Jan 182015
 January 18, 2015  Posted by at 11:53 pm Finance Tagged with: , , , , , , ,

DPC Longacre Square, soon to be Times Square 1904

I’ve said before, and quite a while ago too, – more than once-, that the world of investing as we’ve come to know it is over. It’s still as true as it was then, and I can only hope that more people today understand why it is true, and why I said it in the past. The basic underlying argument then and now is that financial markets have been distorted to such an extent by the activities, the interventions, of central banks – and governments -, that they can no longer function, period.

What we’ve seen since 2008 – not that things were fine and rosy before that – is that all ‘private’ losses were taken over by the public sector, just so the private sector didn’t have to fess up to what it lost, and the appearance of a functioning market system could be upheld. And those who organized this charade were dead on in thinking that as long as Dow and S&P numbers would look good, and they said ‘recovery’ in the media often enough, people would believe there still was a functioning financial marketplace. And they did. But those days are over. Or at least, they soon will be.

What I mean by that is that the functioning marketplace is long gone, and only now people’s beliefs, too, about it are changing, being forced to change, and soon quite radically. The entire idea that ruled the world of finance and kept it -seemingly – standing upright is crumbling fast. And we’re going to have to find a way to deal with that. As of today, we have none, we come up zero. The overriding narrative – which overrides every other thought – is that we’re on our way back to recovery. And then we’ll get back to becoming ever richer, live in ever bigger homes and drive ever bigger, smarter and faster cars. Or something in that vein.

The downfall of finance can be traced back to all sorts of points in history. Think Nixon the gold standard in 1971, for example. But the repeal of Glass-Steagall in 1998, under Bill Clinton, is undoubtedly one of the major ones. Once deposit-taking banks were -again – allowed to use those deposits to ‘invest’ – read: gamble with -, it was only a matter of time before the train went off the tracks in spectacular fashion.

It now seems to stupid to be true, but Alan Greenspan, Bob Rubin and Larry Summers, the guys who had pushed so hard for the repeal – and got it -, were once featured on the cover of TIME as The Men Who Saved The World. While what they did was the exact opposite: they threw the world into a financial abyss. It took a while, sure, but then, 16-17 years is not all that long. Plus, it took just 2 years for the dotcom bubble to burst, and 6-7 more for Bear Stearns, AIG and Lehman to be whack-a-moled.

The rest would have followed, but then the central banks stepped in. And now, 6 years and $50 trillion later, their omnipotence is being exposed as impotence. Which means there’s nothing left to keep up appearances. We’ll all have to leave the theater of dreams and step out into the blinding cold faint light of another morning. No choice. And we’ll figure out at some point that we’ve paid all we had just to watch the show.

No. 1) The Swiss National Bank this week threw in the towel, bankrupted a lot of foreign exchange brokers and investors and destroyed a few hundred thousand Swiss jobs in the process. And that was not the first sign that the game was up, the oil price collapse started it. Or, to be precise, made the collapse visible for the first time to most – even if they didn’t recognize it for what it was-. Central banks are pushing on a string, a concept long predicted: they have become powerless to stop financial markets events from taking their natural course of boom and bust.

No. 2) The Bank of Japan. From Asian Nikkei:

Japan’s Central Bankers Mull Diminishing Returns From Bond Buying

Some in the Bank of Japan are growing anxious about continuing its massive purchases of government bonds, confronted with the program’s negative side effects. [..] The BOJ’s buying of huge amounts of Japanese government bonds has pushed long-term interest rates to unprecedented lows. This has made it impossible for insurance companies to generate sufficient returns on JGB investments to pay benefits to policyholders.

The longer ultralow interest rates continue, the more likely other insurers are to take similar steps. Household finances would suffer. Money reserve funds, used for parking individual stock investors’ unused funds, are another financial product hit by ultralow interest rates. MRFs put money into short-term government bonds and other safe investments. Generating positive returns on the bonds is becoming nearly a lost cause [..]

The BOJ has discussed these costs at its policy board. When the board took up additional easing measures in a late-October meeting, some members raised the specter of hurting earnings at financial institutions and giving the impression that the bond-purchasing program is actually a scheme to enable deficit spending. The board decided to step up the program anyway, judging the benefits to outweigh the costs.

“Since nominal interest rates are already at historically low levels, the marginal impact of more easing aimed at putting upward pressure on consumer prices is not strong,” policy board member Takehiro Sato said in a speech last month, explaining why he opposed additional easing in October. “We have caused tremendous trouble for the financial industry,” a BOJ official says. “I hope we will be able to scale back monetary easing soon by achieving the price stability target as projected.”

All the BOJ can do by now, all that’s left to do, is get out of the way. As it should have done right off the bat, before it started intervening 20 years ago. All central banks should have gotten, and stayed, out of the way. Butt out. They have no role to play in financial markets, and should never have been allowed to assume one. They can only do harm. Free markets may not be ideal, but central bank intervention is a certified lot worse.

No. 3) The Fed:

Yellen Signals She Won’t Babysit Markets in Turmoil

Janet Yellen is leaving the Greenspan “put” behind as she charts the first interest-rate increase since 2006 amid growing financial-market volatility. The Federal Reserve chair has signaled she wants to place the economic outlook at the center of policy making, while looking past short-term market fluctuations. To succeed, she must wean investors from the notion, which gained currency under predecessor Alan Greenspan, that the Fed will bail them out if their bets go bad – just as a put option protects against a drop in stock prices.

“The succession of Fed puts over the years has led to a wide range of distortions in financial markets ,” said Lawrence Goodman, president of the Center for Financial Stability. “There have been swollen asset values followed by sharp declines. This is a very good time for the Fed to move away.”

“Let me be clear, there is no Fed equity market put,” William C. Dudley, president of the New York Fed, the central bank’s watchdog on financial markets, said in a Dec. 1 speech in New York. “Because financial-market conditions affect economic activity only slowly over time, this suggests that we should look through short-term volatility.”

The concept of a Fed put took hold under Greenspan, who in 1998 cut the benchmark federal funds rate three times in response to market stress arising from a Russian bond default and the failure of hedge fund Long-Term Capital Management. The economy expanded 5% that year and 4.7% in 1999, and critics say the rate cuts helped extend a bubble in technology stocks. The Nasdaq rose 40% in 1998 and 86% in 1999 before plunging almost 40% in 2000. Greenspan said in an interview that he regarded the notion of a Fed put as a “joke.”

Bernanke told Fed officials in an Aug. 16, 2007, conference call as they prepared to cut the discount rate, according to transcripts. Bernanke recommended resisting a cut in the fed funds rate “until it is really very clear from economic data and other information that it is needed. I’d really prefer to avoid giving any impression of a bailout or a put, if we can.”

“The put is there – it is just further out of the money,” said Michael Gapen, chief U.S. economist at Barclays. As the central bank raises rates, “there could be more volatility and the Fed could be OK with it.”

No. 4) The ECB. Which is supposed to come with a $1 trillion or so QE package this week. Which has long been priced in by the markets and will have no other effect than to bring down the euro further. QE everywhere is always only a game that shifts wealth from the public to the private sector, which is another way of saying from the poor to the rich. But then you end up with the poor getting so much poorer, you don’t have a functioning real economy anymore, and therefore no functioning financial markets either.

The problem today is not one of lending, but of borrowing. Banks, even if they would want to, cannot lend to people too poor to borrow. Or spend, for that matter. And if people in the real economy, which accounts for 60-70% of GDP in developed nations, don’t spend, because they simply either don’t have the money or have no expectations of getting any, deflation sets in and central bankers are revealed as the impotent old farts they are.

But that will by no means conclude the story. The effects of the ill-fated megalomaniac central bank policies will reverberate through our societies for decades, if only because $50 trillion is a lot of money. Much of it may have gone somewhere, in some zero sum game, but most of it just went up in the thin air of wagers like the ones the forex trade is made of. People keep asking where did the money go, well, nowhere, or rather it went back to the virtual state it came from.

The difference between the past 6 years and today is that central banks can and will no longer prop up the illusionary world of finance. And that will cause an earthquake, a tsunami and a meteorite hit all in one. If oil can go down the way it has, and copper too, and iron ore, then so can stocks, and your pensions, and everything else.

Perhaps Yellen et al are not all that crazy for cutting QE, and soon raising interest rates. Perhaps that’s the only sane thing left to do, as sane as the Swiss cutting their euro-peg. That doesn’t mean the Fed understands what’s going to happen to the US economy because of it, but it may just mean they have an inkling of the lack of alternatives.

Japan is gone, it’s borrowed itself into oblivion. China’s ‘miracle’ was debt-financed to a much larger degree than anyone wishes to admit. Europe will end up seeing its union falling apart, because it could only ever be held up in times of plenty, and those times are gone. And the US won’t make it too long either on people making a ‘living’ flipping their neighbor’s burgers.

But the central bank bills will still come due all over. That’s the bummer about deflation: your wealth evaporates, but your debt does not.

Home Forums The End Of The World Of Finance As We Know It

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    DPC Longacre Square, soon to be Times Square 1904 I’ve said before, and quite a while ago too, – more than once-, that the world of investing as we’ve
    [See the full post at: The End Of The World Of Finance As We Know It]



    Your last sentence could easily be my Dad warning me about another Great Depression. He always told the story of his mother, a thrifty widow, who had savings accounts in 3 banks and a small note in another. She, of course, lost all her savings but still owed the note when the banks closed up. No more banks for her for the rest of her life.
    Your writing is a clear warning to every reader that TPTB could care less if you live or die. It’s up to each individual to look out for themselves-and you better get right on that.


    The lesson from the oil crash and the SNB surprise is that leverage will kill the system. Stability (as evidenced by years of a very low VIX) in a low growth environment is what encourages increased leverage. And increased leverage works until there is an unexpected downside surpise. We have now had two surprises in relatively rapid succession. The house of cards is tottering.


    I agree with everything said here, but wish to know what this financial system failure will mean on the ground for ordinary people? No more loans, then no more banks? So no more global trade and no more big economic players like drillers or miners, or retailers or manufacturers since everything runs on credit? I’ve always wondered why these rich corporations don’t conduct business using their own cash, their retained earnings, instead of borrowing? They’d rather gamble with their cash in paper instruments? And pay interest on money to expand their own business model? Tax incentives?

    If money can and has disappeared into its previous virtual state, and become erased from balance sheets, surely debt can do the same. You can’t get blood out of a stone. If deflation such as you predict hits, debt cannot survive either. Collateral becomes worth way less than before, and if repossessed will find no buyers at any price, with no credit available. No. I disagree with the the idea that money can go but debt always stays. If the financial institutions go belly up, who is keeping track of this (already unpayable even without deflation) debt anymore?


    I was thinking the other day about how differently the ideal economy is viewed from topdown vs bottomup perspectives. A financial economy is certainly prefered in a topdown mode. Markets of markets, a primary focus on protection of the largest financial interests, anything else would just be noise. But that has to be built from a bottomup economy, innovation in the production of day to day needs of the populace. Farming, mining, manufacturing, infrastructure, a primary focus on trying to enable the greater good.

    Looks like the great split, capital vs labor, ying v yang, etc.. resolution doubtful


    Money = debt, so money cannot disappear and debt remain. But wealth is not just money. Actually wealth is not money at all. Wealth disappearing while debt remains, that’s what happened when house prices collapsed. The value of the asset declined, but the mortgage debt doesn’t change. As banks fold, their assets get sold cheaply to the remaining banks. Money gets concentrated into fewer and fewer hands. Plus a fixed amount of money controls a larger amount of wealth. So the concentration of wealth is doubly amplified.

    Of course money is just paper and debt is just paper, but then all property ownership is just paper. If all the paper is just shredded, that is the end of the rule of law. Which, after all, is a normal phase in the general trajectory of such things.


    daisychain, regarding your first point, some corporations do fund their operations out of their own capital. For those that don’t, many of the times it’s by design. The design is to strip everything of value out of the company and load the company under a mountain of debt. If the company does well, the company distributes the profits to the shareholders. If not, let the company’s creditors pick over the carcass.

    Regarding your second point, “Collateral becomes worth way less than before, and if repossessed will find no buyers at any price” — yes, that’s theoretically how it’s supposed to work in deflation (and that is what Ilargi is predicting if I understand him properly). However, I think there’s 0% chance that the authorities will allow deflation to run its full course all the way down the spiral. Instead, they will do exactly what they did in 2008. They will save the debt, save the big banks, save the system, at all costs. They Fed will buy up all of that bad debt and socialize it. They will support collateral prices in nominal terms even if they destroy the currency in the process. We will never, ever, ever see the day when things ground down to the point that respossed items cannot find buyers at any price. The Fed will buy everything, and when the political pressure is high enough, the government will have no choice but to write off and forgive much of that debt.

    Mike Twain

    In the panic of 1893 (https://en.wikipedia.org/wiki/Panic_of_1893) followed by the crash of 1894 the country and world went through many of the same problems we are experiencing today. Luckily, JP Morgan and The Rothschild family were able to step in and save the US government (at great lucrative profits for themselves). Later it was found that the large banks had conspired to raise rates and when debtors couldn’t repay the loans to foreclose. In this way they managed to acquire vast amounts of property and business for small amounts. The plan worked well then and it is right on track to work well now. When the smoke clears they should own almost every oil field in North America. By the way, Goldman Sachs was in fine form over 100 years ago also. When the debt defaults the money supply contracts rapidly. Only the Federal Reserve Notes that are in your possession will be accepted as legal tender.


    Twain has expressed the societal asset stripping process in play right now quite well.

    This is the same old debt bubble/bust cycle that has been played on unwitting societies with unwitting or bought off intelligentsias for hundreds of years – and the process has been refined to a science, exactly as Charles Lindbergh, Sr. made clear, oh, just about 100 years ago…

    “Under the Federal Reserve Act, panics are scientifically created. The present panic is the first scientific one, worked out as we figure a mathematical equation.” (Congressman Charles A. Lindbergh, The Economic Pinch, 1921.)

    He was right, but the one thing we learn from history is that (common) people learn… nothing, or at least very little, from history, hence, we fall for this crap every single time even though it is so obvious.

    I have news for everyone, the debt collapse is part of the program like the ball coming down (depression) is part of the throwing the ball up (debt bubble) process.

    In fact, the debt bust is CRITICAL to the agenda. It was in the Great Depression, it was in the early 1920s, it was every time before that, too!

    The bust is when the debt money generated from fiat turns into a “better than alchemy” mechanism where the debts generated from nothing TURN INTO OWNERSHIP AND CONTROL FOR THE DEBT MONEY MONOPOLY CORPORATE CARTEL.

    The bust is being orchestrated to transfer the physical assets of society to the oligarch corporate fronts.

    The surveillance and police state are being set, right on time, to deal with people who FINALLY realized they will lose everything they worked their lives to obtain – and then some… en masse.

    Ms. Foss knows this quite well… she opines in “A Tribute to the Automatic Earth” youtube video, “why should the bankers get it all?”

    Indeed. They don’t “get it all” until they bust the leveraged out of their assets, hence, the bust is exactly what the Central Bank has engineered on behalf of the Debt Money Monopoly – the same people who own and control the money center banks and the multi-national corporations. These are the same people who have collecting interest on most of the world’s money supply via the monopoly power of money given to them by their quisling politicians.

    Oh, no, don’t expect Ron Paul or Rockefeller funded Mises to point this out – they won’t. They want you to think the politicians are just stoopit or “academic,” which is exactly what the Debt Money Monopolists want the “in the know” people to think.

    No, they are cold blooded criminals waging Sun Tzu Art of War on the monetary witless.


    I think you don’t quite understand…history does not repeat it rhymes ….this fall will not be identical to the great depression…there is a lot less oil and a lot more people, if the system falls it will be hard for the PTB to hold on….I know that privately they think they can but I don’t believe they can .There is just too much debt in the system…A great depression would be nice but I think unfortunately it is worse…………. that this is just not 1929……..


    Triumvium, I generally share your deep aversion to the banks, especially the biggest banks, but I am not so sure about this part: “The bust is being orchestrated to transfer the physical assets of society to the oligarch corporate fronts.” I recall that during the 2008 crisis, the big banks pretty much did the opposite. They were in no hurry to move the foreclosure process along. They had no interest in taking title because they were not set up to take care of the vacant properties and there were not enough buyers to show up at the foreclosure sales because credit had dried up. The banks would much much much rather be paid 100 cents on the dollar from the Fed on all those bad loans than to deal with the mess. They don’t want your house. They really don’t.

    The distinction is important, because in the end the big banks will get what they want. That’s the key lesson from history. Think like a TBTF bank! You have two choices: Behind Door No. 1 50% of the people are defaulting on their mortgages, car loans, small business loans, whatever. Do you think any bank is really set up for this? Sure in theory they can make your life miserable and turn you into a debt slave, but can they do that with you and 50% of your neighbors simultaneously? Who is going to buy at all those foreclosure sales? Behind Door No. 2 the Fed says “No worries, just turn all of those bad loans over to me, I will pay you full value, and then you don’t have to worry about it anymore.” If you are a bank, which alternative is most attractive?

    Now once the Fed buys all of that debt, in theory they can resell it. But who will be the buyers? And what happens when 50%+ of mortgages are in default? That’s when populist politics will finally influence policy, and the people will welcome hyperinflation with open arms as a better alternative to the deflationary spiral. Hyperinflation resets the system. The deflationary spiral just makes things worse and worse and worse. Pressure builds. Extremist political partys rise. Bad news all around. Hyperinflation solves all the problems after 6 months of chaos.


    There can be no logical consequence but phantasmagorical convolution of what passes off as ‘prices’, when governments, banks and monopoly-industrialists interject credit-scrip in trainloads of trillions, supplanting real money of copper, silver and gold which rather value the entire matrix of goods within rationally inter-related supply-demand signals.

    Whether we may individually find true, naturally optimized prices derived from the metallic monetary scheme as ‘good’ or ‘bad’, ought to be dismissed ‘hands-down’, This is because it’s a condition we can dependably plan our entire lives by.

    In reality, then, ‘the end of the world of finance as we know it’ actually happened in the mid-1960s, when (after removing gold) silver was taken from circulation, completely shifting to this current insane paper paradigm.



    No. I disagree with the idea that money can go but debt always stays.

    I was talking about your debt, not debt in an abstract sense.

    If the financial institutions go belly up, who is keeping track of this debt anymore?

    Debt collectors. They”ll make sure you go belly up before the banks do.

    V. Arnold

    ^ Ilargi;
    That is spot on as evidenced in the U.S.
    There is no escaping the debt collectors; they are the new vampires, sucking the life out all who incur debt they cannot pay…
    And the bloody, bought, justice system supports these vermin…


    The Swiss Nat. Bank destroyed a “few hundred thousand jobs” – absurd. A strong currency is good for a nation.


    But there are so many people who have loads of debt. When this system crashes, how can there be enough debt collectors to go after all those people? And who would companies hire to collect bad debtors if so many people can’t pay their loans?

    Dr. Diablo

    Buy off experts, governments, whoever and create an artificial rigging mechanism. Drop rates artificially. False rates that inevitably lead to population taking on unsafe debt. Answer above, why do they do it? Because if you don’t take on debt-to-grow, your competitors will and run you over or buy you. This leads to no sound, wise actors remaining, they have been impoverished and discredited, leaving the reckless fools you want and are easy to cow and manipulate. Then, no need to hurry: soak up the inflation wealth-transfer for 30-40 years, rake in artificial sales of your product called “debt”, and wait for the inevitable. When it inevitably turns, you hold all the world’s assets as collateral, for loans which were massively over-issued from thin air and mathematically cannot be paid.

    Again, in answer above, why be in a hurry? If you collect all at once, they get mad and stop you. Foreclosures may be slow, but when the rigging mechanism–the Fed and Congress–have your back, you can repossess slowly, methodically, at any speed the society will tolerate. Ultimately you still repossess every asset in the nation/world, but slower and safer, setting (rigging) your own prices because you set both the supply and the demand by controlling money supply, rates, and release of assets to the market. No, they don’t want your house. They want your life. Indentured servitude for life, your focus and energy being owned and directed by them. If that can be done with thugs and debtor’s prison, great. If not, then slowly by controlling all the market forces in one’s life. So long as your life and attention is owned by them, who cares how it happens?

    Same with accounts (asset claims) disappearing, but loans (debt) remaining. Exactly as the 1930 Depression–funny thing, huh, that they can somehow lose your account but remember your loan balance? By golly, how does that happen? Is it magic? Yes, if the debts were too high, they’d lose because they’d write them off, but they’ve calculated how many would need to be written off and still profit. So long as more pay than default, it’s still a big win. That’s why assets are lost in 30 minutes, (like Swiss peg) and debts grind on and on, attempting to collect for decades, even though both should in theory follow more or less the same legal rules. Over time, more debt can be clawed back with more threats. Eventually, it’s not worth it, they’ve got all they can economically extract (like Greece), then they change approach to write off, be conciliatory, and encourage you to participate in the system of fraud, theft, cons, and extortion again.

    And they do. …Only for about 5,000 years.


    Thanks Dr. Diablo. What you are saying is that if one has any kind of loan or credit card debt, TPTB will come after you, sooner or later.

    V. Arnold

    @ bluebird

    Yes, and that’s why it’s so important to get rid of debt. Debt is slavery, pure and simple…


    The Swiss Nat. Bank destroyed a “few hundred thousand jobs” – absurd. A strong currency is good for a nation.

    In general sure. But when your neighbor’s currency plunges vs yours suddenly, it can take quite a bit of time to profit from that strong currency. There are already plenty stories of Swiss people starting to shop in Germany and Austria.


    Oh, sure,,,it’s unanimous, so let’s print, print, print. We got the “D” message. We are scared now. We grant full consensus to TPTB.

    This shit couldn’t be any better choreographed. Just that some folks don’t drink the Kool-Aid.

    Deflation! … The Swiss Surrender


    He who has the most debt, at the lowest subsidized rate of interest, generally wins over the long run, in any Fiat based Fractional Reserve system economic cycle. (As long as that debt is against tangibles.)

    Or, do the most expensive words in investing, “This time it’s different,” still stand?

    Interesting choices.



    I most certainly cannot tell you what will happen to the individual. What I can tell you is that the “banking system” will twist and turn like a fish on a hook in an attempt to stay alive at all costs. Do you realize that you might be more vulnerable to foreclosure if you have a mortgage and are paying it off on time if you have some equity? If the bank that holds your mortgage (or note) needs to improve its books, it has the right to “call” your loan at any time, even if you are current. This means pay up now-or else. If you are lucky enough to have rich relatives you might be alright, if not tough luck.
    And, of course, we all remember the confiscation of gold in 1933. The “system” doesn’t care if you live or die. It only cares about continuing onward with-or without-you. Conduct your finances accordingly.


    I love you guys! A few of us are beginning to realize how desperately the titans of finance need us little people. We truly are the wind that fills their sails. As long as we strive, as long as we struggle, we propel them toward their brighter tomorrow.

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