Archive for the ‘Debt’ Category
Iceland, the Mouse that Roared
March 13th, 2010 | 
Author: Iceland, the Mouse that Roared
Szandor Blestman
I thought I heard something the other night. It was a distant sound, a low rumbling, a roar from some far off beast that had finally pronounced its presence. It woke me for a second, but it was so distant I felt no threat and simply rolled over and went back to sleep. The next morning I learned that Iceland was taking a stand. It was refusing to pay its British and Dutch debts. It is claiming the debts are a result of fraud, and it’s right. They have made the offer to pay some years from now, if they can afford it at that time, and only as a percentage of their GDP. This offer has been, of course, declined by Iceland’s creditor banks as they demand payment in the form of real assets.
The Icelanders have grown a pair, so to speak. They are doing something I wish Americans would have done, or will do in the future. They are standing up to the privately owned banks that seem to think they are above the law, that they can change the rules at their whim, and that they alone know what’s best for the world, which of course happens to empower them and help their profits. I may not agree with all the politics of Iceland. It might not be the bastion of freedom one looking to get away from intrusive government might run to, but I do admire their stance against the banksters.
Let’s examine the situation a little closer. The Icelanders claim that private banks owe the money to other private banks, not taxpayers. The people who own the private banks should be responsible for paying back the creditor banks, not the people of Iceland. I agree wholeheartedly with that assessment. Furthermore, I would take it a step further and make the assertion that any government official voting for any public borrowing that requires payment of public funds for interest be held responsible, or their family be held responsible, should the loans go into default. In other words, these public officials should not be allowed to maintain their fortunes while the common folk are expected to pay for the mistakes they made. Perhaps that would help stop the corruption.
It seems that Iceland was fooled into the same ponzi scheme the rest of the world finds itself in. This all revolves around the fact that money in and of itself has no intrinsic value. It is just paper, for the most part, and in the modern world it is just data floating around in cyberspace. Even metal coins are made from cheap and common metals anymore. The fiat system devised by the central banks are designed to collapse at some point, and it’s designed to collapse in such a way that the very few, very rich, very powerful end up with all the marbles. It’s not enough to them, it seems, to be at the top of the heap, they have to be so high up and keep the common folk down so low as to be untouchable.
Those that own the banks now hope that they can swoop in and buy up the nation’s infrastructure for pennies on the dollar, or in this case aurar on the krona. This is how they operate. They print money based on nothing but debt at negligible cost to themselves, then charge interest on that debt, interest that is never created by the way, and then when the debt can’t be repaid they end up acquiring all the real wealth that’s been created. It’s a brilliant scheme in its simplicity. They end up with all the real wealth and they risk nothing of any real value. I could be wrong, but I think it’s safe to say that the Icelanders figured this out when their creditor banks started demanding things like their geothermal power stations and other such publicly owned infrastructure as payment for their defaulted loans. They cried “foul!” – as well they should having played by the rules all this time – and charged that they had been defrauded. They may well have shocked the establishment with their refusal to pay the extortion.
One may well ask, “Is this the fate that awaits all nations?” How many nations in the world today are in the same boat as Iceland? How many are having problems just servicing the interest on their debt? I dare say it would be easier to count the nations that weren’t experiencing debt trouble. And one could rightly ask where all the money has gone. Certainly the debt hasn’t been put back into the economy to create more wealth. Indeed, I would venture a guess that there’s trillions of dollars, euros, yens, pounds, francs, marks, you name it, stashed away in vaults somewhere just waiting for the day when they can be used again, money that should no longer exist that somehow found its way into secret vaults that also shouldn’t exist.
It is interesting to note that the biggest banks, the ones that managed to get bailed out by US tax dollars rather than made to liquidate, are intimately connected to the same international bankers who own the central banks across the globe. Indeed, Goldman Sachs seems to have become a “bank of the world,” so to speak, as it has its fingers in a little bit of everyone’s pies these days. It is also interesting to note that their largest competitors were allowed to fail, effectively setting them up with monopoly privileges. That’s how the power banking elite want it, all the money in their hands and all the corporations under their thumb as they monopolize the issuance of currency and credit. Everyone will have to do as they say or they will quickly become bankrupt and destitute. Such is the power of monopoly.
One may well wonder what happens next. The British and Dutch have threatened economic sanctions should the Icelanders fail to fall in line, but is this how we want to treat our brethren? Is this how we want to treat our allies that stood by us in the darkest of times? Do we now just shun people we consider friends simply because they stand up for what they believe is right? Do we go so far as to commit an act of war on such a democratic nation because they recognize a fraud when they see one? This situation should get everyone thinking. The corruption now exposed is so grievous and obvious that we should all realize the time has come to obliterate the current system and deny any power to those who brought this situation to bear.
It is once again time to set up a system of money based on labor instead of debt. We should have a system where free people are able to own property outright, not have to borrow to afford it and then worry that an uncaring bank may come and claim it should one find one´s self in financial trouble. Similarly, it is very disturbing that government can claim private property via eminent domain and non payment of property taxes as if they feel they already own the land you pay for. These wrongs have needed correction for a long time now and hopefully the actions of the Icelanders will help start the ball rolling.
While the Greeks are rioting because they worry their entitlements will be taken away, the Icelanders have been able to take a more direct roll in the political process. The Greeks may well feel they have been left out of the political process, much like many Americans feel at this point in time as we watch the congress blatantly ignore the wishes of the common folk time and again. The bailouts, the wars, the passing of laws violating our rights and the health care bills are all examples of the minority political class ignoring the wishes of the majority to the detriment of society. The Icelanders may have to pay a price for their bravery, but they are finding their way back to freedom and self reliance.
We have been dependent on these banks for far too long and they have taken advantage of it. They have threatened our lawmakers with martial law and economic destruction. They have refused to honor the will of the people and answer questions involving how they´ve spent our money. As I write this, a very few senators, Bob Corker (R-TN), Richard Shelby (R-AL), Chris Dodd (D-CT) and Judd Gregg (R-NH), are working to strip the Audit the Fed amendment from the Financial Reform Bill and give the Federal Reserve even more power. This will assure they will never be held accountable for the wrongs they have done. These senators need to be shown in no uncertain terms that we the people have had enough and will not obey their dictates and whims any longer.
We as a society need to start producing again. We need to start competing with others who wish to produce. This is how wealth is created. The more wealth we create, the more prosperous we all become. For a few decades now, we have tried to maintain our lifestyles with a service economy. It didn´t work. Now the economy is collapsing worldwide. Now the banks are hoarding that which they created and are trying to claim the real wealth that should be owned by private sovereigns. We need to ask ourselves, can we be proactive and stop this before we wake up and find ourselves in the same boat as Iceland? If not, will we simply say no and refuse to pay as they did, or will we allow our society to break down and resort to violence as the Greeks? Don´t let a few politicians on the bankster´s payroll dictate what needs to be done. Demand action now. Roar louder than the Icelanders. Hopefully, we will find justice later. Hopefully, we can avoid the fate of nations that remain on the central banker´s preferred course.
Szandor Blestman was born the 6th of 8 children to a high school English teacher and a certified financial planner. He attended the University of Illinois and earned a Bachelor’s degree in Rhetoric in 1984 with minors in Math and Geology. He took some time off school to raise a family. He has five wonderful children, three of which have grown to adulthood. He achieved a Master’s of Science in IT from the University of Maryland University College in Dec. 2004. Szandor has been laid off from work since January and is looking for employment. If you know of or have any job openings, particularly in writing, editing, acting or media production, please contact him at sblestman@yahoo.com. Also contact him if you are a publisher and wish to offer him a contract for the work he has already done. He will relocate for the right opportunity. Szandor loves receiving email and feedback.
Posted in Banks, Corruption, Debt, Economic Crisis, Economy, Financial System, Fraud, Iceland | 
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What The Lehman Report Proves: Financial Insolvency
What The Lehman Report Proves: Financial Insolvency
Posted by Karl Denninger
The Lehman Report on which I wrote last night regarding deeply troubling issues surrounding the Lehman Bankruptcy, has laid bare some very ugly facts relating to our financial system, corporate governance, and our government’s active complicity not only in the Lehman collapse, but in ongoing balance sheet shenanigans and the current investment picture.
The conclusions I am forced to reach, after much reflection and sleeping on this article overnight, are not pretty.
They compel me to advise that, in my opinion, the market is now trading both technically and on a fundamental basis, exactly as the Nasdaq was in 1999.
I recognize this is a serious charge and has implications that are most unpleasant, in that it implies a probable detonation ahead at some time in the next year – one that will not only destroy all of the gains made since March of last year but go beyond that – indeed, perhaps as far as the banner on The Market Ticker has for the major indices.
The technicals of the last month leave no doubt what’s going on – the market is moving in a parabolic upward fashion, exactly as was the case for the Nasdaq in ‘99, and indeed, we are approaching the sort of gains in the broad market that Nasdaq saw in 1999.
For those who need a refresher, here it is:
Now let’s look at the S&P 500 since the March lows:
And if you need a refresher on what happened to the Nasdaq after it topped in early 2000, here’s that unfortunate reality:
Not only did the entire ramp in 1999 disappear, more than another 50% was lost beyond that.
The seriousness of this cannot be overstated. Anyone who bought into the start of the decline in 2000 was wiped out by doubling into a decline that took a literal 85% off the NDX from the peak. Worse, today, nearly a decade later, we remain more than 50% below the peak valuation that the NDX reached.
The Nasdaq is not alone in this behavior. The Nikkei 225 reached 38.957 in 1989. Today it trades around 10,000 – a nearly 75% loss from it’s all-time highs, and despite 20 years it has not healed.
An analytical look at history says that when markets rise on fraudulent accounting and false claims - that is, the booking of asset values that is fictional, the claim of profits that were never really made, the hiding of losses off-balance sheet – the losses, when they come, are not recovered for a generation or more.
When this happens to individual companies, they go bankrupt.
When it happens on a broad basis in a market index, the result is utter destruction.
Such happened in the 1930s as well. The DOW’s high of 1929 was not recovered until more than 20 years later, and due to FDR’s devaluation of the currency it was another decade before, on a purchasing-power basis, your original values were seen again.
So the seminal question for this alleged recovery has been whether or not the recovery is real – that is, whether the asset class at the core of the original problem, the banking system, now has clean balance sheets and it can be reasonably assumed that what is reported in terms of assets, liabilities and earnings is in fact real.
If you cannot be reasonably certain of this then you simply cannot, as an investor, be in this market. The reason for this is clear on its face – we will, at some point in the not-distant future, have a point where the insolvency of these institutions rises to public consciousness.
When (not if) that happens the market will collapse.
This is not conjecture.
It has occurred in each case through history where markets have been pumped through fraudulent balance sheets and similar game-playing, and when it happens the typical losses are in the 75-80% range. Those losses are maintained even a decade or more later.
Now let’s examine the evidence on whether the core of the reason for the collapse – bogus accounting that led to the failure of Bear Stearns and Lehman Brothers – is in fact resolved and no longer present.
Tim Geithner and the Obama Administration understand this risk. That much was made clear last year when they ran their so-called “Stress Tests.” The market understood this too, in that the promulgation of those “results” was a large part of the underpinning for the rally in the markets that has followed.
Is that reliance reasonable?
The evidence says it is not.
As was made clear in the article I wrote last night, Lehman failed multiple stress tests internally, and yet they were repeated with ever-looser standards until an internally-conducted test passed – at which point Tim Geithner’s NY Fed proclaimed them healthy:
After March 2008 when the SEC and FRBNY began onsite daily monitoring of Lehman, the SEC deferred to the FRBNY to devise more rigorous stress?testing scenarios to test Lehman’s ability to withstand a run or potential run on the bank.5753 The FRBNY developed two new stress scenarios: “Bear Stearns” and “Bear Stearns Light.”5754 Lehman failed both tests.5755 The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed.5756 However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed.5757 It does not appear that any agency required any action of Lehman in response to the results of the stress testing.
Unfortunately the precise same practice took place with all of the other major institutions when Geithner ran the famous “stress tests” that were hung out in front of investors to “bring them confidence.”
It was physically impossible for The Federal Reserve to actually perform the testing on its own – so instead, they provided metrics to the firms and asked them to run them.
This is the precise same process that was used to produce a “passing” grade by Lehman after the Bear Stearns failure and that process was administered by the same person who was responsible for the false Lehman outcome.
Now add to this that Diane Olick of CNBC has confirmed what I’ve been saying since the crisis began: If the banks really accounted for all the losses in the home loan market, they’d all be insolvent.
Wait a second. If the “stress tests” were valid, then the capital raises that were done were sufficient and none of the banks are insolvent.
Indeed, Diane Olick called this exactly as I have:
That’s why the Obama Administration has created this kind of shell game in the first place.
Shell game?
Further, the fact that these loans have no economic value isn’t just mine. It’s also Barney Frank’s, who is the lead guy in Congress on the House Financial Services Committee. He said:
Many second liens have little value because of the plunge in home prices, Rep. Frank wrote, adding: “Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans.”
Accounting rules that Congress caused FASB to modify by literally pointing a gun at them.
I’m sorry folks, but the weight of the evidence is overwhelming on this point.
Whatever gains you think you’re chasing in the stock market at this point in time, you’re doing so against a risk of an 85% loss. The idea that Government can prevent this sort of collapse if it initiates is fanciful – remember that in the summer of 2008 the common belief was that we’d never see a crash right in front of an election, as “they” would not allow it to happen. If you bought into that belief, you lost half your money.
The risk here is even more severe. If, in point of fact, those “Stress Tests” provided false confidence (and I believe the evidence is strong that they have) then it is simply a matter of when the market comes to realize that these losses in the large banks are still present but being hidden.
If we apply the FDIC’s own metrics to the expected losses from such a revelation that would “immediately appear” we get a number between $2 and $3.5 trillion that would have to be paid to depositors of the failed institutions - equal to somewhere around one full year’s Federal Budget and dramatically exceeding what the FDIC and Treasury could cover – by more than 10 times.
The consequence of such an event would be literally catastrophic. Having squandered over $3 trillion in the last two years in new borrowing by The Federal Government to prop up the economy (instead of clearing this bad debt through resolving the bankrupt financial institutions) it is highly unlikely that The Government would be able to, on short notice, raise another $3 trillion.
I’m out of all long positional trades as of this morning and will not be back in them until this issue is resolved. Even if there is a potential 10 or 20% advance that I will miss by doing so, the downside risk of 85% is so extreme and the facts that we now have available strongly suggest that not only are all the large banks insolvent but that the government has been and is complicit in covering it up – not just temporarily, but as an ongoing practice, just as occurred with Lehman.
I’m sure many will call me crazy for this analysis.
We will see if you still think so in a year or two.
Posted in Banks, Ben Bernanke, Corruption, Debt, Economic Crisis, Economy, Federal Reserve, Financial System, Fraud, Lehman Brothers, Money |
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Russia, Greece, Chile, and the Narcissism of Harvard Debt Lords
Russia, Greece, Chile, and the Narcissism of Harvard Debt Lords
By Damon Vrabel
Today marks the beginning of a new administration in Chile as Harvard economist and billionaire Sebastián Piñera eked out a narrow victory in January. Interestingly this is related to the rest of the world as we also see today Greek police, dressed in the Darth Vader costumes used in every country, cracking down hard on their poor countrymen. They have been robbed by the elite financier/politician tag-teams that roam the world attacking whichever country and currency they choose.
Since almost every currency is just a debt-based instrument, the tag-teams are quite successful. Despite the claims of neoclassical economics and the theories of Harvard Business School, having a debt-based currency means that governments are not in charge of their countries. We are living in a world governed by the bond market, billionaires, and elite financial institutions, not governments. The future is grim if this isn’t changed.
People who dismiss this will learn the painful lesson in due course. Most countries, especially the United States, are now stuck under incomprehensible levels of debt just waiting for financiers to attack. National foreclosure is coming. Those who paid attention when it happened to southeast Asian countries, Russia, Argentina, Mexico, and others know what is coming. People who are paying attention now to Greece can see what is coming—the end of cash transactions, the loss of sovereign land, the privatization of resources, massive taxation, the end of support for the lower classes, and an active police state.
Plutocracy: Government by the Wealthy Few
The Greek protesters are chanting “no sacrifice for plutocracy” while being tear gassed and beaten. It certainly isn’t the catchiest phrase I’ve ever heard, but it is precisely accurate. The private sector rich rotate through the public sector so their nexus of power cannot be threatened. The citizens of Iceland understood this and luckily took their power back by refusing to payoff the fraudulent loans of the foreign financiers. Why has no other country done this? Why have no US states, bankrupt for the same reason, done this? In every situation other than Iceland, the politicians submit to the financiers, put their citizens in austerity, and sick the storm troopers on the poor like a pack of pit bulls.
The reason they submit is primarily because mega banking institutions control money (see previous article on Wall Street http://canadafreepress.com/index.php/article/20368).
But politicians also submit because they are willing accomplices. They increase deficits and participate in the game that builds up the leverage in the first place, which makes a few people very rich. Then when debt deflation or a currency attack occurs, they continue playing the game. We have seen this in the United States over the last several years as presidents let the near-billionaire Harvard boys Robert Rubin and Hank Paulson setup the game, not to mention the not as rich Ivy Leaguers like Larry Summers and Tim Geithner. So far trillions have been stripped from the American people. But we are only at half time. You will know when the 2nd half has started when you look outside your front window and see the picture from Greece above.
The few politicians and financiers I am talking about have been playing this game together for a long time. They are bred in a world separate from you and me. They live in the same elite enclaves, attend the same private prep schools, go to the same Ivy League colleges, business schools, and law schools, and then spread out between New York and Washington DC to continue their self-serving partnership. Again, I’m talking about a small group, not 95% of the graduates of these institutions.
A useful indicator for whether someone is part of the select few or not is narcissism. Are they ruthless overachievers for a paycheck? Is class status important to them? Do they have contempt for the average person? Do they strive to become part of the oligarchic elite in clubs like the Council on Foreign Relations? The answer is yes to all of those questions for some very key names we have seen over the last several years:
Robert Rubin – CFR, Harvard, Goldman, Treasury, Citi
Hank Paulson – CFR, Harvard, Goldman, Treasury
Larry Summers – CFR, Harvard, Treasury, World Bank
Tim Geithner – CFR, Dartmouth, Treasury, Fed, IMF
Jamie Dimon – CFR, Harvard, Chase, Fed
The list could go on for a while. It includes both the private sector folks getting fabulously rich from our monetary, fiscal, and regulatory policy over the last 30 years, and the government officials who are making the policy. In fact the officials making the policy ARE the rich private sector few who benefit from it—the definition of plutocracy and oligarchy.
You will not see people on this list who would be true public servants:
Brooksley Born – tried to stop the Harvard boys under Clinton
William Black – defended the country in the S&L scandal
Janet Tavakoli – explains the public-private fraud better than almost anyone
Eliot Spitzer – could be the modern Teddy Roosevelt going after the plutocrats
People like this are capable of compassion and concern for fellow human beings. They can see through Ivy League schmarm and are not controlled by a desire to be part of the inside clique. They do not suffer from narcissism, which is easy to detect as you see them talk on TV (actually Spitzer is narcissistic, but he is the type that wants to fight the establishment narcissists, so he is a real public servant). If these people ran Treasury, SEC, FDIC, Justice, and other regulatory agencies, we might have a country with a future for the average person. Instead we only see the connected few in these positions.
Harvard Economists, Debt Lords, and Billionaires in Government
In the US, the Harvard economists and billionaires who want to run things have to hide behind lawyers and corporate institutions or be appointed to unelected positions like Treasury Secretary because our citizens would never vote for them. But something has changed in Chile where for decades they voted for public servants who have worked to eliminate poverty but have now put a Harvard economist and billionaire in office.
How did Sebastián Piñera become a billionaire? The same way the most powerful people in the world make money—by using debt to suck wealth from the population creating all the value. He founded credit card company Bancard and helped put the Chilean people in debt to the Anglo banking model. Will someone like this serve the public interest?
Well, here’s a scary thought experiment: would Jamie Dimon, CEO of the biggest debt machine in the US and insider on the NY Federal Reserve Board, be a president who cares about you? Any narcissist who can lecture lower class Americans to pay their debts, the source of his wealth, while his firm is in the process of tripling credit card rates and kicking them out of their homes has no business coming anywhere close to the public sector. This is the type of guy who now runs Chile. Of course with Rubin, Paulson, and their protégé Geithner in Treasury, this is also the type of guy who has run the US for several years.
As a fellow Harvard Business School alum, guys like Jamie Dimon and Hank Paulson embarrass and disgust me by furthering the financial empire system beyond reasonable means to keep lining their wallets while impoverishing the American Republic and conquering other nations. There are more just like them in the select club. But even worse than these MBAs chasing paychecks is the Harvard economist Larry Summers who creates the economic structure within which the MBAs operate. He tore down Glass-Steagall and led the free market jihad against any and all regulation in derivatives, which setup the Wall Street structure that brought us to the crash of 2008. He and his colleague Andrei Shleifer tried to privatize Russia in 1998 and hand it over to the wealthy oligarchs, while Shleifer was personally profiting from insider trades on Russian companies. Then while he was president of the institution, he had Harvard pay the legal settlement for Shleifer, infuriating other Harvard professors. Summers also helped put Mexico in debt and reinforce the plutocratic regime there in the peso crisis of 1994.
These people need to be stopped. It should be clear by now that Harvard MBAs voraciously pursuing paychecks running mega financial institutions, after Harvard economists have rigged the regulatory system, can do a lot of damage. The citizens of Iceland have realized this and set the example. If other countries fail to follow, their populations face a future clash with their police just as Greece is experiencing today. Why the police agree to make war against their own people in order to protect rich guys is a topic for another article, but it could all be avoided if countries would just reassert their sovereignty.
- Start phasing out debt-based currencies by creating sovereign ones that are an asset to the people. Pass usury laws at the same time to prevent banks from jacking up rates to suck up this extra money and creating a financial catastrophe.
- Put people like Born, Black, Tavakoli, and Spitzer in charge.
- Breakup the Wall Street banks. Also end their cartel by nationalizing the Federal Reserve, thereby passing power back to the states and state-chartered banks.
- Push your state governments to spend asset money into the system (see the Minnesota Transportation Act). California and Illinois are about to be pushed into Greece’s foreclosure situation. It does not need to happen if only the governments would do their constitutional duty.
Europe’s Banks Brace for UK Debt Crisis
Europe’s Banks Brace for UK Debt Crisis
UniCredit has alerted investors in a client note that Britain is at serious risk of a bond market and sterling debacle and faces even more intractable budget woes than Greece.
By Ambrose Evans-Pritchard, International Business Editor
The Italian-German group, Europe’s second largest bank, said Britain’s tax structure will make it hard to raise fresh revenue quickly enough to restore confidence in UK public finances.
“I am becoming convinced that Great Britain is the next country that is going to be pummelled by investors,” said Kornelius Purps, Unicredit ’s fixed income director and a leading analyst in Germany.
Mr Purps said the UK had been cushioned at first by low debt levels but the pace of deterioration has been so extreme that the country can no longer count on market tolerance.
“Britain’s AAA-rating is highly at risk. The budget deficit is huge at 13pc of GDP and investors are not happy. The outgoing government is inactive due to the election. There will have to be absolute cuts in public salaries or pay, but nobody is talking about that,” he told The Daily Telegraph.
“Sterling is going to fall further over coming months. I am not expecting a crash of the gilts market but we may see a further rise in spreads of 30 to 50 basis points.”
Yields on 10-year gilts have already crept up to 4.14pc, compared to 3.94pc for Italian bonds, 3.48pc for French bonds, and 3.19pc for German Bunds, though part of this reflects worries about higher inflation in Britain.
Ian Stannard, currency strategist at BNP Paribas, said markets are fretting over how the UK will cover its deficit following the pause in quantitative easing by the Bank of England. The Bank has absorbed £200bn of debt, more than total Treasury issuance over the last year.
“The UK may have difficulty in attracting extra investors to fill the gap. We think they will have to do more QE as recovery falters,” he said.
BNP Paribas expects sterling to drop to $1.31 against the dollar this year and reach parity against the euro despite troubles in Club Med. “We’re very bearish on the UK,” he said.
Big global banks are divided over Britain’s economic prospects . Goldman Sachs is betting on a turbo-charged recovery as the delayed effects of sterling devaluation kick in. Britain’s trump card is an average debt maturity of 14.1 years, nearly three times US maturities and double those of France. This greatly reduces the risk of a “roll-over” crisis.
UniCredit said Greece is better placed than the UK in coming months even if deficits look comparable. “The polls point to a minority government in the UK, while Greece’s government can count on a majority to push austerity measures through parliament. Secondly, the British tax system offers less leverage for a rise in revenue,” he said.
Paradoxically, Greek tax evasion creates scope for a surge in revenues from tougher enforcement. “It is not out of the question that we will see a positive surprise in Greece: is there any such hope for Britain?” said Mr Purps.
Still, while it is arguable whether a hung Parliament in Britain will lead to policy drift, analysts said Greece was in trouble already. The country was brought to a standstill on Thursday by the second general strike in weeks. Police clashed with rioters , again reducing Athens to a fog of tear gas. Observers said that did not augur well for a nation that has hardly begun its three-year ordeal of draconian cuts.
Posted in Banks, Debt, Economic Crisis, Economy, Financial System, Sovereign Risk, UK, United Kingdom, sovereign debt crisis |
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Oh Mr. President and Congress (El-Erian)
Oh Mr. President and Congress (El-Erian)
Posted by Karl Denninger
Well now this is a rather interesting editorial:
Today, we should all be paying attention to a new theme: the simultaneous and significant deterioration in the public finances of many advanced economies. At present this is being viewed primarily – and excessively – through the narrow prism of Greece. Down the road, it will be recognised for what it is: a significant regime shift in advanced economies with consequential and long-lasting effects. To stay ahead of the process, we should keep the following six points in mind.
El-Erian goes on to list six points that make most people’s eyes glaze over. Indeed, the entire editorial is one of those things that reminds one of Alan Greenspan and his famous “how to write 3,000 words and yet never find two people who agree on what you said.”
The final three paragraphs are worth reading though:
This leads to the sixth and final point. We should expect (rather than be surprised by) damaging recognition lags in both the public and private sectors. Playbooks are not readily available when it comes to new systemic themes. This leads many to revert to backward-looking analytical models, the thrust of which is essentially to assume away the relevance of the new systemic phenomena.
You mean things like taking in 30% of what the government spends via taxes, then dismissing this as “oh we’ll just issue some more T-bills”?
There is a further complication. Timely recognition is necessary but not sufficient. It must be followed by the correct response. Here, history suggests that it is not easy for companies and governments to overcome the tyranny of backward-looking internal commitments.
Uh, did you parse that one folks?
“…..tyranny of backward-looking internal commitments”
That’s code for “entitlements that were promised to people but cannot possibly be provided, no matter how long people howl – or how loudly.”
Where does all this leave us? Our sense is that the importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood. Yet, with time, it will prove to be highly consequential. The sooner this is recognised (sp), the greater the probability of being able to stay ahead of the disruptions rather than be hurt by them.
Forget it. One need only look to Greece, where telling people they have to actually go to work and produce something in order to earn a public-sector salary produces riots.
If you think we’re “more advanced” in our thinking here in the United States you’re simply insane.
Times like this require a man in the left seat with a big fat church-bell sized set of balls, and the willingness to be unpopular enough to be a one-term wonder. This is inherently in conflict with the narcissist personality required to run for President in the first place.
Nobody who wants the job and is electable to the office is fit for it at a time like this. I’d do it if drafted, but I’d never put up with the crap required to get there, nor am I electable – because I refuse to lie in the fashion required to obtain the office. Stumping for votes while pointing out that promising to pay $100 trillion in Social Security and Medicare that we don’t have and can’t acquire, that if we try to print our way out of debt that “obligation” will go from $100 trillion to $250 trillion (which still can’t be paid), and that the sort of measures required to bring the economy and government back into balance – at both a state and federal level – will result in massive shifts in the economy’s balance and, in the short-term, lead to even more pain, are not popular. To the contrary – not one person receiving those handouts would vote for me, and since they’re nearly half the population there’s not a snowball’s chance in Hades that I could carry the day at the polls.
So what’s required is a paradox. You need a man or woman who will run for the office saying all the “right things” while lying through their teeth. Someone who will shed that veneer the instant the election is over, then take the left seat and be a five-alarm bastard once in office, placing a big sign on the door “$ = NO!”
Someone who will take a look at The Constitution and if they can’t find whatever it is being proposed in the four corners of the text, it’s gone. That is, Social Security and Medicare – gone. Provide some sort of subsidy to the states with whatever we’ve actually got in the so-called “Trust Fund” (that is, distribute to them the “special Treasuries” in the so-called “box”) and immediately end FICA. The States are then free to run the programs as they see fit. This will instantly force accountability and a transition to a privately-owned pair of accounts, or perhaps one account that provides both functions, since people move and won’t accept anything else.
Someone who will align tax revenue with GDP permanently and radically. This means The Fair Tax, and if Congress won’t enact it, then The President does it by executive order – by abolishing the IRS’ funding and authority! Issue an executive order barring the DOJ and other Federal Law Enforcement from enforcing anything in The Internal Revenue Code, and suddenly Congress will become far more reasonable since in order to acquire funds they will have to do the right thing. Radical? Yes. Bye-bye 16th Amendment and “K Street.”
Now go find the rest. Departments of Education and Agriculture, as just two examples: Gone. All State Mandates from The Federal Government: Gone.
If you can’t find it in The Constitution it goes back to The States and is regulated within their borders. The ability of the people to freely migrate from one state to another enforces fiscal responsibility – if you behave like a jackass, such as California has done, you will be rapidly de-populated and without a tax base, your policies fail. End of discussion. No more Federal Welfare of any sort. If The States want to provide it and can fund it, goody for them. More likely what happens is that The States suddenly find that they can provide lots of workfare doing things that need done, provided they outlaw public employee unions first to disarm those thugs.
On monetary policy it’s simple: The Fed either honors its actual written mandate or they’re gone too. No more BS, no more opacity. Everything they do is public and published on The Internet. Send up a bill mandating that any gaming of economic statistics or monetary policy is a federal offense garnering you 20-to-life in the can and demand that it pass or you’ll veto every bill that comes to your desk until it does.
On Credit Default Swaps and other instruments: All trade on a public exchange. All exchanges in the US are public, non-profit organizations. The Federal Government will run one and The States are welcome to set them up too – but only as public non-profits. National Best Bid and Offer (NBBO) is guaranteed by law with felony criminal penalties for anyone gaming it – like offering ”Flash Orders.” Any federally-chartered institution that fails to adhere to One Dollar of Capital is instantaneously closed – without exception. All firms trading on a public exchange or doing business in The United States across state borders (and therefore under proper federal regulation) is required to produce full, complete and truthful financial statements, without exception. This means the use of off-balance sheet anything is absolutely prohibited under pain of immediate delisting and felony fraud prosecution.
We adopt a national policy that tariffs are set to provide wage parity. This will produce howling from the WTO. Tough. No longer will we permit wage arbitrage as a reason to offshore jobs. This is not only Constitutional, it is the premise upon which this nation was founded in terms of how the Federal Government is supposed to acquire its funds! Combined with The Fair Tax, which will make the United States a corporate tax haven (zero corporate and personal income tax rate) this will result in an instantaneous flood of manufacturing and high-tech jobs back into the United States – all GDP boosters. The United States GDP would double within a decade.
Refuse to sign any budget that does not run a primary surplus, except in times of declared war. If Congress or The Administration wants to play International Cop it either funds the entire thing on-budget and pays for it or declares war and has the ability to do so via deficit spending.
Adopt Freedom’s Vision for monetary policy. No more debt-backed currency. If The Fed doesn’t like being relegated to a clearing house for payments that’s too damn bad. Tell the CFTC you’d like them to list a “boiled rope” futures contract just to underline the point.
Radical? Yes.
The only solution long-term? Yes.
Will it happen? Not unless our present Administration grows a set of balls, which it does not at present possess, or someone is willing to both lie themselves into office and then do it anyway.
As a consequence what El-Erian is talking about will happen – an “unexpected” recognition of the reality that what is being done today both is unsustainable and won’t work, but we will do nothing appropriate about any of it until we find ourselves well-off the cliff and furiously pedaling in the air like Wile-E-Coyote – and at that point it will be to late to avoid the ugly consequences.
Posted in Banks, Corruption, Debt, Economic Crisis, Economy, Federal Reserve, Financial System, Freedom's Vision, Monetary Policy, PIMCO, Sovereign Debt, Sovereign Risk |
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Defaulted Loans May Haunt Seniors
Defaulted Loans May Haunt Seniors
Monday, March 8, 2010
provided by
A little–noticed law could soon result in smaller Social Security checks for hundreds of thousands of the elderly and disabled who owe the U.S. money from defaulted loans and other debts more than a decade old.
Social Security benefits are off–limits to creditors, such as credit–card companies and banks. But the U.S. can collect debts to federal agencies by “offsetting,” or withholding Social Security and disability payments.
The Treasury currently withholds benefits of 3.1 million Social Security recipients to recover defaulted student–, farm– and small–business loans, unpaid income taxes, amounts veterans owe for health care, and other debts to the government.
Previously, the U.S. hasn’t been able to withhold Social Security payments to recover most debts delinquent for more than ten years.
But a provision in the 2008 Farm Bill lifted the ten–year statute of limitations on the government’s ability to withhold Social Security benefits in collecting debts other than student loans—for which the statute of limitations was lifted in 1997—and income taxes, where the limit remains 10 years.
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This means that a person who defaulted on a small–business loan in 1995, for example, and who is receiving Social Security could be notified that his benefits may be reduced each month until the debt, with interest, fees, and penalties, is paid. The Treasury can withhold 15% of the benefit, though it can’t be reduced to below $750. Tax debts have no floor.
The change will add more than $6 billion to the $75 billion in delinquent debt individuals owe the government, according to the Financial Management Service, the Treasury’s debt collection unit.
A Treasury spokesman says the new legislation “allows Treasury’s Financial Management Service to collect older debts and levels the playing field so that all eligible debts, regardless of age, are subject to debt collection. Treasury expects this legislation will result in increased collections of $10 million per year in delinquent federal non–tax debt.”
Though no one argues that people shouldn’t repay their debts, the change is coming at a challenging time for older Americans already pinched by mortgage woes, pension cuts and spiraling medical costs.
The shift applies to debtors of all ages, but Social Security recipients will bear much of the brunt. A Wall Street Journal analysis of Treasury Department data shows that Social Security recipients comprise a large and growing percentage of people from whom the Treasury recovers debts.
For years, most debt the Treasury collected through its “Offset Program,” came from withholding income–tax refunds. But with an aging population and growing unemployment, roughly 10% of the $4.3 billion in debts collected by the Treasury came from Social Security benefits in 2008, the latest figures available. That’s up from 1.6% in 2001, according to Journal computations that the Treasury confirms.
Though the law has expanded the age of debts that can be recovered, it hasn’t addressed the sometimes–Kafkaesque process debtors can face when challenging the validity of a claim.
Consider the predicament of Dr. Robert Steinberg, the founder of Scharffen Berger chocolates, who spent more than six years and thousands of dollars in legal fees appealing the Social Security Administration’s claim that he owed it more than $28,000.
Dr. Steinberg received disability benefits in the early 1990s while undergoing chemotherapy for lymphoma, a condition that ultimately claimed his life. Dr. Steinberg returned to work sporadically at a free clinic before co–founding the chocolate company.
Year later, the Social Security Administration notified Dr. Steinberg he was overpaid in the 1990s. In May 2002, with the matter still unresolved, the agency turned the debt over to the Treasury for collection.
In Oct. 2002, administrative law judge Gary Lee found that the Social Security Administration had never established the amount of the overpayment; had dismissed an earlier appeal “for spurious reasons”; had misinformed Dr. Steinberg and mishandled his later appeals; and had lost his file. He noted that Dr. Steinberg was “without fault,” and told the agency to stop its collections efforts.
Dr. Steinberg died in 2008, at 61. His lawyer, Peter Young, a former staff attorney for the Social Security Administration, has handled more than 100 overpayment cases, “very few of which were accurate,” he says. “Most people can’t find or afford help, and give up very quickly and end up with painful offsets on a fixed budget.”
An agency spokeswoman says mistakes can happen, but “over all, the process works.”
A Treasury spokesman says the new regulations require agencies seeking to recover debts more than a decade old to give debtors the right to review and copy their files, make payment arrangements, and apply for disability and hardship waivers.
But a recent dispute about a student loan shows that even with these rights, a person challenging an old debt can face hurdles similar to homeowners in foreclosure trying to modify a loan that has been resold.
In 2003, the U.S. began withholding $173 a month in Social Security benefits from Annie Brown, a paralyzed 75–year–old widow living in a nursing home to repay a defaulted $8,823 student loan the Education Department says she took out in 1989. The offset reduced Mrs. Brown’s benefit to about $980 a month.
Mrs. Brown said a granddaughter had forged her signature on a loan application. Her daughter and a lawyer spent more than four years disputing the debt with the owner of the loan, United Student Aid Funds, a student–loan guarantor that also was acting as one of the Education Department’s 21 debt collectors. USA Funds itself farms out various debt–collection activities to others, which it did in Mrs. Brown’s case.
Between 2003 and 2008, Mrs. Brown’s daughter and Lynn Drysdale, a legal–aid lawyer in Jacksonville, Fla., corresponded numerous times with USA Funds and two other debt–collection companies it hired. One letter from USA Funds warned that unless documents were received “within 30 days from the date this letter was generated…your case will be closed.” The letter was undated. Another letter required Mrs. Brown to refer to an attached document. There was no attachment. “I don’t know how a lay person could maneuver through this process,” says Ms. Drysdale. “Nobody seemed to know what was needed.”
In 2007, USA Funds denied Mrs. Brown’s claim, citing a recently passed federal rule requiring people claiming identity theft on student loans to obtain a criminal court verdict of the crime. That was impossible for Mrs. Brown; a statute of limitations for bringing a case had passed years earlier. In any case, she wasn’t alleging identity theft, but forgery.
Robert Murray, a spokesman for USA Funds, agrees that Mrs. Brown’s signature was forged. “It’s absolutely a forgery,” he says, “It \[the loan\] should never have been made.”
But he says that USA Funds couldn’t discharge the loan as a forgery because Mrs. Brown didn’t return a required form in 2005, and that USA Funds must rigorously defend claims. “There are borrowers who want to get out of a legitimate debt,” he says. “By the same token, we want to work with individuals who have a legitimate issue.”
Ms. Drysdale, the legal–aid lawyer, finally sought to obtain a disability waiver for her client. That process took more than a year, and was achieved only after Ms. Drysdale asked for help from the Social Security Administration’s ombudsman, who declined to comment.
In August 2009, the Education Department agreed that Mrs. Brown is permanently disabled, and discharged her obligation to repay the loan she never took out. The Treasury returned her withheld benefits in December.
Write to Ellen E. Schultz at ellen.schultz@wsj.com
FedUpUSA – The ORIGINAL Tea Partiers
On April 25, 2008, a group of concerned citizens, from across the country, who met on an online forum called Market-Ticker.org decided that it was necessary to start tying to wake people up to the fact they were being robbed. Not only were they being robbed, but the robbery was about to become brutal.
Just a few days after Bear Stearns was forcibly merged into JPMorgan, using YOUR tax dollars, we stood in downtown New York city, with signs and literature, educating the public about what had just happened. We were well-received by many people, but there were almost as many people who thought we were nuts.
After watching this video, and seeing for yourself what has happened since April of 2008, NOW how nuts do you think we are?
It has been a hard road to haul, trying to wake people up. It was hard being ridiculed and laughed at. It was hard seeing friends and loved-ones walking straight into an abyss of perpetual debt and even harder knowing that they were condemnig their children to the same fate.
Along the way, as economic conditions became more obvious, and our government’s role in perpatuating fraud and protecting the guilty at the expense of the innocent became more clear, finally, it appeared the cavalry might have arrived. FedUpUSA owes a debt of gratitute for Rick Santelli’s loss of composure on CNBC TV in February of 2009. What we had failed to accomplish, seemed to occur overnight: people started awakening from their stupor. ‘Tea Parties’ started springing up overnight in response to what can only be described as the cries of a modern-day Paul Revere, people got up off their couches and started taking their message to the streets.
Our work, however, is not over; it has just begun. Unless we address the ROOT of the problem, we cannot hope to derail the fraud and stop the corruption. The root of the problem is, no more and no less, our economic system. Our economic system is based upon a lie. The is that MONEY = DEBT. Our Founding Fathers knew this and proscribed a NON-debt denominated monetary system. This was intended to be money, the quantity of which was controled ONLY by the production of people – their human labors.
Absolutely all the corruption that now exists in our government can be traced back to the nature of our current financial system. Until or unless this system is changed, there is no hope to ever get out of debt.
Thankfully, there are some very smart people who have figured this out – and not only realize the source of the catastrophe we now face, but have come up with a solution:
Freedom’s Vision – In a Nutshell…
“It’s not WHAT backs our money, it’s WHO controls the QUANTITY!”
-Bill StillPrivate Central Banks control the production of money in the United States, not our Congress as dictated by the United States Constitution. This has given them the POWER to control our economy and our politicians.
It is critical WHO controls the money system which is different than the banking system.
The system of backing our money with DEBT ensures that the system will fail, we are at or approaching the mathematical limits now. This system is controlled by Bankers, not Congress.
The quantity of money and debt is wildly out of control.
History shows that severe upheaval and “other events,” such as wars, follow such times. It is our intention to break that chain so that those other events do not occur.
Freedom’s Vision is comprised of three parts – Economic Reform, Political Reform, and Future’s Vision.
Our immediate mission is to:
“Enact monetary and political reform capable of transitioning our economy from its current debt and derivative entangled state to a prosperous & sustainable system that works to keep the quantity of money under control for the very long term.
Monetary Reform ends the process of debt backing our nation’s money at the Federal level, it establishes procedures to correctly measure our economy and through transparency coupled with checks and balances works with Congress to ensure that the quantity of money never gets out of control.
While the systems of control are simple and intuitive, the very difficult part is transitioning our economy from its current debt saturated and derivative entangled state to a sustainable and prosperous future.
Significant tax money would be returned to the people used to pay down debt for those who have it, thus deleveraging and providing immediate relief to all citizens. This first step also makes the banks more healthy.
Through the unique procedures contained within, the debts would be brought back to manageable limits on all levels. Derivatives would be untangled. All banks would survive the transition and come out of the transition ready to do meaningful and REAL business.
All businesses would immediately benefit as the economy rapidly, but in a controlled fashion, cleanses away the debt and leverage that is holding us back.
State economies will be cleansed and will take more control over their own destiny through the use of state chartered banks that will provide funding and bank control for that state, enabling low and no interest loans for the needs of the state much as the Bank of North Dakota has since the year 1919.
The dollar system that emerges would look and feel to most people almost exactly as it looks and feels today, but without the problems associated with never ending inflation.
Please follow this link to learn more details about Freedom’s Vision Monetary Reform
Political Reform works to separate special interest money from politics, thus ensuring that long term decision making can be made and that WHO controls the quantity of money remains in the hands of the people.
The short list of benefits can be found here – Benefits of Freedom’s Vision.
Swarm Politics is our method of implementing Freedom’s Vision.
Future’s Vision comes into play as the transition of our economy to Freedom’s Vision is being implemented. This third piece of the puzzle provides long term goals and focus for our nation working towards creating real and meaningful jobs while moving our nation ahead with purpose.
None of these procedures are yet set in stone, there is still much room to improve and work on them. We will be working towards creating actual legal language as we proceed. We need your help to create and enact Freedom’s Vision so that we secure our money, our freedom, our future.
Freedom’s Vision – Securing Our Money, Our Freedom, Our Future!
Posted in Banks, Corruption, Debt, Economic Crisis, Economy, Federal Reserve, Financial System, Money |
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Could the US EVER pay off its debt? A mathematical perspective
Could the US EVER pay off its debt? A mathematical perspective
Greetings Fellow Inmates,
Today we will take a break from the URC series for a speculative, fun post of Numbers! We will use one of our three trusty abaci to finally explore a statement we made initially in Count The Money v2.0: “The [US] debt WILL NEVER BE PAID OFF”. The following is a greatly simplified model, and as such we will properly outline its variables, parameters, equations, simplifications, assumptions, uncertainties, weaknesses and inflection points, as we promised we’d do in the About Us section. We will then of course weave this “technical” picture into a coherent story. Please stick with the first half where we lay down the premises of the experiment, we want to make sure you understand the foundations of our thought experiment. The real cool, mind-bending stuff and results are in the second half. We promise that even for those NON-technical amongst you, we will provide enough visual support to clearly and vividly illustrate our points. We will leave the actual equation definitions of our first-ever appendix, in order to not distract the less-math-prone Inmates.
We are setting out to construct a model to attempt to answer the following question. Given the United States of America’s current TOTAL PUBLIC DEBT SECURITIES and the total size of the US economy, as measured by NOMINAL GDP, what is the likelihood the that United States debt will ever be paid off? Remember, as we always say, that the TOTAL DEBT SECURITIES (ie, US Treasuries mostly) is not the total amount of debt since the government has many other liabilities that are equally enormous, such as Medicare, Medicaid, GSEs, etc. So, in any real thorough analysis of the likely evolution of the economy and the debt, these additional liabilities would have to be taken into account. Clearly, they would make the situation, the current system, even more unsustainable than it already is. This falls outside the purview of the following model, where we will attempt to demonstrate through simple math that even when just looking at the securities, which are just part of the total debt, the system is already guaranteed to fail.
OK, on to the basics of the model. We have split up the exercise into two parts. In the first experiment, only the INTEREST on the debt securities is paid down. In the second, the INTEREST is paid down, as well as some PRINCIPAL, with the intent of eventually paying down the debt, as a percentage of total GDP. In both cases, we assume that NO MORE DEBT IS ISSUED IN EXCESS OF THAT INTENDED TO PAY DOWN INTEREST, or at least until the end of our simulations, in 2333. This is a very important point, as any deductions, conclusions or recommendations we derive from this model will be predicated upon this assumption. It is clear a priori that the only chance for the debt to be paid off is if the US starts paying down some of that principal. This, we will see, can only come from real economic output.
For those of you that are math, reason, logic and rigour junkies such as Ourselves, we strongly urge you at the moment to stroll down to the appendix and read the description of the model before returning to read right here. It’s a very simple model. For starters, we assume that there is a fixed interest rate and economic growth. Of course, this is a far cry from reality, and we will not repeat nor apologize for the simplicity of this model. It is intended to be simple, it is in fact conservative, since what we are trying to demonstrate is the inherent instability of The System. And the great thing about the little Excel abacus is that we can make it dynamic, and allow you to play around with it, to really wrap your mind around the absolute ridiculousness of it all. When you play around with some of the parameters you realize the sheer absurdity of our current system and where it is likely to lead us in the future. The over-simplifications in the model are of course not trivial and thus impede precise predictive power, but you can say the same about most anything. The over-simplifications are meant for the simple reason that they illustrate certain key points without the cloudiness of confusion, and because OUR POINT is not to predict the future, but rather clearly demonstrate the nonsensical foundations of our monetary system. In this purpose, the oversimplifications of the model become marginal, in our humble opinion.
You might also notice that of course the model must be iterative, as a simplified model such as this must clearly be; meaning that the total NOMINAL US GDP and TOTAL US DEBT SECURITIES OUSTANDING (the two main variables in which we are interested) in any given year depend on the values in the preceding year. This exactly parallels reality, so this model assumption is safe.
Below are the results of our experiment, for a sample CASE STUDY. You can download the full Excel file here. We highly recommend you download it, since you can simply play with the parameters, in the RED BOXES, to see the wild outcomes that come out, in other words, you can make ANY SAMPLE CASE you want. You are encouraged to explore all the embedded functions, check them for consistency, modify them, use them, distribute them, no copyright. For our purposes we chose as parameters the following: an interest rate of 5% (equivalent to weighted average yield of outstanding US debt securities), and economic growth of 4%. Of course, we are being somewhat generous given what we expect of the economy, but since our simulation is over 322 years at the max, 40 years at the least, we figure this would be a good “average” value to use over that horizon. As for the interest rate, we are also being generous, ie “pro”-system-biased, by assuming that the IR will be only 5%, given that we are likely to see SuperInflation and much higher yields in the mid-term future. So, all in all, we would call these estimates for GDP and DEBT safe, pheasible and conservative ballparks. Remember, this is the base case we are going to work with where annual GDP growth = 4% and the yield on US bonds is 5%
The following chart shows the result of a case study with the preceding parameters. Notice that the chart is divided in two parts, the left when ONLY INTEREST IS PAID, and the right, where INTEREST AND PRINCIPAL are paid. In the second case, in which we assume that principal is paid down, we show that parameter in another RED BOX, as % of GDP. Notice that for both parts, we calculate the ratio of DEBT/GDP and of GDP/DEBT. In our CASE STUDY, we assume that the US designates 2% of its annual real economic output to pay down principal on the debt.
We can notice several things. Let’s start in the case where the US only pays down its INTEREST. Then we see that by 2020, the total DEBT/GDP ratio will be 0.90. By 2050, 1.20 (ie, the total DEBT outstanding is 20% larger than the size of the total US economy). By 2333, the total DEBT will be 78 times larger than the economy! In the case where the US uses 2% of its annual GDP to pay down PRINCIPAL, in addition to the interest, then we see that it is actually WORSE. Up until 2050, things look pretty similar, but they begin to diverge about 2100. In this case, by 2200, the total DEBT will be 297 times larger than the economy. Then, in 2207, the GDP goes negative! Clearly this is a sheer absurdity and the model has “broken down”, partly indicating a “systemic failure”, since remember that THEY do want us to believe that the system works in such simple fashion and there aren’t any nefarious Invisible Hands lurking around.
Now, why exactly does the GDP go negative? Well, that happens because the debt NEVER stops growing (at least in this base case we are working with now), so at some point the interest payments on the debt become so large that even if we only pay 1% of the interest with real economic output, the cost is so large relative to the economy that it eats it all up. Everyone dead. Everything approaches zero; somehow our “system” managed to complete eradicate ALL VALUE FROM ALL THINGS. Let’s look at what happens to our base case (GDP growth = 4%, Yield = 5%) when we only pay INTEREST and where we use different distributions of DEBT and OUTPUT to pay down the principal. In other words, at some point we will pay some of the interest with mostly new debt, run the spectrum, until we pay for the interest with mostly real output. Here are the graphic results.
;)
Yikes! Notice that given our base case, paying for 99% of the interest by issuing new debt, is the only level shown that prevents GDP from turning negative by 2333. Anything less than that, even 95/5 is bound to result in sharply negative GDP eventually, with increasingly parabolic results. In all cases, the debt grows parabolically, but such is the nature of compounding interest and we shouldn’t be surprised. Perhaps you think we are being facetious by extrapolating all the way to 2333, I mean, really, who cares about what happens to their GreatGreatGreatGrandchildren? So, let’s take a smaller-window view into the exact same thing, and selfishly look only until 2050.
;)
Very interesting. For starters we notice that of course, the discrepancy is not as huge. When we change from paying for the interest with almost all NEW DEBT all the way to paying for the interest with almost ALL REAL OUTPUT, the outcomes are largely the same. Between 2030 and 2042, the TOTAL US PUBLIC DEBT will surpass the size of the economy. Big surprise.
Alright, so it has now been unequivocally shown that in this simple base case, the US can NEVER be paid off if they limit themselves to paying only the interest. We believe that this statement of course applies to all debt, anywhere, at any time, but we would welcome some debate on the matter. Now, let’s see if there is any chance of paying off the debt if the US actually intends to pay principal.
In the CASE STUDY presented in the first chart, we saw that using 2% of GDP to pay down the principal actually resulted in a WORSE economic condition and faster deterioration towards ZERO GDP, or the ELIMINATION OF ALL VALUE. However, by playing around with the parameters we realize that this is NOT always true. We found that if the US were to designate 6% of all REAL ECONOMIC OUTPUT to paying down the INTEREST, then the DEBT would be in effect paid off, before GDP hit zero. Voilá! Using 6% of GDP to pay down interest would result in the DEBT being paid off in 2074, and please look at the Excel file and notice how GLORIOUS it is that after the debt is paid down, the GDP begins to grow parabolically. Of course!!! This is what SHOULD happen, in a RATIONAL DEBT-FREE world. Below is a graphical sample of simulations all the way to 2100, using different values for the percentage of GDP assigned to pay down PRINCIPAL.
;)
Wow, many interesting things once again. Notice that when the US designates ONLY 5% of its GDP to pay down the debt the debt begins to decrease (as does GDP of course), but there is a point in which the debt begins to rise again, and once again runs away. Why does this happen? Well, as GDP decreases, so does the amount of principal the US is able to pay, at some point, the principal payment becomes LESS than the mounting interest, so debt begins to rise again, never to fall for the rest of time. At 6% however, this “barrier” is overcome and the debt can in fact be paid down. So, between 5-6% we have another inflection point. If 6% is designated, then the debt would be paid off in 1974; if 10% is designated, then it would be paid in 2033, and if 15% is designated the US would be debt free by 2023.
So what are the chances of this happening? Slim to none. All we did was show under what circumstances it would even be possible to pay down the US debt. So, if reality actually mirrored this greatly simplified model (it doesn’t), if Americans learned to live frugally for an entire generation (they can’t), if the macroeconomic conditions actually maintained the levels of our base case (they won’t), and the US government instituted serious fiscal reforms to bring this about (hahaha), then the US DEBT COULD BE PAID OFF.
Ultimately however, it is important to remember that THEY don’t want the debt to be paid off. Of course not, that is how they keep us slaves. But enough about blaming THEM. It is time to blame OURSELVES. Here it is, in vivid TechniColor, the sheer absurdity of this House of Cards, this Tower of Basel. So why do you still participate in this system Inmates?
“Because I must” Why?
“Because I have no other choice” Why?
“Because I don’t have enough firepower” Why do you need firepower?
“Because the system gives me benefits and comforts which I’m happy to pay for?” Even at the risk of death?
“Because I don’t care enough” You should.
May your capital be safe and your investments prosperous,
MAAA
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APPENDIX
Let:
gOD(Y) = gross Outstanding US Debt securities on year (Y),
IR = representative interest rate of total US debt securities, ie, the yield on the weighted average maturity of outstanding US debt ,
INTEREST(Y) = the interest rate cost on year Y, equal to gOD(Y)*IR
GDP(Y) = nominal US GDP on year Y,
GDPchg = the annual percentage change in nominal US GDP, in decimal units,
DebtPer = percentage of the annual interest cost that will be paid through new debt issuance,
OutputPer = percentage of the annual interest cost that will be paid through real economic output
PrinPer = percentage of nominal US GDP to be used to pay down principal,
PRINCIPAL(Y) = the total principal payment on year Y, equal to PrinPer*GDP(Y)
Then, the model stipulates that:
GDP(Y) = [ GDP(Y-1) – OutputPer*INTEREST(Y-1) – PRINCIPAL(Y-1) ]*[1 + GDPchg];
gOD(Y) = gOD(Y-1) + DebtPer*INTEREST(Y-1) – PRINCIPAL(Y-1) ;
where
GDP(Yi), and gOD(Yi) are the initial conditions, in our case
gOD(2010) = $11.9tr
GDP(2010) = $14.5tr
Breaking the American Bank – Banking Propaganda and Using the American Middle Class as a Credit Card for Wall Street Excess. How About we let the Average American Borrow from the Federal Reserve at 0 Percent and cut out the Loan Shark?
Posted by mybudget360
Banks are showing their true colors and what little regard they have for the average American. As they advertise with cute and friendly faces assuring consumers they are looking out for their best interest, behind their backs they send in a locust of lobbyist onto Washington to do everything in their power to gut any sensible financial regulation. The vultures are picking off every piece of what used to be the middle class. This is the model of the new banking and financial system that many will have to contend with. Americans have seen their access to loans and credit contract at the fastest pace in history while banks have now opened up an unlimited credit card with the taxpayer paying the bill for too big to fail. Banks are doing their best to create a narrative that “if we didn’t bailout the banks then the world would have ended storyline” but the vast majority of Americans did not support the banking bailout.
If you want to see how quickly credit is contracting take a look at this:
The chart above merely highlights what you already know. Banks no longer trust the average American. While they based all their bailouts on the idea that taxpayer money was needed to keep banks lending this has been a lie. In fact, banks need the money to plug the hole that their toxic assets are burning on their balance sheets. You can also look at the amount of credit card offers you are getting in the mail to gauge how quickly the market has changed. No longer do banks want to give credit out (that is, unless it is government backed like mortgages which they are all the more willing to lend out).
The U.S. has over 8,000 banks with the large concentration of assets in 10 banks. These banks continue to use bailout funds to plug the problems from the boom years. But this is not in the best interest of average Americans. If Wall Street and politicians were honest, the bailouts would have been labeled as a massive charity to the elite of the country who made disastrous bets over the past decade. The public takes the lumps while Wall Street actually gets richer. While banks don’t want to reel in their spendthrift ways, Americans are pulling back:
Americans are now having to save more and more of their money as is expected in a tough economy. Yet banks are back to gambling in the stock market while shutting down lending to consumers. Banks are playing the poor me card by arguing that with too much tight regulation, they can’t make loans because they are worried about future balance sheet problems. Thanks for telling us after you took the public money under false pretenses! But this is all a political ploy to steal from the working class. With so many people just unable to even service the debt and rising bankruptcies, banks are now going after good customers who pay their bills on time each month just because they are running out of “options.” Don’t be fooled. They are reaping billion dollar profits because they are using excuses to squeeze the golden goose dry. How about we allow the typical American to borrow at the subsidized low rate from the Federal Reserve directly? Why in the world do we need banks to operate as loan sharks in between? What we need is to transform the banking industry into a utility model. A model designed to serve the people, not the banks. After all, why should they get the privilege of borrowing at criminally low rates while everyone else has to pay the interest and subsidize their gambling adventure?
Even after all the correction in the market American households still carry an inordinate amount of debt:
A giant portion of income simply goes to pay off debt. A large part of the debt is interest or money the banks can suck out of the neck of middle class Americans. Banks live off this margin. Take for example a $100,000 30 year fixed rate mortgage at 6 percent:
Principal: $100,000
Total Interest: $115,838
In the end, you are paying more than the initial cost and all that interest goes to who? What purpose does it serve? Banks are delusional and want the public to believe in the propaganda that they need to charge a higher rate because of “risk” in the loan. Are they kidding? We already know that they are being supported by the entire Federal Reserve and U.S. Treasury. They can make the most insane kind of bets and ultimately the taxpayer will eat the bill. And keep in mind many of these banks are borrowing at low levels from the Federal Reserve. Why not allow the public to keep some of that interest? How is this bad? If banks were lending their own money it would be a different story but they are not. They are creating a dishonest narrative and most Americans are not buying it because they operate in reality and not some parallel universe where you can create something out of nothing.
Just think of the billions charged in overdraft fees. This is criminal. Why not just default debit cards to stop once the account is dry? Instead they want people that charge a $2 burger a $39 over draft “convenience fee” for this nonsense. Are you kidding? Most people don’t want this. They find out the hard way and now billions have left the wallet of consumers for this nice little loan shark fee. $39 can buy you lunch for a few days so this is nothing to laugh at when 38,000,000 Americans find themselves on food assistance. The bulk of the billions are paid by the poor. Good job banks for helping your fellow Americans. Yet banks are leeches sucking the productive life blood out of the economy with gimmicks like this. Time to break the banks up and turn them into utilities.
Take for example JP Morgan. They announced a Q4 profit of $3.28 billion. Where did they make their money?
“(Huff Po) JPMorgan’s biggest trouble spots were in consumer banking and credit card lending. The bank’s retail financial services division, which includes its mortgage operations, lost $399 million. That was worse than the final quarter in 2008, when credit markets had essentially shut down because of the collapse of banks including Lehman Brothers.
The company reported increases in mortgages that were charged off, or classified as uncollectible, including prime mortgages, the highest quality home loans. It also reported an increase in home equity loan charge-offs.”
Wait. So mortgages are being charged off as foreclosures remain high. And this has spread to so-called prime mortgages as the unemployment and underemployment rate remains at 17.9 percent. So let us write off mortgages to average Americans. Where in the world did they get those billions? Maybe they made good money in their credit card unit:
“The credit-card lending division lost $306 million during the final three months of 2009. Results would’ve been worse had the bank not had a payment holiday in the period.”
More losses here? So we’ve ruled out credit cards and mortgages which have become the life blood for Americans. We’re running out of places to look for where they can make a $3 billion profit:
“Despite the ongoing problems with consumer banking, JPMorgan is still performing well because of its robust investment banking unit. As long as stock and bond markets continue to improve, the bank will be able to churn out profits and reward its employees handsomely.
JPMorgan’s investment bank earned $1.9 billion during the fourth quarter, while its asset management division generated $424 million in net income.
Fees from financing debt and stock offerings continued to surge in the fourth quarter. Debt financing fees jumped 58 percent to $732 million from the same quarter a year earlier, while stock financing fees climbed 66 percent to $549 million.”
And there you have it. We are financing Wall Street’s wonderful gambling casino once again while the traditional banking model has collapsed. How this isn’t the number one priority for the government and the people to fix is simply astounding. How we have had no serious financial reform after 26 months of the Great Recession boggles the mind.
Posted in Banks, Corruption, Debt, Economic Crisis, Economy, Financial System, bank bailouts |
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Squeezing the Last Drop of Productivity from the American Working Class – 18 Percent National Underemployment and why Wall Street and the Government are Cheering Your Financial Failure.
Posted by mybudget360
The American financial press cheered on Friday when “only” 36,000 jobs were lost in February. This if you haven’t noticed now passes for good economic news. The unemployment rate remained unchanged because the actual workforce continued to show a decline yet Wall Street somehow viewed this as positive developments. And why not? The middle class is under assault from every angle. Things are so twisted with propaganda that many Americans now believe that the banking elite are actually looking out for the well being of American workers. As news of the job losses somehow echoed as positive developments, more and more Americans are continually being kicked out of their homes from banks they helped to bail out. Irony has no meaning to Wall Street.
And if we look at the details of the jobs report, it turns out that 17.9 percent of Americans are either unemployed or underemployed or flat out have stopped looking for work:
Source: BLS
This wasn’t the only spin going on in the media. Before the jobs report came out there was a preemptive flow of information trying to justify the job cuts by blaming it on the weather. Yes, now instead of blaming the financial catastrophe on the actual perpetrators in Wall Street who systematically looted the American system and turned our economy into a giant casino that they leeched onto, we are now to believe people are losing their jobs because of the weather:
“(CNSnews) Ahead of Friday’s announcement, Goldman Sachs predicted that the storm might skew the job loss number by as much as 100,000 – a prediction that was embraced by officials in the Obama administration.
“The blizzards that affected much of the country during the last month are likely to distort the statistics,” Larry Summers, director of the White House’s National Economic Council, said in an interview with CNBC. “So it’s going to be very important … to look past whatever the next figures are to gauge the underlying trends.”
If the storm caused a skewing of job loss numbers I wonder how many job losses can be linked to Goldman Sachs and their casino style gambling in the derivatives markets and mortgage backed securities? Then again, people should be happy that the unemployment rate remained steady at 9.7 percent even though more Americans are working part-time with no benefits and many others have simply fallen off the payrolls. This is supposedly the new American dream for the middle class through the eyes of Wall Street who are selling capitalism but living in a world of corporate handout socialism.
There is a new show called Undercover Boss where a CEO goes undercover to work in the trenches with the proletariat. As it turns out, the middle class is being worked to death and as we all know, the CEO can’t even do the job most workers do on a daily basis. Even Henry Ford understood the interworking of the cars he was putting out. In the end the CEO reveals his identity and gives a nice little handout to the worker and all is well in TV land. The check is a token of what CEOs actually make. This is the ultimate reflection of our trickle down economy where those at the top act like sociopaths and rulers of the universe but when it comes to doing the daily tasks of their company, they have no clue. This is the de facto rule running on Wall Street. In fact, CEO pay has grown outrageously over the past few decades as the middle class has gotten poorer:
Source: American Progress
In reality, part-time employment has spread even to poor CEOs making 300 to 400 times the average American worker salary. Poor CEOs and Wall Street executives need time off to enjoy their tax payer funded yachts and all expense hedonism trips to the Caribbean. They would like to convince each other that the money they have is all through their will power and market prowess but in reality it is nothing more than being part of a corporatocracy and buying out the government with an army of lobbyist and insiders. You have to be a self indulgent narcissist to take the economy to the brink of financial destruction in the case of many Wall Street firms and still reward yourself with outrageous bailouts. The fact that average Americans are still not protesting in mass about this tells me that many actually believe what Wall Street is saying. You see this when many would rather blame the working class for the ills of today than focus their energy where it really needs to go.
Wall Street loves this economic crisis. They receive trillions in bailouts yet convince the public that what is occurring today is merely the “market” correcting itself. So as most Americans have more and more troubles keeping up with their daily bills, companies are squeezing every little excess from those currently working. Those that have jobs out of fear will work harder and probably demand less merit increases in the current economy. After all, the head guy is only making 300 times what you make even though he can’t even understand the main function of the organization. So what if the low level guy is selling toxic crap to some homeless person with no income and giving him access to a $500,000 loan. These Wall Street tycoons are big picture thinkers and can’t be worried with the day to day operations of the proletariat unless it means turning it into a caricature for mass viewing and quick TIVO access.
You don’t think productivity actually increased? Take a look at this:
Source: BLS
This recession has been fantastic for productivity. Just look at the above chart. American workers have been doing their part during this recession. After all, now you can hire a cadre of “contract” workers and not have to pay them one cent in healthcare support or even contribute to their pension. Once the job is done you can kick them to the curb. After all, this is capitalism so long as those at the top have managed to setup sweetheart deals and golden parachutes. This is how the top 1 percent makes sure their hold on 40 percent of the nation’s wealth isn’t damaged. And if you think financial institutions deserve this bailout money and their outrageous bonuses then companies like Circuit City or Mervyns would still be around today if that model applied across the board. But this doesn’t apply to the general economy. This applies to Wall Street and somehow the absurdity of it all still goes on. The worst financial crisis since the Great Depression and not one solid reform has been enacted. 26 months of job losses and nothing. Who is running the show?
The rise of the part-time work force is nothing new as we become more and more like Japan. Japan bailed out their financial institutions after their failed stock market and real estate bubbles popped and today, their working class is made up of one-third part-time workers:
“(LA Times) In the world’s second-largest economy, the global financial crisis has forced part-time workers such as Kudo to face a harsh new reality.
Over the last few years, temporary employees have gone from being a rarity in Japan to accounting for one-third of the workforce of 67 million. They enjoy far fewer protections than full-time workers — placing their necks squarely on the layoff chopping block.
By March, the government predicts, 85,000 part-timers will fall prey to haken-giri, or temporary-worker cutbacks — a relatively small number compared with U.S. layoffs but high for a nation where job security has long been a staple.
On Wednesday, embattled Prime Minister Taro Aso made the plight of part-timers a major piece of a proposed stimulus package. Aso pledged to create 1.6 million jobs, partly by turning part-time jobs into full-time ones.”
Japan’s headline unemployment rate is 4.9 percent. Just like our headline unemployment rate, the devil is really in the details. If we continue on this path part-time work may be all that is left.
Posted in Banks, Corruption, Debt, Economic Crisis, Economy, Financial System, Government, bank bailouts |
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