The Japanese Economic Dilemma in a Nutshell

Here is a note from a friend in Japan:

In today's Nikkei (Japanese version), on page 5, tucked behind all the hype about the government's decision to lower corporate taxes, in hopes that major companies will raise wages, was a short article on "three miscalculations about the economy" this year.

1. Tax revenues increased with the increase in the sales tax but consumer spending fell. Tax revenues expected to increase by about 5 trillion yen.

2. Weaker yen and higher stock market improved family assets for some I would say, but exports did not improve, and were about 8% lower than 4 years ago.

3. CPI (excluding fresh food) increased, resulting in a real wage decline. Rreal wages have been falling since mid 2013 and are now around 4% lower year over year.

Over the past few days I have been reading about the so-called lost decade of the 1990s and the government's policy decisions to try to kick-start the economy.

In 1990 the government had about 60 trillion in tax revenues and 69 trillion in general account total expenditures.

Now, the government estimates 52 trillion in tax revenues for fiscal 2014 but has more than 95 trillion in expenditures.

Even a second grade student can see that something is not working.

As you know, I think that there are three things that must be done.

Reform, reform, reform.

The Japanese economy is burdened with an unusually bad demographic problem, made much worse by the burdens of insider dealing, crony capitalism, and zombie banks and their corporations.

And its greatest burden of all is an elite that serves itself and its friends first and foremost, and that finds a greater kinship with its global counterparts than with the people whose interests it purports to represent.

 

"The conflict between the East and West was designed to scare the people of the world into accepting a convergence of these two monopoly systems of authoritarian power. The end result was to be a new Imperial Order and a New World Empire run by an elite self-perpetuating oligarchies from the leading nations of the earth."

Carroll Quigley, Tragedy and Hope, p. 860

 

Related:

Princes of the Yen: Central Banks and the Transformation of an Economy

Why the (Global) Kleptocrats Do Not Want a Recovery

The Pursuit of Global Corporatism

Reprise: The Quiet Coup d'Etat in the Anglo-American Financial System

 

“The fine thing about pacts with the devil is that when you sign them you are well aware of their conditions.   Otherwise, why would you be recompensed with hell?”

Umberto Eco, The Name of the Rose

 

This is a reprise of an interview with MIT economist Simon Johnson which I first wrote about in February, 2009.

 

I think I ought to republish this as a reminder every few years, until reform has been achieved, or until the Internet as we know it goes dark.

 

Have we heeded Simon Johnson's warning? Has he proven to be prescient? Is crony capitalism and the kleptocracy becoming bolder, more aggressive, ever more demanding?

"I think I'm signaling something a little bit shocking to Americans, and to myself, actually. Which is the situation we find ourselves in at this moment, this week, is very strongly reminiscent of the situations we've seen many times in other places.

But they're places we don't like to think of ourselves as being similar to. They're emerging markets. It's Russia or Indonesia or a Thailand type situation, or Korea. That's not comfortable. America is different. America is special. America is rich. And, yet, we've somehow find ourselves in the grip of the same sort of crisis and the same sort of oligarchs...

But, exactly what you said, it's a small group with a lot of power. A lot of wealth. They don't necessarily - they're not necessarily always the names, the household names that spring to mind, in this kind of context. But they are the people who could pull the strings. Who have the influence. Who call the shots...

...the signs that I see this week, the body language, the words, the op-eds, the testimony, the way they're treated by certain Congressional committees, it makes me feel very worried.

I have this feeling in my stomach that I felt in other countries, much poorer countries, countries that were headed into really difficult economic situation. When there's a small group of people who got you into a disaster, and who were still powerful. Disaster even made them more powerful. And you know you need to come in and break that power. And you can't. You're stuck....

The powerful people are the insiders. They're the CEOs of these banks. They're the people who run these banks. They're the people who pay themselves the massive bonuses at the end of the last year. Now, those bonuses are not the essence of the problem, but they are a symptom of an arrogance, and a feeling of invincibility, that tells you a lot about the culture of those organizations, and the attitudes of the people who lead them...

But it really shows you the arrogance, and I think these people think that they've won. They think it's over. They think it's won. They think that we're going to pay out ten or 20 percent of GDP to basically make them whole. It's astonishing....

...these people are throughout the system of government. They are very much at the forefront of the Treasury. The Treasury is apparently calling the shots on their economic policies.

This is a decisive moment. Either you break the power or we're stuck for a long time with this arrangement."

Bill Moyer's Journal - Interview with Simon Johnson, February, 2009.

Johnson also wrote a piece in the Atlantic Magazine titled The Quiet Coup. It may be worth re-reading.

"I am not so optimistic that this reform is possible, because there has in fact been a soft coup d'etat in the US, which now exists in a state of crony corporatism that wields enormous influence over the media and within the government.

Let's be clear about this, the oligarchs are flush with victory, and feel that they are firmly in control, able to subvert and direct any popular movement to the support of their own fascist ends and unslakable will to power.

This is the contempt in which they hold the majority of American people and the political process: the common people are easily led fools, and everyone else who is smart enough to know better has their price. And they would beggar every middle class voter in the US before they will voluntarily give up one dime of their ill gotten gains.

But my model says that the oligarchs will continue to press their advantages, being flushed with victory, until they provoke a strong reaction that frightens everyone, like a wake up call, and the tide then turns to genuine reform."

As far as I can tell, we are right on track for a very bad time of it. And you might be surprised at how far a belief in exceptionalism and arrogant superiority can go before it finally ends, or more likely, fails.

“Hubris calls for nemesis, and in one form or another it's going to get it, not as a punishment from outside but as the completion of a pattern already started.”

Mary Midgley

Princes of the Yen: Central Banks and the Transformation of an Economy

"Central banks have the power to create economic, political and social change. This is how they do it."

While I cringed at some of the early parts of the film and the mid-century American attitudes towards the Japanese, even if it was in the aftermath of a long and viciously fought war, I think this documentary provides some valuable insights into the evolution of the modern economy that is Japan.  I direct your attention to the things that we are often saying about different peoples today.

 

I struggle very hard not to judge other periods, cultures, and people with a righteous and twice removed temporal prejudice, enhanced by distance and hindsight.  And I believe such liberality might serve us well, given that we will most likely appear like blundering, hapless baboons to our great grandchildren some day.  What were they thinking!?

 

As a general observation based on experience, people everywhere are just people. Unless you are wearing the goggles of ignorance, fear, and hatred. And wicked men in business and government often encourage that sort of thing for their own ends.   But, in the end, the madness serves only itself.

 

But some cultures do tend to encourage and reward certain traits of personality and behavior more than others.  This has deep roots in their cultural, social, and religious heritage.  So the same economic conditions in two different cultures might provide two very different outcomes.

I recall explaining some of this to a professor from England whom we had in business school.  He could not quite understand how some of the things that were happening in Japan (Japan Inc. as it was known then) that ought not to be occurring in a two party system. The answer of course was that Japan at that time, in the early 1990's, was essentially a single party system with heavy ties to an embedded bureaucracy in partnership with corporate cartels.  And Richard Werner does a fairly good job at describing the evolution and nature of that system.

I think this structure helps to explain the long economic stagnation in Japan that puzzles so many, and has the Keynesians so befuddled.   They have never met any stimulus that they didn't like, even when it was being poured into and abused by a corrupt and inefficient system. 

 

Rather than being naturally more successful at its financial engineering, as fellows like Bernanke have snarkily suggested in their American exceptionalism,  I think it is becoming painfully obvious that the US is 'turning Japanese' in its serial policy errors propagated by an insular, ruling elite and the moneyed interests with their political power.

 

Speaking of financial engineering, Professor Richard Werner has been a long time economic advisor to Japan, and coined the term quantitative easing for his recommendations to them.

 

Japan, and the 'Asian tigers' as well, were mercantilist in their outlook and crony capitalist in their composition.  The enormous amounts of monetary stimulus were dissipated in supporting zombie corporations, a ruling elite, unproductive investments, and widespread soft corruption and insider dealing.

To engage in 'free trade agreements' under these circumstances with other command and control economies is foolish, especially when it puts domestic labor, social services, and the environment at par.  Especially when such processes are disguised under layers of complex rules and commissions, and easily manipulated by global corporations.   These are the bonds of global repression of the common people by concentrated power.

 

It rips the heart out of local autonomy and democracy under the banner of 'competitiveness.' It is corrosive of precious freedoms, and tramples the Constitution. But money has helped to ease the consciences of Western politicians.

Even moreso, can there be any doubt that the US, rather than helping to provide a positive example of a different way to Asia, inculcating freedom through its success of democratic and free markets, is in fact falling into the same model, a kind of a lowest common denominator of inverted totalitarianism under the standard of globalization.

 

I would like to think that Chalmers Johnson would most likely agree that if the Bank of Japan's economists are indeed the 'princes of the yen,' this is because they are now and have long been liege lords in the Empire of the American Dollar and the Anglo-American banking cartel.

The Recovery™ In One Graph

"Gentlemen! I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country.

When you won, you divided the profits amongst you, and when you lost, you charged it to the bank.

You tell me that if I take the deposits from the bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin!

You are a den of vipers and thieves. I have determined to rout you out, and by the Eternal, (bringing his fist down on the table) I will rout you out!"

Andrew Jackson, On the Bank of the United States

"...supply-side economics was merely a cover for the trickle-down approach to economic policy — what an older and less elegant generation called the horse-and-sparrow theory: If you feed the horse enough oats, some will pass through to the road for the sparrows."

John Kenneth Galbraith

Recovery.  For some.

I am not sure what is trickling down in this recovery.  It is not oats, or wealth.

But I am fairly sure that I know why the recovery is so disjointed and selective.  

It is one of the oldest stories.  It is about the abuse of privilege, of foolish people led in herds shouting slogans crafted by the clever and the unscrupulous, of the treacherous and self-destructive fury of unbridled greed.

It is about the lust for power, the deceptiveness of hubris, the blindness of pride, and the lessons from history that have been carefully and intentionally unlearned.  It is about the madness that brings the fire, in hearts and minds of men.

 

 

h/t Anthony Sanders, Confounded Interest

Gold Daily and Silver Weekly Charts - Ship of Fools

The metals were pounded in the quiet overnight session on the COMEX ahead of the Friday Jobs Report, with gold smacked down to $1282 and silver down to $19.20.

The jobs number came in light, and the metals rocketed back to where they started.

Gold is now in the August delivery cycle with registered inventories of actual bullion on the COMEX down to shocking lows. 

The US is closing some of its overseas embassies this weekend and has issued a travel alert because of terrorist threats.   Let's see if anyone throws a flag on the field over the weekend.

A new scandal has emerged as the CFTC investigates fifteen of the biggest banks which apparently have been rigging a key interest rate number in order to swindle their customers in the swaps markets.

"US regulators have reportedly been handed evidence that traders at some of the world's biggest banks manipulated a key rate for derivatives, pocketing millions at the expense of pension funds in the process."

Apparently New York and London are where the elite meet to cheat. 

As Jeff Sachs said to a meeting of economists at the Philly Fed, our modern financiers seem to be almost pathologically criminal, and some of the world's politicians are rightfully aghast at the scope and audacity of their abuses.   Blowback for this gross failure of integrity in financial governance is coming, and it could be terrific.

They have no shame, they are unworthy of all trust, and their word means nothing. So what is there to discuss?

Weighed, and found wanting.

Stand and deliver.

Palast: Did Fabulous Fabrice Really Cause the Financial Crisis

Here is a reminder from Greg Palast, who is one of those rarest of creatures, the investigative journalist, about what caused the last financial crisis, and the source of the criminogenic environment that is likely to be a major contributing factor to the next.

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery.

"...In August 2007, hot-shot hedge fund manager John Paulson walked into Goldman Sachs with a brilliant plan to cash in on the US housing crisis.

He paid Goldman to announce that Paulson would invest a big hunk of his fund's wealth, $200 million, in securities tied to the US mortgage market’s recovery. A few lucky investors would be allowed to give Goldman their billions to bet with Paulson that Americans would not default on their home mortgages.

It was a con. Secretly, Paulson would bet against the mortgage market, hoping it would collapse – making sure it would collapse. All he needed was Goldman to line up the suckers to put up billions to be his "partners".

It was Goldman’s and Paulson's financial version of Mel Brooks' The Producers, in which a couple of corrupt theatre producers schemed to suck investors into a deliberate flop...

What did the Feds do to Paulson? He received... a special tax break.

Am I defending the Fabulous Fabrice, the French-fried scapegoat? After all, he was just along for the ride. But he was deeply thrilled to carry water for the Bad Boys. And the charges against him are merely "civil", meaning he won't get jail time even if found guilty.

And what about Goldman, whose top brass knew of the entire game? The Securities and Exchange Commission did fine Goldman for its duplicity – a sum equal to 5 percent of the cash Goldman got from the US Treasury in bail-out funds.

After Goldman’s con became public, its CEO, Lloyd Blankfein was hailed as a visionary for offloading mortgage-backed securities before the shit hit the finance fan. Blankfein hailed himself for, he said, "doing God's work". God did well. Blankfein’s bonus in 2007 brought his pay package to $69 million for the year, a Wall Street record.

Rather than prison or penury, Blankfein was appointed advisor to Harvard University’s business and law schools.

So here’s the lesson all Harvard students are taught: If you can't do the time, don't do the crime... unless your booty exceeds a billion."

Read the entire piece by Greg Palast here.

Make no mistake. The world is watching-- with increasing revulsion.

"I believe we have a crisis of values that is extremely deep, because the regulations and the legal structures need reform. But I meet a lot of these people on Wall Street on a regular basis right now. I'm going to put it very bluntly. I regard the moral environment as pathological. And I'm talking about the human interactions that I have. I've not seen anything like this, not felt it so palpably.

These people are out to make billions of dollars, and [think] nothing should stop them from that. They have no responsibility to pay taxes, they have no responsibility to their clients, they have no responsibility to people [or] counterparties in transactions.

They are tough, greedy, aggressive, and feel absolutely out of control, in a quite literal sense. And they have gamed the system to a remarkable extent and they have a docile president, a docile White House and a docile regulatory system that absolutely can't find its voice. It's terrified of these companies.

If you look at the campaign contributions, which I happened to do yesterday for another purpose, the financial markets are the number one campaign contributors in the U.S. system now. We have a corrupt politics to the core, I'm afraid to say... both parties are up to their necks in this.

...But what it's led to is this sense of impunity that is really stunning and you feel it on the individual level right now. And it's very very unhealthy.   I have waited for four years,  five years now,  to see one figure on Wall Street speak in a moral language.

And I've have not seen it once. And that is shocking to me. And if they won't, I've waited for a judge, for our president, for somebody, and it hasn't happened. And by the way it's not going to happen any time soon, it seems."

Jeffrey Sachs

Liz Warren Grills Jack Lew on Too Big To Fail

Original source and commentary is at Mother Jones

Warren nails it in the last minute of the tape. The US lack of serious reform is a risk to the world economy.

Obama is a thoroughly modern manager: part Herbert Hoover, and part Richard Nixon.  

Jeff Sachs: The Pathological Environment on Wall Street (and in Washington, London, and Berlin)

"But there is a sort of  'Ok guys, you're mad, but how are you going to stop me' mentality at the top."

Robert Johnson, Audacious Oligarchy

Thanks to Bill Still for making this available on the web, and thanks to several people who sent it to me.

It is remarkably similar to something I wrote earlier today, but I am certainly not the only one.  Reform and the lack thereof is the 800 pound gorilla in the room.

Sachs certainly livened up a clubby conference of complacent financerati in the Pennsylvania Room at the Federal Reserve Bank of Philadelphia. The topic is "Fixing the Banking System for Good."  It is not so much what Jeff Sachs said alone, but also how out of touch with reality that group of people may be.

I find this interesting because just today Mary Jo White, the new head of the SEC, has indicated that their policy would be to 'move along' and not look at the financial crisis any longer.

This will continue until there is a problem too large to hide, and the confidence breaks. And then good luck controlling the reaction in the global markets. 

But for now they don't care, because they are operating within hermetically sealed capsules of personal privilege, and are locked into an odd form of group think and willful denial which I call the credibility trap.   In times of general deceit, telling the truth becomes a revolutionary act. 

And it is killing the economic recovery. 

And for now, anyone who speaks out, who speaks the truth, is ignored, ridiculed, marginalized, and threatened sometimes subtly and sometimes not, and generally isolated because no one will stand up with them. 

Neither austerity or stimulus will work until there is genuine reform. 

Don't forget that the CBC's documentary on the precious metals market is on this evening.  I will post a link with the commentary later, and will link to a video when it becomes available.

There is a strong push for change, and an even greater resistance from those whose paychecks and allegiances require them to oppose it.  This generally makes for an interesting episode in history.

Listen to this carefully. 

Thank you to Janet Tavakoli for this:

"I believe we have a crisis of values that is extremely deep, because the regulations and the legal structured need reform. But I meet a lot of these people on Wall Street on a regular basis right now. I'm going to put it very bluntly. I regard the moral environment as pathological. And I'm talking about the human interactions that I have. I've not seen anything like this, not felt it so palpably.

These people are out to make billions of dollars and nothing should stop them from that. They have no responsibility to pay taxes, they have no responsibility to their clients, they have no responsibility to people... counterparties in transactions. They are tough, greedy, aggressive, and feel absolutely out of control, in a quite literal sense. And they have gamed the system to a remarkable extent and they have a docile president, a docile White House and a docile regulatory system that absolutely can't find its voice. It's terrified of these companies.

If you look at the campaign contributions, which I happened to do yesterday for another purpose, the financial markets are the number one campaign contributors in the U.S. system now. We have a corrupt politics to the core, I'm afraid to say... both parties are up to their necks in this.

... But what it's led to is this sense of impunity that is really stunning and you feel it on the individual level right now. And it's very very unhealthy, I have waited for four years... five years now to see one figure on Wall Street speak in a moral language. And I've have not seen it once. And that is shocking to me. And if they won't, I've waited for a judge, for our president, for somebody, and it hasn't happened. And by the way it's not gonna happen any time soon, it seems.

What Does the Recent Fall in the Price of Gold 'Prove?'

"And this means that it is deeply, deeply wrong to think of rising gold prices when bond yields are low as some kind of symptom of monetary excess."

Paul Krugman, 10 September 2011

So don't think of gold as an indicator of monetary excess when it is going up,  but when it is going down it can be used to prove your hypothesis of a lack of excess, as PK does in the new article cited below. 

But there is some wiggle room between excess and hyperinflation, and degrees of excess, and I would agree if the argument he presented was well reasoned and well tempered, which is it not.  It is just over the top, playing to the crowd. Well, that's show biz, and perception management.

I really would have preferred not to reference this article below, but I am afraid I must because it establishes one important point. It does not have much else to recommend it.  And I have decided to avoid most other articles like this that deal in 'goldbuggery.'  You know where I tend to place my focus, and name calling is what one does when their arguments are insubstantial.  And then it becomes de rigueur on both sides, and thought fails. No need to add to the hysteria.

In taking his victory lap for his economic theory in this manner, Mr. Krugman endorses the ability of gold to predict monetary dislocation and policy error. I would also add that it is a strong indicator of real interest rates.  When they are negative they are good for gold, and when they offer a fair return, they are not.  This is without regard to the nominal level of inflation, Paul.  But you knew that, or ought to have known that.  But the key takeaway is that Krugman admits that gold does matter, and he watches it.  And will use it in his data when it serves his purposes.

I think that is important. He would likely dodge this and say that it does not matter, but merely shows that some people believe that it does and therefore they buy it. When one deals in otherworldly economic models, they can make them do almost anything. The thing that economics does best is rationalizing as you wish after the fact.  There is a paper, by the way, about Gibson's Paradox by Larry Summers that PK can read if he wishes to see a more 'wonkish' linkage.  Oh that's right, he caught up with that in 2011.

But I guess it is ok to use it as an indicator that all is well on the monetary front when it is going down, as he does today.

I will take an aside, and say that the claims that monetization are not yet causing inflation proves nothing. All that proves is that one can give wheelbarrows of money to their friends to prop up their bad debts, as long as the friends keep the money in their own bank and trading accounts.  The first result will be bubbles in financial assets, and the accumulation of wealth in a narrow segment of the target population. 

But I do think that we have passed from the phase where gold is irrelevant and can be ignored, to the point where even 'very serious people' must take it seriously, and deal with it in some manner,  with fear and ridicule.

Open interest generally does not RISE when prices are falling, and people are fleeing away from a particular investment vehicle, especially a commodity. When a 'long' position sells, it closes, and open interest, or the number of contracts, goes down. Open interest increases on falling prices when short selling is pressing a market lower against a steady demand from legitimate investment. But that is a detail, and not in his models.

As you know I only became interested in gold because of my study of currencies back in the 1990s.  And I do not favor a return to a gold standard, although it is painfully obvious that the existing monetary arrangement for trade based on the dollar is as unstable as is the euro in Europe, and for many of the same reasons.  The dollar regime has simply lasted longer, for some of its own scale and reasons. 

And I do not favor austerity as a policy, and believe in the efficacy of stimulus when applied effectively and directly to a demand/employment condition of deadlock or stagnation brought on by a credit bubble collapse as we are in now.   I am what would be called a 'progressive.' 

But all the stimulus one can muster will not repair a system that is still broken and corrupt.  It is like sending aid to some third world nation where it is diverted by the ruling warlords from ever reaching the people, save for some crumbs.  And Paul Krugman, in his zeal for his cause, seems to miss this. 

That is the FDR model, applying stimulus directly to creating jobs and increasing the median wage while reforming the system. And that is most certainly not what we have today.  We are bailing out the banks while allowing their abuses to go unpunished, and the system to be substantially unreformed, for the sake of  'the system,' or more properly the status quo.  And the status quo is quite happy with things as they are, because they are gettin' paid as they say in the vernacular.

I have said for quite some time that the outcome I see from this mistaken policy is stagflation, or as some may choose to call it, the new normal.  It is the price that the public must pay to sustain a system of corporatism, historic inequality, and injustice.

Repressing dissent like the Occupy Movement, limiting people's investment options, and managing perceptions will only go so far.  One needs an exit strategy from a period of sustained and pervasive policy error and corruption.  And that must include real reform and change.  The new normal is not self-sustaining, but is an unnatural equilibrium that must be maintained by force, economic and otherwise. 

Once again, a plea for civility. The future will be what it will be. And all the name calling and repression, financial or otherwise, all the violent language on both sides will only make things worse. 

Chris Hedges is right on some critical things.  This is tied in with the death of the liberal class as an effective bulwark against the rapaciousness and lawlessness of corporation and those who serve their interests, the rise of extremism, and the decline of the individual overshadowed by the rise of the state.   In the parlance of the 1960's,  the liberal class has 'sold out.'  The price varies.

When the tide goes out you not only see who is naked, you see who they are naked with.

Willfulness can take many forms, whether it be a personal desire for riches, or power, or just to be 'right' at any cost, even through control frauds.   It is when those desires override conscience and justice that things begin to go horribly wrong.  It teaches by example, it is contagious, and it breeds.

So the only thing that this recent episode in the metals markets proves is that if you give the Banks enough money and regulatory latitude they can bend the markets to their will. And we already knew that. What is going on in the precious metals markets is apparent to those who look at the trading patterns, the volumes, and the open interest.

The only thing that is lacking is the exact reason, the motive for this, the disaster that has been averted, or the corruption and decay that is being concealed.

Markets are based to a large part on confidence. And when confidence breaks it is hard to get it back. And these jokers on Wall Street are stretching it to the limit, whether they realize it or not.

Gold Does Not Glitter
By Paul Krugman
April 15, 2013

So, the slide in gold has turned into a rout. As Joe Weisenthal says, this should be seen as really good news, because it offers strong evidence that the goldbug/inflationista view of the world — which says that we need to stop all efforts at monetary and fiscal stimulus lest we turn into Weimar — is, in fact, all wrong.

But Joe is, I think, deluding himself if he imagines that this will make any difference. After all, the inflationista view of the world has been repeatedly, devastatingly wrong on many fronts — interest rates, inflation, the effects of austerity. Has anyone other than Narayana Kocherlakota (who deserves big props for intellectual flexibility) actually changed his or her mind in response?

In fact, by and large the goldbug response to each failed prediction has been to claim that evil government officials are hiding the truth. Interest rates are low? That’s because the Fed is suppressing them. How can it do that, year after year, without causing runaway inflation? Oh, actually we have runaway inflation, but the BLS is faking the numbers (and independent measures, like the Billion Prices Index, are part of the plot).

Read the entire article here.

The Market Price of Corruption: Real Rates, the Real Yield Curve, and the GDP Gap

"Gentlemen! I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country.

When you won, you divided the profits amongst you, and when you lost, you charged it to the bank...You are a den of vipers and thieves. I have determined to rout you out, and by the Eternal, (bringing his fist down on the table) I will rout you out."

Andrew Jackson, Andrew Jackson and the Bank of the United States (1928) by Stan V. Henkels

What is the market price of policy error, careerism, and corruption?

The charts are simple, but the implications are profound.

seign·ior·age  

/ˈsānyərij/

Noun Profit made by a government by issuing currency A thing claimed by a sovereign or feudal superior as a prerogative.

Four Largest Banks Are Now Almost As Big As US GDP: Accounting Hides Risks - Taleb on Fragility

This is what happens when one allows the Banks to write their own reform rules in the aftermath of a financial crisis that was spiced with ideology, campaign contributions, and fraud.

JP Morgan, Wells Fargo, Citigroup, and Bank of America, and massively interlocked derivatives positions that are 'netted out' for accounting purposes, but which collapse in chain reaction effect when they encounter counter-party failure, frame this unhappy picture. That is the heart of 'too big to fail.'

And this does not include foreign based banks doing substantial business in the States, that also had to be supported by the Fed during the financial crisis. Or related firms like brokerages, faux banks like Goldman, and camp followers such as AIG and other non-bank financial sector corporations.

To Big To Fail still represents a serious risk to the financial system, and the failure to reform is clear policy error that is owned by the Fed, the Congress, and the Administration.

There will be no sustainable recovery until the Banks are restrained, the financial system is reformed, and balance is restored to the economy.

Bloomberg
U.S. Banks Bigger Than GDP as Accounting Rift Masks Risk
By Yalman Onaran
Feb 19, 2013 7:01 PM ET

Warning: Banks in the U.S. are bigger than they appear.

That label, like a similar one on automobile side-view mirrors, might be required of the four largest U.S. lenders if Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., has his way. Applying stricter accounting standards for derivatives and off-balance-sheet assets would make the banks twice as big as they say they are -- or about the size of the U.S. economy -- according to data compiled by Bloomberg.

“Derivatives, like loans, carry risk,” Hoenig said in an interview. “To recognize those bets on the balance sheet would give a better picture of the risk exposures that are there.”

U.S. accounting rules allow banks to record a smaller portion of their derivatives than European peers and keep most mortgage-linked bonds off their books. That can underestimate the risks firms face and affect how much capital they need.

Using international standards for derivatives and consolidating mortgage securitizations, JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. would double in assets, while Citigroup Inc. would jump 60 percent, third- quarter data show. JPMorgan would swell to $4.5 trillion from $2.3 trillion, leapfrogging London-based HSBC Holdings Plc and Deutsche Bank AG, each with about $2.7 trillion.

JPMorgan, Bank of America and Citigroup would become the world’s three largest banks and Wells Fargo the sixth-biggest. Their combined assets of $14.7 trillion would equal 93 percent of U.S. gross domestic product last year, the data show. Total assets of the country’s banking system would be 170 percent of economic output, still lower than 326 percent for Germany.

U.S. accounting rules for netting derivatives allow banks to erase about $4 trillion in assets, the data show. The lenders also can remove from their books most mortgages they package into securities, trimming an additional $3 trillion.

Off-balance-sheet assets and derivatives were at the root of the 2008 financial crisis. Mortgage securitizations kept off the books came back to haunt banks forced to repurchase home loans sold to special investment vehicles. The government had to rescue American International Group Inc. with a bailout that ballooned to $182 billion after the insurer couldn’t pay banks on derivatives tied to those bonds....

Read the rest here.

Gold Daily and Silver Weekly Charts - The Failure to Reform

"But there is a sort of 'Ok guys, you're mad, but how are you going to stop me' mentality at the top."

Robert Johnson

Audacious oligarchy.

This will not end well.

And a preview of Matt Taibbi and Bill Moyers discussing Why We Can't Let the Banks Off the Hook.

Ignoring such pervasive white collar crimes, which are still ongoing by the way, creates a climate of extreme moral hazard, festering corruption, and teaches felony by example.

I think they give Obama, the regulators, and the Congress far to much credit in ignoring these crimes 'for the good of the system.' It is all about careerism, the credibility trap, and going along to get along.

They cannot reform the system because they are the system, and the political and financial elite are doing just fine with the system the way that it is, thank you very much. They do not want things to change.

If You Remember Nothing Else About the Financial Crisis, Remember This

Few knowledgeable people talk about the need for financial reform anymore, just a few short years after the financial crisis and collapse.

The right talks about getting tough on the weak and settling old scores, and the left is losing its way in obtuse gimmickry and quack economics that promote their own statist agendas. Pile enough rancid margarine on the bread and you won't see its thinness or the mold.

The broad center, independents, and progressives are largely silent, having averted one almost certain disastrous choice in the most recent national election, only to find themselves still on unsteady ground with a weak and wavering 'champion' who may once more betray their trust for his own interests, and the deal.

And yet this is not nearly our darkest hour. That may be yet to come.

All the reform that has occurred so far has been largely window-dressing. Financial and political corruption is a tax that the real economy cannot support or endure while remaining free.

 Until there is substantial reform, there will be no sustainable recovery. This is only the appearance of recovery in the empire of illusion.

"From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent.

Simon Johnson, 13 Bankers


"The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises.

If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time."

Simon Johnson, The Quiet Coup

Taibbi and Spitzer on Sandy Weill, Romney, LIBOR and Geithner

“The disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least to neglect, persons of poor and mean condition is the great and most universal cause of the corruption of our moral sentiments.”

Adam Smith

Geithner and his apologists are the credibility trap in action. He epitomizes Obama's failure to reform and address the great financial crimes. While it is is interesting that LIBOR may have been manipulated going back to 1991, what is more alarming is that market manipulation still being committed on a broad scale today. This reminds one of the shocking murder of Kitty Genovese.

Geithner is no innocent anomaly. Obama shows quite a few signs of being a willing servant to the financial interests.

Sandy Weill senses that the tide is turning, and is worried about covering his derrière for the sake of history, and perhaps for the reckoning which may come, rats-and-ships-wise. I have also heard that there is very bad blood between Sandy and Jamie, and this is payback, with more to follow.

It seems almost like a deficiency in the American character that some of these jokers, like Weill, Greenspan, and Cheney, can walk around like big successes, and still be given a public platform and taken seriously when they speak.

If Charles Ponzi were still alive, I would not be surprised if he had his own show on financial television, with an avid following.

I suspect that the LIBOR scandal, as bad as it may be, will look like cheating at cards if the scandal of the metals and financial asset markets is ever fully revealed.

I am beginning to wonder if Mitt Romney has Asperger's Syndrome. Seriously. Besides being a loutish, prep school frat rat.

History Lesson

History Lesson by Arthur C. Clarke has been one of my favorite short stories since boyhood. It contains an allegorical lesson about the importance of context and assumptions in scientific and historical study. It has served me well throughout the years.

The story is of course an intellectual descendant of Plato's Allegory of the Cave, from Book VII of The Republic, which I also enjoyed as a boy, if you prefer to use a reference with a more high brow pedigree.

And now I would like to share an excerpt from it with you.

As the story begins, the cooling of the sun has turned the Earth into a cold world covered by ice, effectively destroying all life and preserving only a few remnants of human civilization.

But this cooling has had a beneficial effect on Venus, turning a once harsh world into a lush plant. After thousands of years, a reptilian race had arisen, and eventually become capable of interplanetary flight.

This race was intrigued by their sister planet, the Earth. A number of expeditions had retrieved fragments that showed intelligent life, but their understanding was still very limited.

As the story begins here, a recent expedition has retrieved several key artifacts, including one that is utterly unique, holding great promise.

...The warm ocean that still bore most of the young planet's life rolled its breakers languidly against
the sandy shore. So new was this continent that the very sands were coarse and gritty. There had not
yet been time enough for the sea to wear them smooth.

The scientists lay half in the water, their beautiful reptilian bodies gleaming in the sunlight. The
greatest minds of Venus had gathered on this shore from all the islands of the planet. What they were
going to hear they did not know, except that it concerned the Third World and the mysterious race that
had peopled it before the coming of the ice.

The Historian was standing on the land, for the instruments he wished to use had no love of water.
By his side was a large machine which attracted many curious glances from his colleagues. It was
clearly concerned with optics, for a lens system projected from it toward a screen of white material a
dozen yards away.

The Historian began to speak. Briefly he recapitulated what little had been discovered concerning the
Third Planet and its people.

He mentioned the centuries of fruitless research that had failed to interpret a single word of the
writings of Earth. The planet had been inhabited by a race of great technical ability. That, at least,
was proved by the few pieces of machinery that had been found in the cairn upon the mountain.

"We do not know why so advanced a civilization came to an end," he observed. "Almost certainly, it had
sufficient knowledge to survive an ice Age. There must have been some other factor of which we know
nothing. Possibly disease or racial degeneration may have been responsible. It has even been suggested
that the tribal conflicts endemic to our own species in prehistoric times may have continued on the
Third Planet after the coming of technology.

Some philosophers maintain that knowledge of machinery does not necessarily imply a high degree of
civilization, and it is theoretically possible to have wars in a society possessing mechanical power,
flight, and even radio. Such a conception is alien to our thoughts, but we must admit its possibility.
It would certainly account for the downfall of the lost race.

It has always been assumed that we should never know anything of the physical form of the creatures
who lived on Planet Three. For centuries our artists have been depicting scenes from the history of
the dead world, peopling it with all manner of fantastic beings. Most of these creations have
resembled us more or less closely, though it has often been pointed out that because we are reptiles
it does not follow that all intelligent life must necessarily be reptilian.

We now know the answer to one of the most baffling problems of history. At last, after hundreds of
years of research, we have discovered the exact form and nature of the ruling life on the Third
Planet."

There was a murmur of astonishment from the assembled scientists. Some were so taken aback that they
disappeared for a while into the comfort of the ocean, as all Venusians were apt to do in moments of
stress. The Historian waited until his colleagues reemerged into the element they so disliked. He
himself was quite comfortable, thanks to the tiny sprays that were continually playing over his body.
With their help he could live on land for many hours before having to return to the ocean.
The excitement slowly subsided and the lecturer continued:

"One of the most puzzling of the objects found on Planet Three was a flat metal container holding a
great length of transparent plastic material, perforated at the edges and wound tightly into a spool.
This transparent tape at first seemed quite featureless, but an examination with the new subelectronic
microscope has shown that this is not the case. Along the surface of the material, invisible to our
eyes but perfectly clear under the correct radiation, are literally thousands of tiny pictures. It is
believed that they were imprinted on the material by some chemical means, and have faded with the
passage of time.

These pictures apparently form a record of life as it was on the Third Planet at the height of its
civilization. They are not independent. Consecutive pictures are almost identical, differing only in
the detail of movement. The purpose of such a record is obvious. It is only necessary to project the
scenes in rapid succession to give an illusion of continuous movement. We have made a machine to do
this, and I have here an exact reproduction of the picture sequence.

The scenes you are now going to witness take us back many thousands of years, to the great days of
our sister planet. They show a complex civilization, many of whose activities we can only dimly
understand. Life seems to have been very violent and energetic, and much that you will see is quite
baffling.

It is clear that the Third Planet was inhabited by a number of different species, none of them
reptilian. That is a blow to our pride, but the conclusion is inescapable. The dominant type of life
appears to have been a two-armed biped. It walked upright and covered its body with some flexible
material, possibly for protection against the cold, since even before the Ice Age the planet was at a
much lower temperature than our own world. But I will not try your patience any further. You will now
see the record of which I have been speaking."

A brilliant light flashed from the projector. There was a gentle whirring, and on the screen appeared
hundreds of strange beings moving rather jerkily to and fro. The picture expanded to embrace one of
the creatures, and the scientists could see that the Historian's description had been correct.
The creature possessed two eyes, set rather close together, but the other facial adornments were a
little obscure. There was a large orifice in the lower portion of the head that was continually
opening and closing. Possibly it had something to do with the creature's breathing.

The scientists watched spellbound as the strange being became involved in a series of fantastic
adventures. There was an incredibly violent conflict with another, slightly different creature. It seemed
certain that they must both be killed, but when it was all over neither seemed any the worse.
Then came a furious drive over miles of country in a four wheeled mechanical device which was capable
of extraordinary feats of locomotion. The ride ended in a city packed with other vehicles moving in
all directions at breathtaking speeds. No one was surprised to see two of the machines meet head-on
with devastating results.

After that, events became even more complicated. It was now quite obvious that it would take many
years of research to analyze and understand all that was happening. It was also clear that the record
was a work of art, somewhat stylized, rather than an exact reproduction of life as it actually had
been on the Third Planet.

Most of the scientists felt themselves completely dazed when the sequence of pictures came to an end.
There was a final flurry of motion, in which the creature that had been the center of interest became
involved in some tremendous but incomprehensible catastrophe. The picture contracted to a circle,
centered on the creature's head.

The last scene of all was an expanded view of its face, obviously expressing some powerful emotion.
But whether it was rage, grief, defiance, resignation or some other feeling could not be guessed. The
picture vanished. For a moment some lettering appeared on the screen, then it was all over.

For several minutes there was complete silence, save for the lapping of the waves upon the sand. The
scientists were too stunned to speak. The fleeting glimpse of Earth's civilization had had a
shattering effect on their minds. Then little groups began to start talking together, first in
whispers and then more and more loudly as the implications of what they had seen became clearer.
Presently the Historian called for attention and addressed the meeting again.

"We are now planning," he said, "a vast program of research to extract all available knowledge from
this record. Thousands of copies are being made for distribution to all workers. You win appreciate
the problems involved. The psychologists in particular have an immense task confronting them.

"But I do not doubt that we shall succeed. In another generation, who can say what we may not have
learned of this wonderful race? Before we leave, let us look again at our remote cousins,
whose wisdom may have surpassed our own but of whom so little has survived."

Once more the final picture flashed on the screen, motionless this time, for the projector had been
stopped. With something like awe, the scientists gazed at the stiff figure from the past, while in
turn the little biped stared back at them with its characteristic expression of arrogant bad temper.

For the rest of time it would symbolize the human race. The psychologists of Venus would analyze its
actions and watch its every movement until they could reconstruct its mind. Thousands of books would
be written about it. Intricate philosophies would be contrived to account for its behavior.

But all. this labor, all this research, would be utterly in vain. Perhaps the proud and lonely figure
on the screen was smiling sardonically at the scientists who were starting on their age-long fruitless
quest.

Its secret would be safe as long as the universe endured, for no one now would ever read the lost
language of Earth. Millions of times in the ages to come those last few words would flash across the
screen, and none could ever guess their meaning:  

A Walt Disney Production.

Arthur C. Clarke, History Lesson

Whole pyramids of learned understanding, highly structured laws, and academic rules can be built on a set of false assumptions, or some principle or premise based not on context but in some intellectual misapprehension.

So it is with the efficient market theory or trickle down economics, for example. Or the idea that by feeding the 'job creators' until they are stuffed one might eventually improve the condition of the many by trickling down.

Granted, all too often these misconceptions of reality are by intent, just another facet in a general campaign of propaganda and deception. But their acceptance by the public still proves the danger of untested and unproven assumptions and building even highly ordered and intricate structures on false premises.

Whether it is in your study of the stock market, money, and economics, or of some translation and interpretation of an antique work, or in reading an essay about an idea or person in history, you may wish to keep this little story in mind.

All too often someone will make an outlandish assertion, and upon questioning it appears that their primary knowledge of the subject at hand is based upon the reading, or more likely viewing, of an essay or video by some individual or group promoting that particular interpretation of reality.  They have nothing else to judge it by, given their lack of investigation and knowledge, but it is duly enshrined in the pantheon of human thought as 'their opinion,' their private judgement.

And their position is often unassailable by reason, because it is not based in thought but in a system of belief. But it is not safeguarded by the intellectual constraints and dignified distance one must place on a religion as inherently a leap of faith beyond the limits of science.  Science and the supernatural are by definition not the same, but complementary.

When someone says, 'I do not believe that I have a soul or that there is a God,' I may pay attention on the most particular and technical of information, but how can one take someone seriously on philosophical and higher matters who is so dull and unfeeling as to consider themselves and their fellows to be apes?

One could spend a lifetime studying the stock markets trying to make sense of them and their movements, and build an impressive body of study and rules, but fail miserably despite all that work, because one has built upon the false premise that the game was honest and subject to natural laws, and not often rigged and controlled by insiders to the very extent that they can get away with it.

Or perhaps there is a belief in some economic system like 'market capitalism' controlled by an oligarchy through the manipulation of money and information for their own ends in the name of freedom,  for example.

It may be summed up in the familiar saying, 'A little learning is a dangerous thing' and perhaps, 'Beware of wolves in sheep's clothing.'

"Whereas the truth is that the State in which the rulers are most reluctant to govern is always the best and most quietly governed, and the State in which they are most eager, the worst...You must contrive for your future rulers another and a better life than that of a ruler, and then you may have a well-ordered State; for only in the State which offers this, will they rule who are truly rich, not in silver and gold, but in virtue and wisdom, which are the true blessings of life.

Whereas if they go to the administration of public affairs, poor and hungering after their own private advantage, thinking that hence they are to snatch the chief good, order there can never be; for they will be fighting about office, and the civil and domestic broils which thus arise will be the ruin of the rulers themselves and of the whole State."

Plato, The Republic

As with men and rulers, so with markets and money.

Greed is an excess of desire and lack of empathy and judgement, outside of the virtues, and is therefore most decidedly not 'good.'  A system built predominantly upon unrestrained greed, anger, envy, and pride will not, by definition, be virtuous but degenerative, unstable, and ultimately self-destructive if not put down by its victims first.

"The sad duty of government is to establish justice in a sinful world."

Reinhold Niebuhr

And I suspect that history will see our generation as deluded fools for having believed otherwise, forsaking a Constitution and a legacy that is based upon first principles, actively promoting the virtues of goodness, equality, moderation, the careful distribution of power, and both freedom and justice for all.