Have Cash by Nicole Foss July 3, 2010

Posted on April 16, 2014 by

Since we at The Automatic Earth generally tell people to hold cash or cash equivalents, it makes sense to expand on that a little, and to point out some of the location-specific risks of doing so.

Eventually you should get into hard assets, even if asset prices still have further to fall. Liquidity can be as hard to hang on to as it sounds, and is therefore not a long term bet. A couple of years should be enough to ride out the worst of an asset price collapse while still being in a relatively low risk position regarding liquidity

But for now, we tell people to hold cash because that is what they will need access to in order to make debt payments and to purchase the essentials of life in a society with little or no remaining credit. The value of cash domestically – in terms of goods and services in your own local area – is what matters most.

Domestic currency value relative to other currencies internationally will be very much a secondary concern for most people, as the ability to exchange one currency for another is not likely to last far into the coming era of capital controls. Currency risk is likely to become very large, and almost everyone will be better off holding whatever passes for cash wherever they happen to be.

As the price of goods and services fall, thanks to the destruction of purchasing power brought about by collapsing money supply, what cash you still have will go a lot further in terms of, say, milk and bread. Capital preserved as liquidity will go a long way. However, there are NO no-risk scenarios. Apart from the obvious risks of fire, flood and theft, other risks to holding cash will grow over time. Liquidity can be as hard to hold on to as it sounds.

One particular risk is the reissuing of currency. Russia did this during the economic collapse of the Soviet Union, and made it so difficult for ordinary people to convert old currency into new that much of the middle class lost their life-savings. In Russia trust in relation to banks was not particularly high, hence there was a lot of money under the beds of the nation that the powers-that-be were attempting to flush out. That is not the case in present day industrialized countries, where people generally believe that banks are safe and deposits are publicly guaranteed in any case.

Requiring people to convert would require them to reveal what they had though, and this would probably result in windfall tax bills (i.e. extortion) for those who had been foresighted.

On top of that, few people have savings, having become dependent on access to cheap credit for their rainy-day funds. There is virtually nothing under the beds of the Western nation, and so essentially nothing to flush out.

Although that particular rationale for currency reissue does not really exist (the flushing out of hidden wealth), there may be other reasons for doing so, and these will be locational. The risk of currency reissue in the US is likely to be low for some time. The US is likely to benefit from capital flight from other places, on a knee-jerk flight to safety.

In addition, dollar-denominated debt deflation will increase demand for dollars, and hence increase their value. This should reduce pressure for any kind of radical currency reform for a while. If the US does eventually reissue its currency, I would imagine them doing so in order to deprive foreign holders of dollars of purchasing power. There are very large numbers of dollars held overseas, and these would not be able to be exchanged in a currency reissue. At some point this may serve the interests of the US, but not soon.

The pros and cons of short-term T-bills

Negative t-bill rates will make cash on hand look better than bonds, even of the shortest duration, as cash won’t have a built in depreciation.

 

T-bills will still be a good deal relative to most things, but cash on hand will be better.

 

That will increase the likelihood of cash withdrawals leading to bank runs.

 

Welcome to the perfect financial storm

 

What is coming, I think, is a nominal short term interest rate that is moderately negative – an official Fed rate rather than a market rate as at present (as the Fed follows the market). This means people will be paying to own t-bills, but this will still be one of the best options available for short term capital preservation. The capital will be far less likely to be lost there than in a bank, and the return OF capital is the important thing. Despite a negative nominal rate, the real rate (the nominal rate minus negative inflation) will still be high as deleveraging continues and accelerates.

It won’t be as high as it would have been at a nominal rate of zero, but there would still be a real return on top of greater capital security than most other options. I think a lot of investors will be happy to buy t-bills even where the nominal rate is negative. The US dollar appreciation relative to other currencies will be a significant bonus as well.

Of course cash on hand would be an even better option in terms of return, because that would have a higher nominal rate, zero percent, and therefore a higher real rate as well. The real rate will apply even outside a bank, reflecting the greater domestic purchasing power of liquidity.

But it isn’t practical to hold really large sums of money in cash

Hard goods

Everyone will need to make the transition from cash to hard goods at some point. Cash is what you need to navigate the great deleveraging, but over the time the risks to cash will rise and you will need to think of the next phase, which is addressing the risk of the kind of economic upheaval that breaks supply lines. That will come first, and inflation (ie actual currency printing) will come much later. Inflation is only a risk once the power of the bond market has been broken, and that is not today’s risk, nor tomorrow’s.

That is something to consider much further down the line. Deflation and depression are mutually reinforcing in a spiral of positive feedback. That is not a dynamic that will end quickly, but end it will some day. At that point, or well before depending on where you live, you will want to be fully invested in hard goods.

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Fannie & Freddie started the mortgage crisis

Posted on April 16, 2014 by

Reckless Endangerment. How outsized ambition, greed, and corruption led to Economic Armageddon

2011 by Gretchen Morgenson and Joshua Rosner

This book makes the case that Fannie & Freddie started the mortgage crisis and then Wall Street got in on the game and enormously magnified the scale of the corruption and damage of the bubble.

Some reviews of this book in: the New York Times, USA Today, and the Washington Post.

Ilargi at theautomaticearth July 13, 2010

Fannie and Freddie are the main cause why home prices in the US have risen so high that millions of Americans are being evicted from their homes as we speak simply because they can’t afford to live in them anymore. Fannie and Freddie (and the FHFA and FHLB and Ginnie Mae) have been used to guarantee any mortgage at any price and at any liar’s conditions, and all at the risk of the American people.

Charles Hugh Smith sums it up very well, read it a few times, I’d recommend, though he’s got the time-frame wrong. It’s not the con of the decade, it’s the largest financial con ever perpetrated on the American people since 1776:

The Con of the Decade Part I

1. Enable trillions of dollars in mortgages guaranteed to default by packaging unlimited quantities of them into mortgage-backed securities (MBS), creating unlimited demand for fraudulently originated loans.

2. Sell these MBS as “safe” to credulous investors, institutions, town councils in Norway, etc., i.e. “the bezzle” on a global scale.

3. Make huge “side bets” against these doomed mortgages so when they default then the short-side bets generate billions in profits.

4. Leverage each $1 of actual capital into $100 of high-risk bets.

5. Hide the utterly fraudulent bets offshore and/or off-balance sheet (not that the regulators you had muzzled would have noticed anyway).

6. When the longside bets go bad, transfer hundreds of billions of dollars in Federal guarantees, bailouts and backstops into the private hands which made the risky bets, either via direct payments or via proxies like AIG. Enable these private Power Elites to borrow hundreds of billions more from the Treasury/Fed at zero interest.

7. Deposit these funds at the Federal Reserve, where they earn 3-4%. Reap billions in guaranteed income by borrowing Federal money for free and getting paid interest by the Fed.

8. As profits pile up, start buying boatloads of short-term U.S. Treasuries. Now the taxpayers who absorbed the trillions in private losses and who transferred trillions in subsidies, backstops, guarantees, bailouts and loans to private banks and corporations, are now paying interest on the Treasuries their own money purchased for the banks/corporations.

9. Slowly acquire trillions of dollars in Treasuries–not difficult to do as the Federal government is borrowing $1.5 trillion a year.

This part hasn’t happened yet, but still could:

10. Stop buying Treasuries and dump a boatload onto the market, forcing interest rates to rise as supply of new T-Bills exceeds demand (at least temporarily). Repeat as necessary to double and then triple interest rates paid on Treasuries.

11. Buy hundreds of billions in long-term Treasuries at high rates of interest. As interest rates rise, interest payments dwarf all other Federal spending, forcing extreme cuts in all other government spending.

12. Enjoy the hundreds of billions of dollars in interest payments being paid by taxpayers on Treasuries that were purchased with their money but which are safely in private hands.

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A book review of “Russia’s Food Policies and Globalization”

Posted on April 16, 2014 by

Preface.  Today Russia exports a substantial percent of wheat, and now that oil prices are surging is in much better shape than after the Fall of the Soviet Union in 1991.  But with peak oil likely in 2018, and money that should have gone into maintaining and drilling/exploration for oil having gone into bank accounts instead, it remains to be seen how long it will be before Russia begins energy descent.  Perhaps one reason for the invasion of Ukraine now rather than later.

Alice Friedemann  www.energyskeptic.com  Author of Life After Fossil Fuels: A Reality Check on Alternative Energy; When Trucks Stop Running: Energy and the Future of Transportation”, Barriers to Making Algal Biofuels, & “Crunch! Whole Grain Artisan Chips and Crackers”.  Women in ecology  Podcasts: WGBH, Planet: Critical, Crazy Town, Collapse Chronicles, Derrick Jensen, Practical Prepping, Kunstler 253 &278, Peak Prosperity,  Index of best energyskeptic posts

***

Governments that can’t feed their people lose their legitimacy and risk widespread social unrest.  The Russian government has made many mistakes in the past, such as with collectivization (which America has also done by policies that discouraged family farms in favor of mono-cropping industrial large-scale farming).  Russia has also had to cope with a very harsh climate, which has always affected production.

But because of the hard times for centuries, Russians are more prepared than highly functional, industrialized societies like America or Europe, because when times have gotten tough, many of Russia’s citizens have had access to garden plots.  In the 1980s, households that grew food consumed 90% of it and sold the other 10%.

Although the USSR modernized in fertilizer, machinery, food distribution, and post-harvest technology somewhat from 1964 to 1982, farms still had all kinds of shortages.  Large farms couldn’t fire drunks and slackers, nor hang onto skilled and hard-working laborers.  Adding to the confusion, over 11 different ministries oversaw food production.

The main Russian food policy for many decades has been to protect urban dwellers from the true cost of food, to the detriment of the rural sector.  Over 80% of subsidies to agriculture went to keeping the price of food in cities down.  Meanwhile the country had 100 million people, but only 10% of the electricity, no access to the gas network, poor roads, schools, medical services and so on.

Yet food production went up on average, though there were long lines, poor quality, and little selection in the cities due to an inadequate food distribution system.  But still, the USSR fed itself most of the time.

At the state controlled level, large farms mainly produced the grain, flax, sugar, beets, sunflower seeds, and a lot of the meat, milk, eggs, and wool, but only half of the vegetables and a quarter of the potatoes.

In the 1990-1991 food crisis, there was rationing and people resorted to buying very expensive food in the farmers markets that sprang up in cities.  From 1991 to 2002 food production went down 35-40% yet the population only went down 2.5%.  Food production went down and prices went up because less land was cultivated, less fertilizer and pesticide were used, there was more manual labor, and less farm equipment (especially since spare parts were expensive or not available), increased fuel, electricity, and transportation costs.  The years from 1992 to 1998 were the worst.  By 2002, 45 million families grew food on an average of 1 acre (up from half an acre in 1990).  By 1998, households produced 59% of the food grown (the ruble, not calorie value).

Rural families produced 46% of their food, in urban areas families could only provide 9%.  During this time the number of cattle and pigs went down to numbers lower than in 1943.

After price liberalization in 1992, inflation reached 2,600%, and again went up 900% in 1993.  Food prices skyrocketed.  A third of Russians were undernourished.  Hunger was prevalent among older people without sufficient pensions.  Food went from a third to half of urban budgets initially, and then as food production went up, down to 40% in 2000.  But low income families still experienced hunger and malnutrition.  The wealthier were still able to afford to eat meat.

In the worst year, 1998, rural people got a third of their food from what they could grow on their private plots – 3,216 calories per capita vs 2,612 for urbanites, as well as more protein and fat.  Rural people also had more bread, potatoes, vegetables, milk and milk products, and sugar than city dwellers did.

Among rural people, the wealthiest sold more of their home grown food and had more land than the poorer families.  The top 5% of families produced by far the most meat and fruit – the most expensive, valuable food to sell to cities.

The poor remained poor. They consumed all they grew, so they couldn’t sell extra food to accumulate capital to buy more land.

The average private plot of land was about 2100 square feet.  Men spent 10.5 hours and women 8.5 hours per week working the family plot, mainly for family food and not for sale from the 1960s through the 1980s.  In 1991 that acreage went up when 38 million put new plots on nearly 32,000 square miles of land.

Prices really needed to go up in urban areas to reflect the true cost of food production, but the government was so afraid of “social tension” that it wasn’t until April of 1991, for the first time in several decades, that prices went up.  Meat prices went up 200%, dairy 130%, eggs 100%, and bread 200%. But wages went up too.  Bread was subsidized until 1993.

From 1972 to 1991 the USSR accounted for 75% of USA agricultural exports of grain.  The USSR has never exported much food.  In 1991, 28% of Russian food was imported.

Some experts considered the food crisis starting in 1991 to be mainly due to the lack of post-harvest food handling facilities, because for about 6 years, the amount of grain lost to not being stored properly equaled the amount imported.

Grain is one of the most politically sensitive of all food products in the USSR because of the importance of bread in the culture, and even greater in the 90s when the standard of living dropped.

The cost of food went up an average of 5% per week in 1992 and 3% per week in 1993.  The feared social disorder didn’t happen because

1)      Moscow and Leningrad continued to get food – it was the 2nd and 3rd echelon cities that suffered

2)      Before the crash even successful people in the USSR could buy very little with their money, so few worked hard.  When high prices hit, so did the opportunities to make more money, and the appearance of luxury goods that hadn’t been available before, so people hoped that if they worked hard they could someday afford to buy expensive goods.

3)      There was still social protection.  Ceilings on price markups and profits from bread and flour were imposed.  Even in 2000, half of all Russian regions placed controls on prices of primary foods.

Cities like Kostroma were very innovative in coping with the crisis.  The city rented land from landowners and large farms for the poor to grow potatoes on.. The city also rented municipal land to grow food on at very low rates.  Those working on farms could buy their meals and groceries “at cost”, and at the next step up the food chain, food processing, employees could buy food at very little markup.  Restaurant employees got their main meal of the day at a discount.

Food expanded the use of barter – food could be traded for services, debt payments, and so on.  Stalls, kiosks, and urban markets selling food sprang up in new places.

In some regions, the local or regional government gave farmers fertilizer, oil, seed, and so on to grow grain but then insisted on a low price, often too low, to make sure their people had food, or sold the grain at a profit to other regions.   As state government control of agriculture decreased, regional control increased to make sure there was enough food for the people living in the region.  By 1999, 20 regional food markets existed with 30 more regions in the process of doing the same.

Russian oil and gas companies invested in food processing after the 1998 financial crash, which helped food processors recover.

Wheat was especially valued due to its nonperishable nature and in some respects became a substitute currency.  Growers used wheat as barter in 16% of transactions in 1995 and 25% in 1997.

Not much food was sold on commodity exchanges, only 3.3% of the wheat crop was sold this way in 2002.

Many advocated for vertical processing of food, with processors owning the farms, but this isn’t happening much, when it does, it’s in the Moscow or Leningrad area where consumers have greater purchasing power and money to invest.

Families growing a fair amount of wheat, meat, and other food often preferred to sell to the local government or a private company rather than directly to the public because they didn’t have enough time, surplus labor, or contacts to find buyers.

Despite all the pressure to go to a “market economy”, regional governments distrusted “the market” and regulated agriculture heavily to be sure people were fed.  Even in the worst times in 1998, the government made sure that they won the bids to distribute food – controlling food is a good way to stay in power.  This upset some political factions in the USA – we’d sent a lot of food over there and didn’t want this to aid the old guard in maintaining their power.

This book spends a lot of time explaining the history of food in Russia, because it’s trying to explain why it isn’t likely food will be exported from Russia in vast amounts any time soon.  Currently regional governments restrict how much food can be sold outside of the region to other regions within Russia to make sure their people are fed.  Farmers like this protection because they’re paid more since they’re protected them from outside competition.  There are 16 regions that forbid any export of food beyond their borders.  Governments, by lending them money for oil and other farm inputs can insist on this.

So opportunities for Wall Street and Russian capitalists to make lots of money from exporting Russian food globally is not a good way to grow rich now.  Plus Russia’s agricultural production is still low compared to USA or Europe because they’re less mechanized, experience fuel shortages, and have greater production costs.  Their scientists estimate that the biological potential of the agricultural land is 2.5 times less than the USA or EU on average.  So agriculture is protected – just as it is in the USA and EU with subsidies.

In the highest circles of government, Russians would prefer to have food security over importing cheap food and fight to continue to protect Russian agriculture, but it’s a delicate balance since they don’t want to have food prices so high that citizens can’t afford it – so the government helps the bottom 25-35% below the poverty line afford food.

The problems of the large farms – mainly the politics and bureaucracies that oversaw them, were so awful it’s amazing any food was ever produced

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The need for trust

Posted on April 15, 2014 by

Beyond the Trust Horizon 

Oct 1, 2010  Nicole Foss   theautomatic earth

Relationships of trust are the glue that holds societies together. Trust takes a long time to establish, and much less time to destroy, hence societies where trust is wide-spread, particularly for long periods of time, are relatively rare. In contrast, societies where trust does not extend beyond the family, or clan, level are very common in history.

The spread of trust is a characteristic of expansionary times, along with increasing inclusion, and a weakening of the ‘Us vs Them’ divide. Essentially, the trust horizon expands, both within and between societies. Over time it can encompass higher levels of organization – from family to community to municipality to region to nation and beyond – so long as the expansionary dynamic continues to support it.

Within societies this leads to relatively stable and (at least temporarily) effective institutions, and bolsters the development of the rule of law. The rule of law means that law constrains the powerful (more than usual), and there is a reasonable degree of legal transparency and predictability, so that people are prepared to trust in the fairness and accessibility of justice. Naturally, the ideal is never reached, human nature being what it is, but it can be approached under the most favourable of circumstances.

Within societies, trust also confers political legitimacy (ie a widespread buy-in as to the right of rulers to rule). Where there is legitimacy, there is relatively little need for surveillance and coercion. A high level of trust (all the way up to the level of national institutions) is thus a prerequisite for an open society.

Between societies, an expansion of the trust horizon tends to lead to political accretion. Larger and more disparate groups feel comfortable with closer ties and greater inter-dependence, and are prepared to leave past conflicts behind. The European Union, where 25 countries with a very long history of conflicts have come together, is a prime example.

However, all expansions have a limited lifespan, as do the benefits they confer. They sow the seeds of their own destruction, especially when they morph into a final manic phase and begin to hollow out the substance of social structures. Institutions, whether public or private, retain the same outward form, but cease to operate as they once did. For a while it is possible to maintain the illusion of business as usual (or effectiveness and accountability as usual), but not indefinitely. Everything is subject to receding horizons eventually, and trust is no exception.

Over time institutions become sclerotic, unresponsive, self-serving and hostage to vested interests, at which point they cannot be reformed, as the reform would have to come from those entrenched individuals who have benefited most from the status quo. Institutions become demonstrably less effective, while consuming more and more of society’s resources. Corruption, abuses of power, lack of accountability and the loss of the rule of law become increasingly evident, exactly as we have seen with unauthorized wire-tapping, extra-ordinary rendition and many other actions undermining the open society. Once this happens, trust is living on borrowed time. That is very clearly the case in many developed societies today.

Trust in existing organizational structures does not disappear overnight, but ebbs away as institutions decay or the extent of their corruption is revealed. The loss of trust from higher levels of organization undermines the fabric of a society now operating beyond the trust horizon. When trust contracts, socioeconomic contraction is just around the corner. Bank runs are a particularly good example of this. People are currently waking up to the extent of the recklessness, irresponsibility and self-serving short-termism of the banking system, and realizing that reliance on top-down human promises is far riskier than they had supposed. When they cease to trust in those promises, they will are very likely to vote with their feet.

Societies in this position lose a critical pillar of support – the collective acceptance of their people. Governing institutions lose legitimacy, at which point the cost of governance increases significantly, because where there is no trust, resource-intensive surveillance and coercion develop instead. Our societies in the developed world, where institutional decay is well underway, stand on the brink of such a transition.

Where resources are scarce, as they will be soon enough, the diversion of a larger percentage of what remains towards this purpose will aggravate that scarcity considerably. This will further anger people, which is likely to lead to a downward spiral of mutual provocation and recrimination. Most of us have not seen this vicious circle of human sentiment to any great extent, but this is the natural consequence of the collapse of trust.

On the way down, as on the way up, there are effects both within and between societies, as the ‘Us vs Them’ dynamic sharpens once again. ‘Us’ becomes ever more tightly defined, and ‘Them’ becomes an ever more pejorative term. The result is division between disparate groups of people within a society, for instance the unionized and non-unionized, the haves and the have-nots, or different religious or ethnic groups. When there is a paucity of trust, and not enough resources to go meet highly inflated expectations, the risk of conflict is very high. Previously formed political accretions are at a high risk of coming unglued as they will no be longer supported by trust. The European Union should take note.

Between societies, where the existing range of divisive parameters is likely to be much larger, and where there may be a past history of conflict, the risk of conflict flaring up again rises significantly. This is especially likely if societies attempt to deflect blame for the situation they find themselves in towards other nationalities.

We are already seeing evidence of the growing anger, and the change it will usher in as the trust horizon shrinks. In the US, the Tea Party movement is the most obvious example. All major change comes from the ground-up, where the power of the collective is expressed in ways that either support or undermine the actions and intentions of central authorities. It is the interaction between the power of the collective and central authority that determines where a society will head.

The Tea Party movement is a ground-swell of public anger, very much in the tradition of major transformative grass-roots initiatives. It is exactly what one would expect to see at the brink of a collapse in the trust horizon – a movement grounded in negative emotion that both stems from a loss of trust and in turn acts to aggravate it in a self-reinforcing positive feedback loop. The danger with such a movement manifesting such powerful negative emotions is that it will precipitate a major over-reaction to the downside, commensurate with the irrational exuberance we saw to the upside. The anger is largely unfocused, and where it is specific, it is not fully-informed.

The primary target of the Tea Party is big government, but this ignores a major part of the big picture. The abuses of power we have seen are not purely a manifestation of metastatic public authority, but an expression of corporate fascism – the blending and merging of public and private interests in social control. One look at the revolving door between the banking system (where banking law is written) and the US treasury should be enough to demonstrate this.

The Tea Party movement represents largely (but not solely) the unfocused anger of people who know they have suffered, or are about to suffer, substantial losses, but do not (typically) understand the system well enough to understand why. The movement is casting about for someone to blame, as such movements always do on the verge of a trust collapse. The danger is that someone with facile populist answers will come along, offering a target for the urgent desire to blame someone for what has happened and is happening.

This is already happening, as powerful funding sources and nascent populists circle around and seek to tap into the trend for their own purposes. It is absolutely to be expected that existing top-down power structures, or political opportunists with their own agenda, will seek to hijack bottom-up movements as they develop. My primary concern is that in doing so they will lay the foundation for a society attempting to live far beyond the trust horizon, and where there is no trust, and consequently no political legitimacy, there will be surveillance, coercion and repression instead.

It will be easy for movements grounded in negative emotion to gain a foot-hold in the coming environment, as this is very much where the collective mood will lie in the aftermath of a Ponzi collapse. Blame-games will be very tempting (and populists have their own prejudicial ideas as to who should be blamed). However, this would not be compatible with maintaining the constructive and cooperative mindset we need if we are to have a hope of avoiding an over-reaction to the downside that has the potential to magnify the impact of what is coming enormously.

Personally, I would like to encourage the development of a different kind of grass-roots momentum for change, along the lines of what is being developed (albeit not nearly quickly enough so far) by the Transition Towns movement and other comparable initiatives. The key advantages that this kind of approach has are two-fold – the scope of its component activities, based on relocalization, match where the trust horizon is headed, and its driving force is the desire to build rather than to tear down.

Working within the trust horizon is important, as it means individual small-scale initiatives can benefit from the same kind of social support at a local level that larger-scale ones once did at a societal level, when trust was more broadly inclusive. Local currencies work for exactly this reason. While the task will still be difficult, it has a chance of being achievable, especially where the necessary relationships of trust have been established before hard times set in. It is very much more difficult to build such relationships after the fact, but relationships built beforehand may actually strengthen when put to the test.

Trying to maintain a positive and constructive focus at the local level, where trust has a chance to survive, and perhaps even thrive in hard times, and to avoid being drawn into a blame-game, will be an uphill battle. It is nevertheless something we need to do as a society, if we are to have a chance to preserve as much as possible of who we are through what is coming.

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The Murderer Next Door: Why the Mind Is Designed to Kill

Posted on April 15, 2014 by

THE MURDERER NEXT DOOR: Why the Mind Is Designed to Kill, David M Buss

http://www.amazon.com/Murderer-Next-Door-Mind-Designed/dp/0143037056

[pp. 36-44] THE COMPETITIVE LEGACY OF OUR ANCESTORS

Every breath we take we owe to our ancestors-an unimaginably long and unbroken line of forebears who managed to survive all of the Darwinian “hostile forces of nature.” We tend to think of evolutionary competition as the “survival of the fittest,” as the struggle of animals to survive the challenges presented by a harsh environment. Those who failed to find food or avoid predators, those who succumbed to disease or became riddled with parasites, hit the evolutionary dust. This much is obvious.

What is less obvious is that the process of evolution by natural selection is played out through generations, and the key to the long-term outcome is reproductive competition. The winners in evolutionary terms are not only those who themselves survive, hut those who manage to reproduce most successfully: those who have the most heirs who are healthy and go on to have heirs of their own. This competition to reproduce successfully is a key driving force in our lives, and the competition can he quite fierce. In each generation, there are a fixed number of reproductively viable women and men available to mate with. The dating market makes it quite clear that some mates are much more desirable than others. As the saying goes, all the good ones are taken. Each man and woman is ultimately in competition with other men and women for “shares” of the ancestry of the next generation.

We are all obviously descendants of those who succeeded in this reproductive competition. As the descendants of those who succeeded, we modern humans carry with us the remarkably beneficial components of body and designs of mind that helped our ancestors prevail.

The fierce evolutionary competition that has shaped us leads, if we will follow, to a theoretical insight both subtle in nature and profound in implication. Analysts of human nature have either failed to recognize it or have recoiled from its disturbing implications. In the intensely competitive game of reproductive competition, through the eons murder has been a remarkably effective method of achieving evolutionary success. Of course, as we became civilized, all human societies developed laws against murder, and in our contemporary lives, murdering carries the threat of harsh punishment. So murder is now a more costly strategy for defeating mating rivals than it must have been in our distant past. Through the long years of human evolution, however, killing would have been a highly effective means of vanquishing rivals and ensuring that the mate we selected passed on our genes and not another’s. From a man’s perspective, killing a rival’s mate strips him of an invaluable and possibly irreplaceable reproductive resource. Killing his children can snuff out his genetic future entirely. Vanquishing an entire group of rivals through mass murder or genocide opens new vistas for the killers and their children to flourish.

It may seem coldhearted to talk about killing as adaptive or murder as advantageous, but if we consider the nature of reproductive competition humans have faced over the long time spans of our evolution, then we can appreciate just what an edge in that evolutionary competition killing would have provided. The benefits of killing, in an evolutionary sense, must be momentous and manifold, because, on the other side, the negative reproductive consequences of being killed are so profound.

No newspaper is likely to carry the headline “Scientists Discover That It’s Bad to Be Dead.” We know this. Getting murdered, however, turns out to be far worse, evolutionarily, than we have probably realized.

Bear with me as I play out the many aspects of this critical insight. To start with, being killed cuts off all avenues for the unfortunate victim’s genes to be passed on. Never again will a male homicide victim court, attract, or seduce another woman. Never again will the victim make love with his wife. All potential sexual encounters with strangers, all potential liaisons with mistresses, are forever terminated. Every future act of mating, and hence every future opportunity for reproduction, is permanently extinguished. But that’s merely the beginning.

The victim’s wife, if he has a partner, now becomes eligible for mating with other men. No longer can the dead man fend off former friends or current enemies who attempt to charm her. Another man may now sleep in his bed, caress his wife’s skin, and impregnate her. All of his mating losses become potential reproductive gains for other men. But the costs of getting killed get worse still.

The homicide victim’s children now become frighteningly vulnerable. The victim is no longer around to help raise them and see them through life’s countless hurdles. He can no longer protect them from beatings, sexual abuse, or homicide at the hands of strangers or stepfathers. His children also risk losing his wife’s parental attentions if she remarries, which may get rechanneled to children she has with her new husband.

To compound these costs, given the calculus of evolutionary competition, the murder victim’s losses become potential gains for eager competitors. His elimination from the status hierarchy opens a niche for a rival to ascend. The children of his antagonists will thrive in competition against his children, who now become hampered by their father’s death. His entire kin group is weakened and made vulnerable by his death. In short, the costs of getting killed cascade to one’s children, grandchildren, great-grandchildren, and the victim’s entire extended family: Simultaneously, the victim’s costs become his rival’s benefits in this ruthless competitive struggle. The eternity of darkness that comes with premature death may he accompanied by the abrupt end of an entire genetic line.

If this view of the competitive motives behind human nature seems severe, consider the following story from a study of the Ache Indians of Paraguay, South America, one culture that may provide a glimpse into what our ancestral culture was like.

Among the Ache, meat is a scarce and prized resource. Although gathered berries, nuts, and plant foods are shared only within families, the Ache share meat from the hunt communally. Hunters deposit their kill to a central “distributor,” who then allocates portions to different families, based largely on family size. Good hunters enjoy great status, and groups strive to keep good hunters happy, but, surprisingly, skilled hunters do not garner a larger share of the communal meat. They benefit from their greater-than-average contributions in two ways. First, the group provides extraordinary health care and solicitude to the children of good hunters. These children enjoy being groomed and tended-group members take the time to feed them, remove splinters from their feet, and nurse them to health when ill. Second, skilled hunters are highly attractive to Ache women. It’s not uncommon for an accomplished hunter to indulge in a mistress or two on the side. These benefits, however, cause conflict.

One day a fight broke out between two Ache men, a skilled hunter and an average hunter. The conflict arose over a woman-a sexual infidelity discovered by the less adept man, who challenged his rival to an ax fight. The husband lost; he ended up dead, felled by the blade of his more athletic rival. Within a matter of days, the group convened to decide the fate of the dead man’s thirteen-year-old son. The fact that he now lacked a father meant that he would he a net drain of resources on the group. The group made a decision. The dead man’s son must die. The death of the father, in short, caused the group to kill the son. There’s a lesson here-dead men can’t protect their children. This case starkly demonstrates the costs of murder for the victim’s kin.

So it’s astonishingly bad to be dead. And on the flip side, it’s also astonishingly advantageous to get a rival out of the way. Consider just a few of the specific benefits our ancestors could have secured by killing other human beings:

* Preventing injury, rape, or death to oneself, spouse, or kin

* Eliminating a crucial antagonist

* Acquiring a rival’s resources or territory

* Securing sexual access to a competitor’s mate

* Preventing an interloper from appropriating one’s own mate

* Cultivating a fierce reputation to deter the encroachment of enemies

* Avoiding investment in genetically unrelated children (stepchildren)

* Protecting resources needed for reproduction

* Eliminating an entire lineage of reproductive competitors

Of course, many of us never come close to killing someone, and that’s true for several reasons. One is that, as we’ve become more civilized as a species, we’ve developed more and more effective deterrents against murder, both through our legal systems and through our cultural conditioning-though, as we found in our study of homicidal fantasies, most of us do contemplate the idea of murdering at some point in our lives. Another force inhibiting us from committing murder comes from our evolutionary heritage. As the motivations to murder evolved in our minds, a set of counter-inclinations also developed. Killing is a risky business. It can be dangerous and inflict horrible costs on the victim. Because it’s so had to he dead, evolution has fashioned ruthless defenses to prevent being killed, including killing the killer. Potential victims are therefore quite dangerous themselves. In the evolutionary arms race, homicide victims have played a critical and unappreciated role-they paved the way for the evolution of antihomicide defenses.

Thanks to these antihomicide defenses, it’s often far too costly to kill. In attempting to kill, you become vulnerable yourself. The intended victim’s friends and relatives might rush to his defense. From the killer’s perspective, even if he survives and succeeds in carrying out the kill, he risks ostracism or banishment. We usually don’t want killers in our midst, and neither did our ancestors, although in a confrontation with a hostile group, killers come in quite handy.

That we have such a rich repertoire of defenses against killers actually provides compelling evidence that murderers have been among us for a long enough time to have sculpted the human mind. just as our prominent fears of snakes betray an evolutionary history in which snakes posed a hostile threat to survival, our well-honed defenses against murderers reveals an evolutionary history in which homicidal humans have threatened survival.

Because of the deterrents and the dangers involved with murder, most potential killers opt for alternative solutions in contending with a rival. One strategy is to form alliances with others in a group-a tribe, a social group, at the workplace-attempting to form a critical coalition to oust the rival. A second is to befriend the rival, currying his favor, making him part of your coalition. A third is to denigrate the rival to others in an attempt to lower his reputation in their eyes, weakening his position and making him more vulnerable to displacement. A fourth strategy is to lie like a snake in the grass, hiding your time until a rival stumbles, and then making your move. And as you bide your time, a rare opportunity may arise. You may suddenly find all the stars aligning in a unique configuration. The costs of killing unexpectedly dwindle; the benefits abruptly loom large. Perhaps you happen upon your rival alone and unawares. Perhaps you can kill without being discovered. Perhaps you can actively arrange to create all of these conditions. You suddenly find yourself with the means, the motive, and the opportunity. And you seize the moment. Your psychological circuits for homicide become engaged.

Let’s step away from our own species for a moment so we can be more objective, and examine our close primate cousins the chimpanzees. Chimps and humans diverged from common gorilla ancestors roughly seven million years ago. Nonetheless, humans and chimps share roughly 99 percent of their genes. This means that, of the three billion base pairs strung out on the strands of our DNA, as many as ninety-nine out of every hundred are exactly identical. The differences, of course, are as important as the similarities. Humans are bipedal and have evolved language, and women have relatively concealed ovulation. Chimps brachiate (travel from branch to branch through trees) and communicate without language, and the females have periodic estrus with bright red genital swellings visible from a hundred feet. Nonetheless, because they are our closest primate relatives, observing their behavior can sometimes shed light on our own.

Consider an observation by anthropologists who were following a chimpanzee troop around the jungles of Tanzania. One sunny afternoon, eight chimpanzees, all males but one, roamed the border of their home range. Although they usually stayed within their home range, perhaps the chimps felt emboldened by the size of their group, protection afforded by numbers. Not far across the border, they detected a lone male. A chimp named Godi sat peacefully beneath a tree, eating ripe fruit in solitude. Godi, a member of the Kahama community, usually traveled with his group of six other males. This day he happened to be alone.

The second he saw the rival group, a jolt of adrenaline surged through his veins. He dropped his food, sprang to his feet, and bolted through the forest in the direction of his Kahama comrades. But the surprise ambush gave his attackers a timely advantage. His pursuers gave chase and surrounded him. In a flash, Godi was captured. Humphrey, one of the lead chimps, grabbed Godi’s leg, yanked him to the ground, and pounced on top of him. Using his full weight of 110 pounds, Humphrey pinned him to the ground. Godi struggled, but was no match for Humphrey and his six male compatriots, each of whom carried the strength equivalent of four Olympic athletes at the peak of conditioning. With Godi rendered helpless on the ground, the others now launched an assault. In a frenzy of screaming, they bit, pounded, and jumped on their helpless victim.

After ten minutes that seemed like an eternity, the attackers finally stopped. They left behind a body battered and bleeding from dozens of wounds. Godi did not die immediately, but he was never seen alive again. The killer chimps had seized a rare opportunity, perhaps one that would not come along again for many months.

We often think of human warfare as formal battles between declared enemies, but in traditional foraging societies, killing more often takes the form of a raid not unlike that witnessed among the chimpanzees. Anthropologist Napoleon Chagnon, who spent years observing the lives of a group of native peoples in Venezuela called the Yanomamö, observed one such raid.

The night before the raid, a man named Kaobawa stirred the men into an emotional frenzy. He began to sing, “I am meat hungry! I am meat hungry!” Another man screamed, “I’m so fierce that when I shoot the enemy my arrow will strike with such force that blood will splash all over … his household.” At dawn the next morning, the women presented the raiders with a large cache of plantains as food for their raid. The men covered their faces and bodies in black paint for concealment. The mothers and sisters of the warriors offered parting advice, such as “Don’t get yourself shot up.” The women then wept, fearful for the safety of their men. The trek to reach their enemies was long and took several days. At night, the raiding party built fires to keep warm, but on the last night, this luxury had to be eliminated for fear of alerting the enemy.

Back at the home camp, the women grew nervous. Unprotected women risk being kidnapped by neighboring tribes, and even allies cannot be trusted.

The raiding party broke into two groups, each consisting of six men. This grouping allowed them each group would lie in wait toto retreat under protection: two men from to ambush potential pursuers. They struck. The attacking party managed to shoot one of their enemies with a poison-tipped arrow. The raiders then fled. One of the raiders was wounded as they escaped to their home camp, but he survived to go on a future raid. The foray had been a success. They killed one member of the enemy group and escaped with their lives, just like the chimps of Tanzania.

Killing, of course, is ordinarily not a first-line solution, even when your own life is on the line. When threatened by a weapon-bearing intruder who has broken into your home, you would be as likely to hide or flee as to go on the attack. The ancient phrase “fight or flight” captures two of the most important defenses available to us. The shields we’ve developed to stop killing have evolved alongside the mental mechanisms that provide the impulse to kill. Unfortunately, the process of coevolution, whereby new adaptations have developed to counter those defenses, has created a vicious cycle from which there is no escape. Even as we’ve developed defense mechanisms, we’ve also developed ever-more-effective means of killing.

Typically, coevolutionary arms races occur between two different species of which one is predator and the other prey, or between parasites and hosts. As predators pick off slower and less agile prey, the remaining prey and their descendants evolve to be faster and more skilled at evading capture. Then the prey’s improved evasion abilities create greater selection pressure on the predators-the slow predators fail to eat and so die off, and the faster ones give birth to a higher percentage of speedy progeny. Each increment in the skills of one species leads to increments in the abilities of the other. The two species are locked in an endless escalating cycle from which neither can escape.

Coevolutionary arms races also occur within a single species, and this remarkable process has occurred in our species with the evolution of homicide strategies and murder-prevention defenses. As natural selection fashioned defenses against getting murdered by other humans, it simultaneously created more intricate killing strategies to evade these defenses. As potential victims evolved to detect homicidal intentions, potential killers evolved the ability to deceive and surprise victims, to disguise their homicidal designs. Our ancestors evolved to live in groups that afforded defense against marauding males. At the same time, they evolved recruitment tactics designed to increase the size of their killing coalitions.

One time-honored recruitment tactic for increasing coalitional size that we’ve read about in the news lately is to exploit men’s desire for women. Mohamed Atta, one of the main architects of the 9/11 terrorist attacks, was unlucky in love. His recruiters instilled in him the belief that he would spend his afterlife surrounded by “women of Paradise” (from an assassins’ manual found in Atta’s luggage), “youths of never-ending bloom,” and “companions with big beautiful eyes like pearls within their shells . . .” (from the Quran, about the rewards of becoming a martyr). The promise of prestige and the pledge of young women are powerful methods of coalitional recruitment. From the inner-city gangs of New York and Los Angeles to religious jihads, men are motivated to kill to gain these rewards. A relentless coevolutionary arms race in the human struggle for life, liberty, and the pursuit of progeny continues today.

Can this evolutionary-competition theory of murder really account for the motivations for murder in our present times? As I will reveal in the rest of the book, this theory does a remarkable job of accounting for the statistical patterns we find in who kills whom and for the multiple motives for murder. The more I analyzed the psychology of killing in cases of actual murder and in homicidal fantasies, the more striking was the realization that so many murders follow from the intense pressures of mating-a topic explored in the next chapter.

Posted in Violence | Comments Off on The Murderer Next Door: Why the Mind Is Designed to Kill

Marc Faber

Posted on April 14, 2014 by

‘Buy farmland and gold,’ advises Dr Doom.

2010. business.timesonline.co.uk

The world’s most powerful investors have been advised to buy farmland, stock up on gold and prepare for a “dirty war” by Marc Faber, the notoriously bearish market pundit, who predicted the 1987 stock market crash. The bleak warning of social and financial meltdown, delivered today in Tokyo at a gathering of 700 pension and sovereign wealth fund managers. Dr Faber, who advised his audience to pull out of American stocks one week before the 1987 crash and was among a handful who predicted the more recent financial crisis, vies with the Nouriel Roubini, the economist, as a rival claimant for the nickname Dr Doom.

Speaking today, Dr Faber said that investors, who control billions of dollars of assets, should start considering the effects of more disruptive events than mere market volatility. “The next war will be a dirty war,” he told fund managers: “What are you going to do when your mobile phone gets shut down or the internet stops working or the city water supplies get poisoned?” His investment advice, which was the first keynote speech of CLSA’s annual investment forum in Tokyo, included a suggestion that fund managers buy houses in the countryside because it was more likely that violence, biological attack and other acts of a “dirty war” would happen in cities. He also said that they should consider holding part of their wealth in the form of precious metals “because they can be carried”.

One London-based hedge fund manager described Mr Faber’s address as “excellent, chilling stuff: good at putting you off lunch, but not something I can tell clients asking me about quarterly returns at the end of March”. Dr Faber did offer a few more traditional investment tips, although their theme fitted his general mode of pessimism. In Asia, particularly, he said, stock pickers should play on future food and water shortages by buying into companies with exposure to agriculture and water treatment technologies.

One of Dr Faber’s darker scenarios involves growing military tension between China and the United States over access to limited oil resources. Today the US has a considerable advantage over China because it has free access to oceans on both coasts, and has potential energy suppliers to the north and south in Canada and Mexico. It also commands an 11-strong fleet of aircraft carriers that could, if necessary, secure supply routes in a conflict situation. China and emerging Asia, meanwhile, face the uncertainty of supplies that must travel from the Middle East through winding sea lanes and the Malacca bottleneck.

American military presence in Central Asia, Dr Faber said, may add to the level of concern in Beijing. “When I tell people to prepare themselves for a dirty war, they ask me: “America against whom?” I tell them that for sure they will find someone.” At the heart of Dr Faber’s argument is a fundamentally gloomy view on the US economy and its capacity to service a growing mountain of debt. His belief, fund managers were told, is that the US is going to go bankrupt.

Under President Obama, he said, the country’s annual fiscal deficit will not drop below $1 trillion and could rise beyond that figure. Arch bears have predicted that US debt repayments could hit 35 per cent of tax revenues within ten years. Dr Faber believes that the ratio could easily hit 50 per cent in the same time frame.

Posted in Investing advice | Comments Off on Marc Faber

Gordon Long Extend & Pretend

Posted on April 14, 2014 by

Gordon Long has interesting ideas about what’s going on and how to invest accordingly.  I don’t agree with all that he writes, but what he has to say sure is interesting and a good overview of the incredibly widespread corruption across the board.

EXTEND & PRETEND:  An Accounting Driven Recovery

EXTEND & PRETEND:  Manufacturing a Minsky Melt-Up!

EXTEND & PRETEND:  Gaming the US Tax Payer

EXTEND & PRETEND:  Is the US Facing a Cash Crunch?

EXTEND & PRETEND:  Uncle Sam You Sly Devil!

EXTEND & PRETEND:  Shifting Risk to the Innocent.

Extend & Pretend: Its Either RICO Act Or Control Fraud

EXTEND & PRETEND:  Confirming the Flash Crash Omen

EXTEND & PRETEND:  A Guide to the Road Ahead

EXTEND & PRETEND: A Matter of National Security

 

In case I’ve missed any, here’s the sidebar from Long’s website:

Stage 1 Comes to an End!
A Matter of National Security
A Guide to the Road Ahead
Confirming the Flash Crash Omen
It’s Either RICO Act or Control Fraud
Shifting Risk to the Innocent
Uncle Sam, You Sly Devil!
Is the US Facing a Cash Crunch?
Gaming the US Tax Payer
Manufacturing a Minsky Melt-Up
Hitting the Maturity Wall
An Accounting Driven
Market Recovery

 

Posted in Corruption & Finance, Crash Coming Soon | Comments Off on Gordon Long Extend & Pretend

We’ve been “Bankalized” Banks rule and always will

Posted on April 14, 2014 by

Ilargi Nov 8, 2010 I read an article Ashvin Pandurangi, our by now greatly valued roving reporter, sent me, entitled “Plutocracy Now”. Ashvin writes about that first notion I was pondering: the nationalization of US banks, though for him it’s not about Bank of America, but the Fed. He concludes it can’t be done, not even an audit will be achieved. And I think that goes for Wall Street banks as well. We can’t nationalize the banks, because they have long since “bankalized the nation”.

Not that I don’t find the efforts and arguments interesting. I just don’t think the authors necessarily place sufficient emphasis on the amount and level of political clout and power the financial industry has accumulated over the past few decades. Or indeed the past 100 years for that matter. Seeing them celebrate the birth of the Fed, and do so on Jekyll Island to boot, it makes me think the US is surely as far gone as Ireland is; it’s just that fewer people seem to realize it, but that’s not too comforting, is it?

Ashvin Pandurangi closes with a very insightful statement, one that every American should take to heart, and many Europeans too:

The reality is that there is only one way back to a true democratic system now, and this path will require nothing less of us than the courage of our forefathers.

The nation has been bankalized, something we’ve only figured out after it was too late. That means the road to taking over the banks is closed; we’ll be pumping money into them for quite a while to come.

===========================

Oct 30, 2010
A Paralyzed Fed Defers Decision On Monetary Policy To Primary Dealers In An Act That Can Only Be Classified As Treason
by Tyler Durden – Zero Hedge

Below are the 18 banks that, in a completely separate vote, will henceforth rule America, regardless of what particular puppets end up in the Congress and Senate:

BNP Paribas Securities Corp.
Banc of America Securities LLC
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
Jefferies & Company, Inc.
J.P. Morgan Securities LLC
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
Nomura Securities International, Inc.
RBC Capital Markets Corporation
RBS Securities Inc.
UBS Securities LLC.

As if there was any doubt before which way the arrow of control, and particularly causality, points in America’s financial system, the following stunner just released from Bloomberg confirms it once and for all. According to Rebecca Christie and Craig Torres, the New York Fed has issued a survey to Primary Dealers, which asks for suggestions on the size of QE2 as well as the time over which it would be completed.

It also asks firms how often they anticipate the Fed will re-evaluate the program, and to estimate its ultimate size. This is nothing short of a stunning indication of three things:

* That the Fed is most likely completely paralyzed due to the escalating confrontation between the Hawks and the Doves, and that not even Bernanke believes has has sufficient clout to prevent what Time magazine has dubbed a potential opening salvo into a chain of events that could lead to civil war: in effect Bernanke will use the PD’s decision as a trump card to the Hawks and say the market will plunge unless at least this much money is printed,

* That the Fed is effectively asking the Primary Dealers to act as underwriters on whatever announcement the Fed will come up with, and thus prop the market, and, most importantly,

* That the PDs will most likely demand the highest possible amount, using Goldman’s $2-4 trillion as a benchmark, and not only frontrun the ultimate issuance knowing full well what the syndicate of 18 will decide in advance of what the final amount will be, but will also ramp stocks on November 3 to make the actual QE announcement seem like a surprise.

This also means that the Primary Dealers of America, which include among them such hedge funds as Goldman Sachs, such mortgage frauds as Bank of America, such insolvent foreign banks as Deutsche, RBS, UBS and RBS, and such middle-market excuses for banks as Jefferies, are now in control of US monetary, and as we explain below fiscal, policy.

It also means that the Fed has absolutely no confidence in its actions, and, more importantly, no confidence in how its actions will be perceived by the market which is why it is not only telegraphing its decision to the bankers, but is having its decision be dictated by them, an act so unconstitutional it would be seen as treason in any non-Banana republic!

This is the last straw confirming that the only ones left trading the market are the Fed and the PDs, passing hot potatoes to each other, and the HFTs, churning the shit out of everything else to pretend someone is still trading.

And the saddest conclusion is that this is the definitive end of US capital markets: not only is the Fed’s political subordination a moot point, but the Fed, and the middle class’ purchasing power via the imminent dollar destruction that is sure to follow as the PDs seek to obliterate their underwater assets by raging inflation, is now effectively confirmed to be a bitch of Lloyd Blankfein and his posse.

The official explanation for this unprecedented incursion by the banking crime syndicate in US monetary policy is as follows:

Avoiding Disruption

Treasury officials say they want to avoid any disruption to the $8.5 trillion market in U.S. government debt, the world’s most liquid, as the Fed weighs restarting large-scale asset purchases. The Treasury also doesn’t want to give any impression to investors, particularly those based overseas, that it might be coordinating with the Fed to finance the national debt.

“Treasury debt-management decisions are designed to deliver the lowest cost of borrowing over time and are entirely independent from monetary-policy decisions made by the Federal Reserve,” Mary Miller, assistant secretary for financial markets, said in an e-mail to Bloomberg News yesterday. Before joining the Treasury last year, Miller was head of global fixed- income portfolio management at T. Rowe Price Group Inc. in Baltimore.

The Treasury is scheduled to hold its quarterly meetings with bond dealers tomorrow, ahead of the department’s Nov. 3 refunding announcement.

Fill in the blank: the Fed has essentially given PDs the option of $250BN, $500BN or $1 trillion in monetization over six months. It is now absolutely clear that the PDs will pick the biggest number possible… which incidentally amounts to $2 trillion per year, and is precisely what Goldman’s downside case was, as we presented previously.

The New York Fed surveyed primary dealers required to bid in U.S. debt auctions. It asked dealers to estimate changes in nominal and real 10-year Treasury yields “if the purchases were announced and completed over a six-month period.” The amounts dealers can choose from are zero, $250 billion, $500 billion and $1 trillion.

Of course, since a $2 trillion purchase over 1 year means the Fed will have to monetize every single bond issued, the SOMA limit will have to be raised, another prediction we made months ago:

The Fed is unlikely to buy up the entire supply of new securities, although it may adjust its internal guidelines of how much it can hold of any given issue. The Fed limits itself to owning no more than 35 percent of any specific security it holds in its System Open Market Account, or SOMA.

“Our Treasury strategists point out it could also cause pricing distortions along the curve, if, for example, the Fed continues to target a 40 percent purchase concentration in the 6-10 year maturity bucket, as it has in its recent purchases,” analysts at JPMorgan Chase & Co., including Alex Roever, wrote in an Oct. 22 research report. The report predicts the Fed will buy about $250 billion a quarter during the easing campaign.

How about $500 billion?

And, incidentally, since the “independent” Treasury will be forced to issue more debt to fill all the demand for $2 trillion over the next 12 months, as there is not enough debt in the pipeline to fill $2TN worth of demand and prevent the entire curve pancaking at zero (i.e., the 30 year yielding precisely 0.001%) it also means that the government will be forced to come up with more deficit programs, which also means that primary dealers will now also determine US fiscal policy.

Which begs the question, why is anyone pretending that the political vote on November 3 matters at all?

Posted in Banking | Comments Off on We’ve been “Bankalized” Banks rule and always will

Jeff Rubin: Oil and the End of Globalization

Posted on April 14, 2014 by

Jeff Rubin: Oil and the End of Globalization

Nov 8, 2010. ASPO-USA

Much of the article has been snipped below:

It is easy to see how sub-prime mortgages blew up Wall Street; it is a little more challenging to see it as the author of the global recession.

  • Why were there economies that had no sub-prime mortgages that experienced even deeper recessions than the United States?
  • Why did those economies go into recession even before the US economy went into recession?
  • Maybe, just maybe, there was something more important going on–more important to the global economy than Wall Street or sub-prime mortgages, like $147 barrel oil, for example.
  • If we know anything about watching the global economy in the last 40 years, we know this: feed it cheap oil, and it runs very smoothly. All of a sudden, give it expensive oil, and it stops in its tracks.

Every major recession in the post-war period has oil’s fingerprints all over it.

  • The 1973 first oil shock led to what was then the deepest post-war recession, at the time. The second OPEC oil shock led to no less than two recessions: 1979 and 1982.
  • And then when Saddam Hussein invaded Kuwait, and left half of its oil fields on fire, and oil spiked to the then unheard-of price of $40 barrel, lo and behold, the industrialized world again fell into recession.

Oil prices went from about $30 barrel, at the beginning of 2004, to almost $150 barrel by 2008. Even inflation-adjusted, that price increase was over double the price increase of either the first or the second OPEC oil shock. If they had led to devastating recessions, why would not the biggest oil shock of them all, be the obvious culprit for what has been the deepest recession to date?

There are many ways in which oil shocks create global recessions.

  • First, the transfer of income. When oil went from $30 barrel, to about $147 barrel, over $1 trillion of income was transferred from the industrialized oil consuming world to OPEC. Now, that was not neutral for the economy, because the savings rates from which money was coming from, like the United States, was virtually 0%, meaning that consumers spent everything they made. And where the money was going to, places like Saudi Arabia, or Kuwait, or the United Arab Emirates, had savings rates of almost as high as 50%, so it certainly was not demand neutral.
  • High price also create recessions by crowding out non-energy expenditures. Two years ago, when gasoline cost us $4 gallon, low-income Americans were paying more to fill their tanks than they were to fill their stomachs.
  • But by far, the most important mechanism, the most important path, by which oil prices cause recession is through their impact on inflation, and their impact on interest rates.

There is no shortage of people to blame for the subprime mortgage crisis. The real culprit behind subprime mortgages was the very low cost of capital and 0% interest rates. All the greed in the world could not do what the Fed’s easy money made possible. The subprime mortgage rates were created by interest rates and the subprime mortgage market was pricked by interest rates. Everybody would agree with that. What people don’t seem to ask is, “Why did interest rates go from 1% to 5.5% from 2004 to 2006?”

Any central banker will acknowledge that your borrowing cost is a mirror image of your inflation rate. We had 1% federal funds’ rate in 2004, because we had a 1% inflation rate. All of a sudden, in 2006, inflation was over 5.5%, the highest it had been in America, since, coincidentally, 1991, when we just happened to have the last oil shock. All of a sudden, money wasn’t free any more. All of a sudden, you weren’t getting credit cards in the mail any more that you never applied for. And all of the sudden, people who held negative amortization sub-prime mortgage rates had to start paying 7% or 8%.

If interest rates hadn’t risen, that wouldn’t have occurred. Why did inflation move up? Virtually all of the increase in inflation came from one component of the US consumer price index basket–the energy component. By the end of 2006, energy inflation was running at 35%, because of one price: the price of oil. The price of oil went from $30 barrel, which incidentally, every oil analyst at the time said it was going to stay at that level, to over $70 barrel. If oil had stayed at $30 barrel, inflation would never have spiked; neither would have interest rates. All of those good folk in Cleveland would probably still be there, in their homes financed by 0% interest rate sub-prime mortgages. Lehman Brothers and Bear Stearns would probably still exist, and I’d probably still be the chief economist at CIBC.

But that is not what happened. Why did oil prices go up to $147 barrel? Somewhere where virtually every economist said it could not go. Well, there were two reasons that economists said that oil prices could not get into triple digit range, and that was the cherished principles of supply and demand. First, the theory of the upward sloping supply curve–higher oil prices would bring new supply, just like it did after the OPEC oil shocks, where oil gushed from Prudhoe Bay and the North Sea. And not only did that break OPEC’s strangle-hold on the market, but sent oil prices tumbling down.

But there are no more Prudhoe Bays or North Seas to tap. Tar sands and deep water oil did bring new sources of supply, but only at prices we couldn’t afford to burn.

What about the cherished principle of demand? Would not triple digit oil prices quash demand? Well, it did, in certain places. It did in the United States, Canada, Japan, and Western Europe. Fifteen years ago, if those economies suddenly cut back their appetite for oil, oil prices would have fallen, because 15 years ago, those countries would have accounted for almost 75% of world oil consumption. Today, they account for 50%. Tomorrow, they will account for less than half.

Where do you think oil demand has been growing the strongest? Many of you will probably be saying China, and indeed it has. It’s grown from around 2 million barrels a day, to about 9 million barrels a day. But I know a place where the demand for oil is growing even faster than in China. And it is the same place your politicians have told you your supply is coming from in the future. Last year, OPEC and two non-cartel producers, Mexico and Russia, consumed 14 million barrels a day. That is almost two Chinas.

What makes OPEC so thirsty for its own fuel? In Venezuela oil is 20 cents a gallon, 40 cents in Saudia Arabia.  And it’s 40 cents a gallon, whether oil costs $20 barrel, or whether oil costs $150 barrel. What’s the coolest thing to do in Dubai? Ski, of course. Skiing in an area where it’s hot enough to fry an egg on the pavement uses up a whole lot of energy. So the question isn’t really how much productive capacity that OPEC has. How much export capacity is the real question, and every year it’s less and less, because every year, more and more is consumed at home. So chances are, your future oil supply ain’t coming from OPEC, and chances are, it ain’t going to be cheap.

Now sure, oil prices fell to $40 barrel during the recession. And for many folk, that was evidence enough that it never had any business being in triple digit range in the first place. But what a lot of those folk forget is that in the last recession, world oil demand actually fell. It fell for the first time since 1983. Such was the severity that the recession was.

Peak oil is not a problem if the economy that it is powering is shrinking. Peak oil is only a problem if the economy we are in is starting to grow. The first thing you know about an economic recovery is that economies start burning more oil. The next thing you know about an economic recovery is that oil prices start rising. Where is oil trading today? It is trading at over $80 barrel. With the exception of Germany and Canada, every other economy in the G7 is still miles below the level of GDP that they were at before the recession began.

And yet, where oil is trading today, turn the clock back to three years ago, and that would have been a world all-time record high. Now, it is where oil trades in the shadow of the deepest global post-war recession. Where do you think oil prices are going?

I will tell you where I think oil prices are going. Even in this most anemic of economic recoveries, we are going to see triple digit oil prices.

Our rendezvous with triple digit oil prices is not in 10 or 15 years; it is in 10 or 15 months. So instead of trying to turn cow-shit into high octane fuel, we are going to have to learn to get off the road, and that is just what happened. In 2009, there were 4 million fewer cars on the road than there were the year before. In the next ten years, 40 million North Americans will be taking the exit lanes. The question is, “Will there be a bus to get on?” Instead of giving $40 billon to General Motors, what we should have done is spend $40 billion on public transit, so there would be a bus to get on.

In a world of triple digit oil prices, all of the sudden the economy’s speed limit changes. And that is one of the problems that we have here in America, is that we don’t recognize that our economy’s speed limit has changed. What the economy could grow at when oil was $20 to $30 barrel is a whole different speed limit than what the US economy can grow at when oil is $80 to $150 barrel.

And that is something that I don’t think the Administration recognizes. President Obama cannot get cheap oil. He can get expensive oil. We can build a pipeline from the Canadian tar sands down to the Gulf refineries, and we can get oil. But in order to get the kind of oil that will be required, that will require the triple digit oil prices that we can’t afford to pay. Trying to prime the economy with fiscal stimulus is not a substitute for cheap oil. It won’t make the economy grow any faster. It will just make the deficit that much bigger.

Worse than that, triple digit oil prices will not only take millions off the road, it will send our economy right back into recession. We can’t do a whole lot about triple digit oil prices.

 

Posted in Energy Markets | Comments Off on Jeff Rubin: Oil and the End of Globalization

Foreclosuregate

Posted on April 14, 2014 by

Back-Office Blues 

Nov 8, 2010. James Surowiecki. The New Yorker.

In the late 1960s, Wall Street was crippled by an unlikely nemesis: unfinished paperwork. Thanks to a booming stock market, trading volume had soared in the course of the decade; between 1960 and 1968, the number of shares traded daily quadrupled. This should have been wonderful news for brokerage houses—more trades mean more commissions—but it ended up wrecking many of them instead. Because brokerages were slow to add workers and update back-office operations, they were literally buried beneath all the new business—offices were full of stock certificates, and trade documents were stacked halfway to the ceiling. Amid the chaos, dividend checks went unsent, trades were credited to the wrong accounts, and fraud spread; hundreds of millions of dollars in securities were stolen. And since the firms often didn’t process trades quickly enough, billions of dollars’ worth of transactions a month were simply cancelled. In 1968, the stock market started closing one day a week to let firms catch up on their work, but the brokerages’ bookkeeping woes caught up to them first, and more than a hundred firms went under. It took years—and the passage of an investor-protection bill—for the crisis to abate.

You’d think the Street would have learned its lesson. Instead, it’s now threatened by an even bigger back-office crisis: Foreclosuregate. Banks, faced with a flood of delinquent mortgages resulting from the bad loans they made during the housing bubble, have done exactly what the brokerages did forty years ago: they’ve cut corners. They’ve foreclosed on homes without having the proper documentation, and relied on unqualified people to sign affidavits attesting to things they didn’t know—so-called “robosigners.” In a few cases, they seem to have actually tossed people who didn’t have mortgages out of their homes. As a result, federal regulators and attorneys general in all fifty states are now investigating. And, in the weeks since the scandal first erupted, other issues have appeared, calling into question the legitimacy of the way mortgages were packaged and sold, and raising the possibility that the banks might have to buy back piles of bad mortgages. Forecasts of “catastrophe,” “Armageddon,” and “apocalypse” have now become routine.

There’s no doubt that it’s a brutal mess. The banks have been servicing mortgages and chasing delinquents with the same carelessness and indifference to due process that they demonstrated when they underwrote and securitized the mortgages in the first place. A foreclosing bank should be able, at a minimum, to produce the original mortgage note to demonstrate that it has the right to foreclose. But many banks have been unwilling or unable to do so. The same goes for other documentation: in a study of seventeen hundred cases of foreclosure in bankruptcy, Katherine Porter, a law professor at the University of Iowa, found that necessary documents were missing in more than half of them. Servicing mortgages well means hiring and training lots of workers to help customers, modify loans, and insure that documents are in order. But that costs money, and since mortgage servicing is already a low-margin business, banks have preferred to do things on the cheap, which is an open invitation to trouble, including fraud. To those responsible, a bit of sloppy paperwork probably seemed like no big deal, but when you’re talking about taking away people’s homes paperwork and due process should matter quite a bit.

All the same, the widespread proclamations of Armageddon seem overblown. The banks’ behavior has been appalling, but the crisis probably won’t be fatal for them, however much some of them might deserve that. Criminal charges are likely, and justified. And judges are already looking more skeptically at banks’ legal claims. But we aren’t going to see a Jubilee for debtors. The actual debts are almost all real, and the records of most of them presumably exist somewhere. So some financial institution will eventually end up with the right to foreclose, even though getting there will be expensive and time-consuming. And while banks may suffer considerable losses—having to spend tens of billions of dollars to buy back mortgages that violated the warranties they made to investors—forcing them to do this will take a long time, and enable them to spread the pain out over years. Nor is the uproar going to lead millions of homeowners to stop paying their mortgages. Predictions of catastrophe are understandable—the memory of the banking crisis is fresh, and it seems like poetic justice—but we’re probably not going to see apocalypse redux.

Indeed, there’s a chance that in the long run the banks’ travails could make things better for the economy, not worse. For a start, all the sand in the gears of the foreclosure mills will make it easier for delinquent borrowers to stay in their homes—not so bad an outcome, in economic terms, as the banks would have us believe. There are eleven months of existing-home inventory for sale right now; dumping another million foreclosed homes onto the market hardly seems economically essential. More important, making foreclosures tougher to get and more expensive to process could push banks to get serious about modifying mortgages, which at this point is the best route to getting the housing market back in reasonable shape. Up to now, it’s often been easier and cheaper for banks to foreclose, and mortgage servicers commonly make more in foreclosure than in modification. But being forced to follow the law before foreclosing, and having the threat of criminal investigation over their heads, may change that calculus. (More government pressure wouldn’t hurt, either.) The back-office crisis of the nineteen-sixties compelled Wall Street to do a better job of protecting and serving investors. It’d be fitting if Foreclosuregate ended up doing the same for homeowners.

Other articles about foreclosure scandal:

Oct 13, 2010. The Second Leg Down of America’s Death Spiral   Gonzalolira blog.

 

Posted in Mortgages | Comments Off on Foreclosuregate