Dec 172017
 December 17, 2017  Posted by at 10:31 am Finance Tagged with: , , , , , , , ,  7 Responses »

Russell Lee Shasta Dam under construction. Shasta County, California 1942


Zombie Corporations: 10% Of Global Companies Depend On Cheap Money (Mish)
America’s Inequality Machine Is Sending the Dow Soaring (BBG)
“Dark Money” Runs the World (Nomi Prins)
‘There’s No Life Here’: A Journey Into Britain’s Precarious Future (O.)
Brexit: Britons Now Back Remain Over Leave By 10 Points (Ind.)
Call Off Brexit Bullies Or Face Defeat, Conservative Peers Tell May (G.)
Metlife Says It Failed To Pay Some Pensions, Flags Hit To Reserves (R.)
EU Banks Told to Get Crisis-Ready by Removing Wind-Down Hurdles (BBG)
Humans At Maximum Limits For Height, Lifespan And Physical Performance (SD)



Only 10? You sure?

Zombie Corporations: 10% Of Global Companies Depend On Cheap Money (Mish)

10% of corporations survive only because central banks have kept real interest rates negative. The BIS defines Zombie firms as those with a ratio of earnings before interest and taxes to interest expenses below one, with the firm aged 10 years or more. In simple terms, Zombies are those firms that could not survive without a flow of cheap financing. The chart shows the median share of zombie firms across AU, BE, CA, CH, DE, DK, ES, FR, GB, IT, JP, NL, SE and US. According to the BIS Quarterly Report one out of ten corporations in emerging and advanced countries is a “Zombie”. Let’s dive into the report for more details.

The inability to come to grips with the financial cycle has been a key reason for the unsatisfactory performance of the global economy and limited room for policy manoeuvre. Since 2007, productivity growth has slowed in both advanced economies and EMEs. One potential factor behind this decline is a persistent misallocation of capital and labour, as reflected by the growing share of unprofitable firms. Indeed, the share of zombie firms – whose interest expenses exceed earnings before interest and taxes – has increased significantly despite unusually low levels of interest rates. Over the past 10 years, there has been a close positive correlation between the growth of corporate credit and investment.

A build-up of corporate debt has financed investment in many economies, particularly in EMEs, including high investment rates in China. Turning financial cycles in these economies could therefore weigh on investment. As with consumption, the level of debt can affect investment. Rising interest rates would push up debt service burdens in countries with high corporate debt. Moreover, in EMEs with large shares of such debt in foreign currency, domestic currency depreciation could hurt investment. As mentioned before, an appreciation of funding currencies, mainly the US dollar, increases debt burdens where currency mismatches are present and tightens financial conditions (the exchange rate risktaking channel).

Empirical evidence suggests that a depreciation of EME currencies against the US dollar dampens investment significantly, offsetting to a large extent the positive impact of higher net exports. For the above reasons, I believe the end of the global recovery is at hand. And when the next bust happens, the last thing central banks will be doing is raising interest rates.

Read more …

How to define the Fed.

America’s Inequality Machine Is Sending the Dow Soaring (BBG)

The Great Recession is a speck in the rear-view mirror for America’s financial markets. They’ve advanced far beyond pre-crisis levels. In fact, Goldman Sachs says you can go back a century before 2008, and still not find a “bull market in everything” like today’s. If the real economy had roared back the same way, Donald Trump might not be president. Instead, it’s been a grind. While unemployment is near a two-decade low, wages have grown slowly by past standards. They’re nowhere near keeping pace with the asset-price surge. Elected on a promise of better jobs and pay, Trump is about to pull the most powerful lever any government has for firing up the economy: fiscal policy. By slashing taxes on corporate profits, its authors say, the Republican plan will unleash the animal spirits of American business – and everyone will benefit.

A rising tide does lift all boats – but nowadays, in the U.S., not equally. Under both parties, recoveries have become increasingly lopsided. The current one has helped millions of people find work; it’s also benefited asset-owners far more than people who trade their labor for a paycheck. Income distribution, already the most unequal in the developed world, is getting worse. And that’s starting to influence everything from America’s spending habits to its elections. “The story of our time is polarization – by party, by class and by income,” said Mark Spindel, founder and chief investment officer at Potomac River Capital in Washington, and co-author of a 2017 book about the Federal Reserve. “I don’t see anything in the tax bill to make that any better.’’

The Fed’s post-2008 toolkit included massive purchases of financial assets, which supported a liftoff on the markets but took time to trickle through to the real economy. Trump’s tax critics say his plan will have a similar effect, because companies will spend the windfall on share buybacks or dividends, instead of job-creating investments. Plenty of executives say that’s exactly what they’ll do. Bank of America’s most recent buyback program totals $18 billion. Chairman Brian Moynihan championed the tax proposal this month. “It’s good for corporate America, and it’s good for us,” he said.

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Same thing: inequality machine.

“Dark Money” Runs the World (Nomi Prins)

Dark money is the #1 secret life force of today’s rigged financial markets. It drives whole markets up and down. It’s the reason for today’s financial bubbles. On Wall Street, knowledge of and access to dark money means trillions of dollars per year flowing in and around global stock, bond and derivatives markets. I learned this firsthand from my career on Wall Street. My first full year working on Wall Street was in 1987. I wasn’t talking about “dark money” or central bank collusion back then. I was just starting out. Eventually, I would uncover how the dark money system works… how it has corrupted our financial system… and encouraged greed to the point of crisis like in 2008. When I moved abroad to create and run the analytics department at Bear Stearns London as senior managing director, I got my first look at how dark money flows and its effects cross borders.

The “dark money” comes from central banks. In essence, central banks “print” money or electronically fabricate money by buying bonds or stocks. They use other tools like adjusting interest rate policy and currency agreements with other central banks to pump liquidity into the financial system. That dark money goes to the biggest private banks and financial institutions first. From there, it spreads out in seemingly infinite directions affecting different financial assets in different ways. Yet these dark money flows stretch around the world according to a pattern of power, influence and, of course, wealth for select groups. To be a part of the dark money elite means to have control over many. How elite is a matter of degree. These is not built upon conspiracy theories. To the contrary, alliances make perfect sense and operate publicly.

Even better, their exclusive dealings and the consequences that follow are foreseeable — but only if you understand how the system works and follow the dark money flows. It’s easy to see how this dark money affects the stock market at a high level, because we can monitor its constant movement. Here’s the smoking gun:

The red line shows you how much “dark money” the Federal Reserve has printed since 2008. The gray line shows you the S&P 500. They move together — more dark money drives the market higher. Much higher. There are dark money charts from around the world, just like the one I showed you for the Federal Reserve and U.S. stock market. Look at this “dark money” chart from Japan, for example:

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Time for a change.

‘There’s No Life Here’: A Journey Into Britain’s Precarious Future (O.)

Ebbw Vale is the largest town in the county of Blaenau Gwent. This autumn the county was found to be the cheapest place to buy a home in England and Wales (averaging £777 per sq m in 2016, compared with £19,439 for the most expensive, London’s Kensington and Chelsea). It offers the second-lowest mean salary in Britain, and its GCSE results are the worst in Wales. Five food banks operate within an area of about 42 square miles. People here are struggling economically and physically. It’s a grim irony that an area encompassing the former constituency of Aneurin Bevan, architect of the National Health Service, should today be facing a quietly unfolding health crisis. Some 12% of working-age residents receive government support for disability or incapacity – twice the national average.

Life expectancy for both men and women is among the lowest in England and Wales. Out of a population of 60,000, one in every six adults is being prescribed an antidepressant, according to NHS data from 2013. “GPs haven’t got time to listen, to talk to people, to find out what’s going on. They’ve got that five- or 10-minute slot, somebody’s in tears, they’re saying they’re depressed,” Tara Johnstone tells me at the Phoenix Project, the publicly funded drop-in centre where she works in nearby Brynmawr. It’s run by a local charity, Torfaen and Blaenau Gwent Mind, and people come to chat about their problems: anxiety, depression, illness, bereavement. Most stories revolve around the same theme. “It’s lack of work,” explains Trish Richards, another Phoenix staff member. “I’ve had people come to me on zero-hours contracts. They don’t know where they are from one week to the next. Can’t plan. Can’t even plan to go to the dentist in case they get called in to work.”

Read more …

The shift is only just starting. Incompetence will rule 2018 in Britain.

Brexit: Britons Now Back Remain Over Leave By 10 Points (Ind.)

The British public has swung behind staying in the EU by its largest margin since the referendum, with those backing Remain outstripping Leavers by ten points, a new poll has revealed. The exclusive survey for The Independent by BMG Research showed 51% now back remaining in the union, while 41% want Brexit. Once “don’t knows” were encouraged to choose one way or the other, or excluded, the Remain lead rises to 11 points. Either way, it is the biggest gap since the June 2016 vote. It comes as leading political figures write in The Independent tomorrow about whether the country needs a further referendum to decide on Brexit, once terms of departure are known.

Michael Heseltine, Peter Mandelson, Gina Miller and Vince Cable call for a rethink, while Leave campaign mastermind Matthew Elliott and Conservatives James Cleverly and Suella Fernandes demand Brexit is seen through. Last week again underlined the difficulties of withdrawal, after the EU set out terms for a Brexit transition period that will likely be unacceptable to leading Conservative Eurosceptics. Theresa May also suffered a damaging defeat in the Commons while trying to pass her key piece of Brexit legislation, before being forced to make a major concession to avoid further embarrassment next week. Amid the furore, the latest poll indicates British voters have slowly but steadily been turning their backs on Brexit.

When a weighted sample of some 1,400 people were asked: “Should the United Kingdom remain a member of the European Union, or leave the European Union?” – 51% backed Remain, and 41% backed Leave. 7% said “don’t know” and 1% refused to answer. After “don’t knows” were either pushed for an answer or otherwise excluded, 55.5% backed Remain and 44.5 backed Leave. Polling since this time last year appears to demonstrate a clear trend; Leave enjoyed a lead last December which gradually shrank, before turning into a lead for Remain in the month of the general election, that has since grown.

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Pretty soon the only thing left will be dividing lines.

Call Off Brexit Bullies Or Face Defeat, Conservative Peers Tell May (G.)

Theresa May was warned on Sunday by Tory peers that she will face a string of parliamentary defeats over Europe in the House of Lords if she tries to “bully” members of the second chamber into backing an extreme form of Brexit. After 11 Conservative MPs joined opposition parties to inflict a humiliating loss on the government last week, Tory grandees are warning that the spirit of rebellion will spread to the Lords unless May shows she respects parliament and decisively rejects those with “extreme views” in her own party. Writing in the Observer, two Tory peers, the former pensions minister Ros Altmann and Patience Wheatcroft, a former editor of the Sunday Telegraph, say they are appalled at the insults heaped by hardline Brexiters on MPs who voted with their consciences, and at the “strong-arm” tactics of the Tory whips.

They say it is vital to democracy that parliamentarians be given the right to assess the Brexit deal on behalf of the British people without being threatened or bullied, and suggest that the aggression of Tory party managers has helped create a “toxic atmosphere”, not only in parliament but across the UK. Altmann and Wheatcroft write: “The resulting appalling insults from Brexiters, calls for expulsion from the party, and even death threats, are worrying symptoms of the toxic atmosphere which has been created in our country.” They add: “There are many moderate Conservatives in both Houses of Parliament who are deeply concerned that some in our party are so desperate to leave the EU, with or without a deal, that they believe any cost is justified to bring Brexit. They maintain ‘freedom is priceless’ but this extreme view does not reflect public opinion.”

The two peers say Conservative members of the House of Lords, in which there was a large pro-Remain majority, will not take kindly to being told by the Tory whips and the executive what to think about Brexit and how to vote. “Mindful of the monumental importance for future generations of getting Brexit right, the Lords is unlikely to be receptive to bullying over a restricted timetable or vigorous whipping to toe the party line,” they say. “The people voted to ‘take back control’ but that has to mean control by parliament, not a small group with extreme views or an executive that will brook no challenge. It is parliament that must have the final say on whether the deal that is negotiated for breaking away from the EU … is in the UK’s best interests.”

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The shape of things to come.

Metlife Says It Failed To Pay Some Pensions, Flags Hit To Reserves (R.)

Metlife failed to pay pensions to potentially tens of thousands of people and will have to strengthen its reserves because of the costs of finding and repaying them, the New York insurer said. Metlife said in a filing on Friday that it believed the group missing out on the payments represented less than 5 percent of about 600,000 people who receive benefits from the company via its retirement business. Those affected generally have average benefits of less than $150 a month, it said. When taken, however, the increase to reserves could be material to Metlife’s financial results. The insurer said it would provide further disclosure on its fourth-quarter earnings call and in its annual report for 2017. MetLife did not say how many years of missing income was owed. The people who missed out on the payments have changed jobs, relocated or are otherwise unreachable based on currently available information, the company said, adding that it was widening its search efforts and making better use of technology.

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Are we really to believe Europe will stand up against its most powerful banks?

EU Banks Told to Get Crisis-Ready by Removing Wind-Down Hurdles (BBG)

Big euro-area lenders face a choice; clean up the complicated corporate structures that make them difficult to wind down in a crisis, or watch Elke Koenig do it for them. Koenig, head of the Brussels-based Single Resolution Board, said in an interview that streamlining banks’ architecture and ensuring they can fund their own demise without taxpayers’ help will be priorities in the year ahead. “You have banks where you end with something that looks more like a spider web than a clean structure,” Koenig said. The message that those banks will receive is: “Please tidy up,” she said. The SRB is part of the EU’s efforts to end the problem of too-big-to-fail banks. In 2018, it will adopt resolution plans for nearly all of the 140-odd lenders within its remit, then start to identify “substantive impediments” to orderly wind-down.

Under EU law, when the SRB finds such obstacles, it sends a report to the bank, which must respond within four months on how it plans to fix the problem. If the SRB isn’t satisfied, it can instruct the supervisor to impose a range of measures on the bank, including issuing loss-absorbing liabilities, altering its legal or operational structures and selling assets. This task assumed greater importance earlier this year when the the European Commission withdrew a bill that could have forced major banks such as Deutsche Bank and BNP Paribas to split their trading and retail operations. Finance Watch, a public-interest watchdog, has said that without that bill, it’s “squarely” on authorities like the SRB to make sure systemically important banks can be wound down in an orderly manner.

Koenig accepts that the SRB is responsible for making sure banks have resolvable structures. “That’s clearly on us,” she said. “And it’s something that needs to be addressed swiftly.” “The ideal structure for me is one where you can with confidence isolate certain functions to keep them up and running in case something unforeseen happens,” Koenig said. “I would not try to differentiate between investment banking functions and retail banking functions, but think about it this way: If you need to separate businesses, are you producing a viable set of companies? Can you really separate them in a timely manner?”

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But we were going to implant robots into ourselves… When will we learn that it’s the limits that set us free?

Humans At Maximum Limits For Height, Lifespan And Physical Performance (SD)

Humans may have reached their maximum limits for height, lifespan and physical performance. A recent review suggests humans have biological limitations, and that anthropogenic impacts on the environment – including climate change – could have a deleterious effect on these limits. Published in Frontiers in Physiology, this review is the first of its kind spanning 120 years worth of historical information, while considering the effects of both genetic and environmental parameters. Despite stories that with each generation we will live longer and longer, this review suggests there may be a maximum threshold to our biological limits that we cannot exceed. A transdisciplinary research team from across France studied trends emerging from historical records, concluding that there appears to be a plateau in the maximum biological limits for humans’ height, age and physical abilities.

“These traits no longer increase, despite further continuous nutritional, medical, and scientific progress. This suggests that modern societies have allowed our species to reach its limits. We are the first generation to become aware of this” explains Professor Jean-François Toussaint from Paris Descartes University, France. Rather than continually improving, we will see a shift in the proportion of the population reaching the previously recorded maximum limits. Examples of the effects of these plateaus will be evidenced with increasingly less sport records being broken and more people reaching but not exceeding the present highest life expectancy. However, when researchers considered how environmental and genetic limitations combined may affect the ability for us to reach these upper limits, our effect on the environment was found to play a key role.

“This will be one of the biggest challenges of this century as the added pressure from anthropogenic activities will be responsible for damaging effects on human health and the environment.” Prof. Toussaint predicts. “The current declines in human capacities we can see today are a sign that environmental changes, including climate, are already contributing to the increasing constraints we now have to consider.” “Observing decreasing tendencies may provide an early signal that something has changed but not for the better. Human height has decreased in the last decade in some African countries; this suggests some societies are no longer able to provide sufficient nutrition for each of their children and maintain the health of their younger inhabitants,” Prof. Toussaint explains.

To avoid us being the cause of our own decline, the researchers hope their findings will encourage policymakers to focus on strategies for increasing quality of life and maximize the proportion of the population that can reach these maximum biological limits. “Now that we know the limits of the human species, this can act as a clear goal for nations to ensure that human capacities reach their highest possible values for most of the population. With escalating environmental constraints, this may cost increasingly more energy and investment in order to balance the rising ecosystem pressures. However, if successful, we then should observe an incremental rise in mean values of height, lifespan and most human biomarkers.” Prof. Toussaint warns however, “The utmost challenge is now to maintain these indices at high levels.”

Read more …

Nov 222015
 November 22, 2015  Posted by at 2:56 pm Finance Tagged with: , , , , , , , ,  Comments Off on Nicole Foss presents: Challenge and Choices

Theodor Horydczak Washington Monument 1933

The Automatic Earth today releases its newest video presentation by Nicole Foss. Entitled ‘Challenge and Choices’, it deals with the problems presented to us by the earth’s limits to growth, in finance, energy and the natural world, and with the options and answers that exist in face of these problems.

To purchase the 3-hour video download of Challenge and Choices, go to our store. Click this image to get there:

Nicole Foss: After more than 30 years of exponential growth, gargantuan resource demand and increasingly frenetic consumption, we have now reached, or are reaching, an array of limits to growth. During our long, debt-fuelled boom, we reached out spatially through globalisation to monetise as much global production as possible, in order to facilitate the efficient transfer of wealth from the global periphery to its economic heartland.

We also, through the profligate use of credit and debt, reached forward in time to borrow from the future in order to stage an orgy of consumption in the present. This spectacularly successful modern form of economic imperialism delivered unprecedented wealth concentration, the like of which previous imperial structures could not have dreamed of attaining.

We are facing limits in terms of finance, energy, water, soil fertility, food web integrity on both land and sea, biodiversity, carrying capacity and the environment’s ability to absorb waste streams, among others. All of these factors, and the interactions between them, constitute parts of the reality jigsaw which we have been developing here at the Automatic Earth for the past eight years. Although we focus primarily on finance, as this is the first limit many will face, all limiting factors, and their relative timeframes, are vital to an understanding of the way the next several decades can be expected to play out.

This understanding of the big picture is crucial, but even more important is the ability to apply the knowledge in practice. This involves working through a complex decision tree process, spanning the assessment of strengths, weaknesses, opportunities, vulnerabilities and potential courses of action at different scales, from the individual to the regional. Our latest Automatic Earth video offering – Challenge and Choices – is designed to offer guidance in working through this process.

The video is divided into chapters, beginning in Chapter 1 with a broad overview of the limits to growth scenario, expanded to include a wider range of factors than we generally focus on at the Automatic Earth. The elements to be considered in an assessment of dependencies, or vulnerabilities, naturally lend themselves to actions at different scales. A vulnerability assessment typically begins with personal or family circumstances, hence the initial segments of the presentation focus on these aspects, beginning in Chapter 2 with financial circumstances.

As we have discussed many times at the Automatic Earth, we are facing the bursting of a major financial bubble and this is leading us directly into a state of economic depression, where people can expect many of the assumptions upon which their lives have been built to be invalidated in a short space of time. Such a period is characterised by high unemployment, sharply rising interest rates, taxes and rates (property taxes), falling incomes, cuts to benefits and entitlements, falling asset prices, major government spending cuts and increasingly aggressive debt collection, among other factors.

Being aware of these risks in advance allows for people to minimise the impact. The factors under consideration in our new presentation include leverage (what you owe compared to what your own), consequent interest rate risk, the potential for bankruptcy protection, margin call potential, access to and control over liquidity reserves, personal stores of value, risk management strategies and extended family issues.

The security of both liquidity and of stores of value will be extremely important, and extremely challenging. During a liquidity crunch, there will be very little money in circulation, leading to very little economic activity, and under such circumstances, cash will be exceptionally important. Managing risks to liquidity (cash) makes the difference between being at the mercy of changing circumstances and having the freedom of action to respond to both opportunities and threats as they develop. It is therefore important to avoid the large risks beyond one’s own control that are associated with assets inside the financial system, while learning to manage the risks associated with being outside of it.

Income streams will vary greatly in terms of reliability in economically contractionary times, given that the quantity of money available will decline sharply, and money in circulation will diminish even more quickly as increasingly risk-averse people cease spending and hold on to cash reserves, if they are lucky enough to have some. Many current employment opportunities will dry up or cease to exist entirely, and holding on to such a position now may mean being economically stranded at a time when available employment niches are much reduced in scope and already filled to capacity.

In an ideal world, one would therefore seek to be positioned in advance in a trade or profession likely to continue to deliver an income stream even in times when disposable income will be very scarce. This involves looking at one’s own skill set and personal inclinations, and moving towards using these to provide essential goods or services locally. Either employment or self-employment can be viable options, with running one’s own business raising many additional considerations. Although the complications may be greater, so is the potential for adding usefully to the economic and social fabric of one’s local environment.

Major decisions for everyone surround the issue of shelter – the appropriate form, the means of obtaining it and where it is located. The question of ownership versus renting deserves much greater consideration than most people allow for, given the degree of leverage involved in most cases. Property is drastically over-valued in many locations.

Purchasing property will not necessarily be the right decision, especially under circumstances where the financial value of the asset is set to fall substantially, but the debt will remain the same, leading to a rash of negative equity. Since the burden the debt represents will grow as both interest rates and unemployment rise, and social safety nets are withdrawn, there is a considerable incentive to remain debt-free through renting rather than ownership. Renting also allows for valuable flexibility as to location.

Chapter 3 goes into considerable detail as to the advantages and disadvantages of different types of locations – urban, rural, suburban, small town and intentional community. It is important to realise that the status quo is an active choice, not just a default option, and it may well not be a good one for one’s circumstances. All alternative options, including the status quo, should be thought through in order to avoid becoming stuck in the wrong place, facing risks that might have been avoidable. Becoming stuck is a very real risk under depression conditions, when freedom of action is likely to be very sharply limited, hence positioning in advance in highly advantageous.

The best choice will vary for different people with different circumstances, so there is no one right answer as to the best place, or set of circumstances, to be located. Each option is presented with suggestions as to which might suit what kind of individuals and families, and case-studies are provided as to workable approaches in each different environment. There are many quite inspiring examples from around the world to choose from.

In choosing a good location, carrying capacity and natural factors such as local resource availability need to be taken into account. These factors are considered in Chapter 4. For instance, a reliable water supply of predictable quality will be of particular importance, and one might not be able to rely on current sources that may be vulnerable under depression conditions. Similarly the potential impact of natural threats – wildfires, flooding, drought, earthquakes, cyclones, blizzards, extreme cold – needs to be understood as these are highly variable and represent a wide range of risk scenarios. The risks one feels comfortable with, or can tolerate, manage or mitigate, will be individual choices.

The most obviously good places are probably already over-crowded and expensive, whereas more marginal places may well have been overlooked and may represent both much better financial value and a greater range of opportunities. A given area can only support a certain number of people, and those limits can only be circumvented if large-scale trade is feasible and affordable energy readily available.

As we have pointed out at the Automatic Earth many times before, trade is very vulnerable when the credit it relies on dries up, meaning that economically contractionary times typically lead to trade collapses. At that point, local circumstances such as carrying capacity for a given local resource base become paramount. However, living close to a rich resource base is not necessarily the answer. One only has to look at the resource-rich geopolitical hotspots in the world to know that living on top of coveted resources is not necessarily an advantage.

Energy supply will be a major issue in many, if not most, regions. As we have noted many times here at the Automatic Earth, gross energy production is flat to falling globally, and the average energy profit ratio (energy returned on energy invested) is falling sharply. A greater and greater percentage of energy produced is being reinvested in energy production, leaving less and less to serve all society’s other purposes.

Both unconventional oil and gas and most forms of ‘renewable’ energy have low energy profit ratios and are also critically dependent on conventional oil gas gas production to enable them to be developed at all. As such they represent nothing more than an extension of the high energy profit ratio conventional fossil fuel era that we are now moving beyond. Being capital intensive as well as trade-dependent, they also depend on the continued expansion of the financial bubble, but this is on the verge of implosion. The future will be one of far less energy available, and consequently much reduced socio-economic complexity.

Families would do well to take a hard look at their energy-dependent essential functions (such as cooking, climate control, transport, and equipment operation), and think about what energy sources are required to fulfil these functions, what vulnerabilities different sources of supply may be subject to, whether each function is truly essential, and whether there may be more than one way to perform truly essential functions. One may require specifically electricity, liquid fuel or solid fuel, but there may be some capacity for substitution, perhaps with some additional or modified equipment.

The energy required may come from overseas or may require a large-scale centralised distribution system. Both of these represent significant threats to continued supply under conditions of credit contraction, trade collapse and reduced socio-economic complexity. Conversely, local energy sources which can be relatively simply obtained are a far more secure source of supply. Local dependency creates considerably less vulnerability, hence moving over to local supply in advance of supply problems would be advisable. Redefining essentials and moving away from requiring external energy sources would reduce vulnerability even further.

The local climate will determine how many aspects of life play out in practice, notably energy demand for climate control. Climate not requiring external energy inputs would eliminate a substantial dependency, but only a minority would have the choice to live in such a place. For the rest, thinking through how truly essential climate control is, and how this might be achieved in a low energy environment, will be important.

The development of tolerance for a wider range of indoor temperatures is likely to be necessary. Climate and water availability will, of course, determine what food can be grown locally, and in the sharp reduction of trade will reduce the potential for bringing food in from elsewhere. Relative proximity to the poles determines growing season, and is therefore a strong influence on the balance between plant and animal foodstuffs under a locavore scenario.

Health, healthcare care, social circumstances and political culture are also important factors in determining a good location for a given individual or family group. They are highly variable now, and can be expected to become more so as regions become more isolated with reduced trade. Human connections will grow greatly in importance in difficult times, hence being in a location where one is socially and culturally embedded can be expected to make a substantial difference to family fortunes. Any contemplation of relocation must take these aspects into account as they may ultimately matter more than physical circumstances. These factors are covered in depth in the Challenge and Choices presentation.

The scale of the community in which a family is socially involved will determine the range of choices available beyond the scale of individuals and families themselves. Isolation limits the range of options considerably, meaning that attempting to ‘go it alone’ is not advisable. Communities, whether urban, suburban, small town, village or rural, all offer the advantages of being able to work with others for mutual benefit. Chapter 5 is devoted to exploring the options available at larger scale, beginning with emphasis on community scale potential for pooling resources and building valuable social capital.

Relationships of trust are the foundation of society, enabling collective human endeavours to function. Building them in advance of difficult times creates a critical advantage, allowing existing constructive initiatives to flourish and new ones to gain traction rapidly once the need for them becomes clear. A range of examples of communal possibilities is given in the presentation, including community hubs, maker spaces, community projects, local network building and peer to peer coordination and funding activities.

Several are then discussed in greater depth, notably those in the economic sphere which will be necessary to navigate a period of liquidity crunch. These include time banking, savings pools, alternative currencies, alternative trading arrangements and the slow money movement. These are initiatives reducing the dependence on the existing monetary system, thereby reducing exposure to the risk of that system being disrupted.

Periods of economic depression create a situation of artificial scarcity, where a society has all the resources it had before, but due to the lack of money in circulation, can no longer make use of them. As those who lived through the great depression of the 1930s said – “We had everything but money”. Finance represents the operating system for our societies, and when that system crashes, it it necessary to ride out the acute phase of the crunch, and then to reboot the system into a more workable form.  The initial phase creates an urgent need to substitute for the missing liquidity in the larger system with alternative forms of liquidity at the local level, in other words to relocalise finance in order to ride out the period of hardship.

Such systems emerge spontaneously at times and in places where economic depressions have been or are now in force, for instance Austria during the 1930s, Argentina following 2001 or Greece today. However, they can be initiated in advance, functioning in parallel with the larger system, and then are well positioned to stand more or less alone when the need arises. Examples of alternative currencies functioning under normal circumstances and under depression conditions are discussed in Challenge and Choices.

The need for financial relocalisation is but one aspect of the general need for much greater decentralisation. The contraction of the trust horizon during times of economic and financial contraction results in the need for all manner of activities, very much including finance, to operate at much smaller scale in order to function. Trust determines effective organizational scale, hence in contractionary times, working within the trust horizon implies working at substantially smaller scale. Governance mechanisms will be no exception.

Dependence on larger scale organizations to deliver essential goods and services, or to maintain a functioning socio-economic system, will represent a considerable vulnerability at a time when those entities are ceasing to be able to perform the functions for which they currently hold responsibility. Over time those responsibilities will come to vest in whichever organizations are positioned in practice to assume them, whether or not such organizations have the legal responsibility to do so.

Smaller scale governing institutions and regulatory mechanisms, which have been substantially disempowered in recent years, can therefore expect to inherit greater responsibility in the future. Being informed and well-positioned in advance to step into any power vacuum once it appears will be advantageous.

Centralised systems often struggle already to deliver what they are supposed to, hence decentralisation initiatives are already underway in many fields. These are commonly opposed by a top-down system critically dependent on continued growth, and the increasingly complete buy-in required to maintain it. It is therefore becoming increasingly difficult to opt out, even as doing so is coming to make more and more sense because the cost burden associated with the larger system is increasingly disproportionate to the benefits it is able to deliver.

In many ways the essentials can be provided independently at far lower cost, thanks to the absence of large and complex bureaucracies to support. This makes them a threat to a larger system reliant on holding hostage the provision of essentials by closing off independent options. Trying to achieve independence in any sphere therefore faces obstacles which make it more difficult than it should be, but it will be necessary to move in that direction in any case.

The existing level of socio-economic complexity allowing larger scale systems to function is itself dependent on trust, political legitimacy, cheap money and cheap energy, all of which are threatened in a limits to growth scenario. The future will be simpler and more local whether we like it or not, so we must position ourselves for that future. In doing so we generate resilience – the ability to cope under a wide range of circumstances, to bounce back from system shocks and to thrive in the meantime. This capacity is what working through the limits to growth decision tree process is capable of establishing.

Challenge and Choices provides the basis for being proactive at both the individual and collective levels, allowing us to face the approaching limits and navigate a near future fraught with risk and uncertainty. Challenging circumstances are much less daunting when equipped with information, analysis and the tools required to adapt to a changing big picture. We can replace a destructive mindset with a constructive one grounded in a solid sense of purpose, replacing fear of the unknown with empowerment.

Nicole Foss

To purchase the 3-hour video download of Challenge and Choices, go to our store. Click this image to get there:

Oct 152015
 October 15, 2015  Posted by at 11:19 am Finance Tagged with: , , , , , ,  18 Responses »

Marion Post Wolcott. Unemployed coal miner’s mother in law and child. Marine, West Virginia 1938

The Automatic Earth’s Nicole Foss recorded a podcast yesterday with Jack Spirko at the Survival Podcast. I haven’t even had time to listen to it yet, but I’m sure it’ll be as lightheartedly entertaining as her appearances always tend to be ;-). One thing I did notice is that for the first 13 minutes or so, there is no Nicole, just talk about sponsors of the Survival podcast. So you might want to skip that. Enjoy!

Remarks by Jack at the Survival Podcast site:

Special Notice – In the interest of journalistic integrity I feel obligated to reveal something that occurred today. Skype screwed up and only Nicole’s side of the interview came out in the end. Luckily she is a talker and I didn’t say much in this interview. To make it functional for the audience I went though a re recorded my side and pieced the entire thing together. It came out really well but if anything seems missing this is why. Likely if I didn’t tell you you would never even know that my side wasn’t live…

Join Me Today to Hear Nicole Discuss…
• What is the Age of Limits
• The coming liquidity crunch and economic depression
• Some reasons taking out a mortgage may not be a good idea
• What this means for small farms in regard to debt
• How and why population will most likely be reduced
• Why we should not even focus on climate change as a problem
• What do you recommend for the average 9-5er should do
• How much longer can we kick the can down the road
• Nicole’s predictions for how the world wide economic crisis will play out
• Thought on a possible mass migration in the US

Aug 182015
 August 18, 2015  Posted by at 2:32 pm Finance Tagged with: , , , , , , ,  7 Responses »

Gustave Doré Dante and Virgil among the gluttons 1868

In case you missed it, we’re doing something a little different. Nicole wrote a very lenghty article and we decided to publish it in chapters. Over five days we are posting 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 4. Part 1 is here:
Global Financial Crisis – Liquidity Crunch and Economic Depression,
Part 2 is here:
The Psychological Driver of Deflation and the Collapse of the Trust Horizon
and part 3 is here:
Declining Energy Profit Ratio and Socioeconomic Complexity

Blind Alleys and Techno-Fantasies

The majority of proposals made by those who acknowledge limits fail on at least one of the previous criteria, and often several, if not all of them. Solution space is smaller than we typically think. The most common approach is to insist on government policies intended to implement meaningful change by fiat. Even in the best of times, government policy is a blunt instrument which all too often achieves the opposite of its stated intention, and in contractionary times the likelihood of this increases enormously.

Governments are reactive – and slowly – not proactive. Policies typically reflect the realities of the past, not the future, and are therefore particularly maladaptive at times of large scale trend change, particularly when that change unfolds rapidly. Those focusing on government policy are mostly not thinking in terms of crisis, however, but of seamless proactive adjustment – the kind of which humanity is congenitally incapable.

There is a common perception that government policy and its effect on society depends critically on who holds the seat of power and what policies they impose. The assumption is that elected leaders do, in fact, wield the power to determine and implement their chosen policies, but this has become less and less the case over time. Elected leaders are the public face of a system which they do not control, and increasingly act merely as salesmen for policies determined behind the scenes, mostly at the behest of special interest groups with privileged political access.

It actually matters little who is the figure-head at any given time, as their actions are constrained by the system in which they are embedded. Even if leaders fully understood the situation we face, which is highly unlikely given the nature of the leadership selection process, they would be unable to change the direction of a system so much larger than themselves.

Where public pressure on elected governments develops around a specific issue, for whatever reason, the political response is generally to act in such a way as to appear to do something meaningful, while actually making no substantive change at all. Often the appearance of action is nothing more than vacuous political spin, assuaging public opinion while doing nothing to threaten the extractive interests driving the system in the same direction as always. We cannot expect truly adaptive initiatives to emerge from a system hostage to powerful vested interests and therefore locked into a given direction.

Public understanding of the issues agitated for or against tends, unfortunately, to be limited and one-dimensional, meaning that it is essentially impossible to create public pressure for truly informed policy changes, and it is relatively simple to claim that the appearance of action constitutes actual action. A short public attention span makes this even simpler. People are also extremely unlikely to vote for policies which, if they were to make a meaningful difference, would amount to depriving those same people of the outsized consumption habits to which they have become accustomed. The insurmountable obstacles to achieving change through government policy become obvious.

Planned degrowth assumes the possibility of a smooth progression towards a lower consumption future, but this is not how contractions unfold following the bursting of a bubble. What we can expect is a series of abrupt dislocations that are going to wreak havoc with our collective ability to plan anything at all for many years, by which time we will already be living in a lower consumption future arrived at chaotically. Effective planning for an epochal shift requires the capacity for top-down policy implementation at large scale, combined with social cohesion, the ability to maintain complexity, and the energy to maintain control over a myriad distinct aspects simultaneously. It is simply not going to happen in the manner that proponents envisage.

Similarly, a steady state economy is not a realistic construct in light of many non-negotiable realities. Human history, and in fact the non-human evolution which preceded it, is a dynamic history of boom and bust, of niches opening up, being exploited, being over-exploited and collapsing. It is a history of opportunism and the consequences following from it. In the human experience, boom and bust in the form of the rise and fall of empire is an emergent property of civilizational scale. A steady state at this scale is prima facie impossible.

An approximation of steady state can exist under certain circumstances, where a population well below ecological carrying capacity, and surrounded by abundance, is left in isolation for a very long period of time. The Australian aboriginal existence prior to the European invasion is probably the best example, having persisted for tens of thousands of years. The circumstances which permitted it were, however, diametrically opposite to those we currently face.

Proponents of the steady state economy do not seem to appreciate the extent to which we have long since transgressed the point of no return from the perspective of being able to maintain what we have built. Even if we were merely approaching limits, instead of having moved substantially into overshoot, we would not be able to hold society in stasis just below those limitations.

Populations grow and expansion proceeds with it. Intentionally preventing population growth globally is unrealistic. Even China, as a single country, has struggled with population control policies, and has had to take drastic and dictatorial measures in order to slow population growth. This clearly relies on strong top-down control, which is only barely possible at a national level and will never be possible at a global level.

In China we are also going to see that the outcome of population control has challenging consequences, and that a policy supposedly designed to foster stability can have the opposite effect. The desire for a male child has dangerously distorted the gender ratio in ways which will leave the country with a large excess of young men with no prospects for either work or marriage. That is a guarantee of trouble, either at home or abroad, or possibly both. There will also be far too few employed young people to look after a burgeoning elderly population, meaning a rapid die-off of the elderly cohort at some point.

Even then China is unlikely to have managed to get itself back below the carrying capacity it has done so much to destroy during its frantic dash for growth. The tremendous modernity drive China has engaged in essentially undone any benefit curbing population growth might have had, by increasing energy and resource consumption per capita by an enormous margin. It is population times consumption which determines impact, and in China the ecological impact has in many ways been catastrophic. That has to some extent been compensated for by obtaining access to a great deal of land in other countries, but economic colonialism has done nothing for global stability.

While it is possible to conceive, as some steady-state and degrowth proponents do, of a world in which civilization and large-scale urbanism have been dismantled in favour of autonomous, yet networked, village-scale settlements, that does not make it even remotely realistic. Humanity may, in the distant future, after the overshoot condition has been resolved by nature, as it will eventually be, find itself living in villages once again, but they would not be networked in the modern, technological sense, and the population they housed would be very smaller smaller than at present.

If it is below carrying capacity, then it will grow again, restarting the cycle of expansion and contraction rather than settling for a steady-state. Reaching for the stars again would not be possible however, as the necessary energy and resources have already been consumed or dissipated.

People are often inclined to think that a different trajectory is a matter of choice – for instance that we must collectively choose to live differently in order to prevent an ecological catastrophe. In fact it is not a matter of choice at all. There is no basis for top-down control capable of delivering meaningful change, nor would humanity ever collectively choose to scale back its consumption pattern, although individuals can and do. Given opportunities as a species, we take them, as evolution has shaped us to do.

Groups which made a habit of forgoing opportunities in the past would quickly have been out-competed by those who did not. We are the descendants of a long long line of opportunists, selected over millennia for our flexibility in turning an incredibly wide range of circumstances to our advantage. But, in this instance we will have no choice – the shift to lower consumption will be imposed on us by circumstance. The element of choice will be only in how we choose to face that which we cannot change.

Another class of ideas for ways forward is grounded in techno-optimism, suggesting that because human beings are clever and creative, and have tended to push back apparent limits before, that we will be able to do so indefinitely. The notion is that changing our trajectory is unnecessary because limits can always be circumvented. Needless to say, such a view is not grounded in physical reality. These ‘solutions’ are entrepreneurial rather than policy-driven, although they may expect to be facilitated through policy.

Ideas in this category would include such things as smart renewables-based power grids, high-performance electric cars, high-tech energy storage systems, thorium reactors, fusion reactors, biofuels, genetically modified (pseudo)foodstuffs, geoengineering, enhanced automation, high-tech carbon sequestration, global carbon trading platforms, electronic crypto-currencies, clean-tech, vertical farming skyscrapers and many other notions.

Notice that all of these presume the ready availability of cheap energy and resources, along with large quantities of capital, and all assume that technological complexity can be maintained or even increased. Options such as these also have a substantial dependence on the continuation of globalized trade in both goods and services in order to satisfy their complex supply chains. However, globalization depends on the ability to operate at large scale in extremely complex ways, it depends on cheap energy, it depends on maintaining trust in trading partners, and it depends on the ability to travel without facing unacceptable levels of physical risk from piracy or conflict.

Trade does very poorly in times of financial and economic contraction. In the Great Depression of the 1930s, trade fell by 66% in two years. Trust collapses, and with it the contractual ability to agree on risk-sharing arrangements. Letters of credit become impossible to obtain in a credit crunch, and without them goods do not move.

Many goods will in any case have no market, as there will be little purchasing power for anything but essentials, and possibly not even sufficient for those. As we move from the peak of globalized trade, there will be an enormous excess of transport capacity, which will drive prices down relentlessly to the point where transporting goods becomes uneconomic. Much transport capacity will be scrapped. Without credit to oil the wheels of trade, our highly leveraged economic system will grind to a halt.

It is natural that we regard our current situation as being normal, and take for granted that the march of technological progress – the only reality most of us have known – will continue. Few question very deeply the foundations of our societies, and even those who do recognize that change must occur rarely realize the extent to which that change will inevitably strike at the fundamental basis of modern existence. Globalization has peaked and will shortly be moving into reverse. The world will be a very different place as a result.

This is part 4. Part 1 is here:
Global Financial Crisis – Liquidity Crunch and Economic Depression,
Part 2 is here:
The Psychological Driver of Deflation and the Collapse of the Trust Horizon
and part 3 is here:
Declining Energy Profit Ratio and Socioeconomic Complexity

Tune back in tomorrow for part 5: Solution Space

Aug 152015
 August 15, 2015  Posted by at 1:54 pm Finance Tagged with: , , , , , , ,  13 Responses »

Gustave Doré Dante and the Angel of the Church before the Door of Purgatory 1868

We’re going to try something a little different. Nicole wrote another very long article and I suggested publishing it in chapters; this time she said yes. So in the next five days we will post five different chapters of the article, one on each day, and then on day six the whole thing. That way, you will have some time left over to spend with your families… 😉

Just so there’s no confusion: the article, all five chapters of it, was written by Nicole Foss. Not by Ilargi.


A great deal of intelligence is invested in ignorance when the need for illusion is deep.
Saul Bellow, 1976

More and more people (although not nearly enough) are coming to recognise that humanity cannot continue on its current trajectory, as the limits we face become ever more obvious, and their implications starker. There is a growing realisation that the future must be different, and much thought is therefore being applied to devising supposed solutions for that future. These are generally attempts to reconcile our need to make changes with our desire to continue something very much resembling our current industrial-world lifestyle, with a view to making a seamless transition between the now and a comfortably familiar future. The presumption is that it is possible, but this rests on foundational assumptions which vary between the improbable and the outright impossible. It is a presumption grounded in a comprehensive failure to understand the nature and extent of our predicament.

We are facing limits in many ways simultaneously – not surprising since exponential growth curves for so many parameters have gone critical in recent decades, and of course even more so in recent years. Some of these limits lie in human systems, while others are ecological or geophysical. They will all interact with each other, over different timeframes, in extremely complex ways as our state of overshoot resolves itself (to our dissatisfaction, to put it mildly) over many decades, if not centuries. Some of these limits are completely non-negotiable, while others can be at least partially mutable, and it is vital that we know the difference if we are to be able to mitigate our situation at all. Otherwise we are attempting to bargain with the future without understanding our negotiating position.

The vast majority has no conception of the extent to which our modernity is an artifact of our discovery and pervasive exploitation of fossil fuels as an energy source. No species in history has had easy, long term access to a comparable energy source. This unprecedented circumstance has facilitated the creation of turbo-charged civilization.

Huge energy throughput, in line with the Maximum Power Principle, has led to tremendous complexity, far greater extractive capacity (with huge ‘environmental externalities’ as a result), far greater potential to concentrate enormous power in the hands of the few with destructive political consequences), a far higher population, far greater burden on global carrying capacity, and the ability to borrow from the future to satisfy the insatiable greed of the present. The fact that we are now approaching so many limits has very significant implications for our ability to continue with any of these aspects of modern life. Therefore, any expectation that a future in the era of limits is likely to resemble the present (with a green gloss) are ill-founded and highly implausible.

The majority of the Big Ideas with which we propose to bargain with our future of limits to growth rests on the notion that we can retain our modern comforts and conveniences, but that somehow we will do so with far less resource use, and with a fraction of the energy we currently employ. The most mainstream discussions revolve around ‘green growth’, where it is suggested that eternal economic growth can occur on a finite planet, and that we will magically decouple of that growth from the physical basis upon which it rests. Proponents argue that we have already accomplished this to an extent, as the apparent energy intensity of developed state economies has fallen.

In actuality, all that has happened is that the energy deployed to provide developed world comforts has been used in the emerging markets where goods destined for our markets are manufactured, so that the consumption falls within someone else’s energy budget. In reality there has been no decoupling at all. Economic growth requires energy, and there is an exceptionally high correlation between the two. Even the phantom growth of the bubble era, based on the expansion of virtual wealth, requires energy in order to maintain the complexity of the system that generates it.

It is crucial that we understand the boundaries of solution-space, in order to be able to focus our finite resources (in every sense of the word) on that which is inherently workable, at least in theory. ‘Workable In theory’ implies that, while there is no guarantee of success given a large number of unpredictable factors, there is also no obvious prima facie barrier to success. If, however, we throw our resources at ideas that are subject to such barriers, and therefore lie beyond solution space, we guarantee that those initiatives will fail and that the resources so committed will have been wasted. It is important to note that ‘success’ does not mean being able to maintain anything remotely resembling business as usual. It refers to being able to achieve the best possible outcome under the circumstances.

Sculptors work by carving away excess material in order to reveal the figure within the block they are working with. Similarly, we can carve away from the featureless monolith of conceivable approaches those that we can see in advance are doomed to fail, leaving us with a figuratively coherent group of potentially workable ideas. In order to carve away the waste material and get closer to a much smaller set of viable possibilities, we need to understand some of the non-negotiable factors we will be facing, each of which has implications restrictive of viable solution space. Many of these issues are the fundamental substance of the message we have been propagating at the Automatic Earth since its inception and will therefore constitute a review for our regular readership. For more detail on these topics, check out our primers section.

Global Financial Crisis – Liquidity Crunch and Economic Depression

As we have maintained since the Automatic Earth’s launch in early 2008, we have lived through a gigantic monetary expansion over the last 30 years or so –  the largest financial departure from reality in human history. In doing so we have created a crisis of under-collateralization. This period was highly inflationary, as we saw a vast increase in the supply of money and credit versus available goods and services. Both currency printing and credit hyper-expansion constitute inflation, but the outcome, and therefore prescription, for each is very different. While currency printing cuts the real wealth pie into many more pieces, each of which will be very small, credit expansions such as this one create multiple and mutually exclusive claims to the same pieces of pie, hence we have generated a vast quantity of excess claims to underlying real wealth.

In other words, we have created a bubble of virtual wealth, with no substance to back up the pile of promises to repay that it rests upon. As we have said before, this amounts to playing a giant game of musical chairs where there is perhaps one chair for every hundred people playing the game. When the music stops, those best positioned to understand the rules of the game will grab a chair as quickly as possible. Everyone else will be out of the game. The endgame of credit expansion is always a credit implosion, where the excess claims are rapidly and messily extinguished. This is, of course, deflation by definition – a contraction in the supply of money and credit relative to available goods and services – through the collapse of the credit supply, where credit is of the order of 99% of the effective money supply.

A credit implosion crashes both the money supply and the velocity of money – the rate at which money circulates in the economy. Together these factors determine how much economic activity can be sustained. With both the money supply and the velocity of money very low, a state of liquidity crunch exists, where there is insufficient liquidity in the economy to connect buyers and sellers, or producers and consumers. Nothing moves, so there is little or no economic activity. Note that demand is not what one wants, but what one can pay for, so with little purchasing power available, demand will be very low under such circumstances.

During the expansion, both the money supply and the velocity of money increased dramatically, and the resulting artificial stimulation of demand led to an increase in supply, with the ability to sustain a much larger than normal amount of economic activity. But once the limit is reached, where all the income streams of the productive economy can no longer service the debt created, and there are no more willing borrowers or lenders, the demand stimulation disappears, leaving a great deal of supply without a market. The demand that had been effectively borrowed from the future, must be ‘repaid’ once the bubble bursts, leading to a prolonged period of low demand. The supply that had arisen to service it no longer has a reason to exist and cannot be maintained.

The economy moves into a period of seizure under such cIrcumstances. We have frequently compared attempting to run an economy with too small a money supply in circulation to trying to run an automobile with the oil warning light on, indicating too little lubricant. Engines seize up when run with too little lubricant, a role played by money in the case of the engine of the economy. The situation created can also be compared to a computer operating system crash, where nothing functions until the system has been rebooted. During the Great Depression of the 1930s, people noted that they had plenty of everything except money. Liquidity crunch creates a condition of artificial scarcity, where even being surrounded by resources is of little use for a period of time once the operating system has crashed and has yet to be ‘rebooted’.

We will be looking at a period of acute liquidity crunch followed by a long period of chronic financial instability. The initial contraction will be driven by fear and that fear will persist for a long time. This will result in little credit being made available, and only at high cost. In other words, interest rates, which are a risk premium, will be very high as we move beyond the initial phase of contraction and fear is in the drivers seat. Deflation and economic depression are mutually reinforcing, hence once that downward spiral, or vicious circle, dynamic has taken hold, we will remain in its grip for many years.

Given that the cost of capital will be very high, and there will be little purchasing power, proposed solutions which are capital-intensive will lie outside solution space.

Tune back in tomorrow for The Psychological Driver of Deflation and the Collapse of the Trust Horizon .

Sep 022014
 September 2, 2014  Posted by at 3:40 pm Finance Tagged with: , , , , , , ,  15 Responses »

Peter Sekaer Times Square with Father Duffy statue 1937

This is it. This is the biggest we’re going to get. We won’t grow anymore. Not bigger, not wider, not taller (just thicker perhaps, in the sense of more stupid). I return to this from time to time, and still I never see even just one voice in the media with even one hair’s breadth of doubt about the overarching theme of growth at all costs. Is this a sign that economists and other poorly educated people have taken over the world, or is it simply what we are all programmed for?

The only discussion out there is how we can best return to growth. Never if we should return to it. But still, when I look around me I don’t have the feeling that we desperately need to grow bigger. That we need to consume more than we already do, that we need to drive our cars more or move into larger homes or buy more clothes or gadgets or anything.

At least 99% of the time I think that it’s all more than enough. And not just because of the damage our consumption patterns inflicts on our lives and our health and our planet, but certainly also because of what these patterns do to my own mind and soul.

To say that this is it, and we won’t grow any bigger, is not just some spurious remark. The world economy hasn’t actually grown for decades, other than through debt.

The credit issued by Jimmy Stewart in It’s a Wonderful Life could bolster growth. But in a world that’s steeped as deeply in debt as we have become, that debt actually turns into the opposite of growth. We know this happens when more debt is needed every day just to not shrink, like the Red Queen running just to stand still.

From that moment on, more debt can only buy you the appearance and illusion of growth, not the real thing. We passed that point some 40 years ago. If not earlier. You can argue about the exact timing. But not about the fact itself. Still, there’s no argument out there about either.

Joseph Stiglitz has a piece in today’s Guardian entitled ‘Capitalism Needs New Rules To Restore Postwar Growth And Stability’. It secures Stiglitz’s place in history as a useless man, not capable of original thought, like all Fake Nobel for Economics winners. They are people capable of thought alright, provided it’s limited to one dimension only.

The US is the undisputed best of the rest these days. Its GDP growth may be sucked out of some highly paid circle of experts’ thumbs, but at least it doesn’t yet shrink too dramatically. That the entire American growth recovery illusion has been built on ‘debtsand’ is complete and utter anathema. For obvious reasons.

Unfortunately for the American economy, the economies of rest of the world are not so fortunate. They can’t even keep up appearances anymore. Though, granted, that’s not for lack of trying. Which makes sense from the overall storyline point of view. Which dictates that we all must, and therefore will, return to growth. Viewed from that hilltop, any non-growth can only be temporary. And some economist will find the solution to the problem, at which point angels will start singing.

Japan may be the worst of the basket cases. We don’t see everything there is to see yet, since the Tokyo spin machine is perhaps the best asset the country has left. But there can be no doubt that Abenomics is going to turn out brutal. And for many Japanese already has. The last straw will be the GPIF, world’s largest pension fund, switch to stocks just ahead of a giant stock market crash. Then there’ll be nothing left.

China is an economic miracle that’s rapidly turning into a 1.4 billion people size disaster. An empire of debt built on plastic trinkets and quasi slave labor that’s seeing the rest of the world’s debt collapse devastate its own air castles. The unreal estate industry that made up over 20% of the economy has nowhere left to turn. Those local officials who borrowed the most are set to be either imprisoned or have their kneecaps redesigned by the shadow banking backers. Or both. The rest will try hard to fade into the background in some far away location.

Europe is awaiting one last cheap credit splurge that may or may not come, but in a giant spoiler alert we all already know the end of the story. Europe doesn’t just have the global economic meltdown to cope with, it’s also stuck in a horribly failed currency experiment that seeks to force people of very different cultures and languages into a straight jacket that’s already strangling and suffocating some 200 million of them.

Who will be increasingly subject to power politics and vested interests in Brussels, as their lives deteriorate in further decline. The only thing the EU talks about right now is who’s going to get the big jobs in the musical chairs of the new European Committee. It’s the politicians who are important, not the people. Still that’s an issue that will solve itself as circumstances get worse. It won’t be pretty, but it will be resolved.

But come on, who among you can look at the world, at your country, your town, your own homes and lives, and tell yourselves we’re not big enough yet? What more would you want to add? Once again I’ll ask: are you happier than your parents and grandparents? And if not, what exactly are you doing, what are you trying to achieve? Be honest, shouldn’t you lose a little weight?

I can’t leave Ukraine alone when the Kiev government insinuates that Putin has threatened to drop nuclear bombs on them. That’s way beyond the pale.

Just when you think things can’t get crazier, Ukraine’s Defense Minister Valery Geletey claims Russia has in the recent past repeatedly threatened nuclear attacks on Ukraine. That one takes the cake. That is to say, until tomorrow, when Kiev may yet again try to outdo itself in the realm of absurd allegations. Geletey also talked about the threat of tens of thousands of deaths in a ‘Great Patriotic War’, the worst in Europe since WWII. As in, worse than the Balkans.

Obviously, Russia would never threaten Ukraine with nukes, if only because there is no need. At the same time, something Putin actually did say was spun, in a case of deliberate misinterpretation, to insinuate that Russia has plans to conquer Kiev. What Putin really said – to EU head Barroso – was that Russia could take Kiev, in two weeks, if it wanted to. But if Moscow had any such plans, it would just do it, not announce it. However, there are no such plans.

The narrative continues to be built to prepare for the big NATO top September 4-5. There will be many voices calling for Ukraine to be made a member, so European soldiers can be sent into the country, and what’s left of the Donbass after months of Ukraine bombing can be finished of by NATO planes. Let’s hope that plan doesn’t come to fruition, because it would greatly escalate the crisis, and NATO has no chance of winning, it would only lead to more bloodshed.

A number of retired US Army, CIA, FBI, NSA and other intelligence officers sent an open letter to Angela Merkel to urge her not to fall into the NATO propaganda trap:

US Intelligence Veterans Urge Merkel To Avoid All-Out Ukraine War

We the undersigned are longtime veterans of U.S. intelligence. We take the unusual step of writing this open letter to you to ensure that you have an opportunity to be briefed on our views prior to the NATO summit on September 4-5. You need to know, for example, that accusations of a major Russian “invasion” of Ukraine appear not to be supported by reliable intelligence. Rather, the “intelligence” seems to be of the same dubious, politically “fixed” kind used 12 years ago to “justify” the U.S.-led attack on Iraq. [..]

Obama has only tenuous control over the policymakers in his administration – who, sadly, lack much sense of history, know little of war, and substitute anti-Russian invective for a policy. [..] Largely because of the growing prominence of, and apparent reliance on, intelligence we believe to be spurious, we think the possibility of hostilities escalating beyond the borders of Ukraine has increased significantly over the past several days.

Hopefully, your advisers have reminded you of NATO Secretary General Anders Fogh Rasmussen’s checkered record for credibility. It appears to us that Rasmussen’s speeches continue to be drafted by Washington. This was abundantly clear on the day before the U.S.-led invasion of Iraq when, as Danish Prime Minister, he told his Parliament: “Iraq has weapons of mass destruction. This is not something we just believe. We know.”

Photos can be worth a thousand words; they can also deceive. We have considerable experience collecting, analyzing, and reporting on all kinds of satellite and other imagery, as well as other kinds of intelligence. Suffice it to say that the images released by NATO on August 28 provide a very flimsy basis on which to charge Russia with invading Ukraine. Sadly, they bear a strong resemblance to the images shown by Colin Powell at the UN on February 5, 2003 [..]

[..] Although President Vladimir Putin has until now showed considerable reserve on the conflict in the Ukraine, it behooves us to remember that Russia, too, can “shock and awe.” In our view, if there is the slightest chance of that kind of thing eventually happening to Europe because of Ukraine, sober-minded leaders need to think this through very carefully. If the photos that NATO and the US have released represent the best available “proof” of an invasion from Russia, our suspicions increase that a major effort is under way to fortify arguments for the NATO summit to approve actions that Russia is sure to regard as provocative.

According to a February 1, 2008 cable (published by WikiLeaks) from the US embassy in Moscow to Secretary of State Condoleezza Rice, US Ambassador William Burns was called in by Foreign Minister Sergey Lavrov, who explained Russia’s strong opposition to NATO membership for Ukraine. Lavrov warned pointedly of “fears that the issue could potentially split the country in two, leading to violence or even, some claim, civil war,which would force Russia to decide whether to intervene.” Burns gave his cable the unusual title, “Nyet Means Nyet: Russia’s Nato Enlargement Redlines,” and sent it off to Washington with IMMEDIATE precedence. Two months later, at their summit in Bucharest NATO leaders issued a formal declaration that “Georgia and Ukraine will be in NATO.”

The conversation in the west should evolve around American and European, not Russian, involvement in Ukraine. But to get there, we would need actual journalists. There don’t seem to be any left. All we have is parrots, parakeets, chameleons and weasels. And obviously, the way we are fed information about our fatally indebted economies is very much like the way our media feed us misinformation about Ukraine and Russia.

Russia Outraged After Kiev Accuses Moscow Of Nuclear Attack Threats (RT)

Following comments from Ukraine’s Defense Minister Valery Geletey of Moscow threatening with a nuclear attack on its neighbor, Moscow said it was shocked by the statement. Russia warned that such rhetoric only deepens the civil stand-off in Ukraine. “Geletey’s calls to get ready for ‘tens of thousands’ of new victims in what he called ‘Great Patriotic War’ and what in fact is a new punitive operation in his own country are appalling. He only drags the Ukrainian people into a new round of the bloody civil stand-off,” Russia’s Foreign Ministry said in a statement Monday. Earlier Geletey wrote in his Facebook that the operation “to cleanse Ukraine’s east from terrorists” was over. He, however, proceeded to accuse Russia of direct military involvement in the east that followed the rebels’ “defeat.” “A big war has come to our home, a war Europe has not seen since WWII,” Geletey wrote alleging that Russia not only attempted to secure its position on the rebel-held territories, but also advance onto other regions.

He said that Moscow – through “unofficial channels” – has “repeatedly threatened to use tactical nuclear weapons” on Ukraine if Kiev continues to resist. “It is hard to believe that such statements can come from a defense minister of a civilized state. Otherwise, it’s just not clear how tens of thousands of Ukrainian families could entrust this official with lives of their children, brothers and husbands, mobilized into the Ukrainian army to wage a fratricidal war in their own country,” Moscow said, adding that this was a “blatant” attempt on Geletey’s behalf to secure his own post. Earlier on Monday, Russian Foreign Minister Sergey Lavrov stressed there would be “no military intervention by Russia into the conflict in Ukraine”. Lavrov said he hopes that the Monday peace talks held in Minsk will pave the way to agreeing on “an immediate unconditional ceasefire” in eastern Ukraine.

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US Intelligence Veterans Urge Merkel To Avoid All-Out Ukraine War (ZH)

We the undersigned are longtime veterans of U.S. intelligence. We take the unusual step of writing this open letter to you to ensure that you have an opportunity to be briefed on our views prior to the NATO summit on September 4-5. You need to know, for example, that accusations of a major Russian “invasion” of Ukraine appear not to be supported by reliable intelligence. Rather, the “intelligence” seems to be of the same dubious, politically “fixed” kind used 12 years ago to “justify” the U.S.-led attack on Iraq. We saw no credible evidence of weapons of mass destruction in Iraq then; we see no credible evidence of a Russian invasion now. Twelve years ago, former Chancellor Gerhard Schroeder, mindful of the flimsiness of the evidence on Iraqi WMD, refused to join in the attack on Iraq. In our view, you should be appropriately suspicions of charges made by the US State Department and NATO officials alleging a Russian invasion of Ukraine.

President Barack Obama tried yesterday to cool the rhetoric of his own senior diplomats and the corporate media, when he publicly described recent activity in the Ukraine, as “a continuation of what’s been taking place for months now … it’s not really a shift.” Obama, however, has only tenuous control over the policymakers in his administration – who, sadly, lack much sense of history, know little of war, and substitute anti-Russian invective for a policy. One year ago, hawkish State Department officials and their friends in the media very nearly got Mr. Obama to launch a major attack on Syria based, once again, on “intelligence” that was dubious, at best. Largely because of the growing prominence of, and apparent reliance on, intelligence we believe to be spurious, we think the possibility of hostilities escalating beyond the borders of Ukraine has increased significantly over the past several days. More important, we believe that this likelihood can be avoided, depending on the degree of judicious skepticism you and other European leaders bring to the NATO summit next week.

Hopefully, your advisers have reminded you of NATO Secretary General Anders Fogh Rasmussen’s checkered record for credibility. It appears to us that Rasmussen’s speeches continue to be drafted by Washington. This was abundantly clear on the day before the U.S.-led invasion of Iraq when, as Danish Prime Minister, he told his Parliament: “Iraq has weapons of mass destruction. This is not something we just believe. We know.” Photos can be worth a thousand words; they can also deceive. We have considerable experience collecting, analyzing, and reporting on all kinds of satellite and other imagery, as well as other kinds of intelligence. Suffice it to say that the images released by NATO on August 28 provide a very flimsy basis on which to charge Russia with invading Ukraine. Sadly, they bear a strong resemblance to the images shown by Colin Powell at the UN on February 5, 2003 that, likewise, proved nothing.

[..] Although President Vladimir Putin has until now showed considerable reserve on the conflict in the Ukraine, it behooves us to remember that Russia, too, can “shock and awe.” In our view, if there is the slightest chance of that kind of thing eventually happening to Europe because of Ukraine, sober-minded leaders need to think this through very carefully. If the photos that NATO and the US have released represent the best available “proof” of an invasion from Russia, our suspicions increase that a major effort is under way to fortify arguments for the NATO summit to approve actions that Russia is sure to regard as provocative. Caveat emptor is an expression with which you are no doubt familiar. Suffice it to add that one should be very cautious regarding what Mr. Rasmussen, or even Secretary of State John Kerry, are peddling. We trust that your advisers have kept you informed regarding the crisis in Ukraine from the beginning of 2014, and how the possibility that Ukraine would become a member of NATO is anathema to the Kremlin.

According to a February 1, 2008 cable (published by WikiLeaks) from the US embassy in Moscow to Secretary of State Condoleezza Rice, US Ambassador William Burns was called in by Foreign Minister Sergey Lavrov, who explained Russia’s strong opposition to NATO membership for Ukraine. Lavrov warned pointedly of “fears that the issue could potentially split the country in two, leading to violence or even, some claim, civil war, which would force Russia to decide whether to intervene.” Burns gave his cable the unusual title, “NYET MEANS NYET: RUSSIA’S NATO ENLARGEMENT REDLINES,” and sent it off to Washington with IMMEDIATE precedence. Two months later, at their summit in Bucharest NATO leaders issued a formal declaration that “Georgia and Ukraine will be in NATO.”

For the Steering Group, Veteran Intelligence Professionals for Sanity

William Binney, former Technical Director, World Geopolitical & Military Analysis, NSA; co-founder, SIGINT Automation Research Center (ret.)
David MacMichael, National Intelligence Council (ret.)
Ray McGovern, former US Army infantry/intelligence officer & CIA analyst (ret.)
Elizabeth Murray, Deputy National Intelligence Officer for Middle East (ret.)
Todd E. Pierce, MAJ, US Army Judge Advocate (Ret.)
Coleen Rowley, Division Counsel & Special Agent, FBI (ret.)
Ann Wright, Col., US Army (ret.); Foreign Service Officer (resigned)

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What else can they do?

Russia To Adjust Military Doctrine Due To Nato Expansion, Ukraine Crisis (RT)

Moscow is to review its military doctrine, a move that is caused by expansion of NATO in Eastern Europe, problems of missile defense and the crisis situation in neighboring Ukraine, says an official from the Russia’s Security Council. “I have no doubts that the issue of drawing of military infrastructure of NATO member-countries to the borders of our country, including via enlargement, will remain one of the external military threats for the Russian Federation,” Mikhail Popov, deputy secretary of the Security Council said in an interview to RIA Novosti. All NATO’s actions show that both the US and NATO are trying to escalate a deterioration of relations with Russia, he added. “We consider that the defining factor in [Moscow’s] relations with NATO will remain the unacceptability for Russia of the expansion plans of alliance’s military infrastructure to our borders, including via enlargement,” he stated.

Establishing and deploying of strategic missile defense systems which are undermining the global stability, as well as bringing the weapons into space, will also remain major military threats for Russia, he added. “The USA wants to strengthen its troops in Baltic States. [They] have already decided to transfer its heavy weapons and military equipment, including tanks and armored infantry vehicles, to Estonia. And all this next to Russia’s border.” The acting military doctrine was adopted in 2010. The new version will be released by the end of 2014, said Popov. According to Popov, the pursuit of the USA and NATO members to increase its strategic offensive potential is becoming more evident. They are trying to do this “at the expense of development of a global missile defense system” and “the elaboration of new weapons, including advanced hypersonic weapon (AHW).”

The 2010 military doctrine caused the most acute reaction in the USA and NATO, said Popov. “Many high-ranked officials reproached the leaders of our country saying that NATO isn’t a Russia’s enemy and will never attack Russia. But is that true?” he asked. “We were assured of good intentions, but the actions of recent years show entirely different things.” He added that Russia had not managed to establish an equal dialogue with its Western partners. “Everyone wants one-sided concessions from Russia in many international relations issues.” According to Popov, “the role of Russia in the Ukraine crisis is subjectively defined and thus wrong conclusions are drawn and wrong measures are applied.” “There is an unprecedented informational-propagandist campaign against Russia. The image of the enemy is presented in the face of Russia and its politics is considered as a new threat to NATO.”

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There is no other way left.

Donetsk, Lugansk Republics Urge Kiev To Recognize Their ‘Special Status’ (RT)

At talks in Minsk, the self-proclaimed Donetsk and Lugansk People’s Republics have urged Kiev to acknowledge their “special status.” If their demands are met, they will not lay claim to other parts of Ukraine, the rebel republics said. The initial statement said that if Kiev guarantees their “special status,” then the Donetsk and Lugansk republics will do everything possible “to preserve Ukraine’s common economic, cultural and political space and the space of the entire Ukraine-Russian civilization.” This was interpreted as the two self-proclaimed republics seeking autonomy within Ukraine while wishing to remain part of it.

However, later Donetsk People’s Republic Deputy PM Andrey Purgin explained that it’s about “the common security space of Ukraine, Donetsk and Lugansk People’s Republics, about post-war reconstruction of the economic, cultural, and social connections with Ukraine, and also about the fact that the DNR and LNR wouldn’t lay claim to other Ukrainian territories.” The statement comes after a contact group on the crisis in eastern Ukraine finished its work in Minsk, Belarus. In their initial demands, LNR and DNR representatives called on the Ukrainian government to end their military operation in the country’s east so that parliamentary and local elections can take place freely.

“The president, government and [parliament] Verkhovna Rada should accept… decrees granting immediate recovery from the humanitarian catastrophe, acknowledging the special status of the territories under the control of the People’s Republics, creating conditions – first of all stopping the ‘anti-terror’ operations – for free elections of local authorities and MPs,” the document with the republics’ position reads. The document also urged Kiev to guarantee “the right to use the Russian language at an official level on the territories of the People’s Republics.” After the government of President Viktor Yanukovich was ousted in March, the new authorities immediately started to introduce the legislation curbing the Russian language. Though the law failed to materialize in the end, the initiative was one of the major factors that triggered the conflict in eastern Ukraine. The self-proclaimed republics were represented by DNR Deputy PM Andrey Purgin and the chairman of the LNR’s Supreme Council, Aleksey Karyakin.

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Yeah, LNG from Qatar. That’s their plan.

Europe Drafts Emergency Energy Plan With Eye On Russia Gas Shutdown (Reuters)

The European Union could ban gas exports and limit industrial use as part of emergency measures to protect household energy supplies this winter, a source told Reuters, as it braces for a possible halt in Russian gas as a result of the Ukraine crisis. Russia is Europe’s biggest supplier of oil, coal and natural gas, and its pipelines through Ukraine are currently the subject of political maneuvering – not for the first time – as Europe and Moscow clash over the latter’s military action in Ukraine. Kiev is warning that Russia plans to halt gas supplies while Moscow says Ukraine could siphon off energy destined for the European Union – which has just threatened new sanctions if Moscow fails to pull its forces out of Ukraine. While buyers of oil and coal can find new suppliers relatively quickly, southeast Europe receives most of its gas from Kremlin-controlled Gazprom.

Tankers from Qatar and Algeria bring liquefied natural gas (LNG) to Europe via ports along the Atlantic and Mediterranean oceans, but European buyers often re-sell those cargoes abroad for higher prices rather than supplying their domestic market. A source at the EU Commission said it was considering a ban on the practice of re-selling to bolster reserves. “In the short-term, we are very worried about winter supplies in southeast Europe,” said the source, who has direct knowledge of the Commission’s energy emergency plans. “Our best hope in case of a cut is emergency measure 994/2010 which could prevent LNG from leaving Europe as well as limit industrial gas use in order to protect households,” the source said.

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Factory Activity In Europe, Asia Cools (Reuters)

Factory activity in Europe and Asia cooled in August after a strong July, as new orders dwindled in the face of escalating tensions in Ukraine and a patchy recovery in China, purchasing managers indexes showed. Despite euro zone manufacturers barely raising their prices, growth in the region slowed slightly more than initially thought, and activity in China’s vast factory sector slackened on weak foreign and domestic demand, stoking speculation that further policy stimulus would be needed. “A concerted slowdown in the China, euro zone and UK manufacturing PMIs as the second quarter gets under way raises alarm bells about global demand conditions,” said Lena Komileva, chief economist at G+ Economics in London. “This raises serious questions about the ability of major economies such as the U.S. and the UK, to weather higher interest rates, or in the case of the euro zone to withstand deflationary pressures without further stimulus.”

Euro zone factories stumbled with the final August PMI at 50.7, the lowest in over a year, as new orders slowed amidst rising tensions over Ukraine that have triggered sanctions from the West and countermeasures from Russia. Still, that was the 14th month the index has been above the 50 line that separates growth from contraction. The factory PMI for Germany, Russia’s biggest trade partner in the European Union, fell to an 11-month low while in the bloc’s second-largest economy France it dropped further below the breakeven mark. The drop in euro zone manufacturing activity came despite factories barely increasing prices and, with inflation dropping to a fresh five year low of 0.3% in August, that raises risks of the region slipping into deflation.

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That’s a good way to look at it.

Mario Draghi May As Well Roll The Dice – We’ve Tried Everything Else (Satyajit Das)

Despite investor enthusiasm and strong bond and stock markets, the economic and political risks are increasing in Europe. The actions of the European Central Bank (ECB) have reduced borrowing rates for eurozone members. While making existing high debt levels more manageable, the falling funding costs removes incentives for reducing debt and undertaking structural reforms. The Italian government proposes to use the benefit of lower rates, estimated at around €10bn (£8bn) over three years, to increase spending and relax fiscal policy. Expectations of further falls in the credit spread of Italy, Spain and previously vulnerable peripheral nations is driving purchases of their government bonds supporting the value of the euro, at least in the short term.

A weaker euro policy may also prove problematic in the medium to long term. Falls in the euro may not trigger the hoped for rise in economic activity driven by exports. A high proportion of trade is conducted in euros within the eurozone itself, limiting the currency effect. Weak growth in export markets, such as the US and emerging countries, may limit the benefits. The US, UK and Japanese experience suggest that monetary policy may not be able to increase inflation significantly, reflecting the effects of deleveraging by companies, households, banks and governments. Falls in the euro may increase the cost of imported products, driving higher inflation. But the erosion of real household incomes may reduce consumption, limiting any pick-up in growth. A weaker euro entails pursuance of a “beggar-thy-neighbour” policy. Retaliation through competing monetary easing or capital controls may defeat the ECB’s efforts to weaken the currency.

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When in debt, Borrow!

Why Peripheral Euro Zone Debt Is Worrying Investors Again (CNBC)

Companies in the peripheral euro zone countries which caused the near-disaster of the euro zone debt crisis are borrowing big again. Leveraged loan borrowing from peripheral euro zone nations is at its highest level for the year to date since 2007, according to Dealogic. While the amount borrowed this year so far, $43.7billion, is still substantially lower than the equivalent $76.2 billion in 2007, it is 64% higher than the same time in 2013, and may increase concerns that leverage levels may reach dangerous levels once more. Companies based in Ireland, acclaimed as a poster boy for bailout-imposed austerity, have been the biggest borrowers in the peripheral euro zone, as optimism returns to the country’s economy following its bailout exit. In contrast, there have been no leveraged loans signed by Greek companies this year, for the first time in nearly two decades.

This may partly be due to a rush to re-finance before the period of historically low interest rates draws to a close. And investors are looking for somewhere to put the huge sums of cheap money pumped into the financial system by Western central banks. There are particular concerns about new issues of bank bonds. On Tuesday, Spain’s biggest bank Santander announced a plan to issue up to 2.5 billion euros ($3.28 billion) in contingent convertible “CoCo” bonds. This kind of bond, which is relatively high yielding but can be written off entirely if the bank’s capital levels drop below a certain level has caused concerns about increasing risks to investors. There are expected to be a number of new peripheral euro zone bank bond issues of these kinds of bonds in coming months. “The time to worry about bank capital is when the weaker banks try to deluge the markets,” Bill Blain, strategist at Mint Partners, warned.

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China Manufacturing Slowdown Ripples Through Region (Reuters)

Growth in China’s vast factory sector slackened in August as foreign and domestic demand slowed, stoking speculation that further policy easing would be needed to prevent the economy from stumbling once more. The surveys of purchasing managers (PMI) from across Asia told a tale of underwhelming new orders and faltering exports, overshadowing brighter spots such as India and Taiwan. That was a taster for a feast of euro zone PMIs due later Monday where any weakness would only add to pressure on the European Central Bank to at least open the door to more monetary stimulus at its policy meeting this week. The Chinese surveys come in both official and private sector flavors. The National Bureau of Statistic’s version fell from a 27-month high to 51.1 in August, as factories shed jobs for at least the 24th consecutive month.

More worrying was the HSBC/Markit PMI, which eased to 50.2 in August, only a whisker above the 50-point mark that separates expansion from contraction. The official survey showed falls across output, employment, new orders, delivery time and raw material inventory, while the private version highlighted subdued demand. “The economy is healthier than it was in early 2014, but the recovery is tepid and patchy, with housing weakness a weighty anchor on both activity and confidence,” said Huw McKay, a senior international economist at Westpac in Sydney. “The authorities would be wise to stay the course with easier policy settings, especially on the fiscal side.”

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Asian Property Prices Fall ‘As If There’s A Global Financial Crisis’ (ZH)

With China’s property developers slashing prices, piling on incentives, and still seeing sales slump; it is no surprise that demand from the top to the bottom across Asia is falling. As Reuters reports, even Singapore’s Sentosa Cove (the man-made island resort billed as Asia’s Monte Carlo) is eerily silent as the billionaires seem to be staying away with prices down over 20-30% in the past year. New mortgage business is down over 40% as “the rential can’t even cover the mortgage anymore.” As one analyst notes, “the tables have turned,” adding rather ominously that, “The way prices have fallen, it’s as if there is a global financial crisis.”

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More vulture victims lining up.

Not Just Argentina: Other Nations In Debt Doldrums (CNBC)

Argentina’s lengthy debt saga returned to the spotlight this week, with its second default in only 12 years triggering George Soros and other investors to sue Bank of New York Mellon for withholding interest payments. This came after Argentina refused to comply with a U.S. legal ruling ordering it to repay $1.3 billion to creditors, triggering a selective default. Moody’s Investors Service downgraded its outlook for the country’s debt to “negative” at the end of July and confirmed its long-term credit rating at “Caa1″—meaning it views Argentine debt as a highly risky investment at the precarious end of the “junk bond” spectrum.

Argentina is, nonetheless, only one of several countries whose shaky finances leave them on the brink of being unable to repay their obligations. Moody’s currently rates 10 other countries’ debt as equally or even more risky than that of Argentina. These span the globe, from nearby by Venezuela and Ecuador to Pakistan and Greece. The table below shows the countries around the world judged as most likely to default on their sovereign debt by Moody’s. Countries rated Caa1, like Egypt, are judged as risky as Argentina, while those rated Caa2 or Caa3 are even more speculative:

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Wonder what the details are.

Goldman Loaned Espirito Santo $835 Million Weeks Before Bailout (Bloomberg)

Goldman Sachs loaned Portugal’s Banco Espirito Santo $835 million in July, just weeks before the group’s units sought creditor protection in a cascade of insolvencies that resulted in the lender’s bailout. Goldman Sachs made the loan through Oak Finance Luxembourg, an investment company that raised funds destined for a Venezuelan oil refinery project, according to the unit’s offer document. Banco Espirito Santo, once Portugal’s biggest publicly traded lender by market value, was bailed out Aug. 3 after it disclosed potential losses on loans to other Grupo Espirito Santo companies and regulators ordered the lender to raise more capital. The bank was split in two with deposits and healthy assets becoming Novo Banco in a bailout by the central bank’s Resolution Fund.

The Wall Street Journal reported earlier that Goldman Sachs sold some of Oak Finance’s securities at a loss to hedge funds and the New York-based firm is still holding some of the debt, citing a person it didn’t identify. Goldman Sachs had agreed to the funding on May 16, the offer document shows. Four days later, Banco Espirito Santo warned investors buying stock in its rights offer of irregularities in the accounts of a parent company and that the “serious financial situation” of the parent firm could be damaging to the bank’s reputation. Regulators are examining how the group’s companies helped fund each other.

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Stiglitz only wants growth, like all economists do.

Capitalism Needs New Rules To Restore Postwar Growth And Stability (Stiglitz)

The reception in the US, and in other advanced economies, of Thomas Piketty’s recent book Capital in the Twenty-First Century attests to growing concern about rising inequality. His book lends further weight to the already overwhelming body of evidence concerning the soaring share of income and wealth at the very top. Piketty’s book, moreover, provides a different perspective on the 30 or so years that followed the Great Depression and the second world war, viewing this period as a historical anomaly, perhaps caused by the unusual social cohesion that cataclysmic events can stimulate. In that era of rapid economic growth, prosperity was widely shared, with all groups advancing, but with those at the bottom seeing larger percentage gains. Piketty also sheds new light on the “reforms” sold by Ronald Reagan and Margaret Thatcher in the 1980s as growth enhancers from which all would benefit. Their reforms were followed by slower growth and heightened global instability, and what growth did occur benefited mostly those at the top.

But Piketty’s work raises fundamental issues concerning both economic theory and the future of capitalism. He documents large increases in the wealth/output ratio. In standard theory, such increases would be associated with a fall in the return to capital and an increase in wages. But today the return to capital does not seem to have diminished, though wages have. (In the US, for example, average wages are down 7% over the past four decades.) The most obvious explanation is that the increase in measured wealth does not correspond to an increase in productive capital – and the data seem consistent with this interpretation. Much of the increase in wealth stemmed from an increase in the value of real estate. Before the 2008 financial crisis, a real-estate bubble was evident in many countries; even now, there may not have been a full “correction”. The rise in value also can represent competition among the rich for “positional” goods – a house on the beach or an apartment on New York City’s Fifth Avenue.

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We’ll hear a lot about this case.

Detroit Brings Bankruptcy Plan to Court With Billionaires (Bloomberg)

Detroit’s plan to fix its finances with hundreds of millions of dollars in private donations comes years after the U.S. automotive capital got hooked on philanthropy to rebuild its blighted neighborhoods, revamp its riverfront and lure new businesses. Since at least 2003, few big-city governments in the U.S. have leaned as heavily as Detroit on charity for community redevelopment, a habit that won’t change as it seeks to shed about $7.4 billion of debt and end court oversight of its finances. U.S. Bankruptcy Judge Steven Rhodes is to start a trial today in Detroit on whether to approve the city’s plan to exit its record $18 billion municipal bankruptcy with handouts from some of the richest foundations in the world.

Under a deal with state lawmakers and wealthy donors, the foundations offered to shore up Detroit pension funds as long as the city didn’t use its art collection to pay debts. The city may call billionaire Dan Gilbert, the founder of Quicken Loans Inc., and Penske Corp. founder Roger Penske as witnesses to testify in support of the plan. “There is a growing concern about who is controlling the decision-making here,” said Dale Thomson, director of the Institute for Local Government at the University of Michigan at Dearborn. “The scale and length of commitment in Detroit is unique,” according to Thomson, who’s writing a book about the role of foundations in urban revitalization.

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Could have seen that coming from miles away. The IMF brings in Monsanto. While Ukraine has large swaths of black earth, where no chemicals are needed at all even if you’re prone to using them. Monsanto will end up killing off some of the most fertile soil on the planet.

Monsanto To Use Ukraine As GMO Testing Ground, Backdoor Into EU (RT)

Ukraine’s bid for closer ties with the west could come at a cost. With the IMF set to loan the country $17 billion, the deal could also see GMO crops grown in some of the most fertile lands on the continent, warns Frederic Mousseau. Very few, not least the Ukrainian population, are aware of these details, but according to Mousseau, who is a Policy Director at The Oakland Institute, in return for the cash, Ukraine could very well become a test ground for GMO crops in Europe, something the rest of the European Union has been looking to prevent. RT caught up with the Frenchman, who voiced his concerns at what may lay ahead.

RT: When this $17 billion deal is approved by the IMF and the Ukrainian ban on GM crops is lifted, does that mean it is just a matter of time before Ukrainian farmers grow modified crops?
Frederic Mousseau: This is very likely because there is a lot of pressure from the bio-technological industry, such as Monsanto, to have these approved in Ukraine. It is also part of the EU Association Agreement, which has a particular article which calls for the expansion of bio-technology and GMOs in Ukraine.

RT: If it was one of the pre-conditions of the multi-billion dollar loan, do you think it is fair to say that Monsanto has considerable influence over the IMF and the World Bank and even dictates terms to them?
FM: We saw in 2013 that Monsanto invested $140 million in new seed plans in Ukraine. It is clearly the bread basket of Europe and it is a key target for a company like Monsanto, which sees this huge potential for production and this huge market. Europe has been quite resistant in allowing GMOs, but if they are successful in Ukraine then there might be a domino effect in Europe.

RT: Was it a coincidence or a pre-planned action back in December 2013, when the ban on GM goods was lifted in Ukraine, just weeks before the IMF was supposed to give that county a loan?
FM: It can’t be a coincidence because we have seen a very strong mobilization of the industry and the agro business in lobbying the government and the EU to have these changes in the legislation. Also we have seen this investment coming in prior to any adoption of GMOs. So clearly this pressure was there and to have such a clause in the EU Association Agreement means that the lobbyists in the industry must have been at work for months before that.

RT: The president of the US-Ukraine Business Council has said that it is necessary to get the Ukrainian government out of the agriculture business and transform it into a private sector industry. Can we say that America has set its sights on the vast fields that could be a gold mine for agriculture?
FM: There are these seed businesses like Monsanto and pesticide companies, but there is also the land of Ukraine, which has so far been under the control of the Ukrainian government and has not been available for sale. There will be a big push to privatize this land and make it a valuable commodity, which can be acquired by foreign corporations. What we have seen in recent years is that even if the land could not be purchased, it has been leased on a massive scale. Already 1.6 million hectares have been acquired by foreign entities and it is very likely that if the reform programs continue, there will be more companies, more interest and they will be looking to strike deals for Ukrainian land.

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How can that be a surprise?

Poll Finds Rapid Shift In Favour Of Scottish Independence (FT)

Scottish voters are shifting rapidly toward support for independence with less than three weeks to go to a referendum that could end the 307-year-old political union at the heart of the U.K., a new opinion poll suggests. The YouGov survey for the Sun newspaper puts the pro-union lead at just 6 percentage points when undecided voters are excluded, down from the 22 points it found less than a month ago and the 14 points it reported in mid-August.The poll offers a huge morale boost to campaigners for a Yes vote in this month’s independence referendum, particularly since YouGov has consistently reported relatively low levels of support for independence compared with other pollsters.

“If even YouGov have it this close, then you better believe we’re winning this folks,” tweeted one independence supporter.The result will fuel doubts about the performance of the cross-party pro-union Better Together campaign after a week in which its advertising strategy has been widely questioned.The No camp lead had “collapsed”, with the independence campaign now “in touching distance of victory”, Peter Kellner, YouGov president, wrote in the Sun.

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Go East, young man.

Russia and China Launch Construction of World’s Biggest Gas Pipeline (BBC)

Russia and China have begun the construction of a new gas pipeline linking the countries, with a ceremony in the Siberian city of Yakutsk. China’s CNPC has agreed to buy $400bn (£240bn) of gas from Russia’s Gazprom. Russia will ship 38 billion cubic metres (bcm) of gas annually over a period of 30 years. The deal will lessen Russia’s dependence on European buyers, who have imposed economic sanctions because of the crisis in Ukraine. The construction ceremony was attended by Russian President Vladmir Putin and Chinese Vice-Premier Zhang Gaoli.

China will start work on the construction of its side of the pipeline in the first half of 2015, Mr Zhang said. The first gas will be pumped from Siberia to north-east China in early 2019. Over the past 10 years, China has used other gas suppliers. Turkmenistan is now China’s largest foreign gas supplier. Last year, it started importing piped natural gas from Myanmar. China is Russia’s largest single trading partner, with bilateral trade flows of $90bn (£53bn) in 2013. The two neighbours aim to double the volume to $200bn in 10 years.

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A Doomed Earth Of Science Fiction May Well Become A Reality (Guardian)

There’s a scene in the newly-restored science fiction classic The Day the Earth Caught Fire (premiered last week in the summer open air cinema at the British Museum) when The Daily Express’s fictional, bull-nosed science reporter, Bill Maguire, barks at a newsroom junior to fetch him information on the melting points of various substances. It’s to illustrate a spread in the paper which is investigating how massive nuclear tests have shifted the planet on its axis, causing chaotic weather and a heat wave to slowly marinate London. The screening launched the British Films Institute’s Sci-Fi season, whose light-hearted tone was set with kitsch alien facemasks given to the audience. A giant promotional selfie was taken before the film began. At the end, the friend I’d watched it with, who works for an official environmental body, went very quiet. “Do you know what I’ve been doing in the last few days?” she asked rhetorically. “Looking into the melting points of various substances in the event of worsening heat waves hitting London.” We both went quiet then.

Research into heat thresholds shows what happens when science fiction becomes science fact. At 20C legionalla bacteria start developing in normal drinking water. At 24C London Underground start work to prevent track buckling. Less than a degree more, at 24.7C for a two-day duration, and deaths and hospital admissions rise. An estimated 600 more people died in London than usual during the 2003 heat wave. Even well-insulated houses overheat at 27C. Power cables start getting hit at around 30C and the likelihood of power outages for businesses goes up. At 33C road surfaces begin to soften and melt. For comparison, in the 2003 heat wave, there were air temperatures recorded on the tubes and platforms of 41.5C and 36.2C respectively. The UK’s highest outdoor daytime temperature recorded so far was 38.5C, outside London in Gravesend, Kent.

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When are they going to evacuate everybody from there?

Fukushima OKs Nuke Waste Storages, Gets Paid $3 Billion In ‘Subsidies’ (RT)

Fukushima’s governor has officially agreed to allow the country’s authorities to store radioactive waste for 30 years in two municipalities in exchange for 300 billion yen ($2.89 billion) in subsidies. “It’s a difficult decision, but I want to accept the construction plan,” Governor Yuhei Sato told journalists on Saturday. Sato told The Japan Times he accepted the plan because he sees it as “necessary to advance decontamination and realize recovery of the environment.” The mayor’s formal acceptance should be also sent to Environment Minister Nobuteru Ishihara and Reconstruction Minister Takumi Nemoto on Monday, and he is also set to meet with the country’s premier Shinzo Abe in Tokyo.

On Wednesday, two Fukushima prefecture municipalities made the decision that they would accept the government’s package of subsidies, allowing to build the storages. “We succeeded in greatly deepening (local officials’) understanding (of our storage facility plan),” Nobuteru Ishihara, environment minister, told journalists on Tuesday, as quoted by The Asahi Shimbun media outlet, following his meeting with members of the town assemblies of Futaba and Okuma. The central government is to pay subsidies totaling 301 billion yen ($2.89 billion) to support the locals and revive the community. Documents containing explanations of the government assistance are set to be provided for local residents. A telephone line will also be set up to answer questions from locals.

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Antarctic Coastal Waters ‘Rising Faster’ (BBC)

Melting ice is fuelling sea-level rise around the coast of Antarctica, a new report in Nature Geoscience finds. Near-shore waters went up by about 2mm per year more than the general trend for the Southern Ocean as a whole in the period between 1992 and 2011. Scientists say the melting of glaciers and the thinning of ice shelves are dumping 350 billion tonnes of additional water into the sea annually. This influx is warming and freshening the ocean, pushing up its surface. “Freshwater is less dense than salt water and so in regions where an excess of freshwater has accumulated we expect a localised rise in sea level,” explained Dr Craig Rye from the University of Southampton, UK, and lead author on the new journal paper. Globally, sea levels are going up, in part because of the contribution of the world’s diminishing ice fields. This is well known.

But the Nature Geoscience report is the first to show the direct consequences to sea surface height (SSH) around Antarctica itself. While the satellite data record indicates there has been a general upward trend in SSH in the Southern Ocean south of 50 degrees of up to 2.4mm per year, those satellites also indicate a more rapid rise in waters sitting on the continental shelf. Modelling by Dr Rye’s team suggests that this additional 2mm per year can be attributed almost exclusively to freshwater runoff from Antarctica, and not to some climatic oscillation that might make sea levels “breathe” up and down on decadal timescales. “We can estimate the amount of water that wind is pushing on to the continental shelf, and show with some certainty that it is very unlikely that this wind forcing is causing the sea level rise,” Dr Rye told BBC News.

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