Mar 302018
 March 30, 2018  Posted by at 7:07 pm Finance Tagged with: , , , , , , , , , , ,  

Jerome Liebling May Day Union Square Park New York City 1948



Dr. D. peels the American political onion to get down to what it’s all about. I’m impressed. He explains America better than just about anyone. Turns out, there ain’t much left. So yeah, what happened?



Dr. D: The news cycle runs so frenetically it’s easy to lose track of the bigger tide. Let’s go back a week and look at something the Automatic Earth has been talking about since the beginning.

This weekend at a speech in Mumbai, Hillary Clinton said:

“If you look at the map of the United States, there’s all that red in the middle where Trump won. …I win the coast….I won the places that represent two-thirds of America’s gross domestic product. So I won the places that are optimistic, diverse, dynamic, moving forward. And his whole campaign, ‘Make America Great Again,’ was looking backwards.”

There are many ways to look at this: for one thing, by number, over 90% of the counties are Red. Yet over 50% of the population is concentrated in the cities and Blue counties. Clinton officially won the popular vote. Yet the United States has always had a geographical Electoral College system. A compromise of representation between small, weak states and strong, large states, and the rules of the 2016 campaign were no mystery or surprise. Yet that’s only the middle-sized picture.

The Big Picture is Mrs. Clinton saying she’s representing the important people, the right people – even the working people – and that 2/3rds of those people live exclusively in Blue districts on both coasts. While this is arguably true, it wasn’t always true. NYC or San Francisco have always been important, but from their founding until now, places like Dayton, St. Paul, Pittsburgh, or New Orleans were considered vital, important places, places where their own specialty happened: tires or flour, steel or shipping, lumber or mining.

What Happened? In a way the election was a referendum on “What Happened?” What happened to my community, my country, my area, and all the vital work those long-abandoned areas used to do, what happened to the massive GDP those areas used to contribute, and the answer is simple:


An organism contracts from the periphery to the core.


There’s a lot in that statement. As it took decades, even a century to happen, you can see which peripheries were sacrificed first and next, who had power, who didn’t, and how long they could maintain it; and that’s interesting, because it was not East or West, white or black, rural or urban as they might have you believe. There are as many hopeless, abandoned people in Baltimore as there are in Billings, Montana, possibly more, and possibly started far sooner. But if it’s not ethnic or geographical, then what is it?


An organism contracting from the periphery to the core is a consequence of centralization.


The Automatic Earth began with discussing the shrinking of the country, of industrialization, in terms of who would receive the ever-dwindling supplies oil and energy, the infrastructure and attention, but that is not necessarily a function of practicality. It is more often a function of political power, and we largely have a political problem and not a practical one.

The Core has been using their power to attract and concentrate more wealth and more power to themselves and their areas until most of the nation’s wealth and power are concentrated in Clinton’s 2/3rds of GDP, the sub-10% of the counties. All top 10 richest zip codes are now in one region: the Washington D.C. area.

Economic wealth and power is used to expand political power, further extracting the wealth of the Periphery to maintain the lifestyle of the Core. While this may seem a practical strategy, it isn’t. At one time the Periphery was creating maybe 2/3rds of the wealth of the nation, costing nothing, and that was with no more infrastructure than remains today.

So when those places are idled, 2/3rds of the nation’s GDP also vanishes, and while the Core can maintain their lifestyle by cannibalizing the remaining energy and attention, the entire nation they are part of only becomes far poorer. So far from the concentration of power making them stronger , it’s making them weaker , as they have a fraction of the former wealth and ability, cohesion and cooperation, men and materials to draw on.


This leads to the problem she highlights, which is social and political fracturing. With a majority of the wealth pulled to the Core, the Periphery withdraws its economic and social consent in a sense of unfairness that is only validated by further extractions, concentrations, and non-cooperations.

This can make it more difficult to run even the Core economy as disagreements develop between Core vs Periphery or entitled vs disenfranchised peoples even within the Core itself, leading to a difficulty maintaining compliance, resource supplies, disagreements on how to allocate wealth, support infrastructure, and so on.

This may seem an engineering issue, but this is also Tainter’s “Collapse of Complex Societies”, where cultures weather many storms, many expansions and contractions, but what causes “Collapse” is the attempt to maintain expensive infrastructure built up during the good times, at the expense of one portion of society. If compromise can be reached, Society survives.

If a compromise cannot be reached and the Core attempts to force its will via social and military force, the price of compliance becomes too high and fails, and with it, the cooperation, the social contract that makes a people or a nation one unit. It fractures, and when it does, those pieces break up and become, as he says, simpler, Less Complex societies. Less specialized, less concentrated, and less centralized, or by our modern pejorative view, “Primitive.”

As our American society has measurably less energy since 1974, we have seen the re-allocation and distribution of that energy ring-fenced into an ever-dwindling core of fewer counties, and fewer participants in those counties, and like other complex societies, we have been socially fracturing since that time as well, as fewer and fewer within the system benefit from it.

There’s much more to unpack in this, but let’s just ask some questions:

• What makes a “Core”? What constitutes the “Periphery”?

• Since the Periphery has and could contribute a majority of overall GDP, what inspires the Core to sacrifice it rather than expand their wealth through it?

• As a metaphor for a bodily process, a biological “contraction” occurs during emergencies such as starvation, freezing, or flight. But would the body really survive if it crippled the legs, lost its fingers, or its hearing to save itself? Contrarily, would the body survive and function if the brain, liver, or heart swelled to 3 times their original size?

• What is the resource load of a brain or stomach that is 3x larger than necessary?

• Since from an engineering perspective all parts of a machine must be in working order for it to work at all, what impractical, non-engineering priorities must be established to cause the core and periphery to become so mismatched?

• How are those impracticalities decided? How are they maintained?

• Is the deciding and maintaining of inequity and non-function a benefit to the Core? To the Periphery? Both? Neither?

• Once the Periphery has been sacrificed to the Core, what must happen for them to be re-joined and freely cooperate again?

• Can this be done? What would have to be sacrificed that wasn’t sacrificed before? By which side? One? Both?


Mrs. Clinton’s idle quote has meaning. If her places are “optimistic, diverse, dynamic, moving forward” then logically the other , the 90% of Red America is “pessimistic, oppressive, racist, dull, lazy, and backwards.” “Deplorable,” if you will. Aside from how this doesn’t seem to be a good pitch to win votes among 90% of voting counties, you have to ask, “How did they get this way?” and “What is your plan to gather your countrymen and make them optimistic, productive, and to work again, and thus help all?” Yet oddly, that was her opponent’s slogan.

If she’s not asking the question of how to include and elevate everyone, isn’t she really saying “I’m in favor of further enriching my Core at your expense”? And while historically that is indeed a common response to dwindling energy, Tainter warns it may also be one that can collapse both the economy and the society.

Since large, concentrated societies contract to the Core to protect themselves and their critical assets, those in the core historically won’t offer time or resources to help anyone but themselves: the army, the police, the roads, the tax officials. When that is true, you may want to localize, decentralize and maintain your own Core, with your own people, at home. This re-localizing will re-establish the balance of power in the Periphery where most people live.



Jul 222016
 July 22, 2016  Posted by at 5:02 pm Finance Tagged with: , , , , , , ,  

Dorothea Lange ‘OK Family bound for Kingfisher and Lubbock. We’ll be in California yet’ 1938

Basic income is a topic I’ve been thinking about for a while, and while I won’t get anywhere near a comprehensive overview -there are too many uncertainties and untested ideas-, I’m going to try to paint a first chapter in a work of progress. Or, a thought experiment, for me and others.

Of course I’ve read a lot of and about other people’s ideas on the topic, and I’m sure there are many more out there that I haven’t seen yet, but I’m afraid to say that about all of those I did read tend to fall into the same ‘trap’. That is, they project their ideas, which are widely varying, onto -or close to- the economy (economies) and society (societies) as they are today.

Their basic income examples and ideas and theories (as well as criticisms of them) are all built around a perception of the economy as it is, or better still as it once was. And that is probably a bad idea. Because the economy of the future will not be like it is today, or was yesterday, and neither will societies.

And that is not because of the role automation and/or robots will play, a topic that features prominently in many basic income writings; those things are but a minor distraction. What will change our world much more profoundly will be the inevitable demise of the economic system as we know it.

And it’s against that backdrop that the issue of basic income must be viewed. If only because it then becomes something entirely different.



I started thinking a while back that it would not be robots or inequality that would be the foundation of and driving force behind basic income, but the ruin of our pension systems. Of course one has to be careful with general statements on this, because there are so many different systems and approaches when it comes to pensions and other old-age ‘provisions’ and/or ‘benefits’.

What all have in common today, though, is that they’re woefully underfunded and sliding down further fast due to ultralow interest rates and other ‘policies’, as well as to ageing societies. It seems almost incredulous that until a few years ago most pensions funds were required by law to invest only in AAA-rated assets.

While they may not all suffer from the same afflictions, all these systems, from Social Security to private pension funds, do suffer from the same symptoms. Painting the picture with a broad stroke, it’s safe to say they’re all in essence Ponzi schemes.

While many of the ‘Social Security variety’ depend on the trust in a government to pay out something for which nothing -or very little- has been set aside, those of the variety in which money IS actually paid in are inflicted by the twin impairments of too little return on what is paid in to maintain the fund, and too few newcomers to pay for what ‘oldtimers’ never paid but do want to take out.

A third ‘impairment’ will occur when younger workers figure out they’re paying into something they will never see any benefits of, and refuse to fork over any longer.

Low interest rates and ageing populations are wreaking havoc on -especially- European and Japanese pensions even as we speak, and a brief look at future trendlines makes abundantly clear where things are going.

Pondering all that, it seems obvious that at some point a government with at least a bit of vision would come to the conclusion that a basic income to replace all the faltering old-age provisions schemes -and many others- might make a lot of sense. If only because, once you think about it, ‘free’ money only for older people does not make sense, neither politically nor economically.



But let’s take a step back; that last bit still doesn’t take sufficiently into account that our economies are about to undergo radical changes because they are collapsing. What I find interesting is that this collapse actually seems to play into the hands of a basic income. For several reasons, as a matter of fact.

I am convinced that a basic income in an economy that’s part of a centralized, even globalized, system, makes no sense. You can’t really have a basic income in a society that imports most of what it uses, but that still is the model of most of our societies. We import much of what’s essential, and export non-essential things.

That is a problem that will more or less solve itself, though we better pay attention and be prepared, or else. We may not know exactly when or how the economic collapse will occur, but that’s not the most important thing. What is, is that centralization can only happen in a growing economy. As soon as growth halts -or even reverses-, economies will of necessity decentralize. Unless perhaps they’re under a dictatorship, but even then.

Setting up a basic income system in a society that, for example, imports its clothes and furniture -and sometimes even food- from China, is a doomed proposition. The number one requirement for a successful basic income is that the money issued stays inside the society it’s being issued in. If not, it would merely speed up bankruptcy.

The money must be spent locally, on local products, as much as possible, because then it will be worth much more to the local economy. This will also go far towards fighting deflation, because the velocity of money will increase. To ensure that as much as possible is spent inside a community/society, the manufacturing base will need to be (re-)built.

Which must happen anyway as the global economy sinks, and the sooner, the better. The worldwide transport lines we know today will not exist for much longer, and it will take time to adapt one’s economy to that.

On the bright side, this decentralization, or relocalization, or ‘protectionism’ if you will, will (re-)create a lot of jobs. Not ones that will pay as much as what we see now, but that’s not necessarily such a bad thing. And besides, it’s not as if we have some kind of free choice. Reality will dictate the terms. We must produce our own essentials once again: food, clothing, housing, furniture etc.

Still on the bright side, the new jobs will make basic income much less costly for a society. Because you can top off what people make on top on whatever the basic income is, and you can do so at a level that everyone can agree to.



That’s my first take of basic income in a crisis, a crisis I see as set in stone. Which changes the whole issue of a basic income. Plenty people will see this as socialism or something in that vein, I see it as perhaps the only way to make sure you have a functioning society on the way down. With none of the alternatives looking particularly appealing.

When discussing the details of such a program, what would probably be good, if only for the sake of justice, is to combine it with Steve Keen’s notion of a Modern Debt Jubilee, in which debt gets cancelled but those with most debt are obliged to pay -part of it- down, while those who are debt-free get ‘rewarded’ for that status.

What I have always found difficult to envision is how a jubilee would work in modern days. The ones ‘of old’ would typically involve a local ruler and/or landlord to whom subjects owed debts of some sort, which the ruler could declare null and void while still being the ruler- and the richest man around.

Today debts are global, with much of them having been securitized and sold on to large -financial- institutions who may even be anonymous and have shareholders in dozens of different countries. How do you get them to agree to large-scale debt cancellation or reform? I’m not saying it can’t be done, but it’s not the same thing.

The hardest part of what I laid out above may well be to get people who feel they are owed benefits, pensions or otherwise, to accept that these will be incorporated into a new basic income system. Not many understand to what extent pensions systems are Ponzi’s, and even those who do to an extent may still refuse to give up their slice of the pie.

It should be fairly easy, though, to explain what their slice will look like once the systems collapse, or even simply once nobody pays in anymore. And because younger people have no reason to pay for something they know they will never see the benefits of, and moreover all this can be phased in/out over a certain period of time, it may well unfold faster and easier than one might think at first sight.



Lastly, some numbers. Greg Ip wrote for the Wall Street Journal last week: Revival of Universal Basic Income Proposal Ignores Needs of Labor Force. Obviously, in my example, i.e. in an economy that’s going down the drain, the term ‘needs of the labor force’ takes on a whole different role and meaning. In his piece, Ip says:

To send every American adult $10,000 a year would cost $2.4 trillion, or 13% of GDP.

And I think that is a misleading way of phrasing things. Because the money doesn’t disappear, so it doesn’t ‘cost’ that; and that’s not only true in my theoretical example. Most of the ‘basic income money’ would circulate inside the economy, and much comes back to the issuing state through various taxes. Crux is don’t let it leave the economy it’s issued in.

Mind you, I don’t see a basic income trial happen in the US, because it’s far too big a country. The EU is too large too. You’d need smaller units. And as I said, a shrinking economy would of necessity make units smaller. In Europe, these units already exist. In countries the size of Finland, Switzerland, Scotland, Wales, perhaps Greece, a basic income trial may well be viable.

That is, provided they shrug off the strangleholds that bind them to centralized systems. But that they will wind up doing regardless. What’s more important is that such a trial is meticulously planned, and not with some pie in the sky idea of where the world economy is headed.

Greg Ip suggests that a $10,000 basic income for all US adults is not realistic, because it would ‘cost’ 13% of GDP. But this graph from the World Economic Forum World Economic Forum on social expenditures as calculated by the OECD, puts things in a different light:


In 2014, US social expenditures were at about 20% of GDP, which is 50% more than Ip’s example. And that is the main point behind the basic income question, even if you don’t subscribe to the collapsing economy ‘thesis’: what would happen if you replace all -or almost all- social benefit schemes in a particular society with a basic income? How much money would you save, or how much extra would it cost?

Ip seems to contend that a basic income would be prohibitively expensive. But, even if the OECD numbers fail to include certain items, there’s a lot of leeway between the 13% of GDP a US basic income would cost, and the 20% of GDP America now pays in benefits. About $1.2 trillion in leeway. So the cost picture at the very least is not all that obvious.

By the way, it’s kind of funny that I’ve seen nobody address the perhaps most ironic thing: even if the state would save a lot of money moving to the much simpler basic income from a myriad of other programs, that would make a whole lot of civil servants unemployed all at once. Can’t help wondering why no-one brings that up.

But the US is not the best example, for various reasons. It’s countries that have the right size to hold a trial in, or at least what we can perceive as the right size. Finland, Belgium, Denmark all spend close to 30% of GDP on social expenditures. Portugal, Greece, Slovenia, Luxembourg are at 25%. If a basic income can be had for 13% of GDP, these countries stand to save a fortune…

Unfortunately, you can’t be in the EU and start a basic income trial. And that’s a shame. Because it’s going to be very hard to get this right, and it’ll take some serious time and effort. So much so that not starting today is a risk in itself.

But as long as people keep having faith in the economists, politicians, bankers and reporters who drill the ‘recovery is right around the corner’ meme into them 24/7, and any alternative to that meme just scares the heebees out of them, I’m afraid there’ll be no basic income trial. Yes, there are a few ideas, but they’re all based on the wrong -growth- assumptions, so they’re sure to fail.

Caveat: No, I haven’t gone through all different social benefits plans of all countries I’ve mentioned, so I don’t know what part of GDP each spends at present, or how much they could save or lose. Someone will have to write ‘the book’ on this.

For my thought experiment here I found it sufficient to go with the basic principles, and throw in a few numbers. And the most elementary difference between me and other voices is not there anyway: that is in my putting the basic income issue against the backdrop of economic collapse, and nobody else really doing that whom I’ve read.

Yes, the title is Marquez, of course, THE time of cholera



Aug 062015
 August 6, 2015  Posted by at 8:05 am Finance Tagged with: , , , , , , , ,  

Arnold Genthe “Chinatown, San Francisco. The street of the gamblers at night” 1900

Far too many people have already used lines like “We Are All Greeks Now” for the words to hold on to much if any meaning by now. But it’s still a very accurate description of what awaits us all. Just not for the same reasons most who used it, did.

No, I don’t really want to talk about Greece again. I want to talk about where you live. And about how similar the two will be not too long from now. How Greece is holding up a lesson and a big red flashing warning sign for all of us.

Greece is the mold upon which all of our futures will be based. Quite literally. Greece is a test tube baby rat.

Greece will never “recover” to our North American and Western European economic levels (if ever they were there). Instead, it’s us who will descend, “uncover” so to speak, to the levels Greece is at today. That is baked into the cake, that is inevitable, and that is therefore what we need to be ready for.

If we wake up in time to this new reality, we may, and that’s still only may, be able to prevent the worst, prevent something akin to the same punitive measures the Troika has unleashed upon Greek society, fully wrecking it in the process, its healthcare system, the safety nets for its most needy.

We may find a way to make a smoother transition from here to there if we prepare in time. But that’s the best we can do. As societies, that is; individual fates will vary.

Greece will find ways to do better than it does right now, balance things out, but it won’t be through a recovery or a bailout. Athens will -because it must, lest the humanitarian crisis deepens profoundly- find ways to better -fairer- apportion what means are at its disposition, amongst its people.

We all have to do the same, wherever we are. Our advantage today is that we can do this from a relatively well-to-do starting point. Our disadvantage is that, unlike the Greeks, we do not understand the reality we’re in.

We’re ignorant, we deny, we prefer not to think about it. The Greeks used to be like that, but they no longer have that choice. And we won’t for much longer either.

The reason why Greece is where it is today, and why we will all be there tomorrow, we can by now for good reason call ‘deceptively simple’. That is to say, the global banking system that orchestrated the financial crisis refuses to take the losses on its extravagant bets, and it has the political clout to get its way, all the way. That’s all you need to know.

The losses are therefore unloaded upon the citizens of our respective nations. But the losses are far too massive for those citizens to bear. They, or rather we, will see our societies stripped of most things, most of the social fabric, that hold them together. Any service that costs money will be cut, progressively, until there’s very little left.

It happened in Greece, and it will happen all over the world. Mind you, this is nothing new; third world nations have undergone the same treatment for decades, if not forever. Disaster capitalism wasn’t born yesterday. What’s new is that it now takes place in the supposedly well-off part of the world, in this case the European Union. And it will spread.

The successive Greek bailouts that have now ruined the entire nation were “needed” to stem the losses on wagers, derivatives and other, incurred by global banks, French, Dutch, German, Wall Street, the City. The first bailout in 2010 also served the purpose of allowing the banks time to shift away from their exposure to Greek debt.

All bailouts, be they directly for banks, or indirectly through a country like Greece and then for the banks, have been set up according to the exact same MO. Greece’s economic reserves just happened to be a bit tighter, and moreover, the country was a convenient lab rat and scarecrow to prevent others from protesting the bailout system too loudly.

The whole system of bailouts, be it in Greece or in the US, was never anything else than a transfer of public money to private interests, with the express aim of making good on the lost wagers of that private sector. With impunity, no less.

And no, the losses have not disappeared. Nor have they been written down. They have instead been transferred to fester in dark vaults, hidden behind swaps and other derivatives, and on central bank balance sheets. But that won’t last either.

The Automatic Earth has warned of the imminent deleveraging and deflation for years, and now everyone is talking about deflation. No worries, guys. As you were. But do please try and understand how this works.

There’s all these losses, with no-one prepared to write down any of them (see Germany vs Greece), and the elites behind the banks unwilling to absorb any -the elites instead insist on getting richer even in a depression-. There is only one outcome left then: that you and me will have to become much poorer. They are our losses now.

The only way the rich can keep getting richer is if the rest of us keep getting poorer. Economic growth is a thing of the past. Deleveraging has started for real. Huge amounts of zombified ‘money’ are disappearing as we speak.

That leaves the world with a lot less wealth. And still the rich seek to get richer, and they are in charge. The math is simple. As Greece shows us, the rich have no qualms about throwing an entire society off the cliff.

A large part of what is now considered wealth is made up of QE and related and inflated stocks, bonds and real estate prices, all of which is zombie wealth. Which can disappear overnight. And if it can, it will.

China stocks and “real” estate and local government debt to shadow banks, emerging markets, commodity currencies (Australia, New Zealand, Canada etc.), if you overlook that whole panorama it’s hard to see how you could possibly think there’ll be some kind of recovery.

Where should it come from? Overall debts are much worse, much higher, now, then they were in 2008. We haven’t had a recovery, we’ve had an “uncovery”. And we’re headed for a discovery.

The entire idea, the phantom ghost, of a functioning market died, if you were willing to look, with the advent of central bank intervention. People who work in finance, obviously and for understandable reasons, have never been willing to take that look. They’re just looking to make more money even if things tumble down the mountain in a handbasket. They call it “opportunity”.

But they haven’t been actual investors in years. They’ve just helped the banking system put you into deeper doodoo. Greece shows us where that leads. And soon, wherever you live will show that to you too.

Deflation is a bitch. Nicole Foss here at the Automatic Earth has used the phrase “multiple claims to underlying real wealth”, for a long time. It’s like playing musical chairs. And you’re not winning. You never had a chance.

The only people who will wind up winning are the rich trying to get richer. The rest of us will soon live like the Greeks, and that’s if we are lucky.

There is no other possibility. “Money” is vanishing fast, and the only way it can even seem to return is if central banks do more QE, but that’s a dead in the water policy. Economic growth across the globe, and certainly in the west, is an illusion.

China was the last place that briefly seemed to have any, and they screwed up just like us, ending up with far too much debt to ever repay.

There is a point when the can gets so big and heavy, no-one can kick it down any road anymore. Not even one that plunges down a mountain. Something to do with gravity.

Jan 202015
 January 20, 2015  Posted by at 11:08 pm Finance Tagged with: , , , , , ,  

Unknown Charleston, SC, after bombardment. Ruins of Cathedral of St John and St Finbar 1865

After 6+ (BIG +) years of deepening poverty and rising stock markets, of creative accounting, of QE and ultralow interest rates, of extend and pretend and outright propaganda and of what have you, all of which have led us to where we are today, facing yet more rounds of stumbling from crisis into multiple crises, it would seem clear that the model, if not the mold, is broken. In order to fix it, let alone replace it altogether, we need to understand to what extent it is broken. And to do that, we first need to know what exactly the model is.

Now, it would be tempting, even seem logical, to consult with the people who designed and built the model. Who, after all, not only claim to be the only ones capable of fixing the broken mold, but who also have occupied all positions of power that have any say in the process. But that’s less obvious than it may seem. Because, mind you, the model is broken. They built a flawed model. Or rather, they built one that works for them, for some, but not for the rest of us.

There are gatherings and festivities ongoing in Davos. Only some are invited: the rich, the powerful and their court jesters. Those who profited most from the broken model. They’re least likely to fix it, they won’t even admit to it being broken. It works just fine for them. The people in Davos believe in one model only, the one of ever increasing centralization and globalization, because that’s the model that got them where they are.

That means that what’s in their interest is 180º removed from what’s in your interest. And it means that whatever these people propose you do, you should probably do the exact opposite.

The more our economic activities become part of the global economy, the more the rich can skim off. That ‘principle’ got them where they are. They all, to name one thing, keep talking about the need for more reforms, in order to make economies more competitive. Even sounds reasonable at first glance; but only because we haven’t thought it over. It’s mere propaganda.

When it comes to basic necessities, to food, water and shelter, we shouldn’t strive to compete with other economies. That is not good for us, or for our peers in those other economies; it’s good only for those who skim off the top. The larger and more globalized the top, the more there is to skim off. All the ‘reform’ is geared towards making our economies ever more dependent on the global economy. And that is not in our best interest.

It’s not all just even about money, it’s about our security, and independence. Everybody likes the idea of being independent, but at the same time few realize that globalization is the exact opposite of independence. Global trade is fine, as long as it’s limited to things we don’t need to survive, but it’s not fine if and when it takes away the ability of a community or a society to provide for itself.

Protectionism has acquired a really bad reputation, as if it’s inherently evil to try and protect your community from being gutted by economic ideas and systems it has no defense against, or to make sure it can generate and provide for its own basics at all times. But that’s just propaganda too.

If our societies are not designed and constructed to provide for themselves, they’ll end up with no choice but to go to war with each other. Along the same lines, if our societies don’t have strict laws in place that guarantee we can’t and won’t destroy the natural resources of the land we live on comes with, we’ll also end up going to war with each other.

We’re not going to solve the Gordian knot of the entire global economy and all the hubris and propaganda the present leading politicians, businessmen and ‘reporters’ bring to the table. And we probably shouldn’t want to. Our brains did not develop to do things on a global scale. The clowns will blow themselves up sooner or later. We should focus on what we can do, meanwhile, in our immediate surroundings.

And it’s pretty easy from there, really. The economic problems we have are mostly artificial. They have been induced by the broken economic model the Davos crowd, the central bankers and you know who else would have us believe is the one and only, and that they are busy fixing for our sake and greater glory. But they care only about their own glory.

The IMF lowered its global GDP forecast yet again. But who cares? Who has any faith in the IMF? Those numbers are released for consumption by the masses, and duly reported by the media six ways to Sunday. China says its economy grew 7.4% in 2014. But there is no more reason to believe China than there is the IMF. If China’s economy had really grown 7.4% in 2014, oil would not be below $50.

Trying, and desiring, to be part of this global economy idea the clowns propagate, or even a new world order, which can only lead to misery and mayhem for billions of people just because of the way it was set up, is the worst thing we can do now. We owe it to our people, and our children, to leave them with something better than that.

It’s fine to compete with others when it comes to technology and fashion and gadgets and whatever luxury items you can or cannot yet imagine. But it’s not fine to compete with them for the food and water your own children will need to survive. But still, that is the path we’re on. The path the Davos crowd has set us on. Because they get richer as we compete for food and water. Divide and rule stems from Roman times, if not before. And ‘we’ – or they, if you like that better – have perfected it. To the extent that we are now so divided amongst ourselves that a small minority can see its wealth grow at ever increasing speed at our cost.

The Davos crowd are not the important people, it’s just propaganda that makes you see them in that light. There’s no glory in wealth. The important people are your neighbors, your families, and most of all your children. And the answer to their insidious schemes is really simple; its that very simplicity which may well be the reason you never saw it.

You see, a dollar spent on locally made products goes much further than one spent on products that are shipped in. About 4 times further. Because if you buy local products, you support local jobs, which in turn support the community you live in through taxes that pay for strengthening the community, and so forth. Ergo: if something produced locally costs twice as much as what’s available from 1000 miles away, you’d still be better off. Even if it’s three times more expensive, you’ll still end up richer.

The only setback is, you’ll have to work to make it work. You’ll have to get people around you to understand why buying what their neighbors make at double or triple the price of what they pay for what comes from China will make them richer and better people. Sounds stupid and naive and easy to dismiss and unrealistic at first bite, I know. But I don’t mind, because I’m none of those things.

And, moreover, this is the only road out of Davos. All you need to do is wean yourself off the clowns. And I know you can’t do it alone, but then, why should you want to?

Nov 022014
 November 2, 2014  Posted by at 9:34 pm Finance Tagged with: , , , , ,  

John Vachon Boy on porch of general store, Roseland, Virginia April 1938

I often find myself wondering what people, people in the street, western people in general, my readers perhaps, think when they see something like the recent Unicef report, Children of Recession: the Impact of the Economic Crisis on Child Wellbeing in Rich Countries, which states that child poverty in developed nations has risen significantly.

How many of you who live in Europe still see the EU as something good and beneficial when you see that not only does Greece today has 25% unemployment and 55% youth unemployment, and its child poverty rate also went up from 23% to 40.5% since 2008? Or do you put the blame not with the EU, but elsewhere?

It’s not just those numbers, I wonder to what extent you Europeans think the numbers are about yourselves, to what extent you feel responsible, what they do about it. Same for Americans, who live in a country where 1 in 3 children grow up in poverty. How much of that do you think has to do with you? What would you say you can or cannot do to make those numbers better, and what do you actually try to do?

Do you even think less child poverty is better for society, and for yourself, or that less unemployment is a good thing, or do you see that as perhaps for instance the proper way to generate growth in an economy, Darwin-style? Lots of people seem to think that way, so at least you wouldn’t have to feel alone.

Obviously, the UnIcef report should be linked to recent reports that state the number of billionaires in the world has doubled in the same time slot, the past 5-6 years. One can’t very well argue that these things have nothing to do with each other. What the two combined say is that our societies are changing in very fundamental ways.

And at some point you need to ask yourself what you think about that. And if you find this a negative development, what you can do to correct it, as well as what you are in practice doing, today. If there’s too large a discrepancy somewhere in that picture the next question is obvious: why don’t you do more?

Are you comfortable getting up in the morning, go to your job, come home and watch TV, go to sleep and rinse and repeat? Are you not doing something, or not doing more, because you’re afraid if you do your own private daily rinse and repeat routine will be disturbed?

It’s an interesting issue, to which extent we share responsibility for those around us, and for the societies we share with them. We need to realize that if and when we allow large, and growing, numbers of people around us to be desperate, the societies we cherish will of necessity change. When we allow more children to grow up in poverty, our societies will change for many years to come.

There’s no inbuilt mechanism that will revert them to a situation that we would prefer; we have to put in energy to make them what we would like them to be. Our rinse and repeat lifestyles put zero energy into improving, even maintaining, and so they deteriorate. Like anything else in the world.

And there’s always that same question: why do we allow for it to happen? Are our little private cocoon lives really so important to us that we willingly allow the world outside of them to go to hell in a handbasket? Do we just not care? Or do we maybe trust a bunch of people we vote for every so many years to solve all related problems for us, so we can watch TV?

In most western countries youth unemployment is over 25%, in some it’s much higher. For those young people that do find work, wages and benefits are much lower than for their parents’ generation. Still, these young people have to compete with their parents for the amenities of life, like housing, pensions etc., and they haven’t got a chance. Unless they literally fight. is that what you want?

The EU was supposed to be a union, all for one and one for all. But it hasn’t worked out that way. The richer countries have the edge over the poorer, and within nations the richer boomers squeeze the younger generation, their very own children. While all politicians, in every country and from every faith and creed, promise a return to growth waiting just around the corner that will solve all problems.

Not one even dare suggest that growth may not return, and that even if it does, it’s immoral to sacrifice millions of children’s lives while we wait for it. That in other words, a redivision of our wealth may be needed that enables the young to find a meaningful goal in life, even if the older generations would need to give up part of their lifestyles to achieve that.

The choice we are all making right now is to make our own riches more important than the poverty that is increasingly rampant among our children. It’s hardly a political choice, because our political systems don’t offer a way out. They offer different approaches to achieving – more- riches, but none to anything other than that. A true political choice would venture beyond that narrow frame.

If you vote, you vote for more growth, even if that’s an entirely obsolete thing to do. You do it anyway because it soothes your worries, and it allows you to think you can hold on to what you got. While most people in the west could be just as happy – or unhappy – with a bit less than what they have and spend so much time trying to keep. And while you try to keep holding on to it, it slips through your fingers.

And you tell yourself that child poverty is not really your fault. It happened while you were busy doing other things. Maybe it’s time to change your priorities. Like first make sure the society you live in is alright, that the people around you live good lives, and only after that put energy into increasing your own comfort level even more.

We are the richest people who ever lived, and who ever will. We are tens of millions of medieval kings and queens. What is it that is going so horribly wrong that we need to let our children live without purpose, even without food and shelter? I think it must be a short circuit in our brains.

Most of us could easily give up half our incomes and wealth and be at least just as happy, we could save the planet and do much more that would benefit those around us. But instead we choose to destroy it all, just for some imaginary wealth we don’t even need. And blame it all on someone else. It’s not our kids who are the lost generations, we are. We’re very busy losing everything.

Oct 192014
 October 19, 2014  Posted by at 9:41 pm Finance Tagged with: , , , ,  

Dorothea Lange Play street for children. Sixth Street and Avenue C, NYC June 1936

George Monbiot has written a bunch of whoppers in the recent past, his pleas for more nuclear plants as the only way to save mankind in particular raised far more questions than they provided answers. But not everything he’s written since is as nonsensical as those pieces. This week he came with one that I think everyone should read and think about.

In it, he tries to tackle the topic of loneliness among us ‘modern people’. Not an easy topic to address, because there are just so many different sides and approaches to it. I sure don’t have the answers. I do have the questions, though. For starters, when does someone count as lonely? While there are people who feel lonely in the crowdiest of places, others may feel quite content and fulfilled in solitude.

We can all sense there’s something wrong, but it’s very hard even just to simply tell cause from effect. And claiming that our present social lives, and/or the lack thereof, are nothing but some kind of next phase, some development, is something that rings empty in the realization that during our 1 million year (or so) history, we’ve always been very social creatures.

The human being who interacts more with the world outside, and with fellow humans, through screens and phones and other gadgets, does not represent a form of progress. The happiest people in the world, if you discard the myriad of heavily biased surveys based on wealth levels as happiness indicators, live in societies where grandchildren are close to grandparents, and where families are close to their neighbors. It’s simply where we come from, and who we are.

But if you would go stand on some street corner and ask strangers if they are lonely, most would not admit to that. It’s only in other settings, in which people feel more at ease, that they will label themselves lonely. Interestingly, the loneliest among us are the young and the old. Poverty by itself does not cause loneliness, and neither does wealth; but lonely people can be found in all wealth levels. Age, however, does play a role.

We stopped communicating the moment we didn’t depend on each other for bare survival anymore. Resistance to social control is probably a major factor in that. Resistance to churches and other forces that force their opinions about right and wrong on societies and the people that live in them are undoubtedly a huge reason to turn one’s back on that society.

Still, to a large extent we haven’t just changed the way we interact with the societies we were born into, we have withdrawn from them to a very large degree. The nuclear family is a man, a woman, 2-3 kids and the curtains closed at night. Not in the same house as the grandparents, who may live 1000 miles away, and not with anything more than shallow relationships with neighbors.

The nuclear family gave us a lot of lonely housewives. Women then were encouraged to get jobs, and then the kids would find themselves home alone all the time. Everyone’s activities were taking place ever further away, and separate from each other, adults in different workplaces, kids in schools the size of small towns where loneliness reigns like nowhere else, and retired grandparents feeling useless, 1000 miles away.

That is how a lot of us grew up. With societies torn apart, or at least torn from the way they used to be organized. Like lions were forced to turn into tigers. And no electronic or digital inventions can bridge the divide it has ripped through our lives, and our minds. Perhaps at some point far into the future we can grow into the ultimate couch potato, but that is, if we ever ‘achieve’ it, a long time away. In the meantime, there’s a lot of misery. Monbiot:

The Age Of Loneliness Is Killing Us

What do we call this time? It’s not the information age: the collapse of popular education movements left a void filled by marketing and conspiracy theories. Like the stone age, iron age and space age, the digital age says plenty about our artefacts but little about society. The anthropocene, in which humans exert a major impact on the biosphere, fails to distinguish this century from the previous 20. What clear social change marks out our time from those that precede it? To me it’s obvious. This is the Age of Loneliness.

When Thomas Hobbes claimed that in the state of nature, before authority arose to keep us in check, we were engaged in a war “of every man against every man”, he could not have been more wrong. We were social creatures from the start, mammalian bees, who depended entirely on each other. The hominins of east Africa could not have survived one night alone. We are shaped, to a greater extent than almost any other species, by contact with others.

The age we are entering, in which we exist apart, is unlike any that has gone before. Three months ago we read that loneliness has become an epidemic among young adults. Now we learn that it is just as great an affliction of older people. A study by Independent Age shows that severe loneliness in England blights the lives of 700,000 men and 1.1m women over 50, and is rising with astonishing speed.

A good way to lay the foundation of the argument, I’d say.

Ebola is unlikely ever to kill as many people as this disease strikes down. Social isolation is as potent a cause of early death as smoking 15 cigarettes a day; loneliness, research suggests, is twice as deadly as obesity. Dementia, high blood pressure, alcoholism and accidents – all these, like depression, paranoia, anxiety and suicide, become more prevalent when connections are cut. We cannot cope alone.

Yes, factories have closed, people travel by car instead of buses, use YouTube rather than the cinema. But these shifts alone fail to explain the speed of our social collapse. These structural changes have been accompanied by a life-denying ideology, which enforces and celebrates our social isolation.

Loneliness doesn’t just make us lonely and miserable, it makes us sick and shortens our lives. And why would we want to live those lives to begin with, when they’re miserable anyway? But now Monbiot moves into a next, entirely different part of his thesis: what happened to make us what we are, to turn out back on what we once were?

The war of every man against every man – competition and individualism, in other words – is the religion of our time, justified by a mythology of lone rangers, sole traders, self-starters, self-made men and women, going it alone. For the most social of creatures, who cannot prosper without love, there is no such thing as society, only heroic individualism. What counts is to win. The rest is collateral damage. British children no longer aspire to be train drivers or nurses – more than a fifth say they “just want to be rich”: wealth and fame are the sole ambitions of 40% of those surveyed.

That last part reminded me right away of something Lou Reed said 25 years ago in ‘Dirty Boulevard’, from his ‘New York’ album (New York was not a particularly nice place at the time).

No one dreams of being a doctor or a lawyer or anything
They dream of dealing on the Dirty Boulevard

Give me your hungry, your tired, your poor, I’ll piss on them
That’s what the statue of bigotry says
Your poor huddled masses lets club ’em to death
Get it over with and just dump ’em on The Boulevard

Back to Monbiot:

A government study in June revealed that Britain is the loneliness capital of Europe. We are less likely than other Europeans to have close friends or to know our neighbours. Who can be surprised, when everywhere we are urged to fight like stray dogs over a dustbin?

We have changed our language to reflect this shift. Our most cutting insult is loser. We no longer talk about people. Now we call them individuals. So pervasive has this alienating, atomising term become that even the charities fighting loneliness use it to describe the bipedal entities formerly known as human beings.

What I think is worse is that we have taken to calling our fellow (wo)men ‘consumers’, even if we would never think of ourselves that way. We don’t do so ourselves perhaps, but the media that provide our ‘news’ do. And we accept it for something entirely normal. Why do we do that, accept that others are called consumers while we don’t see ourselves that way? Monbiot gives a hint:

One of the tragic outcomes of loneliness is that people turn to their televisions for consolation: two-fifths of older people report that the one-eyed god is their principal company. This self-medication aggravates the disease.

I think we may all of us agree that for far too many older people, TV has become their version of a window to the world. Because the world itself leaves them alone and lonely. Kids and grandkids live far away and have lives too busy with reaching for success to leave time for their (grand)parents. Partners die, so do friends and neighbors. And then they get slotted into highrises with a view of the river. And a TV set.

Almost makes you wonder what older people did before TV, doesn’t it? Sure, people live longer now on average, the prize of progress, but how much of a blessing is that when all you can do is wait for the end while watching, instead of your families, pre-chewed entertainment beamed in from outer space? How do we define progress, again? But George has more intriguing notions:

Research by economists at the University of Milan suggests that television helps to drive competitive aspiration. It strongly reinforces the income-happiness paradox: the fact that, as national incomes rise, happiness does not rise with them. Aspiration, which increases with income, ensures that the point of arrival, of sustained satisfaction, retreats before us.

TV doesn’t just numb or ‘entertain’ us, it evokes tendencies we would never have if we were living in the same arrangements our ancestors did. Who fought rival tribes over land and riches, but not their neighbors; that would have weakened their own position. We now fight each other, mano a mano, ‘educated’ by weird kinds of ideas quiz shows and reality TV bestow upon us. Can it be any wonder that we’re lost and lonely?

The researchers found that those who watch a lot of TV derive less satisfaction from a given level of income than those who watch only a little. TV speeds up the hedonic treadmill, forcing us to strive even harder to sustain the same level of satisfaction.

I’m pretty sure that’s not just TV, it’s the whole set of models of our world we are fed by the whole set of media we ‘are granted’ access to. And yes, that includes the media you use to read this on. No media are bad in and of themselves, but they can certainly be put to bad use. Simply because they’re not in our ‘genetic consciousness’.

So what’s the point? What do we gain from this war of all against all? Competition drives growth, but growth no longer makes us wealthier. Figures published this week show that, while the income of company directors has risen by more than a fifth, wages for the workforce as a whole have fallen in real terms over the past year. [..] And even if competition did make us richer, it would make us no happier, as the satisfaction derived from a rise in income would be undermined by the aspirational impacts of competition.

The entire idea of growth has proven to be nothing but a cancer growth for us. It’s all been one step up and two steps back. Not because new inventions and gadgets are bad in themselves, but because we are lost when it comes to using them in our lives. We let them change the very principles by which we live. Like our compassion for each other, and our care for the planet we live on. And we justify this by claiming and believing that is someone can invent an iPhone, he will surely also be able to undo any and all damage that iPhone may do to us. Progress is a religion, and what use is it to question a religion?

The top 1% own 48% of global wealth, but even they aren’t happy. A survey by Boston College of people with an average net worth of $78m found that they too were assailed by anxiety, dissatisfaction and loneliness. Many of them reported feeling financially insecure: to reach safe ground, they believed, they would need, on average, about 25% more money. (And if they got it? They’d doubtless need another 25%). One respondent said he wouldn’t get there until he had $1bn in the bank.

Yeah, it never stops, does it? Poor man wanna be rich, rich man wanna be king, and a king ain’t satisfied till he rules everything. But most of us do not have psychopathic tendencies, we’re just stuck in a system than makes those who do, end up in charge. And nothing serves their purposes better than for us to compete with each and everyone of us. Including ourselves: who does not feel inadequate after watching a few hours of popular TV replete with commercials?

For this, we have ripped the natural world apart, degraded our conditions of life, surrendered our freedoms and prospects of contentment to a compulsive, atomising, joyless hedonism, in which, having consumed all else, we start to prey upon ourselves. For this, we have destroyed the essence of humanity: our connectedness.

Yes, we have done all this. And we will continue on that path to gain possession of the next gadget, the next empty sign of superiority over all, including those closest to us, over whom we have no need to feel superior. But we no longer realize that: we are all, if not enemies, then surely competitors. Not for happiness, we lost that along the way, and besides we would need each other to achieve it, but for anything that can serve as a placebo for what it is we lost.

[..] … if we are to break this cycle and come together once more, we must confront the world-eating, flesh-eating system into which we have been forced. Hobbes’s pre-social condition was a myth. But we are entering a post-social condition our ancestors would have believed impossible.

Our lives are becoming nasty, brutish and long.

I love that last line. And I think Monbiot is dead on with it. I also fear that it will take a deep dark fall for mankind to ever bring us back, if it is possible at all, to what we are, to where we come from, to what connects our past to our present. For now, we’re stuck in a propaganda machine that we don’t have a way out of, so we’ll have to see everything break down that we see as communication in order to find back what communicating is.

We’ve come a long way, but somewhere along the road ‘we took a wrong turn and we just kept going’. People are not born to be lonely, and if they become it, and in great numbers, it’s time to be afraid for all of us.

Like a river that don’t know where it’s flowing
we took a wrong turn and we just kept going [..]

Everybody needs a place to rest
Everybody wants to have a home
Don’t make no difference what nobody says
Ain’t nobody like to be alone

Jul 162014
 July 16, 2014  Posted by at 8:01 pm Finance Tagged with: , ,  

Marion Post Wolcott Old buildings in New Orleans Jan 1941

There’s a lot of interesting pieces being written on a daily basis, if you care to look for them, and there’s never enough time and space to afford them the attention they should really deserve. Luckily, there are still many people out there, even in the financial world, who have a pretty astute understanding of what’s going on versus what we are told to believe there is. Not that I don’t think there are no smart people in finance, just that many of them watch the world through the blinders their world comes with. Most of us – and therefore them, too – follow the herd, after all.

I like, for instance, the angle of Joe Calhoun at Alhambra Investment Partners, who argues that the US has already turned into Japan:

Return To Normalcy – Even The Supply Of Greater Fools Is Limited

For all those who worried that the US might turn into Japan, well worry no more, that ship has sailed. Over a half decade of zero interest rates says we already have become Japan, with the same demographic, productivity and structural problems so well documented. High taxes, a shrinking workforce, offshored production, protection of large incumbent firms, political gridlock, a falling savings rate, a growing xenophobia and an affinity for sushi all point to America as the economic kissing cousin of the land of the setting sun. Turns out the Vapors were not just one hit wonders but keen eyed economic forecasters as well.

The US economy isn’t acting normally, now in the 6th year of an anemic expansion the likes of which we haven’t seen since, well, never. The temptation is to compare this period with the Great Depression but even the recovery from the early part of that self inflicted economic wound was better in some respects. The unemployment rate has fallen but the path of improvement has been a road less traveled in economic history. No matter the reason, full time employment has become an unreachable dream for too many Americans. Multiple part time jobs and underemployment have made debt a way of life [..] to achieve the perception, the illusion, of success, if not the real thing.

A return to normalcy would mean a rejection of the idea that debt is the sine qua non of economic growth. A return to normalcy would mean a recognition that the Fed’s monetary gnomes are the ones who got us in this mess and are therefore wholly unsuited in their role as the economy’s knight in shining armor. A return to normalcy would mean rewarding and recognizing savers as the unsung heroes of economic growth. A return to normalcy would mean a shared prosperity for all rather than just the privileged few with access to the Fed or the ear of their congressional representative.

Achieving the goals of the Fed’s extraordinary policies – full employment and low inflation – would require an extraordinary set of conditions to develop. The economy would have to achieve a rate of growth that has escaped it for years while the Fed would have to extricate itself from a policy regime they barely – and that is generous – understand. I see no reason other than wishful thinking to believe those conditions can be met.

And what I also like a lot is Salient Partners’ Ben Hunt and his take on Mario Draghi in Wonderland:

Mario Draghi is Alice. The Red King? Well, That’s Us

We’re all familiar with the Queen of Hearts from Alice in Wonderland, less so with the Red King. He’s sleeping all the while, and when Alice goes to wake him up she’s warned off by Tweedledee and Tweedledum, who tell her that everything in Wonderland – including Alice herself – is perhaps just the dream of the Red King. Wake him up and maybe, just maybe, everything goes … poof! Europe is once again nearing a potential Red King moment, something last seen in the summer of 2012.

Then the wake-up call was a series of national elections, particularly in Greece. Today it’s a restructuring of the European financial system, a process started in 2012 with the recapitalization of Spanish banks, continued with the depositor bail-in of Cypriot banks, and now at a tipping point with the imminent ECB regulatory control over all large EU banks. Mario Draghi is Alice, and the dream is a unified European identity triumphant over individual national identities, symbolized and crystalized in a single currency, the Euro. The Red King? Well, that’s us. [..]

So what makes the summer of 2014 different from the summer of 2012? If Draghi sang a lullaby to the fitful Red King two years ago with his “whatever it takes” pledge, why won’t he do the same today by following through with a no-muss-no-fuss ECB regulatory take-over of major EU banks? Odds are he will. But what’s different today is that it’s his own institution on the line. What’s different today is that a heartfelt speech and a mythical OMT program – pure Narratives, in other words – are not sufficient. The ECB actually has to assume responsibility for these banks if Draghi is to move forward with the next step of the Grand Plan, and there’s nothing intangible or mythic about that.

I think that the best way to understand the recent spate of write-downs and default notifications from European banks (Erste Bank on July 4th, Espirito Santo on July 10th) is in the context of this regulatory unification of big EU banks. For the first time in decades these banks are being examined for real. No more patsy national regulators with their revolving doors and inherited culpability, but a highly professional independent banking bureaucracy looking carefully at every bottle and tin in the pantry because they’re scared to death of swallowing some poisonous balance sheet. The problem for the ECB, of course, is that Espirito Santo and Erste are not isolated incidents, any more than Laiki and Fortis and Anglo Irish and WestLB and BMPS and … should I go on? … were isolated incidents.

The problem is that no amount of public scrubbing and show trials can change the fact that the entire European banking system has been an enthusiastic accomplice to domestic political interests for the past 30+ years, stuffing their collective balance sheets to the gills with loans in direct or indirect service to domestic political demands. [..] But precisely because the politically-inspired rot is so widespread, taking a bank like Espirito Santo into the street and shooting it in the head no more solves Europe’s systemic banking crisis than executing Bear Stearns in March 2008 solved the US systemic banking crisis. As Dorothy Parker once wrote, “beauty is only skin deep, but ugly goes clear to the bone.” That’s the European financial system: politically ugly, clear to the bone.

But my favorite for the day has to be the rather incomparable Paul B. Farrell at MarketWatch, who watches events unfold with a combination of the liberty and experience that come with age, and the brains he was born with. Farrell writes about the work of Harvard philosopher Michael Sandel, who makes one wish we had a whole bunch more solid philosophers, and, even more, that they would be listened to. Sandel himself perhaps best explains the reason why we are are not listening.

Our Market Society Has Made A Deal With The Devil (Paul B. Farrell)

For years we’ve been asking: Why does capitalism blindly drive the human brain down this self-destructive path, whether it’s money, global warming, gun sales or voting rights? Why more books and ministers filling arenas with the message, God Wants You to Be Rich? Why is Pope Francis warning that a new “worship of the ancient golden calf has returned in a new and ruthless guise in the idolatry of money and the dictatorship of an impersonal economy?” Why? There is someone who brilliantly explains why free-market capitalism is controlling our brains, sabotaging our world: Harvard philosopher Michael Sandel, author of bestseller “What Money Can’t Buy: The Moral Limits of Markets, and Justice: What’s the Right Thing to Do?”

For more than three decades Sandel’s been teaching us why capitalism is undermining human morality. And why we choose to deny it. Why do we bargain away our moral soul? His classes number over a thousand. You can even take his course online free . He summarized capitalism’s takeover of the human conscience in “What Isn’t for Sale?” in the Atlantic. Listen:

“Without being fully aware of the shift, Americans have drifted from having a market economy to becoming a market society … where almost everything is up for sale.” Capitalism is America’s new “way of life where market values seep into almost every sphere of life and sometimes crowd out or corrode important values, non-market values.”

“The years leading up to the financial crisis of 2008 were a heady time of market faith and deregulation — an era of market triumphalism,” says Sandel. “The era began in the early 1980s, when Ronald Reagan and Margaret Thatcher proclaimed their conviction that markets, not government, held the key to prosperity and freedom.” Then in the 1990s the “market-friendly liberalism of Bill Clinton and Tony Blair … consolidated the faith that markets are the primary means for achieving the public good.” Yes, Ayn Rand’s “pure, uncontrolled, unregulated laissez-faire capitalism” took over America’s brain, our soul, became the nation’s collective unconscious.

Today “almost everything can be bought and sold,” warns Sandel. “Markets, and market values, have come to govern our lives as never before.” Yet few are aware of this historic shift. “We did not arrive at this condition through any deliberate choice. It is almost as if it came upon us,” says Sandel.

As a result, “market values were coming to play a greater and greater role in social life. Economics was becoming an imperial domain. Today, the logic of buying and selling no longer applies to material goods alone. It increasingly governs the whole of life.” Everything has a price.

Examples everywhere: “For-profit schools, hospitals, prisons … outsourcing war to private contractors … police forces by private guards … drug companies aggressive marketing of prescription drugs prohibited in most other countries.” Ads in “public schools … buses … corridors … cafeterias … naming rights to parks and civic spaces … blurred boundaries within journalism, between news and advertising … buying and selling the right to pollute … campaign finance in the U.S. that comes close to permitting the buying and selling of elections.”

Here I would argue, since I don’t see either Sandel or Farrell do it explicitly, that in the end, if you follow the logic, this means that people, too, are for sale. If everything has a price, everyone has a price. Or at least everybody has to work their behinds off not to be for sale, but they do so working jobs that, if you look with an objective eye, simply mean they’ve sold themselves. Basically, anyone who works a job they wouldn’t work if they weren’t paid to do it, is for sale. Not a popular point of view when you ask people to look in a mirror, but hard to argue with.

The 2008 crash ended our faith in conservative free-market capitalism: “The financial crisis did more than cast doubt on the ability of markets to allocate risk efficiently. It also prompted a widespread sense that markets have become detached from morals,” says Sandel. But so what? “Why worry that we are moving toward a society in which everything is up for sale?”

Two big reasons concern Sandel, both echo the warnings of Pope Francis and Piketty: One is inequality: “Where everything is for sale, life is harder for those of modest means.” If wealth just bought things like yachts inequalities might not matter. “But as money comes to buy more and more, the distribution of income and wealth looms larger.” Second, corruption: “Putting a price on the good things in life can corrupt … the meaning of citizenship.”

Sandel warns America’s new capitalism brain is devaluing “nonmarket values worth caring about. When we decide that certain goods may be bought and sold” they become “commodities, as instruments of profit and use.” But “not all goods are properly valued in this way … Slavery was appalling because it treated human beings as a commodity, to be bought and sold at auction.”

Nor do we permit “children to be bought and sold, no matter how difficult the process of adoption can be.” The same with citizenship … jury duty … voting rights. “We believe that civic duties are not private property but public responsibilities. To outsource them is to demean them, to value them in the wrong way.” Yet today many are for sale, have a price.

I’m doing the equivalent of licking my fingers here.

Sandel’s core message is simple: “The good things in life are degraded if turned into commodities. So to decide where the market belongs, and where it should be kept at a distance, we have to decide how to value the goods in question – health, education, family life, nature, art, civic duties, and so on. These are moral and political questions, not merely economic ones.” But in today’s new capitalist world, everything has a price.

Worse, that debate never happened during the 30-year rise of “market triumphalism … without quite realizing it, without ever deciding to do so, we drifted from having a market economy to being a market society.” The difference is profound: “A market economy is a tool … for organizing productive activity. A market society is a way of life in which market values seep into every aspect of human endeavor … where social relations are made over in the image of the market.” Where everything has a price.

But not only did the debate not happen, it may never. Because politicians aren’t up to debating values. They’re pushing America past the point of no return. Today, “political argument consists mainly of shouting matches on cable television, partisan vitriol on talk radio, and ideological food fights on the floor of Congress” warns Sandel. So it is “hard to imagine a reasoned public debate about such controversial moral questions as the right way to value procreation, children, education, health, the environment, citizenship, and other goods.”

Here I would add what I’ve often talked about: basic human necessities should not be part of a market either. Since everyone needs water, food, heat and shelter, we should never even risk leaving them in the hands of just a few people or corporations. And this is the ultimate slippery scale: if you give them one finger, they’ll take your whole hand at some point. It’s like when you allow money into your political system: money will end up buying the entire system outright. Once it’s got a way in, there’s nothing you can do about it anymore.

But look at where we are with regards to our water supply, our food supply; much of it is already ‘reformed’, privatized and owned by big corporations. And look at how much money people must pay for their homes, in 30 or 40 year loans. In Sweden, they have trouble getting people to pay off their homes in 50 years. There are countries where multi-generational mortgages are the norm. We sold our ethics, our values and our necessities, and for the most part we never even noticed. We put ourselves up for sale.

Can we change? “The appeal of using markets to put a price on public values is that there’s no judgment on the preferences they satisfy.” Morals become irrelevant. No debate is needed. Markets don’t “ask whether some ways of valuing goods are higher, or worthier, than others. If someone is willing to pay for sex, or a kidney … the only question the economist asks is ‘How much?’ Markets … don’t discriminate between worthy preferences and unworthy ones.”

Unfortunately capitalism eliminates moral values, just as Nobel economist Milton Friedman and capitalist philosopher Ayn Rand were to preaching conservatives for a long time. As Sandel puts it: “Each party to a deal decides for him- or herself what value to place on the things being exchanged. This nonjudgmental stance toward values lies at the heart of market reasoning, and explains much of its appeal.” But unfortunately, market capitalism “has exacted a heavy price … drained public discourse of moral and civic energy.” Capitalism never has to ask the tough question: “What’s the right thing to do?”

Sandel is a great teacher. And, yes, he’s too idealistic. We need more like him. But you don’t have to be a fatalist to know that without a global economic catastrophe, today’s market capitalists — billionaires, bankers, CEOs, hedgers, lobbyists and every special interest group getting rich off the new Market Society — will never, never voluntarily surrender their control of America’s wealth machine. No, they will keep blindly driving us down their self-destructive path with the delusional conviction God wanted them to get rich. The truth is, they made a wager with the devil … money for a soul.

Thing is, we’re not just talking about billionaires or bankers here, we’re talking about ourselves. We are the ones who allowed this to happen. We are the ones who in out increasingly blind chase for more lost sight of what we incrementally had less of. We let it slip out of our hand because we were too busy doing other things. We never realized we couldn’t win one without losing the other.

Farrell says that Sandel’s writings should be “required for Wall Street insiders, corporate CEOs, and all 95 million Main Street investors.” I think it should be for every single one of us. Because we no longer understand what we lost, and how much we lost. And blaming other people for it is not helpful either; only by seeing our own faults and failures in what we lost do we have a shot at getting at least some of it back.

Global Equity Melt-up In Full Swing Even If Investors Hate Themselves (AEP)

There is no longer much doubt. We are in the midst of a late-cycle blow-off in global equity markets Bank of America’s monthly survey of world fund-managers shows that investors have their second highest allocation to stock markets in thirteen years at 61pc. It is lead by shares in technology, energy, and even banks, and is stretched to a net 35pc overweight in Europe. “The summer ‘melt-up’ is likely to be followed by an autumn correction,” it said This happened in 2007 as you can see from the chart below, and again in early 2011 just before the European Central Bank triggered Part II of the EMU debt crisis by raising rates twice. Investors seem determined to keep dancing until the music actually stops, even though the largest majority since the height of the dotcom bubble think equities are overvalued. They are chasing momentum. It is irresistible to try to eke a little more out of the rally.

This dovetails with warnings from the Bank for International Settlements that markets are now “euphoric”, with the fear gauge (volatility) almost switched off, and the Tobin’s Q measure of the S&P 500 flashing more emphatic overvaluation warnings than in 2007. We are not necessarily at the end of this surge. Cash holding are still very high at 4.5pc, so funds still have a little more money to throw at stocks. High cash levels are theoretically a contrarian buy signal, while anything under 3.5pc is a sell signal, but as you can see it was a counter-indicator in 2007. The proportion in cash peaked at the top of boom. It offered false comfort.

[..] There is a reason why funds are not buying bonds. Central banks are doing it for them. This is either by QE – the Bank of Japan is eating up 70pc of all new debt issuance by the Japanese government – or by FX reserve accumulation.
IMF data shows that central banks have added $774bn to $11.86 trillion over the last year. Almost all of this went into bonds. Sovereign wealth funds are buying bonds too. These behemoths are crowding out the private market. So in a sense, the equity rally is a function of the collective acts of monetary authorities pushing investors into stocks. This of course is why the BIS is in despair. “Overall, it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally,” it said. Just wait until the Fed tightens in earnest.

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Need any more proof?

Market Rigging Explained (Nanex/Zero Hedge)

We received trade execution reports from an active trader who wanted to know why his larger orders almost never completely filled, even when the amount of stock advertised exceeded the number of shares wanted. For example, if 25,000 shares were at the best offer, and he sent in a limit order at the best offer price for 20,000 shares, the trade would, more likely than not, come back partially filled. In some cases, more than half of the amount of stock advertised (quoted) would disappear immediately before his order arrived at the exchange. This was the case, even in deeply liquid stocks such as Ford Motor Co (symbol F, market cap: $70 Billion). The trader sent us his trade execution reports, and we matched up his trades with our detailed consolidated quote and trade data to discover that the mechanism described in Michael Lewis’s “Flash Boys” was alive and well on Wall Street.

Let’s take a look at what we found from analyzing 5 large trades executed at different times over a 4 minute period in Ford Motor Co. Before each of these trades, the activity in the stock was whisper quiet. Here’s a chart showing millisecond by millisecond trade and quote counts in Ford leading up to one of these 5 trades:

You can clearly tell when the trade hits: activity explodes to over 80 quotes in 1 millisecond (this is equivalent to 80K messages/second as far as network/system latency goes). But the point here is that nothing was going on in this stock in the immediate period before this trade hits the market. In this particular example, there were a total of 24,800 shares advertised for sale at $17.38 (all trades and offered liquidity will be at this same price) from 8 exchanges. The trader wanted 20,000 of these shares. What he got was only 12,133 shares and 600 of these were on a dark pool (which wasn’t part of the 24,800 shares of liquidity on the lit exchanges)! Worse, someone ELSE was filled for 1,570 shares during these same milliseconds! Remember, nothing was happening in Ford until his order came into the market. Based on the other 4 examples, we are sure that no trades would have occurred during these few milliseconds of time if it wasn’t for this trader’s order.

What happened to the 24,800 shares offered and why couldn’t he get at least 20,000 of them? How is it that others were able to get shares during this time? This is especially disturbing when you consider these other traders (HFT) only bought shares in reaction to the original trader’s order.

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There’s A Big Hole In The Bull Case For Stocks (MarketWatch)

Some say the stock market’s high price-to-earnings ratio is justified by low interest rates. That seems plausible, right? Think again. There is precious little historical support for this notion. To be sure, virtually everyone I hear from or talk to is certain that above-average high P/E ratios are justified by low rates. The belief is so widespread on Wall Street that few have bothered to examine the historical record. If they did, they would be very surprised indeed. One analyst who did take the trouble to do so is Clifford S. Asness of AQR Capital Management. More than a decade ago, he published his analysis of data extending back more than a century. Titled “ Fight the Fed Model ,” his study appeared in the fall 2003 issue of the Journal of Portfolio Management. Asness’ findings are best understood in terms of a statistic known as the “R-squared,” which reflects the degree to which fluctuations in one thing predicts or explains changes in another. The R-squared ranges between 0 and 1, with 1 indicating the highest possible degree of predictive power and 0 meaning there is no detectable relationship. [..]

How did anyone ever come to believe that the P/E should be adjusted by interest rates? I can think of two possible explanations: one based on lazy thinking and the other on Wall Street’s bullish bias. I mention the first possibility because Asness found some statistical support for the interest-rate-adjusted P/E over the 20-year period between 1982 and 2001. It might therefore be that some believers in the adjusted P/E genuinely believed they had history on their side, even though they were focusing on only a small and unrepresentative subset of the full record. My hunch, however, is that Wall Street’s bullish bias is the bigger reason why so many think an interest-rate-adjusted P/E is superior to the unadjusted. The adjusted version does have some superficial plausibility, and that’s all Wall Street needed to tell a story for why we should buy into a market that is otherwise increasingly overvalued.

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Why We’re Doomed: Interest and Debt (CH Smith)

Even if the economy were growing at a faster pace, it wouldn’t come close to offsetting the interest payments on our ever-expanding debt. If you want to know why the Status Quo is unsustainable, just look at interest and debt. These are not difficult to understand: debt is a loan that must be paid back or discharged/written off and the loss absorbed by the lender. Interest is paid on the debt to compensate the owner of the money for the risk of loaning it to a borrower. It’s easy to see what’s happening with debt and the real economy (as measured by GDP, gross domestic product): debt is skyrocketing while real growth is stagnant. Put another way–we have to create a ton of debt to get a pound of growth. There is no other way to interpret this chart.

The Status Quo has only survived this crushing expansion of debt by dropping interest rates to historic lows. This is a chart of the yield on the 10-year Treasury bond, which reflects the extraordinary decline in interest rates over the past two decades. The Federal Reserve has pegged rates at essentially 0% for years. That means the strategy of lowering interest rates to enable more debt has run out of oxygen: rates can’t drop any lower, and so they can either stay at current levels or rise. Near-zero interest rates for banks borrowing from the Fed doesn’t mean conventional borrowers get near-zero rates: auto loans are around 4%, credit cards are still typically 16% to 25%, garden-variety student loans are around 8% and conventional mortgages are about 4.25% to 4.5% for 30-year fixed-rate home loans. This decline in interest rates means households can borrow more money while paying the same amount in interest. So the interest payment on a $30,000 car today is actually less than the payment on a $15,000 auto loan back in 2000.

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Not a sign that he’s feeling calm and collected.

Mark Carney Blasts BIS For Calling For Rate Rises In A “Vacuum” (Telegraph)

Mark Carney has rejected calls by the Bank for International Settlements (BIS) for a swift return to normal interest rates, lambasting the lauded Swiss institution for operating “in a vacuum” and “outside political and economic reality”. The Governor of the Bank of England said that BIS, considered to be the “bank of central banks” and a bastion of monetary policy, was issuing recommendations from a false premise. Mr Carney views, which are the strongest dismissal of BIS yet among global central bankers, came hours after a shock rise in inflation led to more calls for a rise in interest rates. The jump in the Consumer Prices Index, from 1.5pc in May to 1.9pc in June, was the biggest monthly rise since October 2012.

Giving evidence to the Treasury Select Committee on financial stability, Mr Carney was asked his view on The Daily Telegraph’s interview with Jaime Caruana in which the head of BIS warned that the world economy is just as vulnerable now to financial crisis as it was in 2007. Mr Caruana had warned that investors were ignoring the risks of monetary tightening. In its annual report last month, BIS said the policy of “forward guidance”, adopted by the Bank of England and America’s Fed, was encouraging investors to take on more risk. Mr Carney told the MPs that the BIS report was “interesting”. But he added “It’s a report that’s made in a vacuum though, the vacuum of Basel, a world where a central bank doesn’t have a mandate… a world where a central bank is not accountable to Parliament and through Parliament to the people, to achieve specific targets.”

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JPMorgan Pulls Back From Mortgage Lending On Foreclosure Worries (Reuters)

JPMorgan Chase & Co, the second-largest U.S. mortgage lender, is backing away from making home loans to less creditworthy borrowers after losing faith in its ability to recover much money from foreclosing on homes, even with government guarantees. The shift reflects a change in the way JPMorgan runs its mortgage business: while it used to regard collateral and U.S. government lending programs as key backstops to most of its loans, it now pays closer attention to the credit quality of borrowers. The bank wants to reduce the chances of having to foreclose on a loan, because it’s bad business. “The cost to take a customer through the foreclosure process is just astronomical now,” Kevin Watters, chief executive of JPMorgan Chase’s residential mortgage banking business in New York, told Reuters in an interview. In addition to federal standards, states, and in some cases local governments, have written their own rules making it more expensive for banks to recover loan losses, he said.

According to foreclosure data firm RealtyTrac, it took an average of 120 days to foreclose on a home at the beginning of 2007, just as the housing bubble was starting to burst. In the first quarter of 2014, it took 572 days, or more than 1.5 years. Lenders have generally been paying more attention to borrowers’ credit quality since the financial crisis, but JPMorgan is going a step further in its reluctance to rely on government loan guarantees and insurance. If other lenders choose the same path as JPMorgan, it could become more difficult for people to secure financing to buy homes, even though government programs are intended to help credit flow to these borrowers, said Christopher Mayer, a professor of real estate finance at Columbia University. “This could reduce the number of first-time buyers and slow the speed with which people who lost their homes during the crisis can become homeowners again,” said Mayer.

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You think?

U.K. Buy-to-Let Real Estate: Headed for Mayhem? (Bloomberg)

Shahram Kordestani, who owns seven U.K. rental homes, has advice for investors eager to join the swelling ranks of landlords: Do so at your peril. Kordestani, who has been renting homes in London and southeast England for about 12 years, said when interest rates rise, the jump in mortgage payments will hammer buy-to-let investors who have helped push up property values. “There is going to be mayhem,” said Kordestani, 52. “Whoever pays those prices is going to suffer.”

The loan-to-income cap that Bank of England Governor Mark Carney introduced last month to cool Britain’s housing market does not apply to buy-to-let — the fastest-growing type of mortgage by value. Economists say a hike in the central bank’s benchmark interest rate or falling prices could result in a repeat of the past, when repossessions of private-landlord homes hit a record high after the 2008 financial crisis. “It was a mistake not to include buy-to-let investment,” said Rob Wood, a former central bank official who is now an economist at Berenberg Bank in London. “It’s one way in which households can speculate on house prices rising and that is exactly the sort of dangerous debt build-up that Mark Carney was trying to avoid.”

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Let’s not confuse cost of living with inflation.

As UK Cost Of Living Rises, Young People Hit Hard (CNBC)

Low wage growth has plagued Britain’s economic recovery, failing to pick up despite firm signs elsewhere of a strengthening economy. Average weekly pay (including bonuses) in the three months to April expanded by just 0.7% year-on-year. This was below expectations and down from 1.9% in the three months to March. “It is becoming harder for people to get by as average wages continue to fall behind the rising cost of living. Ministers may have moved on from Britain’s living standards crisis but it’s still the top concern for families,” Frances O’Grady, general secretary of the TUC union, said in a statement. “An economic recovery based on shrinking pay packets is not one built to last.”

Young Britons have been hit hard by the rise in living costs, with a report by the Institute for Fiscal Studies (IFS) finding that “the recession and its aftermath have been much harder on the young than the old.” Between 2007-2008 and 2012-2013, real (inflation-adjusted) median household income among 22-30 year olds fell by 13%. In comparison, income fell 7% among 31-59 year olds, and remained stable for those aged 60 and over. This slide in real wages was driven, firstly, by a fall of 4%age points in employment of those in their 20s, the IFS said. The employment level remained unchanged among 31-59 year olds. Secondly, young peoples’ real median pay fell by 15%, while for people between the ages of 31-50, pay fell just 6%.

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Print print.

China Developers At Risk As Trust Funds Dry Up (Reuters)

China’s shadow banking firms slashed lending to property developers in the first half of this year, closing off a crucial funding avenue just as the housing market cools, potentially spelling trouble for the sector and the broader economy. Trust companies, which pool money from rich people and companies to make high-interest loans and are part of the China’s vast and opaque shadow banking system, were a ready source of cash during the housing boom, particularly for smaller developers that had trouble borrowing from banks. But in the first half of this year, trusts lent real estate firms 39% less than in the previous six months, according to trust research company Use Trust based in Nanchang. At the same time, the average interest on 48.3 billion yuan ($7.78 billion) in loans made through wealth management products climbed 16 basis points to 9.67%.

That bodes ill for Chinese developers who must repay nearly 600 billion yuan ($96.83 billion) worth of trust loans next year, according to brokerage firm Jefferies. “Default risk is heightening because trusts rely heavily on house prices rising,” said Xie Ya Xuan, an economist at China Merchants Securities’ Research and Development Center in Shenzhen. Trust firms, under greater scrutiny from regulators worried about rapid growth of shadow banking, are both finding it harder to raise money themselves and growing wary of lending to developers, particularly smaller ones, while the market cools. New home prices in China fell in June for the third straight month, private sector surveys show, as some developers cut prices to spur sales, with many expected to offer steeper cuts as they scramble to meet 2014 sales targets.

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Don’t trust any numbers coming out of Beijing.

China Is “Fixed”: GDP Beats As Retail Sales, Home Prices Tumble (Zero Hedge)

Having glimpsed the ugly reality of the under-belly of the Chinese economy last week, and the divergence between that and the government’s PMI survey fallacy, it is no surprise that by the magic of excel, GDP and Industrial Production modestly beat expectations (+7.5% YoY vs 7.4% exp and +9.2% YoY vs +9.0% exp respectively). However, despite epic credit injections, home prices tumbled 9.2% YoY and Retail Sales missed expectations rising only 12.4% YoY. Even as it is self-evident that re-flating the next chosen bubble, or attempting to socialize losses, is not sustainable in the long-run, it is clear (given the surge in deposit creation in recent months) that China has chosen the path of short-term easy-street as opposed to the reform-based hard-street they had promised.

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Property Looms Over China’s Target (WSJ)

China is back on its official growth target. But given mounting property pain, investors have to wonder what trajectory it’s really on. Official figures show the economy grew 7.5% in the second quarter from a year earlier, the same rate as the government’s full-year growth target. On a seasonally adjusted basis, it expanded an annualized 8.2%, an acceleration from 6.1% in the first quarter, confirming earlier signals that the economy had picked up steam. It’s not hard to see why. A bundle of stimulus measures flowed through the economy, including a cheaper currency, easier lending conditions and accelerated government spending. Growth in total social financing, the broadest measure of lending in the economy, had been on a slowing trajectory for a year before picking back up in May and June.

One big fillip is from railroads. ANZ economists figure spending on new railways could be above 1 trillion yuan ($161 billion) this year, nearly 60% higher than last year and more than the amount spent in 2010, when China used railway construction as a stimulus in the wake of the global financial crisis. What’s harder to see is a bottom in the all-important property market. That will be the ultimate determinant of how much more stimulus Beijing will have to apply to keep the growth rate steady. Residential construction starts measured by floor space fell 15% last quarter from a year earlier, less steep than the first quarter, but still bad. And most troubling, unsold apartment inventories continue to rise, up 25% in June from a year earlier. Until buyers start eating away at the empty space, developers are unlikely to start new projects.

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Back to the shadows.

China Shadow-Banking Curb Fuels Loan-Backed Debt Spree (Bloomberg)

Chinese banks’ sales of bonds backed by loans have surged 22-fold this year as the government seeks to curb shadow banking, while still allowing lenders to make room on their balance sheets for new financing. Banks have issued 78.7 billion yuan ($12.7 billion) of such securities, compared with 3.6 billion yuan in the same period last year and 15.8 billion yuan for all of 2013, Bloomberg-compiled data show. Such transactions must get approval from regulators and are more transparent than wealth-management products and trusts, which have been used by banks to bypass capital controls.

Premier Li Keqiang is seeking to shift financing to official channels after shadow-banking assets jumped 32% in 2013 to 38.8 trillion yuan, according to Barclays Plc estimates. The banking regulator tightened rules on new trust products in April, after failures of such investments sparked protests. Authorities approved the first asset-backed security tradable on the Shanghai stock exchange last month, and yesterday authorized the first mortgage-backed notes since 2007. “Regulators are closing one door, but opening a window,” said Liu Dongliang, a senior analyst in Shanghai at China Merchants Bank Co., the nation’s sixth-biggest lender. “To Chinese regulators, asset-backed securities, which are standardized products, are safer and more transparent than the shadow-banking products that are hard to monitor.”

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9 EU Countries Ready To Block Economic Sanctions Against Russia (RT)

France, Germany, and Italy are among EU members who don’t want to follow the US lead and impose trade sanctions on Russia. US sanctions are seen as a push to promote its own multibillion free-trade pact with Europe. “France, Germany, Luxembourg, Austria, Bulgaria, Greece, Cyprus, Slovenia, and EU President Italy see no reason in the current environment for the introduction of sectorial trade and economic sanctions against Russia and at the summit, will block the measure,” a diplomatic source told ITAR-TASS. In order for a new wave of sanctions to pass, all 28 EU members must unanimously vote in favor. EU ministers plan to discuss new sanctions against Russia at their summit in Brussels on Wednesday, July 16. Even if only one country vetoed, sanctions would not be imposed. With heavyweights like France and Germany opposed to more sanctions the measure will likely again be stalled, the source said.

According to the source, the US sees slapping Russia with sanctions as a way to promote its own trade agenda with Europe, a side rarely explored in mainstream media. The Transatlantic Trade and Investment Partnership (TTIP) between the US and Europe would create the world’s largest free trade zone, but some worry it could balloon into an “economic NATO” or could end up putting corporation interest above national. “Last year the EU and the US started difficult negotiations on a free trade agreement, which would force the EU into serious concessions, in particular, agricultural quality standards and regulation on genetically modified products. In this circumstance, restrictions against Russia will force EU countries to expand trade with the US,” the source said, citing shale gas as an example.

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Let’s see what happens. $50 billion is peanuts.

BRICS Agree on $50 Billion Bank With Something for Everyone (Bloomberg)

Leaders of the five BRICS nations agreed on the structure of a $50 billion development bank by granting China its headquarters and India its first rotating presidency. Brazil, Russia and South Africa were also granted posts or units in the new bank. The leaders also formalized the creation of a $100 billion currency exchange reserve, which member states can tap in case of balance of payment crises, according to a statement issued at a summit in Fortaleza, Brazil. Both initiatives, which require legislative approval, are designed to provide an alternative to financing from the International Monetary Fund and the World Bank, where BRICS countries have been seeking more say. The measures coincide with a slowing of economic growth in the five countries to about 5.4% this year from 10.7% in 2007, according to economists surveyed by Bloomberg.

“The BRICS are gaining political weight and demonstrating their role in the international arena,” Brazilian President Dilma Rousseff said after a signing ceremony. Until the eve of the summit, India and South Africa had vied with China to host the headquarters of the bank, dubbed the New Development Bank. The administration of Indian Prime Minister Narendra Modi gave in after it was reminded that his country’s previous administration had agreed to Shanghai as the bank’s headquarter, according to an Indian official, who requested not to be named because the talks were not public.

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Portugal’s a place to watch.

Portugal’s Bank Woes Just Got More Complicated (CNBC)

The saga surrounding troubled Portuguese lender Banco Espirito Santo (BES) took another twist on Wednesday, with the fortunes of a telecoms merger shedding more light on the strength of the country’s banking sector. Portugal Telecom rushed Wednesday to salvage a possible tie-up with Oi, the Brazilian telecoms company, after a possible default by Rioforte, an investment unit of the Espirito Santo group, called the deal into question. The two telecoms firms said they had signed a “memorandum of understanding”, in the hope of keeping the deal alive, and insisted they remained committed to “full completion” of the deal. Shares in Portugal Telecom rose 6.8% in morning trade. Concerns about a Portugal Telecom-Oi deal arose after Rioforte – a holding company of the Espírito Santo Group, which is responsible for its non-financial investments – missed a debt repayment of €847 million ($1.15 billion) on Tuesday evening.

Portugal Telecom bought the debt from Luxembourg-based Rioforte in April and it was held in subsidiaries of Portugal Telecom that were given to Oi in May in anticipation of the deal. However, both parties have now revised the terms of the merger and the Rioforte debt will be passed back to Portugal Telecom. The company has also said that it would pursue legal and procedural options against Rioforte and related parties to the “full extent of the law” in the hope of securing repayments on the debt. But Bill Blain, a fixed income strategist at Mint Partners, argued that debt of the various Espirito Santo holding companies was most likely “toast”. With regards to BES, he said the troubled lender should be now worried about its exposure to Portugal Telecom. “In the utter absence of any clear information or transparency, my best guess is that BES looks more and more likely to bail-in subordinated debt holders,” he said in a note, with junior debt holders facing the possibility of losing part of their investment.

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Espirito Santo’s Rioforte Fails to Repay $1.2 Billion of Debt (Bloomberg)

Rioforte Investments SA, a holding company in Portugal’s Espirito Santo group, failed to pay 847 million euros ($1.2 billion) of short-term debt, becoming the second company in the group to miss a payment. Rioforte owes the money to Portugal Telecom SGPS SA, which said today the payment wasn’t made. Rioforte owns 49% of Espirito Santo Financial Group, which in turn holds 20% of Banco Espirito Santo SA, Portugal’s second-biggest bank by market value. Investors are concerned that financial problems within the Espirito Santo group will spill into the bank and subordinated bondholders may be made to take losses in a rescue. Luxembourg-based Rioforte plans to file for creditor protection, a person familiar with the matter said yesterday, asking not to be identified because they’re not authorized to speak about it. “This increases the risk that subordinated bondholders will get bailed in,” said Bill Blain, a strategist at brokerage Mint Partners Ltd. in London. “This is not good news for the bank.”

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Mario Draghi is Alice. The Red King? Well, That’s Us (Ben Hunt)

So what makes the summer of 2014 different from the summer of 2012? If Draghi sang a lullaby to the fitful Red King two years ago with his “whatever it takes” pledge, why won’t he do the same today by following through with a no-muss-no-fuss ECB regulatory take-over of major EU banks? Odds are he will. But what’s different today is that it’s his own institution on the line. What’s different today is that a heartfelt speech and a mythical OMT program – pure Narratives, in other words – are not sufficient. The ECB actually has to assume responsibility for these banks if Draghi is to move forward with the next step of the Grand Plan, and there’s nothing intangible or mythic about that.

I think that the best way to understand the recent spate of write-downs and default notifications from European banks (Erste Bank on July 4th, Espirito Santo on July 10th) is in the context of this regulatory unification of big EU banks. For the first time in decades these banks are being examined for real. No more patsy national regulators with their revolving doors and inherited culpability, but a highly professional independent banking bureaucracy looking carefully at every bottle and tin in the pantry because they’re scared to death of swallowing some poisonous balance sheet. The problem for the ECB, of course, is that Espirito Santo and Erste are not isolated incidents, any more than Laiki and Fortis and Anglo Irish and WestLB and BMPS and … should I go on? … were isolated incidents.

The problem is that no amount of public scrubbing and show trials can change the fact that the entire European banking system has been an enthusiastic accomplice to domestic political interests for the past 30+ years, stuffing their collective balance sheets to the gills with loans in direct or indirect service to domestic political demands. What? You mean that 6 billion euros lent to politically-connected business interests in Angola (a Portuguese colony until 1975) were maybe not such a good idea for Espirito Santo? I’m shocked! But precisely because the politically-inspired rot is so widespread, taking a bank like Espirito Santo into the street and shooting it in the head no more solves Europe’s systemic banking crisis than executing Bear Stearns in March 2008 solved the US systemic banking crisis. As Dorothy Parker once wrote, “beauty is only skin deep, but ugly goes clear to the bone.” That’s the European financial system: politically ugly, clear to the bone.

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Return To Normalcy – Even The Supply Of Greater Fools Is Limited (Alhambra)

The Fed has kept interest rates at zero for 6 years now and their expectations setting forward guidance says 7 is in the bag. For all those who worried that the US might turn into Japan, well worry no more, that ship has sailed. Over a half decade of zero interest rates says we already have become Japan, with the same demographic, productivity and structural problems so well documented. High taxes, a shrinking workforce, offshored production, protection of large incumbent firms, political gridlock, a falling savings rate, a growing xenophobia and an affinity for sushi all point to America as the economic kissing cousin of the land of the setting sun. Turns out the Vapors were not just one hit wonders but keen eyed economic forecasters as well.

The US economy isn’t acting normally, now in the 6th year of an anemic expansion the likes of which we haven’t seen since, well, never. The temptation is to compare this period with the Great Depression but even the recovery from the early part of that self inflicted economic wound was better in some respects. The unemployment rate has fallen but the path of improvement has been a road less traveled in economic history. No matter the reason, full time employment has become an unreachable dream for too many Americans. Multiple part time jobs and underemployment have made debt a way of life, starting with the ubiquitous student loan and throughout life as a way to achieve the perception, the illusion, of success, if not the real thing.

Companies aren’t investing for the future, preferring to spend on the present through stock buybacks and dividends that in many cases exceed their current cash flow, the difference being plugged with debt. Balance sheets are seen as sound by investors who see cash on the asset side of the ledger, forgetting apparently that there is a liability side as well. Where we have seen investment, the returns have left much to be desired. The capital sunk into extracting high cost oil and gas is staggering, approaching $1 trillion per year and $5.5 trillion globally since 2008. What we got for that staggering sum is not a single field that can produce profitably at less than $80/barrel and $4.5 per foot of gas. In some cases, the search for oil has gone to such extremes the breakeven prices are well over $100/barrel.

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Scary graph.

Every Time Is Different, And The Same (STA)

Market crashes are an “emotionally” driven imbalance in supply and demand. You will commonly hear that “for every buyer there must be a seller.” This is absolutely true to a point. However, what moves prices up and down, in a normal market environment, is the price level at which a buyer and seller complete a transaction. In a market crash, however, the number of people wanting to “sell” vastly overwhelms the number of people willing to “buy.” It is at these moments that prices drop precipitously as “sellers” drop the levels at which they are willing to dump their shares in a desperate attempt to find a “buyer.” This has nothing to do with fundamentals. It is strictly an emotional panic which is ultimately reflected by a sharp devaluation in market fundamentals.”

(Note: this is also the danger of excessive margin debt in the financial markets. Margin debt is comprised of “loans” based on the value of a stock portfolio. As prices plunge, the drop in valuations trigger “calls” on margin loans which then requires more sells. The additional selling triggers more selling, and so on. In a highly complacent market environment, as we have currently, there is little attention paid to geopolitical tensions, economic or fundamental data or a variety of other relevant risks. The emotional “greed” to chase returns overrides the sense of logic. “Warnings” that do not immediately lead to a market correction are simply viewed as wrong. However, as investors, are we not repeatedly told to “buy when there is blood in the streets.” Yet, in order to be able to buy in times of “panic,” one would have needed to have “sold” into “exuberance.”

The point is simple. Stock market crashes are triggered by an “emotional panic,” rather than a fundamental data point. While fundamentals are indeed important in determining the long-term (10 years or more) return on an investment, they are terrible at predicting “emotionally driven” turning points in market prices. Like a crowded theatre, no one worries when one or two people exit the building. However, the problem comes when someone yells “fire” and everyone tries to exit the building at the same time. The rush for the exits sends share prices plummeting regardless of the underlying fundamentals.

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Our Market Society Has Made A Deal With The Devil (Paul B. Farrell)

There is someone who brilliantly explains why free-market capitalism is controlling our brains, sabotaging our world: Harvard philosopher Michael Sandel, author of bestseller “What Money Can’t Buy: The Moral Limits of Markets, and Justice: What’s the Right Thing to Do?” For more than three decades Sandel’s been teaching us why capitalism is undermining human morality. And why we choose to deny it. Why do we bargain away our moral soul? His classes number over a thousand. You can even take his course online free. He summarized capitalism’s takeover of the human conscience in “What Isn’t for Sale?” in the Atlantic. Listen: “Without being fully aware of the shift, Americans have drifted from having a market economy to becoming a market society … where almost everything is up for sale.” Capitalism is America’s new “way of life where market values seep into almost every sphere of life and sometimes crowd out or corrode important values, non-market values.” His course should be required for Wall Street insiders, corporate CEOs, and all 95 million Main Street investors.

Here’s an overview: “The years leading up to the financial crisis of 2008 were a heady time of market faith and deregulation — an era of market triumphalism,” says Sandel. “The era began in the early 1980s, when Ronald Reagan and Margaret Thatcher proclaimed their conviction that markets, not government, held the key to prosperity and freedom.” Then in the 1990s the “market-friendly liberalism of Bill Clinton and Tony Blair … consolidated the faith that markets are the primary means for achieving the public good.” Yes, Ayn Rand’s “pure, uncontrolled, unregulated laissez-faire capitalism” took over America’s brain, our soul, and became the nation’s collective unconscious. For both the GOP and Dems. Today “almost everything can be bought and sold,” warns Sandel. “Markets, and market values, have come to govern our lives as never before.” Yet few are aware of this historic shift. “We did not arrive at this condition through any deliberate choice. It is almost as if it came upon us,” says Sandel.

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Oxfam director.

Why Your Morning Corn Flakes Could Milk Your Money (MarketWatch)

For many of us, climate change evokes images of skies darkened by coal-burning plants or oceans slick from spilled oil. But it’s time to take a closer look at another industry with hands dirty from polluting the atmosphere — an industry whose investors have a great deal to lose if nothing is done to stop the climate crisis: Food companies. People don’t normally think “climate change” when they sit down to enjoy a favorite meal. Tony the Tiger and the Pillsbury Doughboy don’t evoke images of droughts, floods or storms. But maybe they should. Oxfam recently released a report, “Standing on the Sidelines,” which shows that reckless deforestation, nitrous oxide released from the overuse of fertilizers, large-scale land clearance, and other harmful production practices in the industrial-scale supply chains of the world’s 10-biggest food companies are huge contributors to global warming that, ironically, could cause tens of millions of people to suffer hunger unnecessarily.

Together, these 10 companies, Associated British Foods, Coca-Cola, Danone, General Mills, Kellogg, Mars, Mondelez, Nestlé, PepsiCo and Unilever, create an astounding 264 million tons of greenhouse gas emissions every year — as much as 69 coal-fired power plants. If these “Big 10” were a country, it would be the 25th biggest polluter on the planet, spewing more emissions than oil and gas producers Qatar and the United Arab Emirates. The emissions these companies cause are contributing to a growing humanitarian catastrophe. By 2050, there could be 50 million more people made hungry because of climate change. More frequent, unpredictable and extreme storms, floods, droughts and shifting weather patterns are affecting food supplies, driving up food prices and causing more hunger and poverty.

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Huge ND Wastewater Spill Prompts Calls For Fracking Regs (

Beaver dams have so far prevented about 1 million gallons of fracking wastewater discovered spilled July 8 from a rural North Dakota pipeline from spreading too far. But area residents, environmentalists and even a Republican state legislator all want more reliable measures. The spill of the toxic saltwater, a byproduct of hydraulic fracturing, came from gas extraction operations at the Fort Berthold Indian Reservation and occurred days before it was discovered. The federal Environmental Protection Agency said the underground pipeline spilled about 24,000 barrels, or 1 million gallon, in North Dakota’s thriving oil and gas region. The water, which can be 10 times saltier than seawater and contains salt and fossil fuel condensates, was being piped away from fuel extraction sites for safe disposal.

The spill has been threatening Bear Den Bay on nearby Lake Sakakawea, which provides water for the reservation occupied by the Arikara, Hidasta and Mandan tribes, though the EPA said there is no evidence that the lake has been contaminated. In fact, it said, most of the saltwater had pooled near where it had spilled and that beaver dams in the area had kept it from spreading. As a result, the EPA said, the local soil has simply been absorbing the spill. That’s a bit too fortuitous for Wayde Schafer, a spokesman for the Sierra Club in North Dakota. He said there have been four other spills in the region recently, including three caused by lightning strikes and a fourth attributed to a cow that rubbed against a tank valve. With its current oil and gas boom, North Dakota has become the second most productive energy state behind Texas. By relying greatly on fracking, though, it also produces millions of barrels of wastewater daily that, like nuclear waste, must be buried underground forever.

In 2013 alone, there were 74 pipeline leaks that spilled 22,000 barrels of saltwater. Yet that same year, the North Dakota Legislature voted 86 to 4 against a bill that would have mandated flow meters and cutoff switches on wastewater-disposal pipelines. Energy companies protested the cost of such measures, and even state regulators argued they wouldn’t detect small leaks.

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