Nov 232017

Nicolas de Staël Mer du nord 1954


Punxsutawney Phil Hammond, the UK chancellor, presented his Budget yesterday and declared five more years of austerity for Britain. As was to be expected. One doesn’t even have to go into the details of the Budget to understand that it is a dead end street for both the country and for Theresa May’s Tory party.

So why the persistent focus on austerity while it becomes clearer every day that it is suffocating the British economy? There are many answers to that. Sheer incompetence is a major one, a lack of empathy with the poorer another. Conservative Britain is a class society full of people who dream of empire, and deem their class a higher form of life than those who work low-paid jobs.

When you see that the British Parliament has even voted that animals don’t feel pain or emotions, you’d be tempted to think it’s a throwback all the way back to the Middle Ages, not just the British Empire. They’re as lost in time as Bill Murray is in Groundhog Day. Only worse.

But perhaps incompetence is the big one here. The inability to understand that if your economy is not doing well, you need to stimulate it, not drain even more of what’s left out of it. The people in government don’t understand economics, and therefore rely on economic theory for guidance. And the prevailing theories of the day prescribe bloodletting as the cure, so they bloodlet (let blood?). Let it bleed.

This is not a British problem, it’s pan-European if not global. Neither is the UK Tory party the only one being killed by it, all Conservative parties share that faith. They’re just lucky that their left wing opponents have all committed hara kiri, and joined their ranks when it comes to economics. All of Europe’s poorer have lost the voices that were supposed to speak for them, to economic incompetence.

Obviously, the US democrats did their own hara kiri years ago. One might label -some of- Bernie Sanders’ views left-wing, but he’s trapped in a system that won’t let him breathe.


All of this leads me to question the following:

A letter in the Guardian published on Sunday called on Chancellor Philip Hammond, ahead of his budget presentation on Wednesday, to end austerity in the UK. It is signed by 113 people, a veritable who’s who from the academic field, one -economics- professor after another. They include people like Joe Stiglitz, Steve Keen, Dave Graeber.

Looking at the letter itself, and then the entire list, makes me wonder: I’m sure you all mean well, guys, but I think perhaps you should first of all ask yourselves how it is possible that such a large group of well-educated ladies and gentlemen has become so utterly sidelined over time when it comes to major economic decisions, has allowed itself to be sidelined.

It’s one thing to ask what someone else is doing wrong, it’s another to ask yourself what you have done wrong. My question to y’all would be: where were you? Shouldn’t you have written and/or signed this letter 7 years ago, or 5, even just 3? Isn’t calling on the Chancellor to ‘end austerity now’ a bit late in the game?

Is it even the right call, or should you maybe be calling for him to simply resign (along with the entire cabinet)? After all, what are the odds that the Tories are going to turn on a dime and reverse their entire economic policies? They would look stupid, and they will avoid that like the plague. Here’s that letter:


The Chancellor Must End Austerity Now – It Is Punishing An Entire Generation

Seven years of austerity has destroyed lives. An estimated 30,000 excess deaths can be linked to cuts in NHS spending and the social care crisis in 2015 alone. The number of food parcels given to impoverished Britons has grown from tens of thousands in 2010 to over a million. Children are suffering from real-terms spending cuts in up to 88% of schools. The public sector pay cap has meant that millions of workers are struggling to make ends meet. Alongside the mounting human costs, austerity has hurt our economy.

The UK has experienced its weakest recovery on record and suffers from poor levels of investment, leading to low productivity and falling wages. This government has missed every one of its own debt reduction targets because austerity simply doesn’t work. The case for cuts has been grounded in ideology and untruths. We’ve been told public debt is the outcome of overspending on public services rather than bailing out the banks. We’ve been told that while the government can find money for the DUP, we cannot afford investment in public services and infrastructure.

We’ve been told that unless we “tighten our belts” we’ll saddle future generations with debt – but it’s the onslaught of cuts that is punishing an entire generation. Given the unprecedented economic uncertainty posed by Brexit negotiations and the private sector’s failure to invest, we cannot risk exacerbating an already anaemic recovery with further public spending cuts. We’ve reached a dangerous tipping point. Austerity has failed the British people and the British economy. We demand the chancellor ends austerity now.

If you ask me, Britain reached that ‘dangerous tipping point’ years ago. And talking about ‘an anaemic recovery’ sounds like total nonsense. There is no recovery, as you yourselves make clear with the examples you provide of the consequences of austerity. So why say it?

I don’t know if we can blame individual economists for missing out on the effects of political measures, although when those measures affect economics, we probably should. But regardless, the big game in town these days is politics, not economics. Everywhere there are ‘leaders’ fighting for survival, and it’s telling that Donald Trump is not nearly the most besieged among them.

That Theresa May is still PM of the UK is as surprising as it is ridiculous. But it also points to the lack of coherence and timing among her opponents, including those 113 academics. That once May goes, which could be soon, the Tories get to pick yet another one of their own as PM, is even more ridiculous. To top off the absurdity, the next in line could be Boris Johnson.

A country that finds itself in a quandary as immense as the UK faces post-Brexit vote, should not let one party that had a mere 42% of the vote, run all the plans, decisions and negotiations, be they domestic and/or international. There is no surer way for disaster to ensue. It’s the system itself that fails if that possibility exists, more than that one party.

The UK needs, more than anything, a national government (or something in that vein), an option in which at least a majority of the population is represented. That is much more important than some call for some policy to be halted.

Moreover, everyone should see this in the light of international political developments as a whole. What’s happening in Albion is not an isolated event, and it doesn’t happen under the influence of isolated forces or developments. What happened overnight on Sunday with the failure of Angela Merkel’s attempt to form a German coalition government makes that more obvious than ever.

Traditional political parties, left and right, have been swept out of power all over Europe. Germany is just one more example. The process doesn’t have the same shape, or the same speed, everywhere. But it’s real. It’s due to a mixture of rising inequality, deteriorating economic conditions and no left left to represent the people, the victims, at the bottom of societies. Well, and there’s the incessant lies about economic recovery.

But let’s take a little detour first. Just in order to illustrate the point even more. The Guardian ran a piece, also on Sunday, on newly minted French President Emmanuel Macron and his government and party, that is pretty hilarious.


New Head Of Macron’s Party Vows To Recapture Its Grassroots ‘Soul’

A fiercely loyal, self-styled “man of the people” has been appointed to lead Emmanuel Macron’s fledgling political movement, La République En Marche (The Republic on the Move, or La REM), promising to recapture the party’s“soul” after a hiatus since the recent election win. Christophe Castaner, 51, a burly member of parliament with a southern accent, styles himself as both in touch with everyday voters and devoted to Macron’s well-oiled communications machine. He was handpicked by the French president to take over the running of La REM.

Castaner, currently a minister and government spokesman, was a Socialist mayor of a picturesque small town in Provence for more than a decade before becoming one of the first politicians to jump ship to Macron’s centrist project in its early days. He grew up in a military family in the south of France, left school before his final exams – which he retook as an adult – and has a reputation for straight-talking. At La REM’s first party congress in Lyon this weekend, Castaner was the lone candidate for the role of party director.

He was picked by Macron at a presidential palace dinner, then confirmed by a group of party members with a show of hands rather than a secret ballot, sparking criticism from the media and political observers about undemocratic internal party practices. A small group of 100 party followers went public last week with an open resignation letter, claiming the party had no internal democracy. Others, including La REM members of parliament, responded that Castaner was “the obvious choice”.

Macron founded his own movement because he saw an opening to defeat all traditional French parties. He won the presidential elections, and only after that organized the movement into an actual political party ahead of parliamentary elections. I’d still like to see someone explain who paid for the campaigns of hundreds of candidate parliamentarians. It’s a mystery. France’s banking and business sector?

Macron has set an example for many people in other countries, provided they can unravel that mystery, of how they, too, can defeat incumbents and other long time power blocks. There are two countries where such tactics have until now not seemed possible: the UK and US. But that, too, will change.

In many other European countries, age-old blocks have already been beaten into submission. Even if many deep state powers in France et al have merely shifted allegiances. As their peers elsewhere will. But that’s just the way things are. It doesn’t negate the huge shifts in politics. Voters all over feel they’ve been had for too long. It’s all part of a tectonic shift. Deteriorating economic conditions will do that for you.

What makes the article on Macron et al so entertaining is the mention of the promise to “..recapture the party’s grassroots “soul”. A political party that’s barely a year old does not have grassroots, let alone a soul. Anyone who thinks otherwise is not thinking. And that is a good thing to keep in mind, because Macron’s example – and success- will inspire similar initiatives in many places, and similar nonsensical narratives.


Ironically, if that’s the right word, the world -or at least the EU- is now Macron’s oyster. Angela Merkel has shown her weaknesses, and she has blinked first, in her failed attempt to form a new cabinet, and she will not recover from that, not with anything remotely like her past clout. Maybe -more than- 12 years as head of state is not such a good idea.

While Macron is a blank sheet without a soul or grassroots, Merkel and her CDU party possess both in spades. It’s just that in today’s world these things tend to easily turn against you. You’re better off without a past that you can be blamed for. Macron has no past. And no soul.

Merkel leaves an enormous void both in Germany and in Europe (even globally). And it’s one thing for her to have become too powerful at home, but it’s quite another for the same to have been allowed on the entire continent. Germany, under any leadership, will remain the only power in Europe that matters, no matter what grand plans Macron devises. And that is the EU’s fatal flaw. If you have 27-28 sovereign countries and you try to order them around all the time, you have a problem on your hands.


There is an inherent contradiction in being both the leader of political union’s strongest country and -simultaneously- of the union as a whole, and Merkel has bitterly failed in addressing, let alone solving, that contradiction. Merkel didn’t create it, true enough, but because she is/was the boss, it is her responsibility to address it. Even if it’s ultimately unsolvable.

In the present setting, any German leader, Angela or someone else, will be voted in by Germans, and focus on their interests, to hold on to these votes. But German interests are not always the same as those of other countries. That means Germany will always come out on top, and more so as time passes. Ever more wealth will flow to Berlin. That’s the fatal flaw, and at present there’s no way out of it.

With Merkel weakened, or soon even gone, lots of voices will speak up across Europe for their countries’ sovereignty, and the attack on them from Brussels. We already have Poland, Czechia and Hungary. Expect a lot more noise from Italy in the run-up to its elections. The power balance that Merkel held together is gone for good.

Yes, her refugee policy backfired, which is no surprise given that she decided on it like some empress. But what may be more important is that her traditional opponent, the left wing SPD, was not only her coalition partner, but it has no ideas that are notably different from her conservatives, and its new head is the former head of the European Parliament.

Where does one turn as a German who doesn’t want all that more EU all the time? Either far left or far right. Everything else has become a homogenous blob, all across Europe. And all of that blob is in favor of imposing ever more austerity on the most unlucky in their societies, because bloodletting is the most advanced treatment they know of.


It’s not even so much the financial crisis that has caused a political crisis in Europe, it’s the answers to it, the incompetence. Greece is a far worse-off victim of austerity than Britain is, and Yanis Varoufakis has described very well why that is: an absolute stonewalling refusal to talk about any alternatives to bloodletting. Because austerity is an ideology bordering on religion, executed by people who care much more about their own careers than they do about their people.

Greece is beyond salvation, its economy has been so thoroughly destroyed it will take decades to recover, if it ever can. Britain is set to follow the Greek example. The blame for that will be put on Brexit, not disastrous economic ‘policies’. In the same way that the Greek crisis was blamed on the Greeks, not the German and French banks that treated the country like an overleveraged game of Texas Hold ’em.

After Merkel Europe will fall victim to a vast power vacuum. In effect, today’s already ‘After Merkel’, even if it will take people a while to understand that. The EU is unraveling, and the blame goes to austerity and its incompetent priests. Including Angela. The bloodletters destroy their own economies, and they don’t understand that either.

Merkel hasn’t just demolished Greece, she has, in doing that, fatally undermined the foundations of the EU as well. And Germany. Look, ‘Mutti’ Merkel invited a million refugees to her country, and now refuses to let hundreds of war-traumatized children stuck on Greek islands join their parents in Germany, because she fears it could cost her votes. Talk about priorities. Theresa May does the same as we speak.

There’s a price to be paid for incompetence. It’s a shame that Merkel and Theresa May and Punxsutawney Phil Hammond won’t be the ones paying -the worst of- it.



Jul 252016
 July 25, 2016  Posted by at 2:08 pm Finance Tagged with: , , , , , , , , ,  8 Responses »

Warren K. Leffler Ku Klux Klan members supporting Barry Goldwater, San Francisco 1964

John McDonnell, UK Shadow Chancellor of the Treasury (at least it sounds important) appealed to his -Labour- party on Sunday morning TV to “stop trying to destroy the party”, and of course I’m thinking NO, please don’t stop, keep at it, it’s so much fun. When you watch a building collapse, you want it to go all the way, not stop somewhere in the middle and get patched up with band-aids.

It’s alright, let it crumble, it’s had its day. And if it’s any consolation, you’re not alone. Nor is that some freak coincidence. ‘Labour’-like parties (the ‘formerly left’) all over the world are disintegrating. Which is no surprise; they haven’t represented laborers for decades. They’ve become the left wing -and even that mostly in name only- of a monotone bland centrist political blob.

The other ‘half’ of that blob, the ‘conservative’ side, is disintegrating just as rapidly, as evidenced by the rise of Trump and a motley crew of Boris Johnson ilk.

The spontaneous self-immolation of the US Democratic Party mirrors that of the British Labour Party, but admittedly, it has even more entertainment value. America does entertainment like nobody else can.

In both cases, we see entire parties turn on their own candidates, it truly is a sight to behold. Especially since people like Bernie Sanders and Jeremy Corbyn are the only ones who do have a tangible connection to the people left that they represent.

One might even say Donald Trump falls in that category too, though in a slightly different way. The others, whether they are from the supposed left or right -and it really makes no difference anymore- rely on pure hubris. The WikiLeaks files on the DNC make that so clear it hurts.

And if one thing exemplifies what’s going wrong, it’s that the DNC in all its superciliousness seeks to blame the fact that there were leaks for the mess, not the content of what was leaked. And replaces one chair with another who was just as guilty as the first one of trying to bring down one of their own candidates. As the leaks show.

The reason all this high value entertainment is presented to us is that the political system is toppling over in line with the economic one. As I’ve argued before, this is inevitable, because they are one and the same system. If one part falls, so must the other. I wrote 7 weeks ago:

The Only Thing That Grows Is Debt

What we have is a politico-economic system, with the former media establishment clinging to (or inside?!) its body like some sort of embedded parasite. A diseased triumvirate.

With the economy in irreversible collapse, the politico part of the Siamese twin/triplet can no longer hold. That is what is happening. That is why all traditional political parties are either already out or soon will be. Because they, more than anything else, stand for the economic system that people see crumbling before their eyes. They represent that system, they are it, they can’t survive without it.

Of course the triumvirate tries as hard as it can to keep the illusion alive that sometime soon growth will return, but in reality this is not just another recession in some cycle of recessions. Or, at the very minimum this is a very long term cycle, Kondratieff style. And even that sounds optimistic. The system is broken, irreparably. A new system will have to appear, eventually. But…

‘Associations’ like the EU, and perhaps even the US, with all the supranational and global entities they have given birth to, NATO, IMF, World Bank, you name them, depend for their existence on an economy that grows. The entire drive towards globalization does, as do any and all drives toward centralization. But the economy has collapsed. So all this will of necessity go into reverse, even if there are very powerful forces that will resist such a development.

And here’s the graph that I said depicts very well what is the problem with the economic system, in an ‘all you need to know’ kind of way:



We’d already be well aware of what’s wrong with our economies if our governments and media hadn’t consistently lied to us about it for all these years. These lies make sense from their point of view; they’d be out of a job and out of power once they would stop lying.

Outside of the media, in people’s own experience, there is no recovery, it’s a fairy tale. And there is no growth the way stock exchanges portray, or employment numbers. You can’t lie to all of the people all of the time. Again, though, the attempts are often good for many hours of solid amusement.

Take the way a word like populist is (ab-)used. Grab a handful of names of people who’ve been labeled populist recently, like Putin, Trump, Tsipras, Varoufakis, Sanders, Corbyn, Chávez, Maduro, Morales, Le Pen, Beppe Grillo, Wilders, etc etc, and you notice they are very different people in more ways than one.

But they have one thing in common: they reject the western establishment, at least to a degree (many merely want to ‘tweak’ it). Which makes it tempting for establishment media to slap the populist label on them, because it has such a bad connotation. Courtesy of the same media, of course.

Still, that’s only mildly funny, more in a subtle kind of way. There are better ones. Where do you think these buttons, for example, find their origin?:




Even better, Zero Hedge and Bryan MacDonald have a nice set of ‘plagiarized’ headlines. Altogether now on the all time favorite whipping boy, Vlad V. Putin. The DNC was at him again today as well, even though by the looks of it they don’t seem to need any help at self-destructing. That’s the one thing left they’re really good at.




And this one here is excellent as well, taking on America’s other favorite enemy no. 1. Again, altogether:




Everybody thought of the word ‘dark’ at the same time! A country full of kindred spirits. Telepathy. Yeah. In China original content is now banned in the media. But China has nothing on the west. Where the system clings together to paint a picture they all want you to believe in. A kind of propaganda Putin wouldn’t dream of. And Goebbels only considered in his wildest nightmares.

These are the death throes of a system. All parts, as separate as they may seem, or want to seem, fall apart together. Maybe not at the same time, but certainly in rapid succession. Still, it’s a bit surprising to see how fast alleged journalists -and the media they work for- have turned from reporting to endless repetition of opinions, most often not even their own.

The media feel they are under threat, and for good reason. Namely, the same reason politicians are. They’ve all been painting fake pictures, and people start to see through that for the simple reason that these pictures look nothing like what goes on in their own lives.

There’s no amount of Kardashians or other Walking Dead that can change that, and unless you let people watch this stuff 24/7, they are bound to notice sooner or later.

I see people saying the system is unstable. Fine, as long as they realize it has no chance of regaining stability, not with its present components. There will have to be a big clean-up. But it will be messy. A very limited number of people, with all of their minions, control the entire now unstable edifice, and they’ll fight tooth and nail to keep their power.

Nevertheless, they’ll lose. It’s just that they’ll drag a lot of other people down with them. They’re fully prepared to go to war just to keep the illusion of power alive. The ultimate hubris.



Jul 232016
 July 23, 2016  Posted by at 9:30 am Finance Tagged with: , , , , , ,  7 Responses »

Jack Delano Conductor picks up message from operator on the Atchison, Topeka & Santa Fe 1943

Britain’s Economy Shrinking At Fastest Rate Since 2009 (G.)
Chinese Companies are Turning Japanese (BBG)
Lagarde Seen Likely to Avoid Jail Time, Keep IMF Job Amid Trial (BBG)
The Great Period of Instability (G&M)
Inequality: The Nexus of Wealth and Debt (Coppola)
The Rise and Fall of the Petrodollar System (Grass)
Trumped! A Nation On The Brink Of Ruin (David Stockman)
Nearly 3,000 Dead In Mediterranean Already This Year (R.)



The fear campaign still works like a charm.

Britain’s Economy Shrinking At Fastest Rate Since 2009 (G.)

The Bank of England and the Treasury are under increasing pressure to prevent Britain from sliding into recession after a wide-ranging health check of the economy completed since the referendum showed the sharpest downturn in activity since the peak of the financial crisis seven years ago, Service industries ranging from banks to restaurants, hedge funds, bars, gyms and hairdressers were all affected by what was described as as a “dramatic deterioration” in business confidence that suggests the economy is on course to shrink by 0.4% in the third quarter unless conditions improve. The City now expects the Bank to deliver a package of immediate support – including a cut in interest rates and a resumption of its quantitative easing programme – when its monetary policy committee meets early next month.

Philip Hammond, the new chancellor, admitted that confidence had been dented by the surprise of Brexit vote and dropped a broad hint that he was contemplating spending increases and tax cuts for his autumn statement. In the first major survey of business activity and confidence since the referendum on 23 June, the services sector was particularly hard hit, showing its biggest drop on record. Manufacturing dropped to its lowest level since February 2013, according to Markit, which compiles the data in its purchasing managers’ index (PMI). The composite index, which measures both services and manufacturing, fell from 52.4 in June to 47.7 – an 87-month low. Anything below 50 signals a contraction in activity.

The services index dropped from 52.3 in June to 47.4, an 88-month low, while manufacturing fell from 52.1 in June to 49.1. Chris Williamson, the chief economist at Markit, said: “July saw a dramatic deterioration in the economy, with business activity slumping at the fastest rate since the height of the global financial crisis in early 2009.

Read more …

Private investment in fixed assets has collapsed. From 20% to 2%. Imagine what the government must do to fill the gap.

Chinese Companies are Turning Japanese (BBG)

Chinese companies are swimming in cheap cash. Problem is, they’re not spending it. A reluctance to invest is frustrating policy makers after they unleashed a wave of cheap credit in an effort to stoke growth. Rather than build new plants or hire additional staff, corporates are opting to park money at the bank – or send it overseas through buying foreign assets. Known as the so called “liquidity trap,” it’s a problem not unlike the experience in Japan where weak business confidence and a reluctance to invest is also holding back the economy. “Cash-rich Chinese companies are searching for offshore investment, just as the Japanese did in the late 1980s due partly to the strength of the yen in the aftermath of the ‘Plaza Accord’,” ANZ bank economists led by Raymond Yeung wrote in a note.

China’s two main money supply gauges continued to diverge in June. M1, which includes currency in circulation and bank deposits, surged 24.6 percent in June from a year earlier, the biggest increase in six years. The broader M2, which also includes savings deposits, increased 11.8 percent. That was flat from May and below the government’s 13 percent annual target. The divergence has raised eyebrows given the main driver behind M1 since mid-2015 has been a demand for deposits by corporates. While healthier balance sheets offer a buffer to debt-burdened companies, the bigger worry is that these companies are reluctant to spend on expanding new capacity.

In a note titled “The Caution of Chinese Corporations,” Thomas Gatley of consulting firm Gavekal Dragonomics highlighted that companies are raising new cash to either hoard it or make financial investments because they expect “a further slowdown in demand for their products, so there is little need to expand production capacity or other fixed assets.” Weak private investment data underscores the observation. Private investment slumped to 2.8 percent in the six months ended in June from a rate of more than 20 percent two years ago.

Read more …

She handed $300 million in taxpayers’ funds to a buddy. That’s all. Slap that wrist!

Lagarde Seen Likely to Avoid Jail Time, Keep IMF Job Amid Trial (BBG)

Christine Lagarde is likely to avoid jail time and keep her job as head of the IMF after she was ordered to stand trial in France on charges that carry a potential prison term. Lagarde, 60, on Friday lost a bid to challenge a December decision to be tried for alleged negligence during her time as French finance minister that paved the way for a massive government payout to tycoon Bernard Tapie. The specialized panel that will hear Lagarde’s case has previously found ministers guilty without having them actually serve time in prison. The panel’s record and Lagarde’s strong support from IMF member nations amid the long-running case mean there’s little chance that it will amount to more than a distraction from her role leading the world’s lender of last resort.

No date has been set yet for the trial, which is expected to last about a week. “I don’t think anybody really feels that this is a matter that undermines her effectiveness,” and if Lagarde received a suspended jail sentence, “she would just carry on,” said Edwin Truman, a former U.S. Treasury official who’s now a senior fellow at the Peterson Institute for International Economics in Washington. Lagarde is accused of failing to block an arbitration process in 2008 that brought to an end the longstanding dispute between former state-owned bank Credit Lyonnais and Tapie, a businessman and supporter of then-French President Nicolas Sarkozy. Tapie walked away with an initial award of about €285 million before it was cut to zero by an appeals court.

Read more …

It’s simply the end of our economic system.

The Great Period of Instability (G&M)

It was just before dawn on the morning of July 15, and I was trying to explain to my six-year-old daughter why – instead of a planned day at the park – I was suddenly heading to the airport to catch a flight to a city called Nice. “A bad man hurt a lot of people in France,” was the best explanation I could come up with. As I watched her turn the news over in her head, disappointment spreading on her face, I realized it was a sentence I’d uttered three times in 18 months. Barely 36 hours later, I called her from a sun-baked plaza in the historic old city of Nice. That day in the park would have to be postponed again. Some men with guns had tried to take over the government in Turkey. Instead of coming home, Daddy was flying somewhere else. More bad men, more people hurt.

After we hung up, I contemplated how little sense any of this must make to her. She’s not alone. All of us – including and especially the political and economic elites who have long stood atop this suddenly wobbly pyramid – have been left reeling by events. A “period of instability” is upon us, historian Margaret MacMillan told me this week, one that has parallels to the pre-war periods of the 20th century that she’s written acclaimed books about. Future historians are likely to judge today’s leaders on whether they seek to calm – or simply take advantage of – the choppy waters that we’re in. Rarely, it seems, has the world spun so rapidly, have events felt so out of control.

The headlines blur into one another, feeding the sense of a world in chaos. The war in Syria bleeds into the refugee crisis. The refugees’ march into Europe boosts politicians on the nationalist right. The truck attack in France is followed by the shooting of police in Louisiana. Then it’s a man with an axe on a train in Germany. On Friday, it was a shooting at a mall in Munich. “Brexit” in the United Kingdom is knocked from the top of the news by a putsch attempt in Turkey. They seem like disconnected events. But what links the British who voted to quit the EU with the Turks who gathered in a public square on Wednesday to cheer the imposition of a state of emergency is their anger at how the system has worked until now.

Brexit was won in the small cities and towns of England, places where globalization has meant de-industrialization, the closing of factories and the transfer of work to cheaper locales overseas. The phenomenon was exacerbated by an influx of job-seekers from Eastern Europe who made competition for remaining jobs even stiffer. Leave voters didn’t change their minds when the elites told them Brexit would batter housing prices, or the stock market. To many, the idea that the elites, people who owned property and shares, would take a turn suffering sounded just about right.

Read more …

Wealth is debt.

Inequality: The Nexus of Wealth and Debt (Coppola)

Debt. We love debt. Money is created by issuing debt. Our monetary system is debt-based. And because we measure economic growth in monetary terms, growth comes from debt. There is a direct relationship between rising debt, rising money supply and rising GDP. To reduce the burden of debt, and stop it building up again, would mean curing ourselves of our love of debt. And that has enormous social and political implications. It is by no means cost-free. Globally, debt has increased since the 2008 financial crisis. Much of this is in developing countries – in corporations and governments. China’s debt burden, both public and private, is already huge and still growing. Will its bubble burst? What would be the consequences? We don’t know.

But other developing countries also have large debt burdens, especially in corporations. The extent of developing-country debt, both government and corporate, is becoming a matter of considerable concern to economists and policymakers. In developed countries, household debt remains a huge problem. In some countries, households are still deleveraging, preferring to pay off debt rather than spend. This puts a dampener on economic growth. In other countries, households have repaired their balance sheets, but are now reluctant to borrow. Though the lack of lending is not entirely due to households: in some countries, lending standards are now so tight that many households and smaller businesses can’t borrow at all.

But there are some countries where households are borrowing wildly. In Sweden, debt secured on property is rising rapidly, fuelled by very low interest rates. Economic projections from the OBR forecast similar borrowing increases for UK households, though as yet there is little sign that UK households are willing or able to comply. But if they do not, the UK’s economic performance will disappoint. High and rising household debt backed by property creates financial instability. So does high and rising corporate and government debt, especially in foreign currencies. By encouraging borrowing against property and across borders, we may gain a little more economic growth – but at what price?

Increasing the global debt burden in pursuit of economic growth will inevitably lead to another financial crisis somewhere in the world. It is not sustainable. But despite the risk that rising debt poses, those who wield power in our current political and social systems have no real interest in reducing the global debt burden. This is because the other side of debt is wealth. And we love wealth.

Read more …

I’m not a great fan of the ‘imminent collapse of the dollar’ meme. That will take a while longer.

The Rise and Fall of the Petrodollar System (Grass)

The intricate relationship between energy markets and our global financial system, can be traced back to the emergence of the petrodollar system in the 1970s, which was mainly driven by the rise of the United States as an economic and political superpower. For almost twenty years, the U.S. was the world’s only exporter of petroleum. Its relative energy independence helped support its economy and its currency. Until around 1970, the U.S. enjoyed a positive trade balance. Oil expert and author of the book “The Trace of Oil”, Bertram Brökelmann, explains a dramatic change took place in the U.S. economy, as it experienced several transitions: First, it transitioned from being an oil exporter to an oil importer, then a goods importer and finally a money importer. This disastrous downward spiral began gradually, but it ultimately affected the global economy.

A petrodollar is defined as a US dollar that is received by an oil producing country in exchange for selling oil. As is shown in the chart below, the gap between US oil consumption and production began to expand in the late 1960s, making the U.S. dependent on oil imports. And while it led to the U.S. Dollar being established as the world’s premier reserve currency, it also contributed to the country’s increase in debt. The oil embargo of 1973-74 was a major hit that exposed the vulnerability of the U.S. economy. Nevertheless, under the banner of “national security” the future policy course was firmly set: in a 1973 National Security Council (NSC) paper, it was stated that “U.S. leverage in energy matters resulted from its economic and political influence with Saudi Arabia and Iran, the two leading oil exporters”.

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From an upcoming book by Stockman.

Trumped! A Nation On The Brink Of Ruin (David Stockman)

America’s faltering economy has been made in Washington DC, not at the illegal crossing routes on the Arizona border or the containership berths at Long Beach. For more than three decades the nation’s central banks have flooded the US and world economies with too much free money and Washington politicians have accommodated the beltway lobbyists and racketeers and the country’s huge entitlement constituencies with too much free boot. So the real disease is bad money and towering debts. The actual culprits are the Wall Street/Washington policy elites who have embraced statist solutions which aggrandize their own power and wealth.

That much, at least, Donald Trump has right. Throwing-out the careerists, pettifoggers, hypocrites, ideologues, racketeers, power-seekers and snobs who have brought about the current ruin is at least a start in the right direction. What made American great once upon a time, of course, was free markets, fiscal rectitude, sound money, constitutional liberty, non-intervention abroad, minimalist government at home and decentralized political rule. Whether Donald Trump gets that part of the equation remains to be seen.

Then again, the GOP establishment has failed, the Democrats are clueless and the mainstream media and punditry is overtly hostile. So if the ideals of world peace, capitalist prosperity and constitutional liberty are to survive at all, it’s up to the Donald. That might seem like cold comfort. But a nation that has been Trumped is a people coming back to life. Americans don’t want to take it anymore. They want their existing rulers to take a permanent hike. And that’s a start.

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All entirely preventable. But that would require an actual cvilization.

Nearly 3,000 Dead In Mediterranean Already This Year (R.)

Nearly 3,000 migrants and refugees have perished in the Mediterranean Sea already this year while almost 250,000 have reached Europe, the International Organization for Migration said on Friday. The estimated death toll could put 2016 on track to be the deadliest year of the migration crisis. Last year the same landmark was only reached in October, by which time nearly one million people had crossed into Europe. “This is the earliest that we have seen the 3,000 (deaths) mark, this occurred in September of 2014 and October of 2015,” IOM spokesman Joel Millman told a briefing. “So for this to be happening even before the end of July is quite alarming.”

Three out of four victims this year died while trying to reach Italy from North Africa, mostly Libya, a longer and more dangerous route. The others drowned between Turkey and Greece before that flow dried up with the March deal on migrants between Turkey and the European Union. Nearly 2,500 fatalities have occurred since late March, with about 20 migrants dying each day along the route from Libya to Italy, Millman said. Most are from West Africa and the Horn of Africa, although they may include people from Pakistan, Bangladesh and Morocco. “The (Libyan) coast guard has had some luck turning back voyages from Libya. We’ve heard in the last six weeks a number of cases where they have been able to turn boats back. “They (have also been) recovering bodies at an alarming rate,” Millman said.

Some 84,052 migrants and refugees have arrived in Italy so far this year, almost exactly the same number as in the same period a year before, he said. That indicated departures from Libya were at “maximum capacity” due to a limited number of boats deemed seaworthy. But there is “a very robust market of used fishing vessels and things coming from Tunisia and Egypt that are finding their way to brokers in Tripoli,” Millman said. “And you can actually go to shipyards where people are trying to repair boats as fast as they can to get more migrants on the sea.”

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Aug 162015

Gustave Doré Dante and Virgil among the late penitents 1868

We’re doing something a little different. Nicole wrote another very long article and I suggested publishing it in chapters; this time she said yes. Over five days we will post five different chapters of the article, one on each day, and then on day six the whole thing. Just so there’s no confusion: the article, all five chapters of it, was written by Nicole Foss. Not by Ilargi.

This is part 2. Part 1 is here: Global Financial Crisis – Liquidity Crunch and Economic Depression

The Psychological Driver of Deflation and the Collapse of the Trust Horizon

The collective mood shifts rapidly from optimism and greed to pessimism and fear as the bubble bursts, and as it does so, the financial system moves from expansion to contraction. Financial contraction involves the breaking of promises right left and centre, with credit instruments drastically revalued downwards in the process. As the promises that back them cease to be credible, value disappears extremely rapidly. This is deflation and the elimination of excess claims to underlying real wealth.

Instruments once regarded as money equivalents will lose that status through the loss of confidence in them, causing the supply of what retains sufficient confidence to still be regarded as money to collapse. The more instruments lose the confidence that confers value upon them, the smaller the effective money supply will be, and the more confidence will become a rare ‘commodity’. Being grounded in psychology is the primary reason that deflation cannot be overcome through policy adaptations which are inherently too little and too late. Nothing moves as quickly as a collective loss of confidence in human promises, and nothing destroys value as comprehensively.

The same abrupt change in collective mood will also drive contraction in the real economy, but more slowly, since the time constant for change in the real world is much slower than in the virtual world of finance. This process will also result in broken promises as structural dependencies fracture when there is no longer enough to go around. There will be wage and benefit cuts, layoffs, strikes, strike-breaking, breaches of contract, business failures and more on a huge scale, and these will fuel further fear, anger and the destruction of trust.

In the political realm, trust, such as it is, will be an early casualty. Political promises have been regarded as highly suspect for a long time in any case, but considering that the electorate tends consistently to vote for whomever tells them the largest number of comforting lies, this is not particularly surprising. Our political system selects for mendaciousness by design, since no party is normally elected by telling the truth, yet we have still collectively retained some faith in the concept of democracy until relatively recently. In recent years, however, it has become increasingly clear that the political institutions in supposedly democratic nations have largely been bought by big capital. More often than not, and more blatantly than ever, the political machinery has come to serve those special interests, not the public interest.

The public is increasingly realizing that ‘representative democracy’ leaves them unrepresented, as they see more and more examples of austerity for the masses combined with enormous bailouts guaranteeing that the large scale gamblers of casino capitalism will not take losses on the reckless bets they made gambling with other people’s money. In the countries subjected to austerity, where the contrast is the most stark, a wave of public anger is is already depriving national governments, or supranational governance institutions where applicable (ie Europe), of political legitimacy. As more and more states slide into the austerity trap as a result of their unsustainable debt burdens, this polarization process will continue, driving wedges between the governors and the governed which will make governance far more difficult.

Governments struggling with the loss of political legitimacy are going to find that people will no longer follow rules once they feel that the social contract has been violated, and that rules no longer represent the public interest. When the governed broadly accept that society functions under the rule of law, in other words that all are equally subject to the same rules, then they tend to internalize those rules and follow them without the need for negative incentives or outright enforcement. However, once the dominant perception becomes that rules are imposed only on the powerless, to their detriment and for the benefit of the powerful, while the well connected can do as they please, then general compliance can cease very quickly.

Without compliance, force would become necessary, and we are indeed likely to see this occur as a transitional phase as social polarization increases in a climate of increasing anger. The transitional element arises from the fact that force, especially as exercised technologically at large scale, requires substantial resources which are unlikely to remain available. Force produces reaction, straining the fabric of society, quite possibly to breaking point.

As contagion propagates the impact of financial and economic contraction, we will rapidly be moving from a long era of high trust in the value of promises to one of low trust. The trust horizon will contract sharply, leaving supranational and national governments lying beyond its reach, as stranded assets from a trust perspective. Trust determines effective organizational scale, so when the trust horizon draws in, withdrawing political legitimacy in its wake, larger scale entities, whether public or private, are going to find it extremely difficult to function. Effective organizational scale had been increasing for the duration of our long economic expansion, forcing an across the board scaling up of all manner of organizations by increasing the competitiveness accruing to large scale. As we scaled up, we formed structural dependencies on these larger scale entities’ ability to function.

While the scaling-up process was reasonable smooth and seamless, the scaling-down process will not be, as the lower rungs of the figurative ladder we climbed to reach this pinnacle have been kicked out as we ascended. Structural dependencies are going to fail very painfully as large scale ceases to be effective and competitive, leading to abrupt dislocations with ricocheting impacts.

Proposed solutions to our predicament that depend on the functioning of large-scale organizations operating in a top-down manner do not lie within viable solution space.

Instability and the ‘Discount Rate’

The pessimism-and-fear-driven psychology of contraction differs dramatically from the optimism-and-greed-driven psychology of expansion. The extreme complacency as to systemic risk of recent years will be replaced by an equally extreme risk aversion, as we move from overshoot in one direction to undershoot in the other. The perception of economic visibility is gong to change substantially, as we move from a period where people thought they knew where things were headed into an era where fear and confusion reign, and the sense of predictability evaporates abruptly.

This is an important psychological shift, as it affects an aspect known as the ‘discount rate’, which reflects the extent to which we think in the short term rather than the long term, or the extent to which we value the present over the future. The perceived rate of change is an important factor in determining the discount rate, and fear, being a very sharp emotion, causes the rate of change to accelerate markedly, driving the discount rate sharply higher in contractionary times.

True long term thinking is relatively rare. We manage an approximation of it at times when all immediate needs, along with many mere ‘wants’, are met and we are not concerned about this condition changing, in other words at times when we take a comfortable situation for granted. At such times, the longer term view is a luxury we can afford, and we find it relatively simple to summon the presence of mind to think abstractly and constructively, and to ponder circumstances which are are neither personal nor immediate. Even at such times, however, it is not particularly common for humans to transcend mere contemplation and actually act in the interests of the long term, especially if it involves aspects beyond the personal, or perhaps familial.

As the financial bubble bursts, and we rapidly begin to pick up on the fear of others and feel the consequences of contagion in our own lives, our collective discount rates are going to sky-rocket. In a relatively short period of time, a large percentage of the population is going to begin worry about immediate needs, let alone wants, not being met. A short time later those worries are likely to transition into reality, as has already happened in the countries, like Greece, in the forefront of the bursting bubble. As discount rates go through the roof, the luxury of the longer term view, which is always quite ephemeral, is likely to disappear altogether.

Where people have no supply cushions and find themselves abruptly penniless, cold, thirsty, hungry or homeless, the likelihood of them considering anything much beyond the needs of the day at hand is very low. Under such circumstances, the present becomes the only reality that matters, and societies are abruptly pitched into a panicked state of short term crisis management. This of course underlines the need to develop supply cushions and contingency plans in advance of a bubble bursting, so that a greater percentage of people might be able to retain a clear head and the ability to plan more than one day at a time. Unfortunately, few are likely to heed advance warnings and we can expect society to shift rapidly into a state of short-termism.

Given the coming rise in collective discount rates, if proposed solutions depend on the ability for societies to engage in rational planning for longer term goals, then those solutions are not part of solution space.

The Psychology of Contraction and Social Context

Expansionary times are times of relative peace and prosperity. If those conditions persist for a relatively long time, trust builds slowly and societies become more inclusive and cooperative, tending to perceive common humanity and focus on similarities rather than differences. In such times we reach out and interact with distant people, even if we have no relationship of personal trust with them, as we have, over time, vested our trust in stable institutional frameworks for managing our affairs. This institutional trust replaces the need for trust at a personal level and is a key factor in our ability to scale up our economies and their governance structures. Individuals raised in such an environment tend to show a presumption of trust towards others, and their inclination is generally to act cooperatively.

There is a sharp contrast between this stable state of affairs and the circumstances which pertain when suddenly the pie is shrinking and there is not enough to go around. As difficult as it can be share gains in a way perceived to be fair, it is infinitely more difficult to share losses in a way that is not extremely divisive. As elucidated above, a deflationary credit implosion involved the wholesale destruction of excess claims to underlying real wealth, meaning that a majority of people who thought they had a valid claim to something of tangible value are going to find that they do not. The losses will be very widespread, but uneven, and the perception of unfairness will be almost universal.

Under such circumstances a sense of common humanity is much less prevalent, and the focus shifts from similarities to the differences upon which social divisions are founded and then inflamed. An ‘us versus them’ dynamic is prone to take hold, where ‘us’ becomes ever more tightly defined and ‘them’ becomes an ever more pejorative term. People build literal and figurative walls and peer suspiciously at each other over them. Rather than working together in the attempt to address concerns common to all, division shifts the focus from cooperation to competition. A collectively constructive mindset can easily morph into something far more motivated by negative emotions such as jealousy and revenge and therefore far more destructive of perceived commonality.

The kind of initiatives which capture the public imagination in expansionary times are not at all the type which get traction once a contractionary dynamic takes hold. Attempts to build cooperative projects are going to be facing a rising tide of negative social mood, and will struggle to get off the ground. Sadly, negative ideas are far more likely to go viral than positive ones. Novel movements grounded in anger and fear may arise to feed on this new emotional context and thereby be empowered to wreak havoc on the fabric of society, notably through providing a political mandate to extremists with an agenda of focusing blame on to some identifiable, and marginalizable, social group.

While it will not be the case that cooperative endeavours will be impossible to achieve, they will require additional effort, and are likely to succeed only at a much smaller scale in a newly fractured society than might previously have been expected. It is very much a worthwhile effort, and will be far simpler if begun prior to the end of the period of cooperative presumption. All the more reason to adapt to a major trend change adapt in advance. There is nothing so dangerous as collectively dashed expectations.

If proposed solutions depend on a cooperative social context at large scale, they will not be part of solution space.

Part 1 is here: Global Financial Crisis – Liquidity Crunch and Economic Depression

Tune back in tomorrow for part 3: Declining Energy Profit Ratio and Socioeconomic Complexity

Apr 012015

NPC Pennsylvania Avenue storefront view, Washington DC 1921

Americans Just Aren’t Spending (CNN)
The Glory Days of Private Equity Are Over (WSJ)
Japan’s Newest Export: Deflation (Pesek)
The Oil Price Slump Is Fuelling Financial Instability Globally (Satyajit Das)
‘A Lot More Easing’ Coming From China Central Bank (CNBC)
Iceland Looks At Ending Boom And Bust With Radical Money Plan (AFP)
Tsipras Vows To Stop Greek ‘Bleeding’ As Creditors Frustrate Athens (Telegraph)
Merkel Faces Rebellion As Senior Official Resigns Over Greek Bail-Out (DT)
Greek Prime Minister Vows No Capitulation To Creditors (Independent)
Greece Fails To Reach Initial Deal On Reforms With Lenders (Reuters)
Japanese Hoarding $300 Billion Under Mattresses (CNBC)
‘Wealth Creators’ Are Robbing Our Most Productive People (Monbiot)
Is It Time For ‘Shadow Bank’ Stress Tests? (CNBC)
The Way Out (Jim Kunstler)
Ukraine Interior Ministry ‘Uncooperative And Obstructive’ In Maidan Probe (RT)
License to Kill (Dmitry Orlov)


Americans Just Aren’t Spending (CNN)

Consumer spending is often called an engine of the United States economy. That engine may be about to blow a gasket. Consumers are sitting on their wallets. The government reported Monday that personal consumption expenditures – aka consumer spending – rose just 0.1% in February. That follows two months of declines of 0.2%. It comes at a time when people actually do have a little bit more money to spend. In the same report, the government said disposable personal incomes rose 0.4% in February, after rising 0.5% in January and 0.3% in December. So what are consumers doing? Despite some headlines to the contrary, it appears that Americans are showing signs of fiscal responsibility. They are saving more. Mind you, they still may not be saving enough for things like retirement, a new house, or their kids’ college education.

But the savings rate rose to 5.8% in February – the highest level since late 2012. This is a bit of a surprise. Many economists were predicting that consumers would spend all that money they were saving from cheaper gas prices as if it were a tax refund check courtesy of OPEC. But oil prices may have now stabilized. As such, economists at Barclays wrote Monday that “the boost from energy prices is fading.” They suggested that the awful winter weather could be one reason for soft consumer spending in February. And Barclays is predicting that spending will rebound in the second quarter and the savings rate will fall. Still, sluggish consumer spending could mean that the economy will report very little in the way of growth for the first quarter — despite the continued strength of the labor market.

The economy has been adding jobs at an impressive clip for the past year. And the unemployment rate has fallen. But even though personal incomes are rising, wages have not risen that much to make consumers feel as if they are rolling in the dough. That’s because the personal income figure takes into account increases in other items such as interest and dividend payments on investments as well as Social Security, Medicare and other government safety net distributions. So wages have to pick up more dramatically, or consumers may not be willing to spend more. And that’s a proverbial Catch-22 for the economy. Saving more is great for the long-term. But spending is what’s needed to get the economy roaring again in the short run.

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No markets left.

The Glory Days of Private Equity Are Over (WSJ)

Private equity is done. Stick a fork in it. With Kraft singles and Heinz ketchup as toppings, there are many signs that private equity has peaked as an asset class. Sure, private equity is pervasive, which is one of its problems. According to Dow Jones LP Source, 765 funds raised $266 billion in 2014, up 11.7% over 2013. Ever since David Swensen, the investment manager of the Yale University endowment, almost 30 years ago began successfully allocating outsize portions of the portfolio to “alternate” assets, especially private equity, the so-called Swensen model has been widely duplicated. Last week the Stanford endowment named Swensen-disciple Robert Wallace as CEO. There is a lot of capital chasing similar deals.

When it comes down to it, private equity is pretty simple. You buy a company, putting up some cash and borrowing the rest, sometimes from banks but often via exotic instruments that Wall Street is happy to sell. Then you manage the company for cash flow, making sure you can make interest payments with enough left over for fees and investor dividends. With enough cash flow, you either take the company public or sell it to someone else. And how do you generate cash flow? You can expand the company, but more likely you slash costs, close divisions, cut staff, curtail marketing, eliminate research and development and more. In other words, cutting to the bone.

The Swenson model has worked for the past three decades. But it’s a bull-market investment vehicle whose time is done. Here are the main reasons private equity has peaked—the first four are reasonably obvious, but the last one is the killer. First, interest rates are going up. As they say on “Game of Thrones,” winter is coming. The Federal Reserve will no longer be “patient” on raising rates. This year? Next year? It doesn’t matter. Rising interest rates mean private equity will see higher costs of capital, wreaking havoc on Excel spreadsheets justifying future returns. Second, banks are slowing lending for leveraged deals. Since 2013, regulators have been discouraging leverage above six times earnings before interest, taxes, depreciation and amortization, or Ebitda, a measure of cash flow. Leveraged loans are the lifeblood of private equity; limits are already crimping the ability to do deals.

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What’d I say?

Japan’s Newest Export: Deflation (Pesek)

In 2006, seven years before he became Bank of Japan governor, a testy Haruhiko Kuroda told me he thought China was raising its own living standards at the expense of its Asian neighbors. “The relationship between exchange rates and poverty reduction is not so direct, but a more flexible Chinese exchange rate would benefit Asia,” Kuroda, who at the time was head of the Asian Development Bank, told me in his office overlooking the Manila skyline. “It would make a difference.” Today, those remarks demand to be read with a sense of irony. As Japan’s leading central banker for the past two years, Kuroda has relentlessly weakened the yen, which means he is now responsible for precisely the same regional dynamic he once lamented.

None of this is to suggest Kuroda is up to anything sinister. His mandate, after all, is to produce 2% inflation for Japan, and thus pull its $4.9 trillion economy out of a two-decade deflationary spiral. But it’s impossible to deny that the yen’s weak exchange rate is indirectly exporting deflation to the region. Taiwan’s export-dependent economy is feeling the strain, and Singapore might be next. But South Korea has been hit particularly hard. The country’s 4.7% plunge in industrial output in February is the latest sign that deflation is on its doorstep. The country’s consumer prices also rose by only 0.5% last month (the slowest pace since 1999), and its exports were down 3.4%.

Korean manufacturers have responded to the yen’s 20% drop in value by trying to keep the prices of their own products down. In practice, that’s meant executives with excess cash on their balance sheets have avoided making investments or giving workers a raise. The resulting wage suppression, however, is having negative consequences of its own, by hampering domestic consumption. (It doesn’t help that Korean households are sitting on record debt, equivalent to about 70% of GDP)

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“..Emerging markets have about 75% of their $2.6trn debt denominated in dollars. A similar proportion of their $3.1trn bank borrowings is dollar-denominated.”

The Oil Price Slump Is Fuelling Financial Instability Globally (Satyajit Das)

Financial markets have generally assumed lower oil prices are good for asset prices, resulting from the positive effect on growth and lower inflation which extends the period of low interest rates. In reality, the large movement in oil prices has the potential to create significant financial instability, especially in debt markets. Heavily indebted energy companies and sovereign or near-sovereign borrowers with large oil exposures face increased risk of financial distress. The boom in borrowings by energy businesses, especially shale gas and oil producers, has created a dangerous debt overhang. Energy companies now make up around 15% of the Barclays US Corporate High-Yield Bond Index, up more than 300% from 2005. Since 2010, energy producers have raised $550bn of funds.

In 2014, more than 40% of new non-investment grade syndicated loans were to the oil and gas sector. During the boom, non-investment grade bond issues and loans for the oil industry were underpinned by high oil prices and the search for yield. Now low oil prices have reduced revenues sharply, making it difficult to service debt. The industry’s weak financial structure and business model compounds the problem. A significant proportion of the industry is highly levered with borrowings that are greater than three times gross operating profits. Many firms were cash flow negative even when prices were high, usually debt-funded to maintain production. If the firms have difficulty meeting existing commitments, then the decrease in available funding and higher costs will create a toxic negative spiral.

Sovereign and near-sovereign borrowers in oil-dependent countries are similarly vulnerable. Energy companies, such as Brazil’s Petrobras, Mexico’s Pemex and Russia’s Gazprom are among the largest issuers of emerging market debt. Since 2009, they borrowed about $140bn in bond markets. Petrobras has around $170bn in debt, one of the most indebted companies in the world. Many oil-dependent economies also face additional problems from a growing currency mismatch. Many producers borrow in dollars. Falling oil revenues as a result of lower prices reduce the dollar cash flow available to service the debt. Weak oil prices also drive weakness in the value of the domestic currency of oil producers, while higher dollar interest rates compound the mismatch.

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QE Peking Duck.

‘A Lot More Easing’ Coming From China Central Bank (CNBC)

China’s most recent effort to prop up its softening real estate market is not enough, analysts say, noting that a series of interest rate cuts from the central bank is the best remedy. “I’m virtually certain we’ll see further interest rate cuts and a lot more easing, probably bank reserve requirement ratio (RRR) cuts, in the coming months,” Macquarie’s Sam Le Cornu told CNBC. “I think people are underestimating the degree of liquidity that will be put into the market and the number of interest rate cuts.” Chinese homebuyers were given a break on Monday after authorities lowered the threshold of down payments on mortgages for second homes to 40% from 60% and waived the business tax on the resale of property after two years. The measures follow Beijing’s effort to spur the economy by cutting interest rates twice since November and lowering the reserve requirements of major banks.

But that isn’t enough for many investors who continue to call for further easing. “[China still needs] further across-board monetary policy easing,” Nomura’s China economics team said in a note on Monday. It expects “more policy easing, with three more interest rate cuts and three more reserve requirement ratio cuts over the remainder of 2015.” However, Nomura believes that Mondays’ move will “see the pace of property market correction stabilizing in the second half of the year.” Monday’s move comes amid growing concerns over slowing economic growth. China set its 2015 growth target “at around 7%” in early March – it’s lowest target in 11 years – after posting its slowest annual growth rate in 24 years in 2014. The housing sector accounts for around 15% of China’s economy, and recent housing data suggests that growth continues to slow.

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No moar.

Iceland Looks At Ending Boom And Bust With Radical Money Plan (AFP)

Iceland’s government is considering a revolutionary monetary proposal – removing the power of commercial banks to create money and handing it to the central bank. The proposal, which would be a turnaround in the history of modern finance, was part of a report written by a lawmaker from the ruling centrist Progress Party, Frosti Sigurjonsson, entitled “A better monetary system for Iceland”. “The findings will be an important contribution to the upcoming discussion, here and elsewhere, on money creation and monetary policy,” Prime Minister Sigmundur David Gunnlaugsson said. The report, commissioned by the premier, is aimed at putting an end to a monetary system in place through a slew of financial crises, including the latest one in 2008.

According to a study by four central bankers, the country has had “over 20 instances of financial crises of different types” since 1875, with “six serious multiple financial crisis episodes occurring every 15 years on average”. Mr Sigurjonsson said the problem each time arose from ballooning credit during a strong economic cycle. He argued the central bank was unable to contain the credit boom, allowing inflation to rise and sparking exaggerated risk-taking and speculation, the threat of bank collapse and costly state interventions. In Iceland, as in other modern market economies, the central bank controls the creation of banknotes and coins but not the creation of all money, which occurs as soon as a commercial bank offers a line of credit. The central bank can only try to influence the money supply with its monetary policy tools.

Under the so-called Sovereign Money proposal, the country’s central bank would become the only creator of money. “Crucially, the power to create money is kept separate from the power to decide how that new money is used,” Mr Sigurjonsson wrote in the proposal. “As with the state budget, the parliament will debate the government’s proposal for allocation of new money,” he wrote. Banks would continue to manage accounts and payments, and would serve as intermediaries between savers and lenders. Mr Sigurjonsson, a businessman and economist, was one of the masterminds behind Iceland’s household debt relief programme launched in May 2014 and aimed at helping the many Icelanders whose finances were strangled by inflation-indexed mortgages signed before the 2008 financial crisis.

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My man.

Tsipras Vows To Stop Greek ‘Bleeding’ As Creditors Frustrate Athens (Telegraph)

Greece’s prime minister has vowed not capitulate to the country’s eurozone creditors, reviving controversial calls for debt relief as his government battles to unlock bail-out cash. Addressing his parliament on Monday evening, Alexis Tsipras said he would seek an “honest compromise” with Greece’s international paymasters, but warned he would not submit “unconditionally” to demands for further austerity on his stricken economy. Mr Tsipras, who spoke after a frustrating day of progress between his government and officials from the Brussels Group, insisted he would stop “the Greek people’s bleeding” as he ruled out measures such as hiking VAT. The Leftist premier also repeated his claims for Second World War reparations from Germany, and insisted on debt relief from Greece’s lenders.

Greek pleas for a bond-swap or outright haircut on its debt mountain have subsided following a February 20 agreement to extend its bail-out by four months. But Mr Tsipras said he would now pursue a claim for debt forgiveness in order to maintain the sustainability of the country’s finances. Greece is racing to get the seal of approval on a bail-out extension, before financial deadlines in April, six weeks after its Leftist government agreed an eleventh hour deal with European creditors. Despite reports Athens would submit a final comprehensive list of proposals to finance ministers on Monday, work on completing the revenue-raising measures has yet to be completed, according to European officials. Speaking in Helsinki alongside her Finnish counterpart on Monday, German Chancellor Angela Merkel cautioned any final Greek blueprint had to “add up”.

“We will await the outcome of these discussions, but in the end the broad framework has to add up,” said Ms Merkel. Circulated drafts of the reforms included cutting early retirement, raising €350m from clamping town on VAT fraud, and €250m from stamping out oil, alcohol and tobacco smuggling. But the measures are likely to fall short of creditor demands. Dissatisfied eurozone officials warned the government would still need cut pensions and wages to receive the €7.2bn it needs to stay afloat. The government’s current public sector wage and pension bill amounts to €1.2bn a month, an outlay which Athens will struggle to meet in April without a fresh injection of cash. The fledgling Greek premier also faces a domestic battle to retain the support of Syriza’s Left Platform, who oppose measures such as a property tax and the continued privatisation of the country’s ports, airports and power grids.

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You tell ’em girl.

Merkel Faces Rebellion As Senior Official Resigns Over Greek Bail-Out (DT)

Political tensions in Europe’s largest creditor nation were laid bare after a senior ally of Angela Merkel’s ruling party stepped down in protest at his government’s support for a Greek bail-out. Peter Gauweiler, deputy chairman of the Christian Social Union – the Bavarian sister party of the ruling CDU – said Greece was a “bankrupt state” and he could not serve as a member of parliament as long as his “dissenting vote against an extension of the current and completely ineffective program” was ignored. Mr Gauweiler, a fierce critic of financial support for the eurozone’s indebted countries, was appointed vice-chairman of the CSU in November 2013 in a move to appease the growing eurosceptic elements within his party.

“I have been publicly pressured to vote in the Bundestag for the exact opposite, on the grounds that I am a vice-president,” said Mr Gauweiler in a statement on his website. “This is incompatible with my interpretation of the duty of a legislator.” Leader of the CSU Horst Seehofer also came in for heavy criticism from Mr Gauweiler, who has lodged legal complaints with the German Constitutional Court against the ECB’s attempts to establish financial backstops and its purchases of government bonds. Mr Gauweiler was also one of the 28 members of Ms Merkel’s coalition to vote in opposition to Greece’s bail-out extension in February. The rapid rise of the Alternative for Germany party (AfD) who seek to force Greece out of the monetary union, has put pressure on Ms Merkel’s ruling coalition.

Her conservative Christian Democrat party suffered its worst election result since the Second World War last month, at the hands of the eurosceptics. The AfD have already made overtures towards Mr Gauweiler, extending an invitation for him to join their ranks on Tuesday. The new Greek government is currently appealing for debt relief and the unlocking of a fresh round of bail-out money as it seeks to avert bankruptcy. Speaking in Helskini on Monday, Ms Merkel warned Athens plans for reforming the economy must “add up”.

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“The European authorities want to show who is boss; This is a government they didn’t want. And they really don’t want this government to succeed.”

Greek Prime Minister Vows No Capitulation To Creditors (Independent)

Germany turned the screws on Greece again yesterday, as officials insisted Athens has still not provided a satisfactory programme of economic reforms to its single currency partners. However, in a defiant speech, the anti-austerity Greek prime minister, Alexis Tsipras, warned that his government would not “capitulate” and would keep on pushing for a “fair compromise” with its creditors. Greece’s fellow eurozone member states, including Germany, must approve the release of the remaining €7.2bn in bailout funds the country is expecting. Without the cash, Greece could run of money to pay its civil servants by the end of next month and might be unable to meet a €450m loan repayment to the International Monetary Fund which is due on 9 April.

Greece has prepared a list of proposed economic reforms, but sources in Berlin said yesterday that it was not good enough to unlock the vital funding. “We need to wait for the Greek side to present us with a comprehensive list of reform measures which is suitable for discussion with the institutions and then later in the Eurogroup,” said Martin Jaeger, a spokesman for the German finance ministry. Chancellor Angela Merkel, on a visit to Helsinki, also implied Athens was still falling short. “The question is, can and will Greece fulfil the expectations that we all have?” she asked. According to Greek sources, Athens’s plan, which is projected to raise some €3.7bn this year, includes a crackdown on tax evasion through thorough audits of offshore bank transfers.

Other proposed revenue raisers are a value-added tax on the lottery, the auction of television broadcast licences and a smuggling crackdown. But, in an indication that Mr Tsipras intends to partly reverse the previous administration’s privatisation programme, the plan also targets only €1.5bn of revenues from state asset sales, down from €2.2bn in the previous budget. And in a speech to the Athens parliament last night, Mr Tsipras insisted, once again, that Greece’s large national debt needs to be restructured – anathema to Greece’s eurozone sovereign creditors. Mark Weisbrot of the Centre for Economic and Policy Research think-tank yesterday accused Brussels and Berlin of deliberately trying to undermine the Greek economy in order to force concessions from Athens. “The European authorities want to show who is boss,” he said. “This is a government they didn’t want. And they really don’t want this government to succeed.”

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Someone up there doesn’t like you.

Greece Fails To Reach Initial Deal On Reforms With Lenders (Reuters)

Greece failed to reach an initial deal with the EU and the IMF to unlock aid after the creditors dismissed a package of reforms from Athens as ideas rather than a concrete plan, officials said on Tuesday. The lack of a deal further raises pressure on Athens, which faces the prospect of running out of money in a few weeks unless it can convince lenders to dole out more financial help. Athens put a brave face on the failure to reach an agreement with the “Brussels Group” of representatives from the EU and the IMF, saying it remained keen for a deal on the basis of its long-held demand that the measures it is asked to implement do not hurt economic growth. Lenders will intensify efforts to collect data in Athens, it said. One source close to the talks said the halt in negotiations was not a sign of a rupture but an indication of slow-moving progress in the discussions.

Mistrust and acrimony have characterized much of Greece’s talks with lenders since Prime Minister Alexis Tsipras stormed to power in January pledging to end austerity and a bailout program that has kept Greece afloat for over four years. Greece and its European partners have sought to show publicly that relations have improved in recent weeks after Tsipras held a series of talks with EU leaders, but both sides remain far apart on issues ranging from pension reform to debt relief. At issue now is a list of reforms that Greece presented to the Brussels Group representatives last week, in an effort to show lenders that it is committed to living up to pledges of financial discipline and is worthy of aid. But euro zone officials panned the list as inadequate. One EU official said the lenders had yet to receive the list they had been waiting for.

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They’re small ones too.

Japanese Hoarding $300 Billion Under Mattresses (CNBC)

The Japanese are hoarding over $300 billion under their mattresses and that cash will likely stay there unless a crisis of epic proportions sparks capital flight, analyst say. “The money has been sitting there so long, it’s difficult to pin down what will prompt people to spend the cash,” Mizuho Securities’ chief market economist Yasunori Ueno told CNBC by phone. The notion came to public attention last year when Finance Minister Taro Aso scolded the Japanese for sitting on 880 trillion yen ($7.33 trillion) in cash, which was widely reported by the local press as being ‘kept under mattresses’. “It’s ridiculous – the money should be deposited at financial institutions so the banks can fund promising industries,” said Aso, according to a Sankei newspaper report.

But that figure was based on household cash deposits at Japanese banks, rather than hidden under mattresses, Ueno said. As per his calculations in a note dated March 25, households are probably hoarding around 36 trillion yen ($301 billion) of cash. “It’s like an iceberg – it just won’t melt,” said Dai-ichi Life Research Institute (DLRI) chief economist Hideo Kumano. “It will just sit there, immobile and frozen in time.” In many countries hoarding cash at home is synonymous with the underground economy, but the reasons in Japan are more mundane. “Under deflation, cash is king,” said DLRI’s Kumano, although he added that an unknown portion of the cash is probably just being hidden from the taxman.

At any rate, putting cash in the bank doesn’t mean it will earn any interest. Deposit accounts do not pay any interest in Japan. Even a ten-year savings account will only pay interest of between 0.10% and 0.150%, or one dollar on every 10,000 dollars in the bank, according to Mizuho Bank’s website. “Why bother going to the bank to deposit your money when it earns no interest? You may as well save yourself the effort of taking the trip down to the bank,” said Kumano.

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Up vs down.

‘Wealth Creators’ Are Robbing Our Most Productive People (Monbiot)

There is an inverse relationship between utility and reward. The most lucrative, prestigious jobs tend to cause the greatest harm. The most useful workers tend to be paid least and treated worst. I was reminded of this while listening last week to a care worker describing her job. Carole’s company gives her a rota of, er, three half-hour visits an hour. It takes no account of the time required to travel between jobs, and doesn’t pay her for it either, which means she makes less than the minimum wage. During the few minutes she spends with a client, she may have to get them out of bed, help them on the toilet, wash them, dress them, make breakfast and give them their medicines. If she ever gets a break, she told the BBC radio programme You and Yours, she spends it with her clients. For some, she is the only person they see all day.

Is there more difficult or worthwhile employment? Yet she is paid in criticism and insults as well as pennies. She is shouted at by family members for being late and not spending enough time with each client, then upbraided by the company because of the complaints it receives. Her profession is assailed in the media as the problems created by the corporate model are blamed on the workers. “I love going to people; I love helping them, but the constant criticism is depressing,” she says. “It’s like always being in the wrong.” Her experience is unexceptional. A report by the Resolution Foundation reveals that two-thirds of frontline care workers receive less than the living wage. Ten%, like Carole, are illegally paid less than the minimum wage. This abuse is not confined to the UK: in the US, 27% of care workers who make home visits are paid less than the legal minimum.

Let’s imagine the lives of those who own or run the company. We have to imagine it because, for good reasons, neither the care worker’s real name nor the company she works for were revealed. The more costs and corners they cut, the more profitable their business will be. In other words, the less they care, the better they will do. The perfect chief executive, from the point of view of shareholders, is a fully fledged sociopath. Such people will soon become very rich. They will be praised by the government as wealth creators. If they donate enough money to party funds, they have a high chance of becoming peers of the realm. Gushing profiles in the press will commend their entrepreneurial chutzpah and flair.

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“..the sector is viewed as likely to be larger than the supervised banking industry..”

Is It Time For ‘Shadow Bank’ Stress Tests? (CNBC)

A leading member of Germany’s Bundesbank has backed U.S. calls for “shadow banking”, the unregulated sector that provides credit on a global scale, to be subject to stress-testing. “Stress testing, as has been suggested, may be a good idea,” Andreas Dombret, a member of the Bundesbank’s executive board responsible for banking supervision, told CNBC on Tuesday. “But if we were to go by this route, it should be directed to the link between the shadow banking sector and the banks. So it is not about introducing regulation, if there is no systemic link between this sector and the banks. That is what we really have to care about.”

Dombret was commenting after Fed Vice Chairman Stanley Fischer suggested tougher rules for shadow banking on Monday, as well as stress tests to assess the risk the sector could pose to global finance in the event of a slump. Shadow banking is huge on a global scale, handled $75 trillion in funds in 2013, up $5 trillion on the start of the year, according to the Financial Stability Board. In some countries, such as the U.S., the sector is viewed as likely to be larger than the supervised banking industry. Stress tests for conventional banking activities were adopted by the U.S. and Europe after the 2007-08 financial crisis to gauge big banks’ ability to manage risk and plan for a potential economic shock.

On Tuesday, Dombret, who has worked for major international banks like Deutsche and JPMorgan, said there might be a need to regulate shadowing banking, if it proved to be a “systemic risk” to the financial sector. “We need to monitor very closely what is happening in this sector, and the relationship between these so-called shadow banks—I would rather call them ‘non-bank’ banks—and the banking sector, and should there be a systemic risk, and should there be a close link, we may even have to go beyond monitoring and we have to go towards may be also regulation.”

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“I don’t think we’ll go there via rational political discourse..”

The Way Out (Jim Kunstler)

The truth is, when you rig a money system with price interventions, distortions, and perversions, they will eventually express themselves in ways destructive to the system. In the present case of world-wide QE and central bank monkey business, these rackets are expressing themselves, finally, in wobbling currencies. In many nations, people are deeply unsure of what their money is worth, and how much it might be worth a month from now. This includes the USA, except for the moment our money is said to be magically appreciating in value compared to everyone else’s. Aren’t we special?

Get this: nothing is more hazardous than undermining people’s trust in their money. All of this financial perfidy conceals the basic fact that the human race has reached the limits of techno-industrialism. There are too many people and not enough basic resources to grow more of them — oil, fishes, soil, ores, fertilizers — and there is no steady-state “solution” to keep that economy going. In other words, it must either grow or contract, and it can’t really grow anymore (despite the exertions of government statisticians), so the authorities are trying to provide a monetary illusion of growth, when instead we’re in contraction.

Yes, contraction. The way out is to get with the program, shed the dead-weight and go where reality wants to take you. In the USA that means do everything possible to quit supporting giant failing systems — Big Box shopping, mass motoring, GMO agribiz, TBTF banks — and get behind local Main Street integrated economies, walkable towns, regular railroads, smaller and more numerous farms, local medical clinic health care, artistry in public works, and community caretaking of the unfit. All this surely implies a reduced role for the national government, and maybe the states, too. You could call it a lower standard of living, or just a different way to live.

I don’t think we’ll go there via rational political discourse. The current instabilities around the world are so sinister that they are liable to lead to even more strenuous efforts at the top to pretend that everything’s working, and even war is one way to pretend you’re okay (and the “other guy” isn’t). Of course, war has already broken out, in the MidEast and Ukraine, and it has everything to do with the sequential failure of nations, in one way or another, to overcome the limits of techno-industrialism. America will be dragged kicking and screaming to the realization of what it needs to do. The 2016 election will be the convulsion point.

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And for good reasons too.

Ukraine Interior Ministry ‘Uncooperative And Obstructive’ In Maidan Probe (RT)

The investigation into Maidan violence during Ukraine’s coup didn’t satisfy the requirements of the European Convention on Human Rights, says a report from the European Council, adding that Ukraine’s Interior Ministry was “uncooperative and obstructive.” The report specifically concentrated on the investigation of violent acts during the three months of Maidan demonstrations: Violent dispersal of the protest by Berkut riot police on November 30, 2013, clashes on January 22, 2014, which resulted in the first deaths of protesters, and February 18-21, 2014, the deadliest days of the Kiev protests. Before the February 2014 coup, “there was no genuine attempt to pursue investigations,” said a document by the International Advisory Panel.

The panel was established by the Council of Europe to review investigations into the violent incidents during the Maidan demonstrations. “The lack of genuine investigations during the three months of the demonstrations inevitably meant that the investigations did not begin promptly and this constituted, of itself, a substantial challenge for the investigations, which took place thereafter and on which the Panel’s review has principally focused,” the report stated. The panel added that “the appointment post-Maidan of certain officials to senior positions in the MoI [Ukraine Interior Ministry] contributed to the lack of appearance of independence.” It also “served to undermine public confidence in the readiness of the MoI to investigate the crimes committed during Maidan.”

The EU experts call the number of investigations performed by the Prosecutor General’s Office (PGO) on Maidan violence “wholly inadequate.” “The Panel did not consider the allocation of investigative work between the PGO, on the one hand, and the Kyiv [Kiev] City Prosecutor’s Office and the MoI, on the other, to be coherent or efficient,” says the report. “Nor did the Panel find the PGO’s supervision of the investigative work of the Kyiv [Kiev] City Prosecutor’s Office to have been effective.” Cooperation by Ukraine’s Interior Ministry “was crucial to the effectiveness of the PGO investigations,” according to the document.

“There are strong grounds to believe that the MoI attitude to the PGO has been uncooperative and, in certain respects, obstructive,” says the report, adding that the “Prosecutor General’s Office didn’t take all the necessary steps to ensure effective co-operation” by the Interior Ministry in the investigations. They also found there were facts of “the grant of amnesties or pardons to law enforcement officers in relation to unlawful killings or acts of ill-treatment” of protesters during the Maidan protests. This “would be incompatible with Ukraine’s obligations under Articles 2 and 3 of the Convention,” said the document. “The serious investigative deficiencies identified in this Report have undermined the authorities’ ability to establish the circumstances of the Maidan-related crimes and to identify those responsible.”

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” ..non-symbolic non-gestures of a preventive nature are sure to follow..”

License to Kill (Dmitry Orlov)

With the strategy of destroying in order to create no longer viable, but with the blind ambition to still try to prevail everywhere in the world somehow still part of the political culture, all that remains is murder. The main tool of foreign policy becomes political assassination: be it Saddam Hussein, or Muammar Qaddafi, or Slobodan Milosevic, or Osama bin Laden, or any number of lesser targets, the idea is to simply kill them.

While aiming for the head of an organization is a favorite technique, the general populace gets is share of murder too. How many funerals and wedding parties have been taken out by drone strikes? I don’t know that anyone in the US really knows, but I am sure that those whose relatives were killed do remember, and will remember for the next few centuries at least. This tactic is generally not conducive to creating a durable peace, but it is a good tactic for perpetuating and escalating conflict. But that’s now an acceptable goal, because it creates the rationale for increased military spending, making it possible to breed more chaos.

Recently a retired US general went on television to declare that what’s needed to turn around the situation in the Ukraine is to simply start killing Russians. The Russians listened to that, marveled at his idiocy, and then went ahead and opened a criminal case against him. Now this general will be unable to travel to an ever-increasing number of countries around the world for fear of getting arrested and deported to Russia to stand trial.

This is largely a symbolic gesture, but non-symbolic non-gestures of a preventive nature are sure to follow. You see, my fellow space travelers, murder happens to be illegal. In most jurisdictions, inciting others to murder also happens to be illegal. Americans have granted themselves the license to kill without checking to see whether perhaps they might be exceeding their authority. We should expect, then, that as their power trickles away, their license to kill will be revoked, and they find themselves reclassified from global hegemons to mere murderers.

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