Homer-Dixon Key findings on resources and war / violence

Posted on May 2, 2014 by

The Project on Environmental Scarcities, State Capacity, and Civil Violence

Key Findings

Abot 50 experts from 5 countries, developed a detailed set of conceptual tools for thinking about environmental scarcity and state capacity.

Environmental scarcity has 3 sources:

  1. reduced resource supply (from degradation or depletion)
  2. increased resource demand (from larger populations or higher per capita consumption)
  3. skewed resource distribution.

State capacity is a function of the state’s fiscal resources, political autonomy, legitimacy, internal coherence, and responsiveness (see Table 1 below).

This set of conceptual tools has allowed our researchers to identify links between rising environmental scarcity and declining state capacity. They have found 4 separate and often simultaneous effects:

  1. Environmental scarcities increase financial and political demands on the state. In addition, analysis of diverse cases — including those of South Africa, Pakistan, and the Philippines — shows that environmental scarcities expand marginal groups that need help from government by constraining rural economic development and by encouraging people to move into cities where they demand food, shelter, transport, energy, and jobs. In response, governments come under pressure to introduce subsidies of urban services; these subsidies drain revenues, distort prices, and cause misallocations of capital.
  2. Resource scarcities affect the state via their effects on elites. On one hand, scarcities can threaten the incomes of elites that depend on resource extraction. These elites often compete among themselves for shrinking resource rents; they may turn to the state for compensation, or they may act to block institutional reforms that would distribute more fairly the costs of rising scarcity. Scarcities can also aggravate competition among political elites that derive their power from rival political institutions. The management of such conflicts requires immense amounts of state attention, time, and money.On the other hand, environmental scarcities generate opportunities for powerful coalitions of elite members to capture windfall wealth. Scarcities can boost the economic power of small elite groups. As they become more powerful, these groups are increasingly able to ignore state dictates, shirk taxes on their greater wealth, and penetrate the state to make it do their bidding. In particular, they often lobby to change the property rights and other laws governing the use of scarce resources such as water, land, and forests. These groups have a great incentive to pursue such change: the state is usually able to generate large economic rents by expanding the range of permissible uses of resources and by granting monopolistic access to resources. In many societies, these rent-seeking elite groups influence the state through bribery, kickbacks, and other forms of corruption.
  3. Such predatory behavior by elites often evokes defensive reactions by weaker groups that directly depend on the resources in question. The struggle for resource control between powerful and weak groups, and among weak groups themselves, worsens social segmentation, which in turn debilitates civil society and erodes the trust-building processes that civil society promotes. The loss of trust, of information flows from society to the state, and of private implementation of state policies reduces the reach and responsiveness of the state at the local level. The state’s failure to meet local needs then depresses its legitimacy.
  4. If resource scarcity affects the economy’s general productivity, tax revenues to local and national governments can decline. Such a revenue decline hurts elites that benefit from state largesse and reduces the state’s capacity to meet the increased demands arising from environmental scarcity.

We see, therefore, that environmental scarcity can affect a number of the variables measuring state capacity. It can directly constrain a state’s fiscal resources, and by encouraging predatory behavior by elites, it can reduce state autonomy. Rivalry among political elites reduces coherence, and competition among groups over resources weakens civil society. The conjunction of these four changes, in turn, hinders state responsiveness by reducing its ability to supply social ingenuity in the form of efficient markets, clear property rights, and an effective judicial and police system. Environmental scarcity can also boost financial and political demands on the state and increase grievances of marginal groups. A widening gap between rising demands and state performance, in turn, erodes state legitimacy, further aggravates conflicts among elites, and sharpens disputes between the elites and the masses. As the state weakens, the social balance of power can shift in favor of groups challenging state authority.

In addition to the Case Studies below, there are other articles on this topic here.

Case Studies

Chiapas, Mexico. The rebellion of Zapatista insurgents in Chiapas, Mexico is a result, in part, of a classical process of ecological marginalization. Indigenous peasants were pushed into ecologically vulnerable highland and tropical forest areas; high population growth and land degradation in these areas in turn exacerbated the poverty that catalysed the insurgency. The Chiapas rebellion has had a monumental effect on Mexican economic stability. It has disrupted international investment and strained NAFTA. It is an example of the potentially large-scale social and economic impacts of population and ecological problems.

Gaza. The achievement of limited autonomy for Palestinians in Gaza and Jericho in 1993 engendered hope for peace in the Middle East, yet violence persists. In Gaza, water scarcity has clearly aggravated socio-economic conditions. These conditions, in turn, have contributed to the grievances behind ongoing violence against Israel and emerging tensions among Palestinians in Gaza.

Pakistan. With one of the highest population growth rates in Asia, widespread land degradation and water scarcity, stalled economic reform, and weak governmental authority in both the cities and countryside, Pakistan’s political stability is threatened. A radicalization of the Pakistani regime would have implications for stability throughout South Asia, especially in the context of the unending crisis in Kashmir, the nuclear dimension of Indo-Pakistani relations, and continued turmoil in Afghanistan and Central Asia.

Rwanda The recent catastrophe in Rwanda is of great concern to policymakers, and many analysts have suggested that demographic and ecological factors powerfully contributed to the violence. A report on Rwanda therefore examines whether rapid population growth and cropland scarcities helped cause the civil conflict. Although the report concludes that the country’s demographic and scarcity stresses were extreme, these pressures are best seen as factors aggravating, not directly causing, the country’s widespread ethnocide.

South Africa Although astonishing political changes have taken place recently in South Africa, many people do not realize that the country remains burdened by extreme land degradation in the former homelands. This resource scarcity and rapid population growth are driving large migrations of homeland residents into urban areas. Urban squatter settlements and townships are still experiencing high levels of ethnic violence exacerbated by this migration. South Africa’s move to democratic stability is therefore threatened by environmental and demographic pressures.

Table 1: Indicators of State Capacity
Indicators of the State’s (or its Components’) Intrinsic Characteristics:
Human Capital The technical and managerial skill level of individuals within the state and its component parts.
Instrumental Rationality The ability of state’s components to gather and evaluate information relevant to their interests and to make reasoned decisions maximizing their utility. (Note that “utility” may be locally defined; i.e., it may reflect the narrow interests of the component and not the broader interests of the state or society.)
Coherence The degree to which the state’s components agree and act on shared ideological bases, objectives, and methods; also, the ability of these components to communicate and constructively debate ideas, information, and policies among themselves.
Resilience The state’s capacity to absorb sudden shocks, to adapt to longer-term changes in socio-economic conditions, and to sustainably resolve societal disputes without catastrophic breakdown. The opposite of “brittleness.”
Indicators of the Relations between the State (or its Components) and Society:
Autonomy The extent to which the state can act independently of external forces, both domestic and international, and coopt those that would alter or constrain its actions.
Fiscal Resources The financial capacity of the state or of a given component of the state. This capacity is a function of both current and reasonably feasible revenue streams as well as demands on that revenue.
Reach and Responsiveness The degree to which the state is successful in extending its ideology, socio-political structures, and administrative apparatus throughout society (both geographically, and into the socio-economic structures of civil society); the responsiveness of these structures and apparatus to the local needs of the society.
Legitimacy The strength of the state’s moral authority — the extent to which the populace obeys its commands out of a sense of allegiance and duty, rather than as a result of coercion or economic initiative.
Posted in 2) Overshoot, Caused by Scarce Resources, Collapsed & collapsing nations, Scientists, Stages of, Violence, War | Comments Off on Homer-Dixon Key findings on resources and war / violence

Cash is King in a deflation — but there are dangers

Posted on May 1, 2014 by

Risk 1: Capital controls

Restrictions on bank withdrawals (no ATM withdrawals, no bill payments, etc)

Restrictions on money market fund redemptions

Greater restrictions on retirement fund liquidations

Fixing an official exchange rate and criminalizing market rate transactions

Banning the conversion of domestic currency to foreign currency

Banning the movement of assets out of the country to foreign financial institutions

Barriers, restrictions, additional transaction costs imposed on foreigners seeking to deposit funds or make investments in safe havens

Forcing sovereign debt owners to accept longer maturities rather than principal repayment

Banning gold ownership

Reissuing the currency in a new form (an acute risk in Europe)

Restrictions on the size of cash transactions

Civil Asset Forfeiture is already happening

Risk 2: Being Taxed to Death on Real Estate, Stocks, Savings

What can you do?

There are no no-risk solutions, but different options will suit different people, depending on their circumstances. Some may choose to store assets in another jurisdiction or in another currency if those options are available, but losing control over assets abroad is a distinct possibility, as is difficulty in converting the currency chosen as a store of value back into something that will functions as cash at home.

Physical travel may become much more difficult as capital controls lead to border controls of other kinds. Holding assets close to home gives one the greatest degree of control, but with certain obvious risks attached. Typically, he who loses the least in a deflation is the winner, as there are no easy answers.

Legal niceties are very likely to go by the wayside as deleveraging proceeds and the global grab for scarce cash begins in earnest. Those who posses the power to grab assets left in harm’s way are very likely to do so, then possession will be nine tenths of the law.

Safe deposit boxes are not a secure option in the event of a bank run. If the bank’s doors are shut, the likelihood of being able to access a safe deposit box is vanishingly small. The odds of the contents remaining where they were left for long enough for the owners to be reunited with their property are also rather low. Even when there is no threat of an imminent bank run, financially-strapped central authorities may be minded to help themselves to the assets of others.

Moving money abroad to a safer haven is not the simple solution one might imagine either. Governments that could not stop the hemorrhage as it was happening are seeking to reverse the capital flight after the fact. Of course, such actions will only further inflame fear, while doing nothing to address the reason for capital flight. They will thus increase the impetus for capital to flee in any way that it can.

If you are able to get cash from the bank and hide it at home, that can be a problem too, as David  Böcking writes about in a June 18, 2012 article in Der Spiegel: Desperate Greeks Withdraw Money from Accounts  Many Greeks are emptying their bank accounts out of fear that the country may return to the drachma. But most of the money is not going abroad. Instead, individuals are storing cash in safe deposit boxes (there aren’t any more to be had at the banks, they’re all taken) or at home ( at least €50 billion)– leading to an increase in burglaries (700% in Crete, €50,000 in cash from a house of an old couple in Athens, etc… people are withdrawing hundreds of millions of euros from the banks every day. In May alone, outflows totaled €5 billion. According to official figures, €80 billion has been withdrawn since the start of the crisis…Greeks fear a currency reform such as banks closing to prevent further transfers into foreign accounts, or marking existing Euro bills with stamps that wouldn’t be valid in other countries and replaced with the drachma again.

Once fear is in the ascendancy, it is very difficult to combat. Governments and central banks simply do not have the control they think they do, and they do not understand the nature of battle they are engaged in. It is not a matter of restoring certain objective conditions. Central authorities are trying to fight the inexorable recognition that the magnitude of the debt that has resulted from our 30 year credit expansion dwarfs the wealth of the world, that the $70 trillion in G10 debt underpins some $700 trillion in derivatives.

That realization, and the natural reactions stemming from it, are the problem. As confidence evaporates, so does liquidity. Credit – the vast majority of the effective money supply – ceases to be equivalent to money. The resulting crash of the effective money supply is deflation by definition. This is what we have been predicting since the inception of theautomaticearth (TAE). This is how credit expansions always end – with the implosion of credit instruments that amount to no more than a pile of human promises that cannot be kept.

Why Safe deposit boxes aren’t safe
1) The State of California started taking money from safe deposit boxes that hadn’t been touched after just 1 year.  The requirement used to be 15 years of no contact with the bank, but California  lowered it to 7, then 5, tnen 3 and now just 1 year (Leamy).
2) England is opening safe deposit boxes looking for cash to see who might be a drug dealer (Edwards)
3) Nicole points out the government will just take the money it needs, i.e. In Greece and Italy, suddenly No ATM withdrawals allowed, no bill payments, nothing. You Just get locked out overnight.  In Greece, the government is pulling funds directly out of its citizens’ bank accounts from anyone suspected of being a tax cheat
4) The Greek government is trying to get money moved from greek banks to other countries back.
5) if your money is still in euros in Greece, if a return to drachmas, maybe you’ll have 50% of your money as it’s devalued in half

Weiss writes about what has happened in other countries when the financial system explodes: Brazil begged people to donate their gold and gold jewelry, confiscated everyone’s bank accounts by freezing them, and replaced their money with a far less valuable currency. In Russia, millions fell victim to crime and corruption, traffic tickets for no reason, smuggling, narcotics – criminals owned or controlled half of the countries private businesses. Banks closed their doors forever.  In all countries, unemployment can be up to 50%, with little government aid because there aren’t taxes to be collected, a downward spiral.

Weiss recommends that you 1) plan to live without SSN, Medicare, etc since we’re heading on a course where that won’t be there (i.e. unfunded liabilities), 2) Washington may no longer be able to bail out your bank or guarantee your deposits when skyrocketing loan defaults push it to the edge of the precipice 3) Ensure your family’s safety because police, fire, and emergency services will probably be hard to come by in many communities 4) If you live in a city, have a plan and a place to go if things become uncomfortable for you. 5) Make sure your bank is the safest you can find. 6) Build a wall of privacy around your finances. The central government will not be your friend, or state or local government either. 7) Others will try to seize your wealth, especially in a city or suburbs 8) Keep a low profile 9) Hide your assets.

 

Leamy, Elisabeth. 2012 Not-So-Safe-Deposit Boxes: States Seize Citizens’ Property to Balance Their Budgets. ABC News

“They figured the safety-deposit box was safer than keeping it under the mattress. In the case of a lot of citizens, they were wrong, weren’t they?”

California law used to say property was unclaimed if the rightful owner had had no contact with the business for 15 years. But during various state budget crises, the waiting period was reduced to seven years, and then five, and then three. Legislators even tried for one year. Why? Because the state wanted to use that free money…

…Some states keep their unclaimed property in a special trust fund and only tap into the interest they earn on it. But California dumps the money into the general fund — and spends it.

2) Governments may also decide that the contents of safe deposit boxes may constitute evidence of criminal activity, and reserve the right to assess the property stored, making the owners prove legitimacy. In a liquidity crunch, it is quite likely they will regard there being no legitimate reason for holding cash, and private gold ownership may be declared illegal. Both cash and gold could be subject to confiscation.

Edwards, Richard. 2012. Safety deposit box raids yield £1bn of drugs, cash and guns. The Telegraph.

Scotland Yard said that Met’s Specialist Crime Directorate raided seven properties: three safe depositories, an office and three residential addresses…

…”Operation Rize is a money laundering investigation and is entirely unprecedented, one of the largest of its kind ever undertaken in the UK,” he said. “In the past safety deposit boxes have been searched on an individual basis often resulting in the recovery of guns, drugs and cash. We believe that this operation has the potential to impact upon many layers of serious crime.”

The investigation has been running for two years and included intensive work with lawyers to ensure they were able to seize all of the boxes.

Members of the public who have innocently and legally stored their valuables were”inevitably” going to get swept up in the disruption, it was predicted.

Black, Simon. 2012.  It starts: the government’s plan to steal your money. Sovereign Man

European officials yesterday flat out admitted that they were discussing rolling out a series of harsh capital controls across the continent, including bank withdrawal limits and closing down Europe’s borderless Schengen area.

Some of these measures have already been implemented sporadically; customers of Italian bank BNI, for example, were all frozen out of their accounts starting May 31st upon the recommendation and approval of Italy’s bank regulator. No ATM withdrawals, no bill payments, nothing. Just locked out overnight.

In Greece, the government has taken to simply pulling funds directly out of its citizens’ bank accounts; anyone suspected of being a tax cheat (with a very loose interpretation in the sole discretion of the government) is being relieved of their funds without so much as administrative notification.

It’s no wonder why, according to the Greek daily paper Kathimerini, over $125 million per day is fleeing the Greek banking system. European political leaders aim to put a tourniquet on this wound in the worst possible way.

Bruce Krasting On Capital Flight and Forced Repatriation

All around the globe one can find evidence that money is moving around with the sole purpose of finding someplace”safe”. Capital flight is a perfectly logical consequence in today’s world. Barely a day passes where we are not reminded that nothing is safe any more. Not our currencies, not our equities, not our bonds and certainly not our banks/brokers.

In Greece there are many example where capital flight is undermining stability. The most obvious is the capital flight from the Greek banks that has taken place over the past few years. This flow of money is also perfectly logical. There are many risks of leaving money in a Greek bank:

•The Bank could default. The principal in the account is at risk. The guarantee (up to E100k) is from the government. What’s that worth?

•The government could default. The chaos that would follow would result in a freeze of all bank balances.

•The government could announce one morning that it was re-establishing the Drachma. This would mean that any Euros in a Greek bank would be automatically converted into Drachmas at the old official rate. The value of those Drachma would be worth half (or less) as a result of the immediate devaluation that would occur…

…A move is being made in Brussels to”force” the Swiss government/banks to transfer all of the assets of Greek citizens back to the Greek banks. For a Greek this means that your money is hostage. It has been functionally expropriated. It will be transferred into a banking system that is fraught with risk. Some portion of the money that goes back to Greece will certainly be lost…

…If this happens (the folks in Brussels are pushing hard) a very dangerous precedent will have been set. Flight capital will have been made illegal.

Posted in Money | Comments Off on Cash is King in a deflation — but there are dangers

How Companies Plunder and Profit From the Nest Eggs of American Work

Posted on May 1, 2014 by

Retirement Heist: How Companies Plunder and Profit From the Nest Eggs of American Workers

By Ellen E. Schultz    Portfolio/Penguin 2011 216 pages, in hardcover and paperback

August 20, 2012. UE News – Summer 2012 issue

We already knew that employers are stealing workers’ pensions, and that they’ve doing it for more than 20 years. But in this well-researched and well-argued book Ellen Schultz, an award-winning investigative reporter for The Wall Street Journal, documents the complex ways in which they’ve been doing it, how they profit from these crimes, and how gaping loopholes in laws and regulations let them get away with it.

Interestingly for UE members, the first corporate leader Schultz mentions is Jeffrey Immelt, CEO of General Electric, recounting a speech he gave to investors in December 2010. Immelt told them that the GE pension “has been a drag for a decade,” and that to relieve itself of this financial burden, GE was going to keep future employees out of the pension. But Immelt’s presentation was fundamentally untrue, says Schultz – the company’s pension and retiree plans, huge and well-funded, “had contributed billions of dollars to the company’s bottom line over the past decade and a half”, and the company had not contributed a cent to the workers’ pension plan since 1987.

One of the ways GE made money from the pension fund was by selling chunks of it when it spun off a division of the company. For example, Schultz writes that when GE sold an aerospace unit to Martin Marietta in 1993, it transferred 30,000 employees and $1.2 billion in pension assets – $531 million more than was needed to cover the pension liabilities. But all that was included in the sale price, so “GE effectively got to put half a billion dollars from its pension plan into its pocket.”

With case studies involving some of the biggest names in corporate America, Schultz describes the elaborate schemes by which employers have gutted workers’ pension plans and retiree health care to finance downsizings, boost corporate profits and, in many cases, pay for the obscenely generous benefits of top managers and executives.

 

She describes how some companies have transformed their pensions into “cash-balance plans,” presented as a change that will benefit employees, when in fact cash-balance plans are a way to disguise retroactive pension cuts. A similar scheme called the “pension equity plan” also enables employers to cut workers’ pension benefits; the calculations are so complex that most employees don’t realize they’ve been fleeced until they’re about to retire. These and other innovative ways of robbing workers have been developed by what she calls “a new breed of benefits consultants” that emerged over the past two decades, who specialize in cutting retirement benefits for ordinary employees while boosting executive compensation.

The many complicated and sinister schemes to loot retirement benefits that Schultz describes can be depressing and mind- boggling to follow. She humanizes these stories by introducing us to individual retirees who were the victims of these plots, who struggled for months or years to even grasp what was happening to them. Some of these people fought back, in some cases achieving limited success, but often failing in a system of “benefits law” which the corporations have largely rigged in their own favor.

The book deals with the looting of pensions in the private, corporate sector. But in the final pages she says a few words about the developing crisis of public employee pension plans. The same consultants and financial firms who engineered the pillage of private pensions, she writes, are now playing “a non-starring role in the public pension debacle.” She adds:

“The scapegoat game continues. Corporate employers are still blaming aging workers, rising ‘legacy costs’ and ‘spiraling’ retiree health care costs for their financial woes – not their own actions that squandered billions of dollars in pension assets, their thinly-masked desire to convert benefits earned by and promised to retirees into profits for executives and shareholders, and their willingness to sacrifice retiree plans, and the well being of retirees, for short-term gains.

“In the public plan sector, the scapegoats are the public employees and retirees, who are beginning to have the haunted look of victims of the Salem witch hunts. The real culprits are the self-serving politicians and officials who passed the funding buck to future generations, the consulting firms that helped them do this, and the investment banks that conned local governments into investing taxpayer-funded pensions into risky, abusive investments. ”

What’s the answer? Schultz calls for tightening laws to stop many of the abuses she’s uncovered. “Pension law requires that the plan be managed for the ‘exclusive benefit’ of the participants, ” she writes, but the law “is like a toothless dog.” She wants “laws that make it tougher for companies to terminate their pensions to capture the surplus money,” and tightening of loopholes that enable corporate executives to divert the money in pension and retiree health plans.

While the reforms she proposes would help protect those workers and retirees who still have defined benefit pensions and retiree healthcare, they could not help the millions who have already lost these benefits. Because Schultz’s scope is limited to the past two or three decades, she does not look back to the origins of employer-based pensions, and therefore misses the underlying problem.

Social Security, as originally conceived by members of President Franklin Roosevelt’s Committee on Economic Security in 1934 and ’35, was intended to provide full retirement security as well as “all forms of social insurance” – health insurance, accident insurance, unemployment benefits, maternity benefits, etc. To get the original Social Security Act through Congress in 1935, Roosevelt scaled back these goals (National healthcare was left out of the bill, for example, and agricultural and domestic workers were excluded, which left out half of the African American workforce.) New Dealers planned to broaden the concept and coverage of Social Security in later amendments. But by the late ’30s life insurance companies, which devised and marketed pension plans to employers (then generally covering only high-paid managerial employees) had gained political traction for the idea of “supplementation. ” This was the notion that Social Security should provide only a minimal, subsistence retirement benefit, to be “supplemented” by employer pensions, savings and other income.

After World War II, with the failure of efforts to expand Social Security’s coverage of retirement and healthcare, unions turned, often reluctantly, to bargaining pensions and health insurance with employers. (An excellent history of these developments is Jennifer Klein’s 2003 book, For All These Rights: Business, Labor and the Shaping of America’s Public-Private Welfare State.

The system of employer-based pensions and health insurance “supplementing” Social Security was never complete – even in the boom years of the 1950s and ’60s, huge sections of the working class had no pensions or health coverage. In our time, we’re witnessing the collapse of that system, with healthcare becoming unaffordable even with insurance, and defined-benefit pensions rapidly disappearing. Retirement Heist is a very important indictment of corporate America’s looting of its workers’ retirement funds. It is further evidence that we need to return to the vision of 1935:

Retirement and healthcare are much too important to be entrusted to employers, and must instead be guaranteed by the federal government as human rights.

Excerpts

Siphon

In November 1999, a group of the nation’s leading pension experts met at the Labor Department in Washington to discuss a $250 billion problem. After eight years of double-digit returns, the pension plans at American corporations had more than a quarter of a trillion dollars in excess assets. Not a shortage of assets. Excess assets. At some companies, the surpluses had reached almost laughable levels: $25 billion at GE; $24 billion at Verizon; $20 billion at AT&T; $7 billion at IBM.

One might expect that such lush asset balances would be something to celebrate. Many employers hadn’t contributed a dime to the plans since the 1980s, yet they still had enough money to cover the pensions of all current and future retirees even if they lived to be 100. With so much money, the plans would cost the companies nothing for years to come. But employers weren’t celebrating. The money was burning a hole in their pockets.

————

Today the giant surpluses are gone: sold, traded, siphoned, diverted to creditors, used to finance executive pay, parachutes, and pensions. But you’d think the employers had nothing to do with it. Companies blame investment losses for their plight, as well as their aging workforces, union contracts, regulation, and global competition. But their funding problems were largely self-inflicted. Had they not siphoned off the assets, they would have had a cushion that could have withstood even the market crash that troughed in March 2009. Nonetheless, employers continue to lobby for more liberal rules that would enable them to withdraw more of the assets to pay other things. Meanwhile, their solution when funds run low remains the same: Cut pensions.

The Heist

In 1997, Cigna executives held a number of meetings to discuss their pension plan. At the time, the plan was overfunded, but executives weren’t satisfied and suggested cutting the pensions of 27,000 employees in an effort to boost the earnings they could report on their bottom line. The only problem? How to cut people’s pensions—especially those for long-tenure employees over forty—by 30 percent or more, without anyone noticing?
Cigna was just the latest of hundreds of large companies, including Boeing, Xerox, Georgia-Pacific, and Polaroid, that had already gone through this charade in the 1990s.

These companies had something in common: They all had large aging workforces—with tens of thousands of employees who had been on the job for twenty to thirty years. These workers were entering their peak earning years, and with traditional pensions that are calculated by multiplying years of service by one’s annual salary, their pensions were about to spike. With the leverage of traditional pension formulas, as much as half an employee’s pension could be earned in his final five years. In short, millions of workers were about to step onto the pension escalator. Financially, that wasn’t a problem. Companies, including Cigna, had set aside plenty of money to pay their pensions, so having a large cohort of aging workers didn’t put the companies in peril. ..

The problem, from the employers’ perspective, was that it would be a shame to pay out all that money in pensions when there were so many other useful ways it could be put to use for the benefit of the companies themselves.

Laying people off was one way to keep pension money in the plan. When people leave, their pensions stop growing, and if this happens just when employees’ pensions are poised to spike, all the better. In the 1990s, companies purged hundreds of thousands of middle-aged workers from the payrolls at telephone companies, aerospace and defense contractors, manufacturers, pharmaceutical companies, and other industries, reducing future pension outflows by billions of dollars.

Employers couldn’t lay off every middle-aged worker, of course, but there were other ways to slow the pension growth of those who remained. They could cut pensions, but there were certain constraints. Pension law prohibits employers from taking away pensions being paid out to retirees, and employers can’t rescind benefits its employees have locked in up to that point. But they can stop the growth, by freezing the plans, or slow it, by switching to a less generous formula.

That was the route Cigna took. The company estimated that the move would cut benefits of older workers by 40 percent or more, which meant that as much as $80 million that had been earmarked for their pensions would remain in the plan. The challenge was how to cut pensions without provoking an employee uprising. Pushing people off the pension escalator just when they’re about to lock in the fruits of their long tenure would be like telling a traveler that his nearly one million frequent flier miles were being rescinded—they weren’t going to like it.

Cigna’s solution to this communications challenge? Don’t tell employees. In September 1997, consulting firm Mercer signed a $200,000 consulting contract to prepare the written communication to Cigna employees, describing the changes without disclosing the negative effects. One of these was a benefits newsletter Cigna sent employees in November 1997, entitled “Introducing Your New Retirement Program.” On the front, “Message from CEO Bill Taylor” declared: “I am pleased to announce that on January 1, 1998, CIGNA will significantly enhance its retirement program.” “These enhancements will make our retirement program highly competitive.”

The newsletter told employees that “the new plan is designed to work well for both longer- and shorter-service employees,” provides “steadier benefit growth throughout [the employee’s] career,” and “build[s] benefits faster” than the old plan. “One advantage the company will not get from the retirement program changes is cost savings.” In formal pension documents it later distributed, Cigna reiterated that employees “will see growth in [their] total retirement benefits every year.”

The communications campaign was successful: Employees didn’t notice that their pensions were being frozen, and didn’t complain. “We’ve been able to avoid bad press,” noted Gerald Meyn, the vice president of employee benefits, in a memo three months after the pension change. “We have avoided any significant negative reaction from employees.” In the margins next to these statements, the head of Cigna’s human resources department, Donald M. Levinson, scribbled: “Neat!” and “Agree!” and “Better than expected outcome.”

When employees made individual inquiries, Cigna had an express policy of not providing information. “We continue to focus on NOT providing employees before and after samples of the pension plan changes,” an internal memo stresses. When employees called, the HR
staff, working with scripts, deflected them with statements like “Exact 02 comparisons are difficult.”

Cigna wasn’t the only company deceiving employees about their 04 pension cuts, and actuaries who helped implement these changes were concerned, because federal pension law requires employers to notify employees when their benefits are being cut. At an annual actuarial industry conference in New York later that year, the attendees discussed how to handle this dilemma. The recommendation: Pick your words carefully. The law “doesn’t require you to say, ‘We’re significantly lowering your benefit,’” noted Paul Strella, a lawyer with Mercer, which had advised Cigna when it implemented a cash-balance plan earlier that year. “All it says is, ‘Describe the amendment.’ So you describe the amendment.”

Kyle Brown, an actuary at Watson Wyatt, reiterated that point: “Since the [required notice] doesn’t have to include the words that ‘your rate of future-benefit accrual is being reduced,’ you don’t have to say those magic words. You just have to describe what is happening under the plan. . . . I wouldn’t put in those magic words.”

Just to make sure the message had sunk in, in December 1998, Cigna sent employees a fact sheet stating that the objectives for introducing the new pension plan were to:

  • Deliver adequate retirement income to Cigna employees
  • Improve the competitiveness of our benefits program and thus
    improve our ability to attract and retain top talent
  • Meet the changing needs of a more mobile employee workforce, and
    provide retirement benefits in a form that people can understand.

The letter went on to say that “Cigna has not reduced the overall amount it contributes for retirement benefits by introducing the new Plan, and the new Plan is not designed to save money.”

This was true, literally. Cigna had indeed not reduced the overall amounts it contributed for retirement benefits. It had lowered the benefits for older workers and increased benefits for younger workers (slightly) and for top executives (significantly). Looked at this way, the plan wasn’t designed to save money, just redistribute it.

The communications campaign was successful. Janice Amara, a longtime Cigna employee, didn’t learn that she had not actually been receiving any additional benefits until September 2000, when she ran into Cigna’s chief actuary, Mark Lynch, at a farewell party for two other Cigna employees. “Jan, you would be sick if you knew” how Cigna was calculating her pension, she recalled him telling her. “Frankly, I was sick when I heard this,” Amara said. Under Cigna’s new pension formula, Amara’s pension would effectively be frozen for ten years.

Posted in Ponzi Schemes | Tagged | Comments Off on How Companies Plunder and Profit From the Nest Eggs of American Work

Why Treasury Bills are likely to be safe for at least a few years

Posted on May 1, 2014 by

my comment: SHORT-TERM 4-week or 13-week treasury BILLS that is

Apr 19, 2012   Ilargi at the automaticearth.com

Mauldin: unproductive government debt is killing us. So we either make some big, tough collective decisions, and make them soon; or we come to the “bang point” documented by Reinhart and Rogoff, where the bond market no longer believes the US will pay its bills. Europe and Japan will get there before we do, but the writing is on the wall: we must get our national-deficit act together.

Ilargi: I don’t think Reinhart and Rogoff ‘s bang point is near for the US. There are many countries in line before the US to reach their bang point. But the issue of accumulating additional debt in order to make matters look better today in exchange for worse conditions tomorrow, stands. For every country. It’s madness that originates in the human talent for discounting the future.

It seems obvious that “the grinding halt” will be reached sooner in Greece, Spain, Italy, etc., than it will in America.

Selling Treasuries, therefore, will be easy for the US for a while to come. Increasingly easy even. A lot of money will be looking for a safe haven. America will be perceived as that safe haven, simply because it is the least worst option. The US dollar will rise substantially because of this, as well as the fact that most international debt is denominated in US dollars, which will greatly raise demand.

Talk of hyperinflation is, as a consequence of this, greatly exaggerated. The American government is as addicted to credit as any government is, and its continuing access to bond markets will make printing money a non-issue, since it would only serve to raise interest rates.

The US is in dire straits. Just not as dire as many other nations. For the moment.

Feb 2, 2012  Ilargi at theautomaticearth:

The Treasury Borrowing Advisory Committee has unanimously recommended that the Treasury officially allow investors to bid negative rates at bill auctions (see Treasury may let investors pay to lend to U.S. government for details).

We have now reached the stage where the return of capital, rather than return on capital, takes precedence over everything else.

So even if you lose some money on treasuries, it’s still a good deal, because as in 2008, all other assets than cash will drop EVEN MORE.

All of this, of course, is a way to extend the USD-based sovereign debt ponzi for a few more years, and will make the collapse that much more painful when it occurs. For now, though, everyone must pay the global Mafia Don protection money to stay safe from the credit contraction monster.

 

May 10, 2011   http://theautomaticearth.blogspot.com/

Ashvin Pandurangi: Jumping the Treasury Shark

By now, it is is painfully obvious that the U.S. economy is not going to “recover” and that its fiscal situation will continue to deteriorate over the next few years, at least to those of us who value being truthful to ourselves. This will happen regardless of how much chatter is generated by the politicians about “fiscal responsibility” and the importance of reducing the deficit, or an imminent “government shutdown”. That begs the question of what will actually happen to the U.S. treasury market and the dollar as a “store of value” during this time.

Treasuries and dollars are ultimately driven by the forces of supply and demand, just like all other ones. Their supply will be plentiful, as the federal government generates new credit to fund the increasing gap between tax revenues and spending, so the question is whether there will be enough demand to meet the supply. The answer to that question is not as simple as determining whether rational investors will maintain their confidence in the U.S. treasury market and place their limited capital at its feet.

Your average financial investors (individuals, asset managers) are, A, not rational, and B, not the only source of support of support for the market. The latter is clear enough from the fact that the Federal Reserve, a privately-owned institution with no actual reserves, is now the largest creditor of the federal government, as its treasury holdings surpassed those of China earlier this year.

The Fed (along with a few other central banks and the IMF) is merely a front for a cartel of major financial institutions that are primarily located in the U.S., Japan and Europe, as well as other multinational corporations that work with them to maintain their operations.

These institutions, unlike the average and irrational financial consumer, will not necessarily throw their support behind the treasury market out of panic or fear of a worsening global economy. If they choose to continue “investing” in U.S. treasuries, it will be a calculated decision that is based on what they believe is the best method of preserving their wealth and power.

It is obvious to even the mainstream financial world that the public bond markets of the EU (and possibly the UK) and Japan are not going to last much longer, so those investments are not really options at all.

The choice they face can be analogized to the choice faced by a middle-class entrepreneur with a relatively profitable business operation in his home country. Although the businessman may be getting anxious about the market for his products and his ability to continue generating revenues and profits, he is also very experienced at operating the company in its current environment, with his current clients and his traditional methods of conducting business.

The market for his products may indeed by on the verge of collapse, but he cannot be sure that a similar market in another artificially-created jurisdiction would be any healthier for his business. On top of that, his family and friends all live in the jurisdiction where the business currently operates, and the businessman is very familiar with his local clients and his community.

There is no guarantee that a smaller market in another community would even be able to accommodate the scale at which he is used to operating his business, or that new clients there would be able or willing to entertain his services. Ultimately, the physical, financial and psychological costs of such a dramatic switch do not appear to be worth the trouble for the businessman. He decides to simply continue running his local business and hoping or praying for the best possible outcome.

Are the major financial players, who hold trillions of their net worth in dollar-denominated debt-assets, any different from the hypothetical businessman above? Perhaps they have a degree of more flexibility in their decision-making process and significantly more resources to help them decide, but they are also slaves to tradition and the human tendency of sticking to what they know.

The debt-dollar markets (equity markets, commodity markets, real estate markets, bond markets), already systematically entrenched around the world, combined with the “full faith and credit” of the federal government and the Fed’s unrestricted license to generate credit with the push of a button, tilt the scales in favor of sticking it out with the U.S. treasury market and currency. There are certainly alternative courses of action at the disposal of the wealthiest institutions in the world, but they are all a far sight short of being attractive.

One alternative plan would be to begin dumping all of these debt-assets on some clueless investors and taxpayers (via government programs such as TARP) and use the freed up capital to invest in hard assets (land, gold, oil, grains, etc.) and/or perhaps in the “emerging markets” of India, Brazil, China, etc. Personally, if I somehow ended up in the wacky world of financial elites, where priority #1 is to protect ungodly amounts of wealth and political power during a global economic depression, then I would dismiss this alternative as soon as it was presented to me.

The plan would have numerous flaws, some of which are too complex to even predict, but my general line of thinking could be summed up by comparing a few statistics and conducting a simple analysis.

  • The global bond market was valued at $91 trillion as of 2009, and the U.S. treasury market accounts for almost 8% of that value. [1].
  • The “over-the-counter” derivatives market was notionally valued at $615 trillion as of 2009, with interest rate derivatives accounting for 70% of that value, and 32% of those being directly sensitive to the value of the U.S. dollar and rates on the U.S. treasury curve. [2].
  • The U.S. has the first and third-largest equity markets in the world, and they combine to have a market capitalization of about $15 trillion, which also equals the total capitalization of the other eight markets in the largest ten. [3].
  • About 5.3 billion troy ounces of gold have been mined in human history as of 2009, and gold is currently selling at record prices, for about $1450/oz.
  • There are less than 10 billion acres of arable land on Earth, and some of the most expensive farmland in the U.S. averaged about $2K/acre in 2006.[4],[5].

Average consumers of financial products in the developed world simply do not have enough capital to buy up a significant portion of the dollar-denominated debt-assets that the elites would like to dump, especially when those assets are “officially” marked as being much more valuable than they really are. Foreign governments, of course, can barely afford to finance their own operations, let alone pour additional funds into U.S. treasuries. The same is true of institutional asset managers (pension funds, mutual funds, etc.) who may have rebounded a bit of business activity since 2007-08, but are still teetering on the edge of destruction from quarter to quarter, not knowing whether they will record a profit or a digital suicide note when the next one comes around.

These institutions may be willing to aid the elites in transferring worthless mortgage and equity instruments to average workers and taxpayers through government directives, pension plans and mutual funds, but they simply do not have the free capital to do the same for U.S. treasuries. That is truly the limiting factor, as the U.S. treasury market and its sprawling derivatives contract extensions make the stock market look like a penny-ante game of Bingo at Uncle Sam’s Fiesta Rancho Casino.

Regular old investors or fund managers with modest stock portfolios and limited capitalization cannot absorb the behemoth treasury market at full value, or anything close to it. Even if they could, where would the elites take the dollars that they received in exchange? The exact same problems described above apply to farmers, miners, manufacturers, etc. who work, invest and deal in the markets for hard assets. Besides, there is no need to pay people for their gold, land or oil when you can just take it by brute military force.

And that’s really the beauty of the debt-dollar system for the financial elites. It is globally established and it comes with the implicit understanding that, if you buck the system, there will be a fiery dose of hell to pay. These elites have all the time and resources they need to abandon the current system and down-size from the Yukon Denali to the Ford Focus, but the word “sacrifice” isn’t a part of their vocabulary. Instead, they will fight hard to keep the system functioning in whatever form they can manage, as long as it remains at the same scale of operation.

They are not under the illusion that the U.S. treasury or currency market are sparkly diamonds in the rough, or even shined shit in the land of fool’s gold. Fundamentally, the dollar is no healthier than the euro and they know it. The choice, however, is whether to wholly abandon the treasury shell game between the federal government, the Fed and private banks or to keep a good thing going while it seems to be working. They are banking on the Fed’s monetary operations, political illusions (the appearance of two parties working towards reducing the deficit), panicked “flights to safety” and a little bit of luck to preserve the debt-dollar system until global markets “reset” and economies begin to grow once again.

Perhaps they will keep other options open, as lifeboats to hop into in the last second before the Treasury Titanic is fully submerged. The problem for them is that such backup options never really end up working out as planned, especially when time is not on the same side as you are. It is also a distinct possibility that, despite what anyone wants or plans, the treasury market will blow its lid sky high next month or the month after. Possible, but not very likely, given the current situation in global bond markets and the “full court press” that is being launched by the elites. Personally, I give the treasury market and the dollar at least a few more years before their shine truly wears off, and the fan has its way with them.

Posted in Investing advice, Money | Comments Off on Why Treasury Bills are likely to be safe for at least a few years

After a nation crashes it can’t afford oil, collapse happens FAST

Posted on May 1, 2014 by

Why fixing energy policy is so difficult

April 25, 2011 by

Everyone would like to fix the US energy policy, but doing so is almost impossible, in my view, because we need to be planning for a much bigger change than most people can even imagine.

It seems to me that our international financial system is at this point, inching closer and closer to collapse. It needs growth to operate. Now that world oil supplies are virtually flat, and China and India and oil exporters are getting more of the oil, the financial system can’t get enough growth momentum.

The US has applied various sleight of hand techniques to try to cover this problem (see my post What’s Behind US Budget Problems?), but at some time in the not too distant future, the techniques are going to stop working, and there is going to be a major financial crash, with debt defaults. This could happen when QE2 ends, or maybe QE3, QE4, or QE5. The timing may vary by country, with some countries holding out for a while longer.

The reason I point this out is because after such a crash, as far as I can see, everything is going to go downhill quickly. This is a graph of my view of one such scenario of oil supplies, if a country that imports all its oil undergoes such a collapse:

 

The point is that the oil consumption goes down very quickly, not over a period of many years, because the decline in supply is determined by something quite different from what oil is in the ground–it is determined by ability to pay for the oil.

A potential buyer can be cut off very quickly, if its credit is no good.

We have gotten used to the idea of being able to keep running a tab, but at some point, this whole process is likely to come to a halt–something that can’t go on forever, won’t. Some international trade may continue, especially when a country has goods to trade for oil (rather than an IOU), but the level of free trade we have now can’t be expected to continue indefinitely.

The problem I see with a collapse scenario is that a plan that uses less oil and tries to make it go farther really isn’t helpful. Thus, a gas tax, or cap-and-trade, or fuel-efficient cars, or more fossil fuel extenders like wind and solar PV really aren’t helpful.

Instead, we need to put our effort into figuring out how we would get along without fossil fuels and nuclear, rather than get along with less.

We may have some supply for a while, but if we do, we need to use it to help with the transition, not to expect such supply to continue forever.

This is the big problem I have with energy policies and transition plans–they assume we are planning for a slow decline, when it is likely that we will not have such a decline.

In the case of an oil producer rather than an oil importer, perhaps the situation is better, but even here, there is a question of how much will continue to be produced, if there is major political upheaval. We know that the USSR broke up at the time of its collapse. There would seem to be a substantial chance of that happening elsewhere.

Everyone would like to add new and more complex systems to help–for example, more wind with upgraded transmission systems, smart grids, and electric cars. As nice as these might seem, the new systems become more and more complex, and more dependent on everything working together exactly correctly. As we lose ability to import spare parts, they will become very difficult to maintain, and will likely collapse within a few years. While they seem appealing, I don’t think they will add very much for very long.

Moving to a new system will require a lot of other changes:

1. A different financial system, that is not dependent on debt and growth.
2. More even distribution of incomes. With much less wealth, it won’t make sense for a few to have such a disproportionate share.
3. More even distribution of land. Without fossil fuels, it will not be possible to farm nearly as large plots. This also goes with more even distribution of wealth.

Changes such as these would be very difficult to make within our current structure. But without making such changes as well, it is hard to see that the new system would work.

Posted in Gail Tverberg, Oil Shocks | Comments Off on After a nation crashes it can’t afford oil, collapse happens FAST

Natural Gas used in Agriculture

Posted on May 1, 2014 by

Will Natural Gas Fuel America in the 21st Century?

May 2011    Post Carbon Institute

Agriculture and Natural Gas by Michael Bomford

Michael Bomford is a research scientist and extension specialist at Kentucky State University and an adjunct faculty member in the University of Kentucky Department of Horticulture. His work focuses on organic and sustainable agriculture systems suitable for adoption by small farms operating with limited resources.

Natural gas has many uses in the agricultural sector, both on-farm and off-farm; it has provided between a third to half of the fossil fuel energy used by U.S. farms over the past 40 years.1

The vast majority of the natural gas supporting American agriculture today is used off-farm. Most of it is used to manufacture farm inputs like pesticides, plastics, and fertilizers; nitrogen fertilizer production in turn accounts for most of that. Nitrogen fertilizer use has almost quadrupled in the U.S. since 1961 while rising more than eight-fold globally (Figure 1); industrial production of nitrogen fertilizer accounts for 2-3% of natural gas consumption in the U.S., and about 5% globally.2 A less significant use of natural gas off-farm is the generation of electricity for farms, even though electricity consumption rose from 6% of farm energy use in 1965 to 22% in 2002.3

The least significant use of natural gas in the farming sector is on-farm, where it is used primarily for energy: powering irrigation pumps, drying crops before storage, heating buildings and greenhouses, and other uses. Efficiency gains and fuel substitution enabled American farmers to cut on-farm use of natural gas from 8% of U.S. farm energy use in 1965 to 4% in 2002.

Nitrogen Fertilizer Production

Nitrogen is the most abundant element in the earth’s atmosphere and the most important mineral nutrient for crop production. Plants need nitrogen to make proteins, but they cannot access the nitrogen in the air because it consists mainly of stable pairs of nitrogen atoms bound together by strong chemical bonds. Nitrogen fertilizer is made by combining gaseous nitrogen (N2) and hydrogen (H2) under very high heat and pressure to form ammonia (NH3). Nitrogen gas comes from the air and natural gas typically provides both the hydrogen and the energy needed to maintain the temperature and pressure that enables the reaction. Although ammonia can be used to make plastics, synthetic fibers, resins, explosives, fuels, and other chemical compounds, almost 90% of it is currently used for fertilizer.

Nitrogen fertilizer production in the U.S. fell by one third between 1995 and 2010, while imports rose from 15% to 43% of consumption.10 The imported fertilizer is made in countries with plentiful natural gas, including Trinidad and Tobago (57%), Russia (15%), Canada (13%), the Ukraine (7%), and others (8%). As a result, regions that use nitrogen fertilizer may be far removed from the regions that bear the environmental costs of its production.

Chemical Dependence?

The rapid increase in nitrogen fertilizer consumption in the latter half of the 20th century is often credited with keeping grain production growing faster than population. President Nixon’s secretary of agriculture, Earl Butz, famously dismissed the idea of large-scale conversion to organic methods (which preclude the use of synthetic nitrogen fertilizer) by saying, “Before we move in that direction we must decide which 50 million of our people will starve.”14 A quarter century later, geographer Vaclav Smil estimated that “at least two billion people are alive because the proteins in their bodies are built with nitrogen that came—via plant and animal foods—from a factory […] In just one lifetime,” he concluded, “humanity has indeed developed a profound chemical dependence.”

[Bomford then goes on to explain how we could use less nitrogen and the benefits that would have, and believes organic agriculture can grow as much food].

 

Posted in Natural Gas | Comments Off on Natural Gas used in Agriculture

Bill Black on why there aren’t any prosecutions for financial fraud

Posted on May 1, 2014 by

2011 Will Bring More De facto Decriminalization of Elite Financial Fraud

Dec 28, 2010   Bill Black

The role of the criminal justice system with regard to financial fraud by elite bankers in 2011 is likely to reprise its role last decade — de facto decriminalization. The Galleon investigation of insider trading at hedge funds will take much of the FBI’s and the Department of Justice’s (DOJ) focus.

The state attorneys general investigations of foreclosure fraud do focus on the major players such as the Bank of America (BoA), but they are unlikely to lead to criminal liability for any senior bank officials. It is most likely that they will lead to financial settlements that include new funding for loan modifications.

The FBI and the DOJ remain unlikely to prosecute the elite bank officers that ran the enormous “accounting control frauds” that drove the financial crisis. While over 1000 elites were convicted of felonies arising from the savings and loan (S&L) debacle, there are no convictions of controlling officers of the large nonprime lenders. The only indictment of controlling officers of a far smaller nonprime lender arose not from an investigation of the nonprime loans but rather from the lender’s alleged efforts to defraud the federal government’s TARP bailout program.

What has gone so catastrophically wrong with DOJ, and why has it continued so long? The fundamental flaw is that DOJ’s senior leadership cannot conceive of elite bankers as criminals. On Huffington Post, David Heath writes:

Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. An investor in loans who documents fraud can force a bank to buy the loan back. But convincing a jury that executives intended to make fraudulent loans, and thus should be held criminally responsible, may be too difficult of a hurdle for prosecutors. ‘It doesn’t make any sense to me that they would be deliberately defrauding themselves,’ Wagner said.”

Mr. Wagner is confused by his own pronouns: “It doesn’t make any sense to me that they would be deliberately defrauding themselves.” This direct quotation needs to be read in conjunction with the author’s description of his position: “banks lose money” when loans “turn out to be fraudulent.” Wagner was responding to a question about control fraud — frauds led by the person controlling the seemingly legitimate entity who uses it as a “weapon.” The relevant “they” is the person looting the bank — the CEO. The word “themselves” refers not to the CEO, but rather to the bank. The CEO is not looting the CEO; he is looting the bank’s creditors and shareholders. Two titles capture this well known fraud dynamic. The Nobel laureate in economics, George Akerlof, and Paul Romer co-authored Looting: the Economic Underworld of Bankruptcy for Profit in 1993 and I wrote The Best Way to Rob a Bank is to Own One (2005). The CEO becomes wealthy by looting the bank. He uses accounting as his ammunition because, to quote Akerlof & Romer, it is “a sure thing.” The firm fails (or in the modern era, is bailed out), but the CEO walks away wealthy.

Here is the 4-part recipe for maximizing fraudulent accounting income in the short-term:

1. Grow extremely rapidly

2. By making bad loans at high yields

3. While employing extreme leverage, and

4. Providing only minimal loss reserves

A bank that follows this recipe is mathematically guaranteed to report record income in the near term. The first two ingredients in the recipe are linked. A bank in a reasonably competitive, mature market such as home mortgage lending cannot decide to grow extremely rapidly by making good loans. A bank can, however, guarantee its ability to grow rapidly — and charge a premium yield — if it lends to the tens of millions of people who cannot afford to own a home. Equally importantly, if many lenders follow the same recipe they will cause a financial bubble to hyper-inflate. Financial bubbles extend the lives of accounting control frauds by making it simple to refinance loans to those who cannot afford to purchase the asset. The longer that delinquencies and defaults can be delayed the more the CEO can loot the bank.

Note that the same recipe that maximizes short-term fictional income in the near term maximizes real losses in the longer term. Mr. Wagner is unable to understand that accounting control fraud represents the ultimate “agency” problem — the unfaithful agent (the CEO) enriches himself at the expense of the principals he is supposed to serve and the firm’s creditors. Agency problems are well known to white-collar criminologists, economists, lawyers that practice corporate, securities, or criminal law, and financial regulators. Yes, accounting control fraud causes the bank to suffer huge losses. The loans don’t “turn out to be fraudulent” — they are fraudulent when made. The recognition of the losses is delayed when an epidemic of accounting control fraud hyper-inflates a bubble, but the bubble will increase the ultimate losses. Sacramento, California is one of the epicenters of the mortgage fraud that drove the financial crisis, so Mr. Wagner’s lack of understanding of fraud mechanisms is particularly harmful.

Financial regulators are essential to prevent this kind of error by senior prosecutors. The regulators have to serve as the Sherpas for the criminal justice system to succeed against epidemics of control fraud. The FBI cannot have hundreds of agents expert in many hundreds of industries. The regulators have to do the heavy investigative lifting. They have the expertise and greater staff resources. The regulators also have to serve as the guides. Their criminal referrals have to provide the roadmaps that allow the FBI to conduct successful investigations. The regulators played this role successfully at key times during the S&L debacle, filing thousands of criminal referrals that led to over 1000 priority felony convictions. During the current crisis the OCC and the OTS – combined – made zero criminal referrals. None of the federal regulatory agencies appear to have enforced the regulatory mandate that federally insured depositories file criminal referrals – and noncompliance with that requirement was and is the norm. There is no indication that the FBI has demanded that the regulators enforce their rules.

Absent guidance and support from the regulators, the FBI turned to the worst conceivable source of guidance and support – the trade association of the “perps” — the Mortgage Bankers Association (MBA). The MBA, predictably, defined its members as the victims of mortgage fraud. The MBA invented a nonsensical definition of mortgage fraud which made accounting control fraud impossible. All fraud supposedly fell into one of two categories: “fraud for housing” or “fraud for profit.” The MBA members are, in fact, victims of accounting control fraud. The mortgage banks, however, do not set MBA policy. The CEOs of the mortgage banks determine MBA policy and they are not about to tell the FBI that they are the primary source of the epidemic of mortgage fraud. Similarly, they are not about to make criminal referrals, which might cause the FBI to investigate why some lenders made loans that were overwhelmingly fraudulent. MBA members virtually never made criminal referrals even though they made millions of fraudulent loans. Why don’t the victims make criminal referrals and help the FBI protect them from the frauds?

Why did an industry, home mortgage lending, which had traditionally been able to keep losses from all sources to roughly one percent suddenly begin to suffer 80-100 percent fraud incidence on “liar’s” loans? Why would an honest mortgage lender make “liar’s” loans knowing that doing so would produce intense “adverse selection” and a “negative expected value”? They would not do so. They were not mandated to do so by federal regulation or law. They were not encouraged to do so by federal regulation or law. They did so because their CEOs decided they would do so in order to maximize fictional income and real bonuses. The CEOs increased the number of liar’s loans they made after they were warned by the FBI that there was an “epidemic” of mortgage fraud and the FBI predicted it would cause an “economic crisis” were it not contained. The CEOs increased their liar’s loans after the MBA’s own anti-fraud experts stated that they deserved the name “liar’s” loans because they were pervasively fraudulent and after those experts said that “liar’s” loans were “an open invitation to fraudsters.” The industry’s formal euphemisms for liar’s loans were “alt-a” and “stated income” loans. None of this makes sense for honest CEOs.

The federal regulators have not made any public study of liar’s loans. The FDIC and OTS’ joint data system on mortgages is an anti-study — it uses a categorization system that ignores whether the loans were underwritten. This makes the data base useless for studying loans made without full underwriting — the loans that were overwhelmingly fraudulent and drove the crisis. Credit Suisse reported that mortgage loans without full underwriting constituted 49% of all new originations in 2006. If that percentage is even in the ballpark it indicates that that there were millions of fraudulent loans originated in 2005-2007. It is appalling that the regulators are not studying the facts necessary to understand the crisis and hold the perpetrator accountable.

Fortunately, the state attorneys general have studied these mechanisms and they have found that it was the lenders and their agents that overwhelmingly (1) prompted the false loan application data and (2) coerced appraisers to inflate market values. An honest lender would never engage in either practice or permit its agents to do so. The federal regulators, however, have spent their passion trying to preempt state efforts to protect borrowers. The federal regulators took no effective action in response to the State AGs’ findings.

The combined effect of these private sector, regulatory, and criminal justice failures has created a set of intellectual blinders that have caused DOJ to mischaracterize the nature of mortgage fraud. Attorney General Mukasey famously dismissed the epidemic of mortgage fraud as “white-collar street crime.” He did so in the context of refusing to establish a national task force against mortgage fraud. A national task force is essential in this crisis because of the national lending scope of many of the worst accounting control frauds. Attorney General Holder has maintained Mukasey’s passive approach to the elite frauds that drove the crisis.

The U.S. needs to take three major steps to be effective against the epidemic of accounting control fraud. First, DOJ needs to realize that it is dealing with accounting control fraud. That task is not terribly difficult. The criminology, economics, and regulatory literature — as well as the data on fraud and analytics are all readily available. The FBI must end its “partnership” with the MBA.

Second, the regulators need new leadership picked for a track record of success as vigorous regulators and a willingness to hold elites accountable regardless of their political allies. The regulators need to make assisting prosecutions, and bringing civil and enforcement actions, against the senior officers that led the control frauds their top priority. The regulators need to make detailed criminal referrals, enforce vigorously the regulatory mandate that insured depositories file criminal referrals, and prioritize banks that made large numbers of nonprime loans but few criminal referrals. The regulators need to work with DOJ to prioritize the cases. In the S&L debacle we used a formal process to create our “Top 100″ priority cases. The regulators need to investigate rigorously every large nonprime lending specialist by creating a comprehensive national data base. We have unique opportunities given the massive holding of nonprime paper by the Fed and Fannie and Freddie to create a reliable data base and use it to conduct reliable studies and investigations.

Third, the regulators and the DOJ need to partner with the SEC and the state AGs to share data (where appropriate under Grand Jury rule 6e). The federal regulators need to end their unholy war against state regulatory efforts and the SEC needs to end its disdain for the state AGs. The SEC needs to clean up accounting and the Big Four audit firms. The bank control frauds’ “weapon of choice” is accounting. The Big Four audit firms consistently gave clean opinions to even the most egregious frauds. Provisions for losses (ALLL) fell to farcical levels. Losses were not recognized. Clear evidence of endemic fraud was ignored.

What are the prospects for these three vital changes occurring in 2011? They are poor. There is no evidence that any of the three changes is in process. The new House committee chairs have championed even weaker regulation and have not championed the prosecution of Wall Street elites.

The media, however, has begun to pick up our warnings about the failure of the criminal justice response to the epidemic of fraud. Prominent economists, particularly Joseph Stiglitz and Alan Greenspan, have joined Akerlof, Romer, Galbraith,Wray, and Prasch in emphasizing the key role that elite fraud played in driving this crisis. Even Andrew Ross Sorkin, generally seen as an apologist for the Street’s elites, has decried the lack of prosecutions.

Our best bet is to continue to win the scholarly disputes and to continue to push media representatives to take fraud seriously. If the media demands for prosecution of the elite banking frauds expand there is a chance to create a bipartisan coalition in Congress and the administration supporting prosecutions. In the S&L debacle, Representative Annunzio was one of the leading opponents of reregulation and leading supporters of Charles Keating. After we brought several hundred successful prosecutions he began wearing a huge button: “Jail the S&L Crooks!” Bringing many hundreds of enforcement actions, civil suits, and prosecutions causes huge changes in the way a crisis is perceived. It makes tens of thousands of documents detailing the frauds public. It generates thousands of national and local news stories discussing the nature of the frauds and how wealthy the senior officers became through the frauds. All of this increases the saliency of fraud and increases demands for serious reforms, adequate resources for the regulators and criminal justice bodies, and makes clear that elite fraud poses a severe danger. Collectively, this creates the political space for real reform, vigorous regulators, and real prosecutors.

Posted in No Jail for Bankers & Wall St execs | Comments Off on Bill Black on why there aren’t any prosecutions for financial fraud

Inflation: defining and identifying it

Posted on May 1, 2014 by

Ilargy 2011 automatic earth

The fact that there’s all that zombie money around (or zombie credit, to be precise) leads many to believe the US witnesses inflation. Not true.

Inflation is not the same as rising prices. Prices can rise for many reasons:

  1. Scarcity
  2. Speculation
  3. Real inflation

It’s important to be able to identify which of these causes is in play.

If you call all price rises inflation, you lose the ability to distinguish between the causes, which means you lose a crucial analytical tool.

The media has force-fed the incorrect definition of inflation to the masses, and there are plenty of people who say rising prices is all they care about, not monetary theory. However, a clear view of causation is essential when it comes to defining your reaction to rising or falling prices, and prices that rise because of scarcity demand a totally different set of actions than those that do because of a rise in total supply of money and credit, combined with velocity of money, which is what inflation truly is.

The present, incorrect and force-fed “meaning” of inflation as all price rises no matter what their cause is, is relatively new. Rising prices used to be referred to as “(currency) devaluation”. Not perfect, but way better than what we have now, where terms like “monetary inflation”, “price inflation”, “consumer inflation”, “energy inflation” all the way down to “cookie inflation” fill the media.

Why is the distinction between the definitions important? Because today in the US both the money/credit supply and the velocity of money are falling (deflation), while some prices are rising, in particular those of food and energy. And no, you can’t have deflation in one sector and inflation in the other. That really turns the whole debate into obscure nonsense. It’s important that we can determine that if prices rise in times of deflation, the cause for those price rises might be something other than inflation.

In today’s world, that something else is speculation. But not of the ordinary kind. What we have right now is zombie money speculation. The same unrecognized losses in the financial system that our governments cover up with criminally negligent accounting non-standards cause prices of oil and food to rise, since that’s where the zombie money -inevitably- ends up. And it’s not just the banks that invest zombie money, it’s all of us.

If banks had been forced to reveal their losses, the hammering of home prices would have been huge. Since this did not happen, a lot of people are still sitting pretty in their homes, which are way more overvalued -in free market terms- than just about anyone is ready to recognize. Also, if banks had revealed their losses, unemployment rates would have been far higher than they are today.

I know what many are thinking: maybe it’s not such a bad idea to cover up those losses. But you’re not seeing the whole picture. First, the cover-up has enabled the banks to access your money in order to pay down their debts. And second, zombie money is not the same as real money, as something that has been earned by adding real value. Zombie money is not real.

I read a piece at Zero Hedge the other day by a group that calls themselves the NIA, for National Inflation Association. But they don’t even know what inflation means. Hence their slogan: “Preparing Americans for Hyperinflation”. Hey, if you can’t define inflation, chances are you’ll miss the truth on hyperinflation too. Look, the US depends for its money and credit supply on international bond markets. Whenever Bernanke turns on his so-called “printing press”, which in actual fact is an “additional credit” press, it’s not as if free money is created. There‘s interest to be paid on all of it. And while interest rates may be low right now, it’s not Bernanke who sets those rates, try as he might to make you think so.

If and when the bond markets decide that the risk on US debt rises enough -or too much-, they will decide what the interest rate is, not Bernanke, and not Geithner. Obviously, with every dollar printed, risk assessments will rise, and the outcome is inevitable: less appetite for US debt (don’t forget that there’s plenty zombie money in the bond markets too), and higher rates. And only if and when the US no longer has access to international markets does the option of hyperinflation come into play.

I may be quite negative on the prospects for the US economy, but a full separation from global debt markets is a while away yet, and that means the prospect of hyperinflation is as well.

Preparing for hyperinflation is not just useless at this point in time, it’s also damaging in that it makes people blind to the real problem: deflation. And before we get to hyperinflation, if we ever do, deflation will cause so much pain and grief and unrest and death, that the very thought of hyperinflation will come to be seen as a highly delusional non-issue.

So how long will the zombie money last? Can it last as long as Bernanke and Geithner and Obama and Dimon want it to? No, in fact, they’re fighting a lost battle against time itself.

The zombie money has to disappear, and it will. It all starts and ends with US and European real estate, the biggest investment of those of us living on Main Street, by far. US home prices have now fallen for 53 consecutive months, despite the fact that Fannie Mae and Freddie Mac buy up and guarantee near 100% of all mortgages, and despite the fact that the Fed has purchased huge swaths of the securities allegedly backed by these mortgages.

All those trillions “worth” of your money haven’t been able to prevent that. And no amount of additional trillions will. Foreclosures are setting brand new records across the country, even as banks are ever more nervous about their paperwork, and their balance sheets. It doesn’t matter how much money Washington throws at the issue, other than it’ll make you a whole lot poorer, for you’ll never see it back.

A further deterioration in home prices can’t be prevented. Fannie and Freddie can’t buy 101% of mortgages; they’re buying close to a 100% right now and prices still fall. Wal-Mart greeters, burger flippers and the rest of the great unwashed will not be allowed back into the housing market. There are over 10 million homes on the market, and perhaps twice that if you count all foreclosed properties that banks sit on (and the millions they won’t foreclose on), plus all those that people would like to sell but can’t lest they go underwater. And the pool of potential buyers has shrunk with a vengeance since the 2005-6 “heydays”. Huge increase in supply, huge decrease in demand; e all know where this will go.

Now, take Fannie and Freddie out of this picture. What do you see? They’ll be taken out in some way, and at some time. I know what I see: the housing and mortgage situation in the US has turned into what I’ve always called the “Bulgaria model”, where you guarantee the mortgage on your neighbor’s home, and he guarantees yours; anything goes as long as it’s not the free market your politicians and media tell you about. And we know what happened to Bulgaria in the end, don’t we?

I’m all for a society, a government, that takes care of the weakest in its midst. I’m all against a government that props up the strongest in its midst, in this case the bankers with bonuses larger in one year than the weaker among us can make in a lifetime, the same bankers who lost more money in bad wagers than the entire country can cough up, and still be economically viable. We’re fast becoming zombie societies.

Food prices

Let’s start with the news that the Tunisian president has fled his country, and the military’s taken over, according to Al Jazeera. Mass protests are ongoing in Morocco and Algeria. The riots in Tunisia are not all about food prices, but they were certainly a substantial factor. And more, much more, of the same is on the horizon, in many different places.

The consequence of the zombie money is is that it is driving up food prices to levels where millions of people around the world will go hungry, and will revolt as a result of that. Wall Street and the bankers have long realized that they can’t maintain their velvet “God’s work” thrones just by robbing Americans of all they’re worth. Their losses are far too great. They need to have access to everyone’s wealth all over the world.

And since oil and food are traded on international commodity markets, and they have gotten hold of all the money America is worth, and then some, they can play these markets as much as they want, whether it’s wheat or natural gas or gold. People like to claim that gold will rise as the US dollar becomes worth less, but they forget that it’s zombie money that has been buying gold, and that has thus lifted gold prices. Once daylight comes and the zombies are gone, there’s only one way left to go for gold prices too.

What we know for sure is that the zombie money we elected to have flow through our financial systems is going to kill a lot of people this year.

Posted in Crash Coming Soon, Inflation or Deflation, Money | Comments Off on Inflation: defining and identifying it

How you’re tricked into thinking there is an economic recovery

Posted on May 1, 2014 by

Ilargi 2011 theautomaticearth

A real recovery would require a surge in real productivity, i.e. outside of the service industry. Where and how have we increased production since the crisis started? Obviously, nowhere. The vast majority of “jobs created” is in the service sector, while manufacturing today counts for less than 10% of US jobs. And no, flipping burgers does not create value. For the US economy to recover for real, we would need to see hundreds of thousands of jobs created every month, on top of the 150-250,000 needed to just keep up with population growth. Not happening.

How you’re tricked into thinking there is a recovery

the US government and the Federal Reserve have injected more trillions of dollars into the system than anyone can keep track of. Moreover, they have done so only in those sectors that remain beyond the grasp of the average American. Which means that we see relative highs in the markets, as well as record or near record amounts paid out in bonuses on Wall Street, and at the same time there are record numbers of foreclosures and record or near record unemployment numbers.

While it’s true that stock markets have been rising lately, how anyone can see that as proof of a recovery is beyond me. The idea that if you just make the rich richer, the rest will follow, is not even something I want to discuss anymore.

Second, any attempt to maintain what could be considered accounting standards, such as those that would apply to you and me, was given up long ago. The reason for this is that the trillions upon trillions of dollars that were taken away from you and your offspring, and handed to the main banks, would still not have been enough by any stretch of the imagination to keep up even the slightest appearance of solvency for these banks. It’s important to let that sink in.

The untold trillions have been only sufficient to pay down the first “level” of debt the banks had accumulated, that part of the debt that could no longer be hidden from view. The rest of the debt, which is far greater than all the trillions handed out so far, remains in dark vaults, treated like some sort of state secrets that can’t be divulged for the next 50 or 100 years. The result is that hardly anyone realizes how big the debt is, and the losses are, and that bank stocks have actually been going up. This is how zombie money is created.

You, too, if you’re a gambling addict, could live for a while pretending you’re rich, even after you’ve lost all you have and ten times more, provided you’re capable of hiding your lost wagers. Charles Ponzi and Bernie Madoff did it on their own for years; JPMorgan Chase and Bank of America do it with the full aiding and abetting from Washington, which uses your money to comply with whatever it is the banksters say is needed to stave off a collapse.

In other words, the economy may seem to be recovering, and the banking system may seem to have recovered, but the illusion has come at a gigantic price to the American (and European) societies, and in the end it will not make one iota of difference for the outcome. Then again, let’s correct that: it will make a difference, but not – at all- in your favor: the multi-trillion dollar illusion will greatly enhance the misery and destitution on Main Street. All that money could have been used to mitigate and minimize the suffering of the herd; instead, it’s all gone to wolf packs and vampire squids. We’ll yet come to deeply regret this.

Posted in Crash Coming Soon, Debt | Comments Off on How you’re tricked into thinking there is an economic recovery

Predictions on how a crash will unfold

Posted on May 1, 2014 by

You can read Martin Weiss’ prediction here.

Keep in mind that although these predictions were made years ago, and it seems as if some of them were wrong, all that’s happened is that the trillions of dollars given to banks has kicked the can down the road.  These events will still happen for many reasons listed in other posts.

Ilargi

Housing: Real estate prices will need to fall more, and a lot, to make homes affordable again in a time of greatly reduced credit availability, but that same fall in prices will hammer Americans’ wealth and consumer spending like there’s no tomorrow, which will reduce available credit even more, which will further lower real estate prices and so on and so forth. There is no way to avoid going through this process, called deleveraging. None. The American economy can’t even stand still, let alone grow, without a “healthy” housing market; it’s just that big a part of the economy, a home is the biggest asset purchase of their lives for most Americans. But we have entered a time where prospective buyers can’t afford to buy at present prices, and owners can’t afford to lose the difference between what they wish their home were worth and what the market will soon tell them it is.

Everyone who today holds assets, such as real estate, or stocks, or yes, even gold and silver, will at some point need to acknowledge that the perceived value of what they hold has been hugely propped up by the government’s refusal to mark assets to market.  That is as true for your assets as it is for those held by the banks. The difference is that these banks have received trillions of dollars of your money in order to make the zombie accounting look at least somewhat credible for a while, while the same government that handed them your funds, has left you to your own means. That is to say, your own means minus what it gave away to the banks.

China, Japan, Europe all show signs of instability in many ways (my comment: too big a topic to add here, but easy to look up on the internet, and still going on despite not much news coverage).

The question is: how long can our governments and bankers extend ‘Extend and Pretend’?

The answer to that question is not that easy. The financial industry has a very firm grip on government throughout the western world. It can therefore save its own -thoroughly bankrupt- skin at the expense of the public at large for a long time.  And since the public craves the green shoots and recovery illusion so much, it may take a while to wake up. Then again, with real and actual unemployment numbers approaching 20% in the US, we need to remember what Bill Black says: “governments cannot remain in power with 20% unemployment”. Still, Wall Street owns both sides of the aisle in Washington, so a new government makes little difference. Just feed them another puppet who can rake ’em in with yet another ‘change they can believe in’.

There is a (side) effect of the Extend and Pretend, mark-to-whatever, policies, that doesn’t get a lot of attention, but that may well decide the timing of the return of mark-to-market. That is, it’s not just the banks that can keep roaming the plains in their zombie guises, while hiding the lost wagers that would do them in under lock in dark closets. Everybody appears much richer than they truly are, including pension funds, market funds, governments, and individuals. Yeah, you! Many parties among these, which are today still active as “investors”, would no longer be that if mark-to-market would be the rule of the land.

There is therefore a huge amount of fake -or virtual- money and credit out there that is looking for profits. And it’s inevitable that much of it will eventually move into commodities, thereby raising the price of oil and food and many other basic needs across the globe, including our parts of the world.

The desire to look richer today than you really are will make you a lot poorer down the line. Not just because it takes trillions of dollars per year in public funds -(future) tax revenue- in the US alone to keep the illusion alive, but also because it raises prices for everyday necessities. While at the same time, on top of all else, governments at all levels will raise taxes across the board like you wouldn’t have dreamt possible until very recently.

 

 

 

 

Posted in Crash Coming Soon | Comments Off on Predictions on how a crash will unfold