Feb 182014
 February 18, 2014  Posted by at 4:09 pm Finance

Fenno Jacobs for OWI “Southington, Conn. Monty’s Diner” May 1942

When I see things like today’s Bloomberg headline “Currency Traders Facing Extinction as Computers Replace Humans”, I can’t help pondering, if even for a fleeting moment, that perhaps it makes no difference, since currency traders don’t produce anything of value, they only shift existing and virtual wealth around. And so will the computers that replace them. In fact, developments like this should free up the humans involved to change into more productive occupations.

While there’s no absolute fault to be found in such thoughts, they’re way out of left field as far as the general mainstream notions of value are concerned. Because currency traders, human, or otherwise, make a lot of money. And that’s the only thing left we really look at. That this money can only made by taking value away from actual human labor and/or the earth’s natural resources is of no concern to our ideas of what value in our societies consists of. It will even be denied, or at least heavily debated.

We will therefore not free up the talents of the traders for more productive and useful activities. They will continue to chase virtual money, just in a slightly different capacity. Because in their worldview, that represents value. Profit. A good or even lavish lifestyle. Why should they look for more than that? Indeed, why should they, they’re not the best and brightest we have. The best and brightest are now developing the digital systems that can trade in ever smaller increments of a nanosecond. That’s where the money is. And why should they care that it’s only virtual, and that it preys on human labor and planetary resources; after all, isn’t that what everybody chases?

And now we have a problem. In the grand scheme of things, run of the mill currency traders are like WalMart cashiers, just people needing to feed a family that can’t be expected to work for anything other goal. For our best and brightest, it’s a whole other story. And if they commit to developing nano second trade contraptions, we can only conclude that they’re not. Our best and brightest. They have a talent, but they have no view, no overview or panorama, let alone a vision.

The inevitable conclusion then is that the people who we regard as the best and brightest among us, are not. Because those we call the brightest work for the most money they can get, in finance, gadgets, computer tech etc. If they were really that bright, they would understand that these activities get rewarded only in certain models of societies, and while we happen to live in such a model, ours has already died.

Our true best and brightest, and that’s how we would recognize them, would focus their time and energy on figuring out where to go from here, not on getting us even deeper ‘into here’. Because that’s all we’re all doing today, getting deeper ‘into here’. And here ain’t good. Where we are here is killing us, and the deeper we go into it, the more of us it will kill. We need to get out of here, but our supposed best and brightest are only digging us deeper in.

We need to find ourselves better best and brightest. Where to go from here will not be found through computer models or self-driving cars or GMO seeds or improvements in management systems. Those things all belong in the model that died. We need a new model. Desperately.

We can all see our present model died when we look around us, it’s not that hard. Our societies are drowning in debt, and incapable of coming up with any solutions for that. We are running out of the fossil based energy that built our world. Which is made up of carbon structures that are also crucial in far more than driving cars or powering factories. And we are increasingly locked in by the consequences of the dead model of living that both the development of our debt and the exploitation of our carbon based resources have resulted in, we’re locked in by the problems we cannot solve.

And moreover, we – or our brightest minds – only look for solutions in as far as there is money to be made in doing so. If the solutions are to be found in areas that are not profitable, we will not find them; the set-up of our societies precludes it. Since alternative energy forms will never be as profitable, for both EROEI and EROI reasons, as carbon has been, we will find only false positive solutions there.

Our measure of success has been wrong for a long time, and it’s now starting to bite for real. Money is not life’s ultimate fulfillment, but it is the most important thing for many people. After all, how many of us would work the exact same jobs we work today if we wouldn’t get paid for them what we do, or even much less?

The truth is you’re all doing a sh*tload of damage, each and every one of you. And you don’t know how to stop doing it. You’ve never learned how, and you’re not smart enough to find it out for yourself. So you get in your car and you buy the latest gadget or you fly to some resort and you don’t think of the damage and the externalities of what you do, because it would make your words about caring for the planet and doing the right thing and saving the world, sound like they were spoken by the devil’s tongue.

It’s this whole world we inhabit that is so replete with money and technology we can’t see beyond them anymore, that’s got us in as deep as we are, with our supposed best and brightest trying to solve problems caused by money and tech with more money and tech, and that’s just not that bright. The least they could do is to step back and see if that’s really the way to go, but they don’t, either because they’re too addicted to money and tech, or because they’re simply not smart enough to see a bigger picture. And that means we need to find smarter people, smarter than the physicists and the quants and the banking executives and the electric car developers that we mistake for our best and brightest today.

I don’t know all the answers, and I don’t have to know the answers to understand that this is not what we should be doing, not if we want a life that feels like it holds real value, value embedded in the world and the planet that gave birth to us and all the thoughts that’s in our heads. In the end, this thing we’re doing is we’re murdering ourselves and each other, first in our heads and then outside of them too. If we want to experience meaning in our lives we first need to see that a wild elephant or a dolphin or even a simple tree have more meaning for us, for our minds and souls, than a cellphone or a car ever could, no matter how clever they look.

And that down the line the two are not compatible, that that is just some tale we tell ourselves so we won’t have to feel so bad about our lives and what we do to each other and to the natural world. Preserving a coral reef is infinitely more important for what’s inside our heads than coming up with the next fad gadget ever will, even if it makes you $100 billion.

Of course, if we know what’s good for us, we’ll undertake a massive overhaul of our education systems too, which are to a large extent co-responsible for the blinders we face our lives with, and teach us only to be cogs in a wheel and pawns in a game. But there’s no guarantee our smartest sons and daughters will rise above the crop in any education system, schools and universities don’t make you smart, they blunt talent in the worst case (today) and sharpen it in the best. In a word, it’ll help the smart, but not the smartest, other than by providing access to the best possible access to information.

In an ironic sense it’s funny that we try to fight the problems caused by too much debt with more debt, and we try to fight the problems caused by too much tech progress with more tech progress. It’s funny, but it’s not intelligent. It’s neither best nor brightest. We can do better.

Check the numbers here: the amount of productivity generated by incremental debt has long become negative in the US. It’s not just government debt. And that should have us take a pause. And shed some notions we’ve held to be true.

5 Years Later – What Did Obama’s Recovery and Reinvestment Act Achieve? (STA)

The 17th of February, 2014, marked the annual observation of George Washington's birthday and the 5th anniversary of the American Recovery and Reinvestment Act. Given that is has been half a decade since President Obama signed that bill into law, it would not surprise me if you did not immediately recognize what it entailed. However, the term "Government Bailout"will certainly jolt your recollection.

The WSJ penned a great opener:

"The $830 billion spending blowout was sold by the White House as a way to keep unemployment from rising above 8%. But the stimulus would fail on its own terms. 2009 marked the first of four straight years when unemployment averaged more than 8%. And of course the unemployment rate would have been even worse in those years and still today if so many people had not quit the labor force, driving labor-participation rates to 1970s levels."

Given that Governments are generally the worst allocators of capital it should come as no real surprise that the money was squandered on non-productive investments.

"$783,000 was spent on a study of why young people consume malt liquor and marijuana. $92,000 went to the Army Corps of Engineers for costumes for mascots like Bobber the Water Safety Dog. $219,000 funded a study of college 'hookups.'"

However, it really is much worse than that. The table below shows the "taxpayer cost" of the bailout on various economic metrics.


It cost taxpayers roughly more than $0.50 for each and every dollar of economic growth over the last 5 years. $206,879 for every job created. $0.84 for every dollar of real personal consumption expenditures and $0.90 for every dollar of increase in real personal incomes (not including government transfers).

The ARRA was supposed to boost "shovel ready" infrastructure and investment projects by businesses which would have created jobs and economic prosperity. Sadly, that was not to be the case as fixed investment has fallen $53.50 for every dollar of government funded bailout while the labor force participation declined by almost 4 million.

However, that is really not the whole story to be told of government bailouts and interventions. As I discussed previously, the real total of government interventions, bailouts and artificial supports far exceeds the initial ARRA of $830 billion. Today, as shown in the table below, that number has risen above $31 Trillion.


If we apply the total of all government interventions into the same analysis as above, we find a far more disappointing result.


At a cost of $19.90 for each dollar of economic growth, almost $8 million for each job created and a loss of nearly $600,000 of fixed investment, it is hard to suggest that the government interventions have been successful.

I do not disagree with the argument that, without government interventions, the economic recession would have been far worse. However, there is also no real evidence that the economy is gaining any organic traction either. This is due to the continued misallocation of resources, combined with ever increasing levels of government debt, which continue to rob future economic growth for short term stability. This is clearly shown by the chart below.


Of course, five years after all the bailouts began, the Keynesian argument remains "fool proof." The only reason that the economy is not growing faster is because the government is not doing enough. However, if the economy slips back into a recession, it will simply be because the government did not do enough. You simply can't argue against logic like that.

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The pension people themselves get nervous about the big grab. Sorry, too late.

The pension fund cookie jar (Pionline.com)

Corporate defined benefit plans, still struggling to raise funding levels, are being used, in the words of one actuarial consultant, as a cookie jar by Congress to finance unrelated federal spending. In other words, Congress turns to the corporate defined benefit system as an accessible source for any legislation that needs funding, even if it generally makes corporate plans less secure.

The most recent example occurred on Feb. 6, when the Senate sought to vote for an extension of unemployment insurance for three months, financing the new benefits by extending the pension funding relief enacted in the Moving Ahead for Progress in the 21st Century Act of 2012, or MAP-21. Republicans as well as Democrats supported the move, but the measure failed because of objections to unrelated provisions that some senators attempted to add.

That proposal was only the latest as Congress looks to unconventional revenue sources to finance more spending without adding to the already large federal budget deficit. Earlier in the month, a proposal would have repealed the medical device tax contained in the Patient Protection and Affordable Care Act of 2010, financing the move by extending pension funding relief.

Corporate pension fund sponsors, unfortunately, have endorsed the maneuvers to raise revenue on the backs of underfunded plans. In fact, they are encouraging the move because it will reduce required contributions to their pension plans, even though funding levels are fragile and many plans are still underfunded. Although corporate defined benefit plans in general are fading away, the assets of the remaining plans — and amount of corporate contributions to them — still command considerable attention of Congress, providing a ready source of revenue to offset federal spending.

Congress should stop the impulsive embracing of pension funds as a source of revenue to finance federal spending. Legislators are drawn to pension funds especially in times of excessively high levels of federal spending. That impulse is undermining pension security. At the same time, corporations should stop seeking pension funding relief.

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The number of stocks traded in America is down 44% from 1997. The system is dying, even if its upper echelons make more money than ever. It has nothing to do with underlying real value anymore, that’s just a bitter joke.

Is shrinking stock market a bullish sign? (USA Today)

Wall Street’s growing legions of analysts might have overlooked one reason the stock market has risen in recent years: The U.S. stock market itself is shrinking. At the end of last year, 5,008 stocks traded on U.S. exchanges, down 44% from a peak of 8,884 in 1997, according to the World Federation of Exchanges. Similarly, there were only 3,776 stocks in the Wilshire 5000 stock index, the broadest gauge of the U.S. equity market, which also peaked in 1997, with 7,459 stocks.

What’s more, the number of outstanding shares of stock available to be bought or sold has shrunk by nearly 10% since the end of 2010, according to S&P Dow Jones Indices. The upshot? Some investment strategists say more money chasing fewer stocks has created a supply-and-demand dynamic that is supportive of higher stock prices. “The de-equitization of the markets may stand as perhaps the most unheralded reason for all of the rapid rise in stock prices since 2009,” Jason Trennert, founder of Strategas Research Partners, told clients in a research note.

The reasons for the shrinking number of stocks in the U.S. are many and date to the dot-com stock crash of 2000. By the end of 2000, nearly 1,000 fewer companies were trading compared with 1997. The big drop was caused largely by fledgling tech companies going out of business. Every year in the 2000s saw a decline in the number of listed stocks. The number of stocks exiting exchanges picked up steam following the 2008 financial crisis and the Great Recession, when close to 1,000 more stocks disappeared from exchanges, according to the WFE.

That steep drop was due in part to fewer companies going public, with investor fear, as well as rising costs, increased scrutiny and more stringent regulations from the federal government, cooled the market. Back-to-back market meltdowns in the past decade took a toll on the initial public offering market. In 2000, a record 406 companies went public, according to Renaissance Capital. But the market for IPOs, which went dormant from 2001 to 2003, dried up again in 2008 and 2009.

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Currency Traders Facing Extinction as Computers Replace Humans (Bloomberg)

A widening probe of the foreign-exchange market is roiling an industry already under pressure to reduce costs as computer platforms displace human traders.

Electronic dealing, which accounted for 66% of all currency transactions in 2013 and 20% in 2001, will increase to 76 percent within five years, according to Aite Group LLC, a Boston-based consulting firm that reviewed Bank for International Settlements data. About 81% of spot trading — the buying and selling of currency for immediate delivery — will be electronic by 2018, Aite said.

“Foreign-exchange traders are much like stock floor traders: a rapidly dying breed,” said Charles Geisst, author of “Wall Street: A History” and a finance professor at Manhattan College in Riverdale, New York. “Once the banks realize they are costing them money, the positions will dwindle quickly.”

At least a dozen regulators are investigating allegations first reported by Bloomberg News in June that traders colluded to rig benchmarks in the $5.3 trillion-a-day currency market. That scrutiny may give banks an opportunity to cull more staff, say analysts including Christopher Wheeler of Mediobanca SpA in London. It’s also boosting demand from clients for greater transparency in pricing and transaction charges, accelerating a longer-term shift in trading onto electronic platforms.

“The margins are very, very skinny in foreign exchange because it’s easy to move onto a trading platform,” said Wheeler, who tracks European lenders. “The move by banks into electronic trading in other areas has cost a large number of jobs, and we’ve seen revenue come off sharply. The foreign-exchange probe won’t help this.”

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Counting down the trust products. There are people in China who are extremely nervous right now. Do we have adequate suicide reports from there? Question is, who’s more nervous, the government or the shadow bankers? The answer is not as easy as many seem to think.

Get ready for more China shadow-banking defaults (CNBC)

China has just settled a high-profile failure of one shadow-banking product and already another has emerged, with analysts expecting a wave of potential defaults ahead. “We definitely expect to see more trust-related products souring through 2014 and maybe next year as well,” with the difficulties likely coming from stressed industries, such as coal, as the economy slows, said Ruta Cereskeviciute, senior economist at consultancy IHS.

In January, a trust marketed by ICBC with the moniker “2010 China Credit/Credit Equals Gold #1 Collective Trust Product” said it likely wouldn’t be able to pay investors back as the 3 billion yuan, or around $496 million, trust used its funds to make a loan to unlisted coal company Shanxi Zhenfu Energy Group, which has since collapsed.

Local media have since reported the trust firm reached an agreement allowing investors to recover their invested principal, but that they would sacrifice their final interest payment. Some reports have said that the Shanxi government may have contributed funds to the bailout.

But concerns over the shadow banking sector didn’t get much of a break, with products worth around $126 million issued by Jilin Province Trust failing to repay investors in recent weeks; the trust also made loans to a coal company, Shanxi Liansheng Energy. Six other trusts also lent more than 5 billion yuan to this same delinquent coal company, Reuters reported, citing state media. “The most important question now in this latest case is whether investors will be bailed out. It’s already in default,” Cereskeviciute said. She noted that up until now, investors have been repaid even when underlying assets soured, creating a moral hazard.

Others also expect continuing to bail out trust investors will weigh on China’s financial stability. “We have not seen a significant default in China’s shadow banking market in over a decade,” Bernstein Research said in a note last week. “The lack of investor losses has ensured that credit continued to be channeled to unproductive and risky entities,” it said. “Good money is going after bad money,” it said. “Banks and investors are, in order to prevent defaults, investing money in unprofitable companies that would, in other situations, be deemed insolvent.”

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Yup. China must support the US dollar, or else. But they may still choose else, if and when the domestic financial and economic situation becomes bad enough or even untenable.

China Digs Itself Deeper Into Dollar Trap (Bloomberg)

Reading Eswar Prasad’s new book, it’s easy to picture the entire global economy as a giant bird cage, with Jack Lew and Janet Yellen standing outside waving at all the unwitting creatures inside.

In “The Dollar Trap,” the Cornell University economist doesn’t paint the U.S. Treasury secretary or Federal Reserve chairman in sinister terms. Prasad’s argument is that for all the worries about U.S. policies and debt, and the many efforts to build up an alternative, the dollar’s linchpin role is only strengthening. What struck me most, though, is that China still can’t see that it’s the dupe in this giant pyramid scheme.

China’s $3.8 trillion of currency reserves are the largest stockpile ever amassed. Economists have long seen that money as a strength — the ultimate rainy-day fund should China’s shadow-banking system blow up. Trouble is, the value of those holdings depends on China’s $1.3 trillion of U.S. Treasuries. If they plunge in value, all hell breaks loose and officials from Beijing to Brasilia will scramble to exit the American bird cage.

The concept of such enclosures has great significance in feng shui. In the late 1960s, Macau tycoon Stanley Ho designed his Lisboa casino — featured in a James Bond film — to be a huge bird cage. The symbolism was obvious: We’ve got you and your cash trapped. China is looking like a big-money gambler who just knocked over a casino and can’t use the loot because it’s all in marked bills. If the mainland ever tried to spend down its Treasury holdings, the global financial system could collapse.

China’s central bank “faces the prospect of significant losses in its reserve portfolio if it were to disentangle itself from the trap through any precipitous actions to shift out of the dollar,” Prasad writes. And “the political fallout could be ugly if the Chinese public learned of the magnitude of these losses, which would be seen as a transfer of wealth to the U.S.” [..]

Although the Communist Party wields great power over the masses, it remains extraordinarily sensitive to spikes in public outrage. Those worries are increasing amid tepid global growth, as Chinese leaders struggle to keep their own economy expanding at more than 7%. As Prasad writes, “China now has a strong incentive to support the dollar’s value, limiting its losses for the time being but at the cost of getting even more entangled in the dollar’s sticky web.”

The Chinese central bank is stuck in a dangerous cycle. Every time it clamps down on credit to curb excessive lending, markets panic, interbank borrowing rates skyrocket and policy makers back off. At the same time, a minicrisis in emerging markets this year will greatly complicate President Xi Jinping’s efforts to restructure the economy away from exports and hyperinvestment.

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Britain has been setting itself up for a huge real estate bomb. And it will detonate. Short term views will do that for you.

UK House Asking Prices ‘At 6-Year High’ As London Soars (Independent)

The average asking price of a home in the capital has jumped over 10% to hit £541,313 in January. London saw a 11.2% year-on-year increase in average asking prices, while asking prices across the country saw their biggest year on year jump since 2007 in February, according to Rightmove. The property website said the average asking price across England and Wales has hit £251,964, 6.9 per cent higher than a year ago, thanks to demand from would-be buyers.

The increase marks the highest annual rate of growth since November 2007 and means that new sellers are now asking over £16,000 more for their home than those who came to market a year ago. On a month-on-month basis, asking prices were ramped up by 3.3% across the country, although Rightmove said that signs that more sellers are starting to coming to market could have a calming effect on prices in some areas the coming months.

Rightmove said there was a “welcome jump” in the number of properties coming to market this month. The number of new properties listed on the website has averaged 27,768 over the last four weeks, marking an 18% increase on the same period a year ago.

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I’d like to see Carney and Cameron resort to interest rate hikes to freeze housing. I’d love that. By then, the Chinese and Russian mobs will own London. And I do feel for the Londoners caught in the diaspora their government has started.

UK Interest Rate Rise ‘A Last Resort’ To Cool Housing Market (Telegraph)

The Bank of England will only use interest rate rises to cool the housing market if its financial stability toolkit is “not up to the job”, one of its policymakers has said. David Miles, an external member of the Monetary Policy Committee (MPC), said rate rises were a “big stick” that would only be used as a last resort.

“We do have, as the last line of defence, the blunt instrument, the big stick of interest rates,” he told Bloomberg TV. “If you did get into a situation where the tools that the Financial Policy Committee (FPC) have seem not up to the job of stopping overheating in the housing market, we would then turn to the blunter instrument of using bank rate. “We’re a long way from that.”

The Government handed the Bank of England sweeping powers last year to regulate lenders as well as monitor the financial system and prevent shocks. Last week, Mark Carney, the Bank’s Governor, severed the link between the unemployment rate and an interest rate hike. He said the Bank’s revamped forward guidance policy “highlighted a clear division of responsibilities between monetary and macro-prudential policy”, suggesting the FPC will do most of the heavy lifting to prevent house prices spiralling out of control.

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London, Vancouver, Sydney: they’re all resetting into Chinese funny zombie money standards. Getting what they deserve. Not the people, mind you, but the leadership. Then again, who’d picked them?

Wealthy Chinese buyers are making Sydney’s housing problem worse Guardian)

Every weekend in Sydney, young Australian couples are turning up at auctions excited at the prospect of finally owning their own home, only to find that other bidders are wealthy foreign buyers with money to burn.

Last year, median house prices in Sydney rose by a crazy 15%, in some suburbs by up to 27%. Cash pouring in from China is one of the principal drivers and this flood of unregulated investment, coupled with other factors driving up Sydney house prices, are slowly changing the city’s social fabric in a way that will be felt for generations to come. Couples planning families can no longer afford to buy in the suburbs where they grew up, where they have built friendship networks or where they work. Forced further and further west and south, they are progressively cut off from their old neighbourhoods.

Watching weekly auctions, one real estate agent from northern Sydney told the Australian Financial Review that some Australians were “sick of going to auctions and being outbid by Chinese buyers paying above the odds.” Anecdotally, the Herald recently reported an auction for a Chatswood apartment at which all 16 registered bidders were from China. At another auction in Eastwood, all 38 registered bidders were mostly Chinese, according to the estate agent John McGrath. The property sold for $1m above the reserve price.

Of course, the real estate agents aren’t complaining; in a booming market, they share in the spoils. Savvy agents are now travelling to China to talk up Sydney properties and advertise homes in Mandarin. Prominent agent Ray White has set up an office in Beijing, from where they boast they now “catch all the best fish”.

Juwai.com, the leading broker connecting Chinese buyers with overseas property, estimates that 63m Chinese are rich enough to buy property abroad. It claims that over the last three years, the number of Chinese buyers in Australia has grown nine-fold, faster than anywhere else. For wealthy Chinese looking for a safe haven, both for their money and for themselves, it is hard to go past Australia.

The impact of those buyers on Sydney property has only just begun. As the value of the dollar falls, foreign buyers will be paying less for Sydney real estate, and the Chinese government is relaxing restrictions on Chinese citizens wanting to buy overseas assets. Real estate agents report that Chinese buyers often buy several apartments in a new development as a family group. Joseph Ngo, an agent for LJ Hooker in Glen Waverly, said that paying $100,000 to $200,000 over the market price “is not a problem for these buyers”. The same is happening in

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Thailand has a long way to go before it returns to any kind of stability. The government has turned the main food crop, rice, into a Ponzi scheme. The bottom of that pyramid now starts to crumble, and the whole top is still to follow.

Run on Thai Bank Linked to Rice Subsidy Weighs on Economy (WSJ)

Depositors have withdrawn nearly $1 billion from a bank linked to a foundering rice-subsidy program, the bank said Monday, in one of the first signs that Thailand’s months-old political stalemate is starting to affect the economy. Adding to the pressure on Prime Minister Yingluck Shinawatra, a government agency Monday forecast economic growth rates would slow in the months to come because of the unrest. The prime minister has faced street protests since November calling on her to resign.

Woravit Chailimpamontri, chief executive at Government Savings Bank, said that depositors withdrew 30 billion baht, or $930 million, over the past three days after the bank extended a 5 billion-baht loan to a financial cooperative involved in a state-subsidy program. The cooperative, which buys rice from farmers at up to 50% above market prices, has been singled out by the antigovernment protesters as representative of the kind of damaging populist policies pursued by the prime minister to build rural support, which has translated into large parliamentary majorities.

As the withdrawals at Government Savings Bank worsened, Mr. Woravit said it wouldn’t extend any further loans to the Bank for Agriculture and Agricultural Cooperatives, which manages the rice subsidy program.
In recent weeks, the Yingluck administration has struggled to secure loans from commercial banks to pay the rice farmers, who are demanding payment for grain they already handed over to the government.

After dissolving parliament in December in a bid to ease tensions, Ms. Yingluck now governs in a caretaker capacity without any power to make major spending decisions. Protests and blockades of voting centers prevented Ms. Yingluck from forming a new government after national elections on Feb. 2, and a fresh round to complete the ballot isn’t set until April. The political pressure on Ms. Yingluck continues despite government efforts to clear protesters from some sites in the capital.

Protest leader Suthep Thaugsuban, a former deputy premier, on Monday urged his supporters to continue a blockade at the main government office in downtown Bangkok. “Yingluck Shinawatra will not have a chance to return to work at the Government House, in this life or next,” Mr. Suthep said. His supporters set up concrete barriers in front of some of the gates and sealed them with cement in their latest bid to force Ms. Yingluck to step down.

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The future of Europe. Scary for a lot of European countries.

Bosnia presents a terrifying picture of Europe’s future (Guardian)

Exactly 30 years after the Olympic flame was lit in Sarajevo in 1984, the city was in again in flames. In recent weeks, protesters have stormed government buildings in an explosion of anger over their social situation, rampant poverty, moribund economy, and the stagnant social and political life. When the flame was lit back in 1984 I was seven and lived just across from the Olympic stadium. We could not sleep for two weeks, the flame was that powerful. But, we were at the same time very happy: it was a flame of prosperity, peace and endless possibilities.

Back then Sarajevo was projecting an image of what the European Union wanted its members to become: prosperous, diverse and secular with functioning industries, social equality, enviable social mobility and consistent growth. The European Union, as we now know, has failed to live up to that ambition.

There is another scene from the past too. Ten years after the Olympics, Sarajevo was in ruins, the exact image of what Europe thought it had left behind: a besieged and destroyed city, the victim of resurgent nationalism and sectarianism, Bosnia’s landscape dotted with concentration camps and mass graves. Europe watched without doing anything, as if the image it believed to have left for ever in its past was too mesmerising.

And now again, Sarajevo and Bosnia are holding up a mirror to Europe, to its present and to its future. Bosnian cities resemble London in the summer of 2011 and the suburbs of Paris in 2005: an explosion of anger and the anarchic destruction of all symbols of political, social and economic power. Almost 20 years after the Dayton peace agreement, it seems as if local elites and international players have both reached a consensus only on one point: how to rapidly restore capitalism in the country. Yet it is mass privatisation that has led to almost total de-industrialisation and the dependence on imported goods and services financed by the debt slavery of citizens and their weak state.

The result is that ethno-nationalist elites, greatly responsible for war, were rewarded in peace not only by ethnic partition, but also with all the wealth of the territories they control. This was the elite that the international community and the EU, through their marginal politicians sent as “high representatives”, treated as their main partners. Citizens were to be kept at bay.

But there is one big difference with the riots seen in other European cities, and this is where Bosnia speaks directly to Europe’s current predicament: this is not a rebellion of discriminated and ghettoised groups, territorially contained on the outskirts of big cities. It is a rebellion of the whole population that has been subjected to economic impoverishment, social devastation and political destitution. In this, Bosnia is an image of Europe’s future: ungovernable populations, exhausted by austerity measures and left to their own devices after the collapse of remnants of the welfare state – a state with no prospect for growth, run by elites of dubious, if any legitimacy who deploy heavily armed police to protect themselves against ordinary citizens.

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This is also the future of Europe: the failed EU set-up will give birth to age old nationalist sentiments. There’s nothing wrong with nationalism in itself, but force out the dark side of it and you have trouble with a capital T. The EU was means to prevent this, but does the same as all the other decrees through history that all led to the same outcome. Megalomania, I know your face when I see it.

The Swiss Virus: Europe Gripped by Immigration Worries (Spiegel)

Switzerland, of course, is not a member of the European Union, but it is closely bound to the bloc by a number of bilateral pacts. The fact that one of the most prosperous countries in the world is seeking to distance itself from the union shows just how great the resentment has become — and it shows what might be in store for Brussels in the not-too-distant future. German Finance Minister Wolfgang Schäuble, European Parliament President Martin Schulz and European Commission President José Manuel Barroso were quick to emphasize that the right to free movement within the bloc was not up for debate. But they also said that they respect the voters’ desires as expressed in the Swiss referendum.

One reason for the mostly cautious reactions from European politicians is that it remains unclear exactly what the concrete results of the referendum will look like; Bern must first determine how high the quotas for immigrants from the EU will be. But more importantly, European politicians are clearly wary of fueling the debate. Few, after all, can be certain that citizens in their own country wouldn’t have voted the same way, given the opportunity.

Indeed, it wasn’t just right-wing populist politicians — such as Heinz-Christian Strache from the FPÖ in Austria, Geert Wilders from Holland or Marine Le Pen from the Front National in France — who rushed to congratulate the Swiss and demand immigration quotas for their own countries. Even politicians with reputations as moderates, such as former French Prime Minister François Fillon, likewise demanded quotas. In Germany, a survey found that 48% would support a similar policy.

In particular, however, Brussels is concerned that the Swiss virus could infect Great Britain. Hate for the EU there is so great that a conservative politician even blamed Brussels indirectly for the recent flooding in the country. Many in Britain are delighted by the result of the Swiss referendum — and no one is as vocal about it as Nigel Farage. “Fantastic,” he yells into the telephone. Farage is head of the UKIP party, which favors Britain’s withdrawal from the EU and is currently polling at 20% in pre-election surveys. “The result of the referendum is very encouraging,” he says. “Finally, common sense is winning out.”

British Prime Minister David Cameron, facing the prospect of a strong UKIP, has himself demanded that some EU treaties be renegotiated in Brussels. He would also like to see immigration quotas like those approved by the Swiss, but his demands have thus far not been met. Last week, Cameron’s spokesman said that the referendum reflects a “growing concern” when it comes to freedom of movement within the EU. For Britain, Switzerland is a test to see how susceptible the EU is to coercion.

Read more …

Oh, it’s all going so great in Spain, recovery is here! Yeah, right. Don’t live in the cloud.

Spain’s 2013 public debt highest in 100 years (RT)

Spain’s public debt is on its way to surpass total annual economic output, as it reached 93.7% of the country’s GDP in 2013. It stood at $1.317 trillion, which is three times as much as at the start of the crisis in 2008. The historical series compiled by the IMF shows that a bigger debt to GDP ratio was fixed about a century ago, at about 123%, El Pais newspaper says.

Initially the government planned to cap the debt at 90.5%. But subsequently the figure was raised to 94.2%, driven by unemployment benefits to the increasing number of jobless and a $56 billion (41 billion euro) European bailout to clean up the banking system. In the fourth quarter of last year Spain’s GDP grew the fastest in six years, while unemployment remained a huge drag on the recovery, as a 26% jobless rate in 3Q 2013 was still the second highest in Europe after Greece.

In the third quarter of 2013 the Spanish economy officially exited from a six-year-long recession, while the debt to GDP ratio hit 93.4% during the period, according to the European key statistics service Eurostat. To compare, in 2007, just ahead of the crisis, Spanish debt was equivalent to 36% of GDP, which was about half the average in Europe. Although the Spanish government aims to stabilize the debt at 100% of GDP in 2016, the latest figures show that the debt could become equal to economic output in 2015.

Read more …

Different reports come out of Greece. The government says things are great, the troika says they’re terrible. You choose.

Merkel ‘vetoes quick aid’ for Greece (AFP)

German Chancellor Angela Merkel has blocked a bid by her powerful finance minister to offer fresh aid to Greece ahead of European elections in May, Der Spiegel magazine reported on Sunday. Finance Minister Wolfgang Schaeuble had wanted to give the ailing Greek government a “demonstration of solidarity” by committing this spring to further support from Europe after the May 25 poll.

“He sees the danger that without the prospect of further aid, radical parties in Greece could make big gains in the election,” leading the government in Athens to collapse, the magazine reported. However, it said Merkel’s own domestic political concerns led her to veto the move over fears that the euroskeptic Alternative for Germany (AfD) could benefit from a fresh debate about aid for Greece.

The AfD, which wants to abandon the euro and return to the deutschmark, was formed last year and failed to win any seats in September’s general election. But it scored 7% in a recent poll, far above the 3% hurdle for seats in the European Parliament.

The Eurogroup of eurozone finance ministers, where Schaeuble represents Europe’s biggest economy, decided in November that Greece could apply for help in reducing its massive debt if it achieves a primary budget surplus. Prime Minister Antonis Samaras said Sunday that Greece had registered a surplus of more than €1.5 billion euros ($2.05 billion), exceeding requirements for additional debt aid.

Read more …

The IMF floats another bail-in trial balloon. Having money in European banks becomes riskier in small steps.

A Disruptive Proposal by the IMF (Bloomberg)

Hoping to learn from what it sees as its missteps in handling the Greek bailout and other recent crises, the International Monetary Fund is quietly wading into one of the most sensitive issues in international finance: How to balance political, economic and financial considerations when a country might not be able to pay back its debts.

Specifically, some at the IMF are suggesting that, as a precondition for financial assistance, countries would be required to force private creditors to accept losses when the borrowing country’s debt sustainability is uncertain and market access has been lost. The fund will act as the lender of last resort only if the private sector shares the pain. However well-intentioned, such a policy shift would probably disrupt markets, increase episodes of default, raise borrowing costs and discourage countries from seeking the IMF’s help when they most need it.

The IMF argues that countries sometimes wait too long to seek its assistance, increasing the amount of money required for a bailout and allowing some private investors to cash out their holdings at public expense. The IMF’s first Greek rescue program, for example, allowed investors, including German and French banks, to be paid in full, thus avoiding responsibility for their poor lending decisions. The IMF justified this decision by citing the risk of a systemic meltdown.

To better protect its resources in the next crisis, the IMF is considering abandoning this systemic exception and establishing more rigid rules for the model it uses to assess a country’s ability to repay its debt. Under the system being considered, the IMF would establish thresholds for debt sustainability, and if a country breaches those limits, it would be judged on its perceived sustainability and ability to access markets. If both sustainability and market access are found wanting, there would be a presumption of limited costs imposed on creditors, forcing the country to temporarily delay repayments to its bondholders in exchange for IMF support.

Read more …

My main man James. He needs no introduction here.

Forward Guidance (Jim Kunstler)

Lo, the taper is still on under Wizard Yellen, for the simple reason that if she backed out of it now, before she officially chaired her first meeting of the Fed governors, her outfit would lose whatever shreds of credibility it still hangs onto. Even with the taper on, it is for now still pumping over half a trillion dollars a year into the banking system. There is some reason to think that it made the markets puke two weeks ago.

But then a really bad employment number came out, and in the inverse climate of bad-news-being-good-news for bubble markets, that was construed as a sure sign that the Fed might have to un-taper sometime around late spring with Yellen’s chairpersonship fully established. I suspect they’ll do something else: they’ll continue to taper down purchases of treasuries and mortgage detritus via the direct TBTF bank channel and they’ll establish a new “back door” for shoveling money into the system.

Nobody knows what this is yet, and it may be some time even after it starts that the mechanism is discovered. In the meantime, the seeming placidity of the renewed “risk on” mood should be a warning to market cheerleaders. Something’s got to give and I think it will be the US dollar index, which has been in Zombieland since November. The world has never been so ready for a change in direction. Expect no real guidance from your leaders.

Read more …

China will end up needing to spend 100 times $330 billion to clean its water, and bankrupt itself trying.

China to spend $330 billion to fight water pollution (Reuters)

China plans to spend 2 trillion yuan, or $330 billion, on an action plan to tackle pollution of its scarce water resources, state media said on Tuesday. China has a fifth of the world’s population but just 7% of its water resources, and the situation is especially precarious in its parched north, where some regions have less water per capita than the Middle East.

The plan is still being finalised but the budget has been set, exceeding the 1.7 trillion yuan ($277 billion) China plans to spend battling its more-publicised air pollution crisis, the China Securities Journal reported, citing the Ministry of Environmental Protection.

It will aim to improve the quality of China’s water by 30 to 50%, the paper said, through investments in technologies such as waste water treatment, recycling and membrane technology. The paper did not say how the funds would be raised, when the plan would take effect, or what timeframe was visualised, however.

Groundwater resources are heavily polluted, threatening access to drinking water, Environment Minister Zhai Qing told a news conference in the capital, Beijing, last week. According to government data, a 2012 survey of 5,000 groundwater check points found 57.3% of samples to be heavily polluted. China emits around 24 million tonnes of COD, or chemical oxygen demand, a measure of organic matter in waste water, and 2.45 million tonnes of ammonia nitrogen, into its water each year, Zhai said.

Over the next five years, China has previously estimated it will need to spend a total of 60 billion yuan to set up sludge treatment facilities, and a further 10 billion yuan for annual operation, the environment ministry says. China is short on water to begin with but its water problems are made worse by its reliance on coal – which uses massive amounts of water to suppress dust and clean the fuel before it is burnt – to generate nearly 70% of its electricity while self-sufficiency in food remains a key political priority.

Read more …

Time to move to the hills?

Arctic getting darker, Earth warmer (AP)

The Arctic isn’t nearly as bright and white as it used to be because of more ice melting in the ocean, and that’s turning out to be a global problem, a new study says. With more dark, open water in the summer, less of the sun’s heat is reflected back into space. So the entire Earth is absorbing more heat than expected, according to a study published on Monday in the Proceedings of the National Academy of Sciences.

That extra absorbed energy is so big that it measures about one-quarter of the entire heat-trapping effect of carbon dioxide, said the study’s lead author, Ian Eisenman, a climate scientist at the Scripps Institution of Oceanography in California. The Arctic grew eight per cent darker between 1979 and 2011, Eisenman found, measuring how much sunlight is reflected back into space. “Basically, it means more warming,” Eisenman said in an interview.

The North Pole region is an ocean that mostly is crusted at the top with ice that shrinks in the summer and grows back in the autumn. At its peak melt in September, the ice has shrunk on average by nearly 35,000 square miles (90,650 sq kilometres) – about the size of the US state of Maine – per year since 1979.

Read more …

This article addresses just one of the many issues discussed in Nicole Foss’ new video presentation, Facing the Future, co-presented with Laurence Boomert and available from the Automatic Earth Store. Get your copy now, be much better prepared for 2014, and support The Automatic Earth in the process!

Home Forums Debt Rattle Feb 18 2014: The Best And Brightest Among Us Are Not

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    Fenno Jacobs for OWI “Southington, Conn. Monty’s Diner” May 1942 When I see things like today’s Bloomberg headline “Currency Traders Facing Extinction
    [See the full post at: Debt Rattle Feb 18 2014: The Best And Brightest Among Us Are Not]


    First, apologies to ted and Professor L&L, whose IPs were both rejected by our spam detection systems. I have no idea why. It’s an aggressive bunch, and g-d knows we need that (43699 Cached Bad IPs. all good for maybe a thousand attempts), the attacks remain insane, but throwing out regular commenters seems weird. The system now says for both “Cached Bad IP”, but only after accepting registration and tons of comments from that same IP for months.

    I whitelisted their IPs, it should be fine now. If this happens to anyone else, plaese notify me at contact •at• theautomaticearth •dot• com


    I’m in.

    I believe that the structures of a stable system exist. It will need improvement.

    The powerful and wealthy people will spend “their” money on what they want.
If they want a good road that’s where they will spend their money.
If they want a windmill then they will get it.
If they don’t want to see starving people then they will need to do something about it.

    There are not enough lifeboats ….. 

      We Can Be Certain of This   (February 15, 2014)
    Our job is to describe and discuss another arrangement, a sustainable, non-addictive one that isn’t doomed to collapse from the start, so all those currently clinging to the path of self-destruction will have an alternative when the Status Quo comes apart and the smack they “need” to continue living is no longer available, or no longer available in sufficient quantity or quality.

    For thousands of years, there existed an imperfect system.
    It would distribute surpluses from those that produce more than what they needed to those that could not produce enough for their needs.

    Here is my definition of wealthy.

    The wealthiest and most powerful person is the one that does not need to use any energy to replace his/her energy expenditure.


    Thanks Ilargi, guess I’m alive again.

    Interesting take on the usefulness of currency traders. My take is they serve a useful function as market makers, That said, probably the last price discovery task they will perform at the end of this sad joke will be the one that marks the dollar to real value,,,zero.

    Back in the day, finance served market systems. It was directly answerable to those who used it’s services. Today, under government protection from failure, it has become parasitical.

    Creative destruction is prevented from doing it’s work now. The efficiencies of Free Market Capitalism are long behind us at this point. All frivolous consumption is now sanctioned and subsidized by Central Planners. Planners who have no concept of self sufficiency or conservation, EROEI etc. as they have never had to provide for their own livelihoods.

    All they seem to “know” is, when they want more of anything, just subsidize it. After all, un-backed currency is now free to them. Never mind every new IOU they create displaces value and efficiency and consumes more real resources.

    I’m still not in the deflation camp because I see this ending in a Soviet style command system, where deflation, even if it took place, would never be allowed to be discovered. Really, how many bouts of deflation occurred under Soviet rule or Maoist rule, for that matter?

    Again, deflations are the stuff of honest money, and there is little that is honest about fascism (what most socialist experiments seem to morph into) and it’s monetary systems.

    The process I see, after being well shaken down by TSA these past few days of air travel is, an offer of, “Hand over your Democracy, and in turn we’ll provide for all your needs.” Nothing new under the sun?

    Even though there was deflation during the Great Depression, because the dollar had the backing of gold and silver, it was still devalued against those metals. Today, there is no such repricing mechanism.

    Deflation won’t take place until after the currency of the realm, or the realm itself, collapses. (See first paragraph of this comment.)


    You are not a deflationist because you are holding a lot of precious metals….ie…Gold….and you have an emotional attachment to the situation at hand. Ted


    Hi Ilargi-

    My first post here. Just wanted to thank you and Nicole for everything you do. It must be very difficult at times to continue. Just ordered the videos in the hopes of convincing a few people around me to at least consider that the next twenty years are going to be very different than the last twenty.
    Any chance of Nicole coming to the maritime region of Canada in the future? There is still much social cohesion here in the rural areas and while I know it will not be a walk in the park, I think there is a least a shot at making some sort of future people can find peace with.


    Hey caper, welcome. Thanks for your order. What I find hard at times is the continuing nonsense and illusions that reign the day. I think it would be much more helpful for us all to face up to our losses. Nicole won’t be in the maritimes in the near future, but perhaps later. And no, that”s not the worst part of the world to be when the whip comes down.


    Here is something to make you realize that the messages are getting out.

    The following link is from an online newsletter for expats in Costa Rica that give the same advise as TAE to their reader who want to prepare for the changing future.

    In case that link does not work, its page 22-25 of the may/june 2013 issue of El Residente at

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