anonima vicina all’organismo. Per il Governo di Atene è una prospettiva salubre, considerato che soltanto il Fondo può garantire la salvezza del paese. Per quanto dal Fondo tengano a precisare di non credere nell’ipotesi bancarotta, infatti, l’apertura nei confronti di un ulteriore intervento salva-Atene suona implicitamente come un’effettiva ammissione di.................................

Basel III: The Global Banks at The Edge of The Precipice. Trillions of "Toxic Waste" in the Global Banking System

by Matthias Chang
- 2010-09-19
The Global Too Big To Fail Banks are so precarious that literally anything can trigger a collapse in the coming months. I have read recent commentaries on Basel III posted to various renowned websites and financial publication, but they missed (or deliberately misled) the underlying message of the proposals, the implementation of which will be delayed till 2017 and some till 2019. Basel III is pure spin and its timing was to assuage the deep-seated fears that there are no solutions in sight to save the fiat money system and fractional reserve banking. THE PROBLEM The major global banks are all under-capitalised and this was all too apparent when Lehman Bros. collapsed. Banks were borrowing so much and so recklessly to play at the global casino that when the bets went sour, they were staring at a black-hole in the $trillions. In fact the banks are all insolvent. The problem was compounded when the central bankers (all are corrupt without exception) and regulators turned a blind eye to how bankers defined what constituted “capital” so as to circumvent the need to maintain the capital ratio. THE BASEL III SOLUTION At its 12 September 2010 meeting, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced a substantial strengthening of existing capital requirements and fully endorsed the agreements it reached on 26 July 2010. These capital reforms, together with the introduction of a global liquidity standard, deliver on the core of the global financial reform agenda and will be presented to the Seoul G20 Leaders summit in November. The Committee’s package of reforms will increase the minimum common equity requirement from 2% to 4.5%. In addition, banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirements to 7%. This reinforces the stronger definition of capital agreed by Governors and Heads of Supervision in July and the higher capital requirements for trading, derivative and securitisation activities to be introduced at the end of 2011. Increased capital requirements Under the agreements reached, the minimum requirement for common equity, the highest form of loss absorbing capital, will be raised from the current 2% level, before the application of regulatory adjustments, to 4.5% after the application of stricter adjustments. This will be phased in by 1 January 2015. The Tier 1 capital requirement, which includes common equity and other qualifying financial instruments based on stricter criteria, will increase from 4% to 6% over the same period. The Group of Governors and Heads of Supervision also agreed that the capital conservation buffer above the regulatory minimum requirement be calibrated at 2.5% and be met with common equity, after the application of deductions. The purpose of the conservation buffer is to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. While banks are allowed to draw on the buffer during such periods of stress, the closer their regulatory capital ratios approach the minimum requirement, the greater the constraints on earnings distributions. This framework will reinforce the objective of sound supervision and bank governance and address the collective action problem that has prevented some banks from curtailing distributions such as discretionary bonuses and high dividends, even in the face of deteriorating capital positions. A countercyclical buffer within a range of 0% - 2.5% of common equity or other fully loss absorbing capital will be implemented according to national circumstances. The purpose of the countercyclical buffer is to achieve the broader macroprudential goal of protecting the banking sector from periods of excess aggregate credit growth. For any given country, this buffer will only be in effect when there is excess credit growth that is resulting in a system wide build up of risk. The countercyclical buffer, when in effect, would be introduced as an extension of the conservation buffer range. These capital requirements are supplemented by a non-risk-based leverage ratio that will serve as a backstop to the risk-based measures described above. In July, Governors and Heads of Supervision agreed to test a minimum Tier 1 leverage ratio of 3% during the parallel run period. Based on the results of the parallel run period, any final adjustments would be carried out in the first half of 2017 with a view to migrating to a Pillar 1 treatment on 1 January 2018 based on appropriate review and calibration. Systemically important banks should have loss absorbing capacity beyond the standards announced today and work continues on this issue in the Financial Stability Board and relevant Basel Committee work streams. [1] THE LOOPHOLE & ADMISSION OF INSOLVENCY Since the onset of the crisis, banks have already undertaken substantial efforts to raise their capital levels. However, preliminary results of the Committee’s comprehensive quantitative impact study show that as of the end of 2009, large banks will need, in the aggregate, a significant amount of additional capital to meet these new requirements. Smaller banks, which are particularly important for lending to the SME sector, for the most part already meet these higher standards. The Governors and Heads of Supervision also agreed on transitional arrangements for implementing the new standards. These will help ensure that the banking sector can meet the higher capital standards through reasonable earnings retention and capital raising, while still supporting lending to the economy. THE IRON CLAD CONFIRMATION THAT BANKS ARE IN DEEP SHITS Please read all the passages which I have highlighted in bold in the above paragraphs. If the banks were at all material times adequately capitalised and the central bankers in collusion with these banksters and fraudsters were prevented from manipulations, there would not be any need for Basel III regulations. In saying this, I am not in anyway conceding that even with these new requirements, the banks will be adequately capitalised. The simple truth is that as long as the derivative casino is still running and banks are allowed to continue their off balance sheet activities, nothing will be resolved. The 2 tables below tell the whole story: Source: Basel iii Compliance Professionals Association (B iii CPA) How can the ultimate capital requirement of 8 percent be adequate when leverage under Basel III is still allowed at the astronomical rate of 33:1? In the second table, and it is a no brainer to conclude that the banking crisis (if we are lucky) may be “resolved” by 2015 but it is most likely that it can be only resolved by 2017/2018 . This is an express admission that all banks would require such a long transition period to comply with the new requirements! The stark reality is that the Too Big To Fail Banks do not have the ability and or the means to raise capital at this critical juncture. To use an analogy, the banking patient will be in Intensive Care until 2017, which is rather optimistic for the projection implies that the patient may be able to recover. It is my view that Basel III is pure spin and is intended to convey the impression that the central bankers and regulators have things under control. This is a big lie! I have said in my earlier article that the FED through QEI purchased toxic assets from the banks and part of the monies were used to shore up the reserves and part to purchase treasuries (to give an illusion of better quality assets in banks’ balance sheet). There are so much more, $trillions more of toxic waste that no amount of QE (quantitative easing) can remove them. This situation does not even take into consideration the toxic waste in SPVs – the off balance sheet mumbo jumbos. The FED and Accounting Bodies have suspended accounting and regulatory rules that have enabled the banks to hide such toxic waste in SPVs and not having to account for them in the banks’ balance sheet. LIFE SUPPORT QEI has merely enable the Too Big To Fail Banks to continue some form of banking activities thus deceiving the public that they are solvent and prevent a bank run. But the central bankers cannot have the cake and eat it as well. In trying to shore up public confidence in banks with the introduction of Basel III, they have inadvertently let the cat out of the bag and as the above two tables show, the banks are all insolvent. Additionally, whatever reserves that have been accumulated are insufficient to stimulate further lending, because the banks have reached their limits under the fractional reserve system.  This is the reason for the contraction of credit and not as one commentator has postulated that Basel III would “contract credit”. Two burdens are weighing down on the banks: 1)    inadequate capital to meet liabilities (borrowings); and 2)    inadequate reserves under fractional reserve banking.    This is a big mess! THE CONFIDENCE GAME At this moment, I cannot give a precise time-line as to how long the FED and the global central banks can prolong the confidence game, hoodwinking the public and sovereign creditors that all is well. When confidence in banks evaporates for whatever reasons, the consequences will be ugly and there will be massive social upheavals across the globe. The first indication that the game is up is when US treasuries are increasingly purchased by the FED to make up for the shortfalls by foreign creditors and to finance the ballooning US deficits. All of a sudden, some entities may start to get real nervous and unload the treasuries, and the FED steps in to shore up treasuries. Then, the tipping point is reached and Hell breaks loose! China is also part of this confidence game. But, contrary to IMF and other renowned economists who are betting on China’s and Asia’s so-called economic strengths, I take the view that when US treasuries collapse, faith in all fiat monies will likewise evaporate and there will be massive capital flight to commodities, especially gold, silver and oil. Asian stock markets will be devastated and there will be volatile gyrations in currency values. Therefore, it is utter lunacy and recklessness for the Malaysian central bank (Bank Negara) and the government to even consider allowing the ringgit to be traded. When confidence in dollar assets vaporises, China will be caught right in the middle. The third and final phase of the Global Financial Tsunami will devastate Asian economies and with it, the greatest depression in history will ensue. Time Line? Between now and anytime in 2011. At the latest, 2012. God help us.

The Curse of Fiat Money

September 17th, 2010
	It may come as a surprise to many, but the relative size of the US commercial-banking industry has not declined following the so-called credit-market crisis, which developed in the second half of 2007. On the contrary, it has increased since then. While nominal GDP rose 4.2% from the second quarter of 2007 to the second quarter of 2010, banks' total assets rose 18.4%. In a recession one would expect an unwinding of credit-financed investments that have turned sour. Economically unsuccessful firms go out of business, malinvestment is liquidated, losses reduce investor equity capital, and the cost of borrowing increases, providing incentives for reducing overall indebtedness. However, this is not what happened in the banking industry as a whole. The Federal Reserve, in an attempt to prevent the bank system from collapsing, supplied any amount of base money that was deemed necessary to keep banks afloat. This can be illustrated by the drastic increase in banks' base money holdings since around the third quarter of 2008. The Fed's monetary policy tries to keep the balance sheet of the commercial banking sector from shrinking. For a shrinking of banks' assets would be accompanied by a decline in the credit and money supply — a development that is widely seen as being harmful to production and employment growth. However, this is a severe, and actually fatal, misinterpretation of cause and effect. It is bank-credit expansion that has brought about the trouble in the first place, and a policy of ever lower interest rates, provoked by ever greater doses of credit and money injections, is not going to solve the damage done but will actually make matters even worse. Fiat-Money Creation through Circulation Credit Whenever commercial banks extend loans to nonbanks (private consumers, firms, and public-sector entities) in today's fiat-money regime, they increase the money supply uno actu. Ludwig von Mises called this type of credit "bank-circulation credit." Bank-circulation credit, which is associated with a rise in the money supply out of thin air, causes malinvestment and boom-and-bust cycles. It causes all the evils that are regularly associated with inflation: rising prices (and a corresponding decline in the purchasing power of the money unit), a coercive redistribution of income, and malinvestment. However, what happens if and when commercial banks are no longer willing to roll over maturing loans, or borrowers wish to repay their bank debt? Such developments — which are frequently labeled deleveraging and derisking — would lead to a decline in the economy's fiat-money stock. This is because repaying bank loans basically means that the fiat money that has originally been injected into the economy is literally leaving the economic system. And if this happens, the inflation regime turns into a deflation regime. Deflation in a fiat-money system is of a different nature than in a commodity-money regime. To see this, consider the gold standard. Here, the money supply may decline because people decide to move gold from monetary to nonmonetary purposes. Another reason for a decline in the money supply is a correction of fraudulent banking. Fraudulent banking means that banks issue money substitutes in excess of holdings of money proper (gold). If clients demand redemption, banks default on their payment liabilities. The outstanding money stock drops, as money substitutes not covered by gold become worthless. Deflation in a gold standard comes to a halt once the outstanding claims on money proper are brought back in line with the stock of money proper people have deposited with banks. In other words, deflation makes the inflated money stock return toward its rightful level. In today's fiat-money system, however, the inflated money stock cannot be brought back toward any rightful level, as fiat money is created out of thin air via circulation credit, not backed by any commodity whatsoever. There is no equilibrium level the fiat-money supply could shrink toward. "The Piper Must Be Paid" Fiat-money systems collapse once the increase in ever-greater amounts of credit and money comes to a halt, let alone goes into reverse. Even a slowing down of credit and fiat-money expansion causes economic trouble — as the illusion fueling the credit boom breaks down. As Murray N. Rothbard noted, Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance by repeated and accelerating doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop or sharply slow down, either because the banks are getting shaky or because the public is getting restive at the continuing inflation, that retribution finally catches up with the boom. As soon as credit expansion stops, the piper must be paid, and the inevitable readjustments must liquidate the unsound over-investments of the boom and redirect the economy more toward consumer goods production. And, of course, the longer the boom is kept going, the greater the malinvestments that must be liquidated, and the more harrowing the readjustments that must be made.[1] However, couldn't the central bank just keep the money supply unchanged, preventing it from falling by, for instance, purchasing assets (bonds, stocks, etc.)? Such a policy wouldn't do the trick. The ensuing slowdown of credit and money expansion would, as Rothbard outlined forcefully, make the economic production structure explode. The market interest rate would start moving from its artificially suppressed level toward its natural level as determined by the societal time-preference rate. This, in turn, would reveal that the economy — due to increases in circulation credit and fiat money — has lived beyond its means. Malinvestment will be revealed. Credit losses would rise as firms run up losses due to bad investment and consumers, plagued by unemployment and declining incomes, default on their debt. Tax revenues would decline, and governments, which chronically rely on debt financing, would have to pay ever higher interest rates for rolling over their maturing debt and financing new deficit-financed outlays. That said, once increases in fiat money slow down, come to a halt, or become negative, the credit pyramid and the production structure it has created would start disintegrating. Inflation Temptation Under a fiat-money regime there is a great temptation for governments and their supporters (protégés) to advocate a further increase in the fiat-money supply — by arguing that a further increase in the fiat-money supply (and a somewhat higher inflation) is the policy of the lesser evil as compared to a breakdown of the economic and monetary order. Many renowned economists have argued that, because of political reasons, (hyper)inflation rather than deflation will be the ultimate consequence of fiat money. Take, for instance, Irving Fisher, who in his book The Purchasing Power of Money, its Determination and Relation to Credit, Interest and Crises (1911) made an unmistakable statement regarding the quality of fiat money: "Irredeemable paper money has almost invariably proved a curse to the country employing it."[2] A similar view was expressed by Frank A. Fetter, who explicitly referred to the political-economic dimension of inflation when he wrote in his book Modern Economic Problems (1926), Once the issue of political money begins to be excessive, its further limitation proves to be most difficult. A result usually unintended is the derangement of business and of the existing distribution of incomes. The rapid and unpredictable changes in prices give opportunity for speculative profits, but injure legitimate business. This incidental effect on debts and industry offers the main motive to some citizens for advocating the issue of paper money. It is peculiarly liable to be the subject of political intrigue and of popular misunderstanding. It is this danger, more than anything else, that makes political money in general a poor kind of money.[3] Mises, in a 1952 addition to his book The Theory of Credit and Money (originally published in 1912), put forward an explanation of why people opt for inflation in times of emergency. The emergency that brings about inflation is this: the people or the majority of the people are not prepared to defray the costs incurred by their rulers' policies. They support these policies only to the extent that they believe their conduct does not burden themselves. They vote, for instance, only for such taxes as are to be paid by other people, namely, the rich, because they think that these taxes do not impair their own material well-being. The reaction of the government to this attitude of the nation is, at least sometimes, directed by the sincere wish to serve what it believes to be the true interests of the people in the best possible way. But if the government resorts for this purpose to inflation, it is employing methods which are contrary to the principles of representative government, although formally it may have fully complied with the letter of the constitution. It is taking advantage of the masses' ignorance, it is cheating the voters instead of trying to convince them.[4] In his book Age of Inflation (1979), Hans F. Sennholz noted, In the past, the inflations were of relatively short durations, limited to periods of national emergency when the central government was called upon to finance extraordinary defense expenditures. After the end of hostilities monetary stability soon returned as the emergency financing was abandoned. Today, public demand for governmental services never abates, in wartime and in peacetime, but seems to accelerate year after year. In fact, the more government spends on economic and social objectives the louder the public clamor for more services seems to become. Thus, the temporary emergencies that in the past gave occasion for extraordinary defense expenditures and inflationary financing have given way to a permanent emergency of social service and inflationary financing. It is true that inflation can never be permanent, for it must come to an end with the total destruction of the currency.[5] The only chance to prevent the exchange value of fiat money from collapsing altogether is a return to sound money — a way that would start by reanchoring fiat monies to gold, as outlined most prominently by Mises, Rothbard, and Sennholz. However, limiting the damage done by the fiat-money curse is not a technical problem in the first place. It is first of all a matter of overcoming the political, economic, and sociophilosophical framework of our time. As Mises noted, The belief that a sound monetary system can once again be attained without making substantial changes in economic policy is a serious error. What is needed first and foremost is to renounce all inflationist fallacies. This renunciation cannot last, however, if it is not firmly grounded on a full and complete divorce of ideology from all imperialist, militarist, protectionist, statist, and socialist ideas.[6] Notes [1] Rothbard, M. N. (2006, 1973), For A New Liberty: A Libertarian Manifesto, 2nd ed., Ludwig von Mises Institute, p. 237. [2] Fisher, I. (1922, 1911), The Purchasing Power of Money, its Determination and Relation to Credit, Interest and Crises, New York: Macmillan, p. 78. [3] Fetter, F.A. (1926), Modern Economic Problems, 2nd ed., New York, The Century Co., p. 53. [4] von Mises, L. (1981), The Theory of Money and Credit, Liberty Fund, Indianapolis, p. 468. The quote was taken from part four, "Monetary Reconstruction," which was written in 1952 and first appeared in the 1952 American edition by Yale University Press. [5] Sennholz, H.F. (1979), Age of Inflation, Western Island, Belmont, Massachusetts, p. 62. [6] Mises, L. (2006, 1923), "Stabilization of the Monetary Unit — From the Viewpoint of Theory," in The Causes of the Economic Crisis, Ludwig von Mises Institute, Auburn, Alabama, p. 44.     Thorsten Polleit   Thorsten Polleit is Honorary Professor at the Frankfurt School of Finance & Management.  This essay was originally published in www.Mises.org. By authorization.