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Bad Jokes and Stupid Pet Tricks ...

You know you are in trouble when even the smart guys stop making sense. Here's Andy Xie:

Between a Crutch and Walking Stick

Why the dollar has got to go as the world's reserve currency – and how the euro will replace it

China and Japan are supporting the euro zone by purchasing government bonds that the market shuns today. China and Japan have US$ 4 trillion in foreign exchange reserves and are capable of bridging liquidity problems that some of the Eurozone economies are facing.

What China and Japan can do is to stop market panic from leading some otherwise viable economies down a vicious spiral of rising interest rates, rising debt burdens and bankruptcy. Economies that are not viable in the first place shouldn't be helped.

China and Japan's actions help themselves in two ways. First, the euro is the only alternative to the dollar for global trade, commodity pricing and storing foreign exchange reserves. If the euro falls apart, the U.S. Federal Reserve will be further emboldened to pursue inflation to decrease the U.S.'s leverage or indebtedness at the expense of dollar holders. China and Japan hold vast dollar assets.

The problem in the Eurozone and elsewhere including China and Japan is insolvency rather than insufficient liquidity. China and Japan must look to their own solvency. Japan's deflation and China's hyperinflation are symptoms of both countries' inability to service their accumulated energy- and money debts.

Neither China nor Japan can rescue the EU whose consumption assets -- its residues of 'modernity' -- are basically worthless.

The economy is so bad that I got a pre-declined credit card in the mail.

Both China's and Japan's foreign exchange surpluses are liabilities, not assets. Japan has ruined itself attempting to maintain the value of its current account which has been leaking value for over 20 years. China is destroying the value of its currency attempting to support the value of its foreign exchange reserves. Along with buying worthless 'empty cities', malls and high rises, (and automobiles and freeways) China buys trillions in foreign bits of colored paper, pretending that the act itself bestows upon the colored paper some real worth. This is a bad 'stupid pet trick' joke the Chinese are playing on themselves.

This is the part that Andy Xie misses which is puzzling. It indicates how far out along the gangplank the waste- based culture has been led by its marketing department.

When the Chinese buy euros or dollars it 'sells' its own currency. Chinese dollar holders discover there are good and better reasons not to sell them to the central bank but to sell them instead to the 'loan- shark' economy. The central bank must bid for the dollars or euros which in turn reinforces the credibility of the 'underground' dollar market which offers a better price.

Part of this is the maturing process of a country creating a convertible currency where one does not currently exist. China will take its lumps as the yuan becomes freely exchangeable for other moneys, if only due to the serious shortage of yuan overseas: its 'float'.

China expanding its yuan- float both domestically and overseas will reduce its value. The yuan's current 'value' represents both the flow of dollars to China along with a yuan 'scarcity premium'. As more yuan flow into circulation the scarcity premium evaporates - they aren't scarce anymore! This dynamic and the domestic dollar trade takes place against a background of the flood of dollars and other foreign currencies into China which tends to press the yuan's value upward.

China's dilemma is acute: it can either bid for dollars or allow these dollars to trade within China's domestic economy. China bidding against itself for dollars supports the value of the dollars it already owns. Doing so validates the domestic dollar market even as the bidding devalues the yuan while increasing circulation- plus velocity stokes hyperinflation. Bidding also pisses off the US Treasury Secretary: not bidding for dollars means the value of China's dollar reserves erodes with an upward revaluation of the yuan. Instead of hyperinflation there is a dramatic loss of Chinese output even as Geithner grins. China is caught between a rock and another rock.

The fact that the yuan does not appreciate despite massive dollar inflows toward China indicates there is a large, Chinese domestic market for dollars that pushes the yuan price lower.

All this explains why China urgently needs to reduce its F/X surplus even as its interest rate differential with other nations causes it to balloon. China and Japan are trapped by their surpluses. Lending to Eurozone banks that have demonstrably destroyed vast amounts of funds to date indicates both China and Japan have exhausted ideas about what to do with the surpluses.

Here's this from the Dave McWilliams @ the Irish Independent

Last night, over a jar, the (Swiss) bankers told me that the flows of cash from Germany have been huge because the average well-to-do German is taking his savings out of the euro and putting them on deposit here in Switzerland. The fact that the Swiss banks normally offer no interest on deposits and still get huge inflows is indicative of the fragility at the heart of the euro.

They also explained that lots of money is coming from Ireland. These guys, who I worked with years ago, have never really seen any business from Ireland and certainly during the boom they looked on with a sense of trepidation because they had seen this before.

Now they are getting calls from Dublin on a daily basis.

They have concluded that this is because the banks and the Government can't be trusted. These investment bankers -- serious financial people -- agree that the Irish taxpayer has no business bailing out the banks. At the table last night were two bondholders, men who invested in the Irish banks in the good times. They are now embarrassed because they were taken in by the Irish and European spin.

So here are the so-called mysterious "bondholders" and even they don't expect to be paid. They made a mistake and they should bear the consequences.

In their eyes, there is now a direct link between the ongoing Irish government guarantees and the flow of money out of Ireland. However, their view is precisely the opposite view to that held by our Department of Finance and the Irish Central Bank.

The bankers here see a pattern which has been repeated in every financial crisis in the past The more time that goes by, the less credible they become. The more any government bluffs and provides guarantees, the less those guarantees are worth and it gets to a stage where the guarantees are worthless because the State simply doesn't have the money to back them up.

This is the logic of capitalism. When you pile more and more financial burdens on the population in order to bail out the banks and to guarantee banks, the chances of the population being able to pay all this back diminish. This increases the risk. As the risk increases, capital gets scared and leaves. There is a well-established pattern in this development.

China and Japan pouring F/X reserves into the euro rathole erodes depositor confidence and accelerates runs out of euros. Quantitative Easing PR and other central bank maneuvers does exactly the same thing. This is another 'stupid pet trick'. The establishment fools exactly nobody but their own marketing departments and the mainstream news media.

China does not have enough euros to guarantee all the liabilities on EU banks' balance sheets. The Euro- banks aren't simply insolvent, they are walking bankrupts. The big shots might not believe this but the bank depositors instinctively understand what the smartest central bankers cannot grasp.

The economy is so bad right now if the bank returns your check marked "Insufficient Funds," you have to call and ask if they mean you or them.  

What the bankers do understand is that any deleveraging 'haircuts' mean a complete loss of confidence along with depositor flight which are what is taking place across Europe right now. Bank runs and credit destruction are the inevitable outcome of three years of pointless guarantees.

Part of this is the macro- economic conundrum which has a country being able to have an independent monetary policy, the free flow of capital and fixed foreign exchange but not all three simultaneously. This dynamic is called the 'Unholy Trinity' and is a well- known aspect of macroeconomics:

What the Establishment refuses to understand is that the crude/currency relationship has rendered central bankers irrelevant along with any idea of an independent monetary policy. The world's hundreds- millions of auto drivers and the oil minister of Saudi Arabia make monetary policy, now. This is no joke!

This is also why zero interest rate policies, open market operations, bond purchases and other PR stunts by central bankers have failed completely in the US and elsewhere. Money values are set by swapping cash for absolutely vital crude and crude products by billions of users in the greater world. Just as the dollar value of yuan is set by millions of Chinese citizens on the streets of China, the 'fuel value' of dollars and other currencies is set by millions of drivers in gas stations every day all over the world. Value is scaled beyond he grasp of the handful of central bankers, business managers and economists. Priced in crude, both dollars and euros have value, this is determined by the willingness of consumers to offer dollars and other currencies and the producers to accept them.

Dollars are a de- facto hard currency freely exchangeable on demand for a valuable physical good. The 2011 oil/dollar has much greater mobility value compared to the 1913 dollar which could only purchase a Model T jalopy and run it over rutted dirt tracks. At the same time, compared to oil, what the economy offers now in exchange for dollars is a bad joke.

The economy is so bad BP Oil laid off 25 Congressmen.

Twenty five Congressmen aren't worth anything! Without independent monetary policy the nations are left with either currency exchange pegs and capital flows. China's peg means an unhindered flow of 'hot money' capital into China fueling hyperinflation. Trying to staunch capital flows writes 'fin' to the yuan/dollar peg and Chinese 'growth'. Right now China 'enjoys' the worst of both worlds as both the Peoples Bank of China and the US Federal Reserve are stuck with oil- valued hard currencies.

In the Eurozone the currency peg between nations is absolute: an Irish euro is absolutely the same as the German version. What remains from oil- determined ECB monetary policy and the 'euro/euro peg' is capital flight ... the race of depositors out of European banks. Staunching the capital flow would mean a euro breakup as there is no way to have multiple values for the euro in different EU countries.

The effort of central banks to become relevant by attempting currency depreciation and creating liquidity is doomed by the crude price. Reducing currency value -- and increasing fuel prices -- is a form of economic suicide. Fuel becomes unaffordably expensive just like real estate was in 2005. When the fuel prices are not matched by earnings the outcome is demand destruction. People cannot buy what is unaffordable. The outcome as is the case with real estate in 2011 is a return to high currency values, that is low crude prices.

These low prices are not what they might have suggested in the past which was an excess of crude supply: rather they indicate a customer base lacking discretionary purchasing power.

This is the outcome of high currency value: the usual hoarding and decline of commerce as capturing currency value becomes the only economic activity left standing. People go broke, the cannot buy fuel or anything else. Welcome to 1933!

Since 2007 the question has been whether the crisis is a matter of liquidity or insolvency. The Establishment has from the beginning acted by hosing the finance sectors with liquidity from all angles. The idea has been that sufficient liquidity would allow the consumption based growth 'perpetual motion machine' to restart on its own. The onrush of liquidity has failed. Expanding both the Federal Reserve and US governments' balance sheets has bought 17% unemployment and GDP @ 2002 levels. A few more of such liquidity victories and the entire country will be ruined.

The flood of liquidity directed toward banks are claims promised against depositors, retirees and our young children. Our policies aren't just ineffective but sadistic.

The depositors look to retrieve what liquidity they have left out of harm's way. They follow the example of the 'smart money' which has been cashing out of finance assets and taking their dollars out of the country into tax havens.

The solvency issue is not limited to finance and money. We live beyond our credit means and also our energy means. Serious people in high offices hold serious discussions about our energy future and wind up promoting more of the same: auto- first transport: SUVs and giant pickup trucks. Failure to address the central issue of energy insolvency erodes confidence ...

The failure to hold bankers accountable and to rein in derivatives, central bank money laundering along with pointless political finger- pointing does the same. The public waits for the establishment to 'get serious'.

 The economy is so bad a truckload of Americans was caught sneaking into Mexico . 

The only real cure is conservation and its finance analog thrift. Unfortunately, this is off the table for the sake of faddish 'style'. The future is conceded to the force of events. This means the bailout game is finished: past the point of diminishing returns. Even China the 'super- sovereign' cannot do the impossible.

Any euros that China or anyone else would pour into EU banks down the chimney would simply run out the door into Swiss francs, or traded for gold and silver. The flight to precious metals isn't a currency trade so much as a vote of no- confidence in the world's policy makers who refuse to face reality. Remember Ireland's bank deposit guarantee?

Ireland guarantees six banks’ deposits

John Murray-Brown Neil Dennis

Ireland’s government on Tuesday unveiled a wide-ranging guarantee arrangement to safeguard the deposits and debts at six financial institutions in response to turmoil in the financial markets.

The scheme, which guarantees an estimated €400bn (£315bn, $567bn) of liabilities, covers retail, commercial and inter-bank deposits as well as covered bonds, senior debt and dated subordinated debt.

Most depositors were already covered by an existing deposit insurance scheme for up to €100,000. But Tuesday’s initiative was primarily aimed at easing the banks’ short-term funding, which had seized up in recent days.

The short- term liquidity lockup was a symptom of systemic insolvency that was not recognized. The 'Great Moderation' long run of growth in China and elsewhere resulted in a flood of credit and declining real interest rates. Credit chased a shrinking base of quality investments flooding instead into speculation. This is how the business cycle operates. The longer a credit expansion lasts the longer time exists for negative real interest rates to inflate asset bubbles. Eventually, real output is insufficient to service the overhang of debts. This is Hyman Minsky's 'Financial Instability Hypothesis'.

Adding the cost of negative real interest rates to real fuel costs results in an economy that is unable to fund itself organically. This is what is being endured worldwide right now. Even if liquidity allows debt service, credit cannot replace energy in the creation of real output.

Until this is accepted by the establishment and its functionaries the economy is going to be a bad joke.

I was so depressed last night thinking about the economy, wars, jobs, my savings, Social Security, retirement funds, our shrinking 401k Plans and our bleak future, that I called the Suicide Help line and was connected to a call center in Iraq. When I told them I was suicidal, they got all excited, and asked if I could drive a truck!

Bankrupt Notion of Progress ...

Americans can take some time to reflect on Martin Luther King who led African- American citizens to the long- overdue bright light of freedom and equal acceptance. At the same time compare the final address of President Dwight Eisenhower. The ideas presented by both men are remarkably congruent and prescient.

Here is Martin Luther King as he spoke in August, 1963:

Five score years ago, a great American, in whose symbolic shadow we stand today, signed the Emancipation Proclamation. This momentous decree came as a great beacon light of hope to millions of Negro slaves who had been seared in the flames of withering injustice. It came as a joyous daybreak to end the long night of their captivity.

But one hundred years later, the Negro still is not free. One hundred years later, the life of the Negro is still sadly crippled by the manacles of segregation and the chains of discrimination. One hundred years later, the Negro lives on a lonely island of poverty in the midst of a vast ocean of material prosperity. One hundred years later, the Negro is still languished in the corners of American society and finds himself an exile in his own land. And so we've come here today to dramatize a shameful condition.

In a sense we've come to our nation's capital to cash a check. When the architects of our republic wrote the magnificent words of the Constitution and the Declaration of Independence, they were signing a promissory note to which every American was to fall heir. This note was a promise that all men, yes, black men as well as white men, would be guaranteed the "unalienable Rights" of "Life, Liberty and the pursuit of Happiness." It is obvious today that America has defaulted on this promissory note, insofar as her citizens of color are concerned. Instead of honoring this sacred obligation, America has given the Negro people a bad check, a check which has come back marked "insufficient funds."

Here is Dwight Eisenhower, from January 17, 1961:

Progress toward these noble goals is persistently threatened by the conflict now engulfing the world. It commands our whole attention, absorbs our very beings. We face a hostile ideology global in scope, atheistic in character, ruthless in purpose, and insidious in method. Unhappily the danger it poses promises to be of indefinite duration. To meet it successfully, there is called for, not so much the emotional and transitory sacrifices of crisis, but rather those which enable us to carry forward steadily, surely, and without complaint the burdens of a prolonged and complex struggle – with liberty the stake. Only thus shall we remain, despite every provocation, on our charted course toward permanent peace and human betterment.

Crises there will continue to be. In meeting them, whether foreign or domestic, great or small, there is a recurring temptation to feel that some spectacular and costly action could become the miraculous solution to all current difficulties. A huge increase in the newer elements of our defenses; development of unrealistic programs to cure every ill in agriculture; a dramatic expansion in basic and applied research – these and many other possibilities, each possibly promising in itself, may be suggested as the only way to the road we wish to travel.

But each proposal must be weighed in light of a broader consideration; the need to maintain balance in and among national programs – balance between the private and the public economy, balance between the cost and hoped for advantages – balance between the clearly necessary and the comfortably desirable; balance between our essential requirements as a nation and the duties imposed by the nation upon the individual; balance between the actions of the moment and the national welfare of the future. Good judgment seeks balance and progress; lack of it eventually finds imbalance and frustration.

The record of many decades stands as proof that our people and their Government have, in the main, understood these truths and have responded to them well in the face of threat and stress.

But threats, new in kind or degree, constantly arise.

Of these, I mention two only.

A vital element in keeping the peace is our military establishment. Our arms must be mighty, ready for instant action, so that no potential aggressor may be tempted to risk his own destruction.

Our military organization today bears little relation to that known by any of my predecessors in peacetime, or indeed by the fighting men of World War II or Korea.

Until the latest of our world conflicts, the United States had no armaments industry. American makers of plowshares could, with time and as required, make swords as well. But now we can no longer risk emergency improvisation of national defense; we have been compelled to create a permanent armaments industry of vast proportions. Added to this, three and a half million men and women are directly engaged in the defense establishment. We annually spend on military security more American makers of plowshares could, with time and as required, make swords as well. But now we can no longer risk emergency improvisation of national defense; we have been compelled to create a permanent armaments industry of vast proportions.

This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence – economic, political, even spiritual – is felt in every city, every Statehouse, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society.

In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.

We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.

King speaks to a nation arbitrarily divided with the rump excluded from a common prosperity. King paints the exclusion was a moral fault by both the measures of the founders alongside of those of 'modernity' which even in the early 1960s demanded a shallow conformity and trivial 'trend cosmopolitanism'.

In tail- fin America there would be no place for Jim Crow or the shabby night- riders of the Klan; for segregated lunch counters or even lunch counters. Martin Luther King contrasted the idealism of the American federal state with apartheid and institutional racism. At the same time, he promoted commercial 'progress' as a moral force. Racism was not only evil but more-so it was obsolete.

King was un-ironically demanding equal admission into the matrix.

Eisenhower divided ends and means. The General who had led the Allies into Nazi Germany understood that withstanding great danger meant making sacrifices rather than going shopping. The retiring president demanded something other than a passive citizenry watching television.

King was Eisenhower's activist, the limits of that role he acknowledged even as he pressed them. He was leading the American Negro nowhere in particular, but what other choice did he have? In 1963 the American dream of accessible modernity and Warholian irony was shiny and new. James Hansen's price tag had not yet appeared around the corner and Ike's warning of the dangers of material progress for its own sake could be perceived as a kind of short sale or 'reverse psychology'.

King and other activists could ask where were the white people voluntarily choosing to live like oppressed and pathetic blacks in dismal and rotting ghettos? White people lusted after automobiles and suburbs and by God blacks were going to have these things, too! King:

Let us not wallow in the valley of despair, I say to you today, my friends.

And so even though we face the difficulties of today and tomorrow, I still have a dream. It is a dream deeply rooted in the American dream.

Grasping for the illusion as it slips out of reach: Eisenhower's view was the dream was metastatic:

Akin to, and largely responsible for the sweeping changes in our industrial-military posture, has been the technological revolution during recent decades.

In this revolution, research has become central, it also becomes more formalized, complex, and costly. A steadily increasing share is conducted for, by, or at the direction of, the Federal government.

Today, the solitary inventor, tinkering in his shop, has been overshadowed by task forces of scientists in laboratories and testing fields. In the same fashion, the free university, historically the fountainhead of free ideas and scientific discovery, has experienced a revolution in the conduct of research. Partly because of the huge costs involved, a government contract becomes virtually a substitute for intellectual curiosity. For every old blackboard there are now hundreds of new electronic computers.


The prospect of domination of the nation's scholars by Federal employment, project allocations, and the power of money is ever present – and is gravely to be regarded.

Yet, in holding scientific research and discovery in respect, as we should, we must also be alert to the equal and opposite danger that public policy could itself become the captive of a scientific-technological elite.

It is the task of statesmanship to mold, to balance, and to integrate these and other forces, new and old, within the principles of our democratic system – ever aiming toward the supreme goals of our free society.

Another factor in maintaining balance involves the element of time. As we peer into society's future, we – you and I, and our government – must avoid the impulse to live only for today, plundering for, for our own ease and convenience, the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without asking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow.

Both Eisenhower and King grasped the same insolvency metaphors, acknowledging the possibility of a bankrupt notion of progress. That the human race and its embrace of the American- style 'dream' would soon enough harvest the bitter crop of strip- mined 'freedom', the discourse and practical use of which is vacant of any real possibility. Our grandchildren will harvest what, exactly?

Thermodynamics is relentless and cannot be negotiated with. Eisenhower's warned against a 'scientific- industrial establishment'. Science is both corrupted and corrupting. This allows its 'users' to pick and choose which forms of science it wants to pay attention to.

The amalgamation of the 'commercial- creative establishment': of marketers and credit enablers crafted containers for both a Detroit- then Chinese- manufactured 'pseudo- dream' along with an unresponsive and unyielding security apparatus. King:

But there is something that I must say to my people, who stand on the warm threshold which leads into the palace of justice: In the process of gaining our rightful place, we must not be guilty of wrongful deeds. Let us not seek to satisfy our thirst for freedom by drinking from the cup of bitterness and hatred. We must forever conduct our struggle on the high plane of dignity and discipline. We must not allow our creative protest to degenerate into physical violence. Again and again, we must rise to the majestic heights of meeting physical force with soul force.

The marvelous new militancy which has engulfed the Negro community must not lead us to a distrust of all white people, for many of our white brothers, as evidenced by their presence here today, have come to realize that their destiny is tied up with our destiny. And they have come to realize that their freedom is inextricably bound to our freedom.

We cannot walk alone.

King's dream became the hollowed out premise that all men created equal. American Apartheid was a rear guard action that in the end resolved to zero.

We are equal now, so what?

I have a dream that one day this nation will rise up and live out the true meaning of its creed: "We hold these truths to be self-evident, that all men are created equal."

I have a dream that one day on the red hills of Georgia, the sons of former slaves and the sons of former slave owners will be able to sit down together at the table of brotherhood.

I have a dream that one day even the state of Mississippi, a state sweltering with the heat of injustice, sweltering with the heat of oppression, will be transformed into an oasis of freedom and justice.

I have a dream that my four little children will one day live in a nation where they will not be judged by the color of their skin but by the content of their character.

I have a dream today!

I have a dream that one day, down in Alabama, with its vicious racists, with its governor having his lips dripping with the words of "interposition" and "nullification" -- one day right there in Alabama little black boys and black girls will be able to join hands with little white boys and white girls as sisters and brothers.

I have a dream today!

King's dream has morphed into dispiriting and depersonalized techno- fantasy. In 1963, King's negroes were American society's fools in the market. American business success required more than cheap inputs and credit. It needed a low- cost 'insolvency sump' which could provide a 'market of last resort' for useless surplus goods and property along with a reservoir of the cheapest and least accountable labor. King argued the country had moved past that point of need. He could not calculate the forces that Eisenhower warned of equalized by enslaving on a much broader scale. The "larger ghetto" that King railed against was engulfing the entire world. Black and white Americans, Chinese and Europeans were being recategorized as consumers -- or worse -- and being dehumanized in the process.

Here's Patrick Deneen:

Tocqueville discerned over 125 years before Eisenhower that the utilitarian pursuit of scientific knowledge would imperil democracy, above all by leading men to live and think in the short term. “To minds thus predisposed, every new method that leads by a shorter road to wealth, every machine that spares labor, every instrument that diminishes the cost of production, every discovery that facilitates pleasures or augments them, seems to be the grandest effort of the human intellect. It is chiefly from these motives that a democratic people addicts itself to scientific pursuits.” In a brief but telling section of his address, Eisenhower warns against the tendency to “live only for today,” urging his fellow citizens to think in terms of generational debts and obligations lest democracy become “the insolvent phantasm of tomorrow.”

We now tend to think our various forms of insolvency—economic, certainly; in natural resources, as gathering evidence suggests; and morally, at the root of our bankruptcy—can be answered by the application of better scientific technique. What America’s second voice has warned all along, and what Eisenhower powerfully articulated 50 years ago, was that our faith in science will not save us, but may in fact be the very source of our insolvency. What is needed instead is a sounder idea of liberty—in which (to paraphrase the forgotten second verse of “America the Beautiful”) we confirm our soul in self-control and find liberty in law.

What does morality allow us in a world that has been purposefully created as 'post- morality'  and expedient. Dreams are both undermined and undermining because they have been corrupted fatally by commerce and a culture that equals commerce with art.

This way, commerce constantly reinvents itself mimicking science process while pimping itself as 'creative' at the same time.

Some progress, some dream. This -- the evil of banality -- is what we are stuck with. The article of faith was that the unholy matrimony of art and commerce would conjure a form of 'value'. This union could not earn any value in any marketplace. The outcome is commerce- abandoned and endless blight, the wasting of the Earth and all that inhabits the Earth.

Artcommerce or commerceart or whatever the marketers intended to label it could never support itself and was never supposed to. The outcome is not and never has been the triumph of a techno- establishment but that of the unscrupulous. King's failure was his appeal to the "better angels" of human nature, Eisenhower's was to appeal to rationality and tradition. Neither could imaging the full scope of the waste- based economy. The angels have been turned into street whores and reason baffled by incoherent nonsense.

Tradition, like money is a time- value. Over time the abandoned and rotting big box stores become 'traditional' along with 'traditional' Detroit, 'traditional' Las Vegas, 'traditional' Ireland and 'traditional' Spain. This is what citizens must begin to get used to.

We are all niggers, now.

What Do Economists Know, Anyway?

According to this article in the Business Insider, economists have no better idea of what the economy is going to do than 'normal' people. Consequently, they simply follow the herd as published in the media. The consensus opinion is GDP growth of approximately 4%.

Notice a few things about this chart: the first is that real GDP is extremely choppy. Except for a five year period beginning in 1995, economic activity swings dramatically from year to year. Another thing to notice is the long- term downtrend in GDP from the dramatic +8% explosion in 1984. Even with a big increase in productivity over this period with cheap computers and means of communication and the widespread introduction of robotics/automation in all areas of production from retail self- checkouts to PC- controlled CNC machines, the overall output has been steadily declining. Notable in this regard is the period from 2003 to 2008 where real GDP growth was diminishing even as the country was recovering from the 'Dot- Com' recession.

This period was known as a 'Jobless Recovery', what will economists label the current 'recovery'? Notice too, that every period of negative growth has been accompanied an energy 'shock' of some kind or other. These crude oil prices @ or above $90 per barrel are something to pay attention to.

Here's the Brent crude weekly chart from the estimable TFC Chartz:

The trading on the exchange exceeded $99 per barrel on Friday. The question for the economists is what sort of activity can be done profitably when a gallon of crude oil costs the wholesaler $2.50? Certainly not run around in circles for the 'fun' of it.

The small open interest relative to the OI in 2008- 09 indicates this is not an index fund- or speculator- driven market.

Here's NYMEX/WTI crude, there is a $8 spread between Brent and Cushing fuels. One reason is weather demand has been higher in the Eurozone. Another is the NYMEX market is larger and represents a lower grade of crude product. Keep in mind that there is usually a very small price differential between the two markets:

The moral of this article is the contra- economist notion that there are limits to use/consumption of inputs and we are reaching them. Even if GDP does not plummet next week the current fuel price level has a constraining effect on output.

For example, the estimable Jeffrey Brown discusses with others @ The Oil Drum the Brent- WTI spread:

My guess is that it is due to a combination of a few million extra barrels of oil in a remote area of Oklahoma, (WTI) combined with the fact that the US is more or less in the process of being outbid for a (so far) slowly declining supply of global net oil exports. One would think that this kind of imbalance can't continue indefinitely. Something will have to change.

The question is who is outbidding whom and to what end? High prices as the outcome of F/X intricacies means oil traders are being forced to outbid currency traders. It's also hard to see the point of countries pushing petroleum prices higher when doing so bids up the cost of food at the same time! The same countries presumably supporting faddish 'modernity' and more auto use are the same countries who cannot afford food!

How long can this last?

Food riots in turn lead to instability and the overthrow of governments which happened last week in Tunisia. It's all part of the current dynamic where choices must be made: whether to either drive a car or have a job, to drive a car or have something to eat.

Modernity has obviated the need for choices. Americans in particular have been able to choose, 'all the above'. That era is past. Americans and those who wish to imitate them from this point forward are going to be disappointed because they are going to have to make existential choices.

At some point society is going to have to acquire less costly forms of transport. Our current 'system' is too gluttonous. The world cannot afford all the above: both a reasonable living with a modicum of control over ourselves, a nature that provides vital services and a massively inefficient and wasteful means of transport.

The recent editorial "SANDAG wins for North County" demonstrates a tragic and potentially fatal flaw in the current American conversation. The editorial applauds a decision by SANDAG to commit $4 billion to a widening of the I-5 corridor. It dismisses the informed opinion of thousands of residents who have thoughtfully explained transit alternatives in many town hall meetings. The editorial lauds the idea of a muscular expansion as transportation progress.

The flaw derives from three essential facts. First, America is now a second-tier economy, because the love of personal mobility has shut out societal advances in shared transportation. While Europe expands its high-speed rail in all countries, including Croatia, Poland and Western Europe, and while China completes 9,900 miles of 200-plus-mph rail, San Diego will still be constructing a completely useless 23-mile widening of an already massive freeway. Is widening an already wide freeway transportation innovation and progress? Where are the voices in San Diego planning who speak for transportation innovation?

Second, our domestic security depends on weaning ourselves from fossil fuels lest we continue to be held in the grip of those societies who will export every last drop of their oil to dominate one of the great democracies in history. With peak oil comes the realization that the price and supply of oil is a risk too high for domestic security. The widening of I-5, like a co-dependent or alcoholic enabler, says: "I like my citizens dependent on fossil fuels." Wrong now ---- and future generations will scorn the expansion as criminally wasteful.

It's us or our machines! Modern auto transport returns very little on the capital expended on it while the 'environment' this transport requires is both soul- destroying and unproductive. Creating the transport environment of roads, stores, tract houses, freeways, parking lots and all that supports this infrastructure precludes other profitable uses of the land- and money capital.

The economists cannot see the zero- sum forests because of the trees. They ignore high fuel costs undermining economies. Finance combined with a slowdown in production creates a condition where economic dynamics converge. 'Market forces' in finance are driving fuel costs higher along with other asset classes such as gold and stocks. The same increased costs are undermining the productive economy which needs cheap oil to run profitably. Further increases in finance asset values destroy more wealth in the real economy than is gained by finance. We need to get serious, ditch the cars and the wasteful infrastructure and come up with a 'Plan B'.

This chart from the Energy Information Agency proposes a large consumption increase both in this year and next. Where is this new oil going to come from? USA energy consumption is shown to have a modest growth in consumption. How does this align with a 4% rise in GDP? Our energy consuming mechanisms are not any more efficient than they were a couple of years ago. Demand destruction and accompanying deflation stifled energy use in 2008 and 2009. Of the 250 million vehicles on the US highways the percentage that are hybrids or electric- only is minuscule. Three of the top- ten selling vehicles in the US were the 'Big Three's giant Pickup Trucks.

$95 crude is presumed to be safe to enrich oil traders and 'friends' in the Middle East and elsewhere with no harm to the rest of the world's economies. This is a fantasy. $97 was the average price of crude during 2008 when the US and the developed world was overflowing with credit. This price level was unsupportable and the economies unraveled. According to the EIA the average price for crude last year was almost $78 per barrel. The average for the last four months of 2010 was $81.60. The noose is tightening. The 2 million barrel per day increase in consumption is not matched by an equal increase in production or an equivalent increase in discoveries.

Oil prices may spike higher to the $97 annual price limit or the economy could turn down from this point forward following a fuel price decline. Current price levels are unaffordably high for a system built upon an assumption of $25 per barrel fuel inputs.

This last chart from estimable Gregor Macdonald indicating the last ten year's crude output. I've taken the liberty to make a point: about the slowdown in production that began in 2005. The dashed line is a growth in production more or less equal to the 6 million barrel per day increase in extraction from  2002 to 2005. Equivalent growth would peg petroleum production 'off the chart'!

Take ten minutes and be a 'pretend economist' and ask yourself if the world was producing 80 million barrels per day or more of crude oil would there be a recession now?

Bitz and Piecez ...

Views from China aren't that much different from Economic Undertow's. This is today's New York Times:

Chinese Foreign Currency Reserves Swell by Record Amount

China’s foreign exchange reserves surged in the fourth quarter by a record amount while the money circulating within the Chinese economy also climbed more than expected in December, according to government statistics released Tuesday that underline the country’s worsening inflation dilemma.

The Chinese government has been printing renminbi at a furious pace to buy foreign currencies like the dollar and the euro, which are pouring faster and faster into the country through trade surpluses and foreign investment. The People’s Bank of China, which is the country’s central bank, has been doing so in an effort to hold down the value of the renminbi and preserve a competitive advantage in foreign markets for exporters in China and the tens of millions of workers they employ.

The extra renminbi issued to pay for rising foreign exchange reserves will make China’s inflation problem even worse, said Diana Choyleva, an economist in Hong Kong for Lombard Street Research. The extra renminbi come as the Chinese central bank has been grappling with the additional money that it pumped into the Chinese banking system in 2009 and early 2010 to keep the economy growing through the global financial crisis.

An analysis of the data by Standard Chartered said that trade and government-approved foreign investments into China accounted for less than half of the increase in foreign reserves in the fourth quarter; investors around the world have also been putting money into Chinese real estate, bank accounts and other investments despite efforts by the Chinese government to discourage these capital inflows.

The Chinese foreign reserves leaped by $199 billion in the fourth quarter, to $2.85 trillion. The increase was much larger than economists expected, and the numbers suggested that China had about doubled its intervention in currency markets to about $2 billion a day.

Which means two things: first is the 'unofficial' flows of F/X into China are as large as the unofficial flows and that the Chinese establishment is adding 12+ billion yuan into circulation every single day in an attempt to manage the difference between official and unofficial flows.

The article points out that the inflation rate in China is greater than the released figures would indicate. Sacre bleu! The Chinese are misstating figures? Who would have guessed?

Meanwhile, a look around the web reveals the dog that does not bark, that the class war has begun for real. That is, the shooting war has broken out between the pampered 'haves' versus the penniless and desperate 'have- nots' who are armed to the teeth.

Pop culture has made an industry of 'sexing up' our outlaws making them all 'Queens for a day (of so)', while at the same time celebrating their ill- gotten 'loot'. The next step is lust/envy and the sale of person- hood to the 'idiot box' and what goes with it. Outlaw Goldman- Sachs has been a tough sell but given the efforts of estimable Matt Taibbi and Max Keiser the reprehensible Lloyd Blankfein has a spot in the gay outlaw pantheon next to Tupac Shakur and John Dillinger.

"Steal from the 'rich' and give to the richest, eh Lloyd?" Tres Robin Hood, the archetypal gay outlaw figgah. That's right, gay. You just want to be butt- fucked by these people. And you are, over and over again.

Class war shrivels the gay outlaw archetype into another systemic fraud. Once the shooting starts and blood flows outlawry ceases to be an hegemonic American culture phenomenon and something far more real. Class warfare is anti- anti- heroic and is unable to pimp anything, not even gold- plated trash cans or lavatory faucets.

The 'haves' aren't hard to find. Like a large (and growing) minority in Congress Gabrielle Giffords is a millionaire albeit a minor variant. She is not in the league with Darrell Issa ($300 million) who prepares to take taxpayer- funded cheap shots @ 'Government Corruption' (the president) as if there is nothing better to do.

Where are these people going to hide? Not just Congress but the entire constellation of pop culture moneyed hotshots: rappers, real estate executives, business tycoons, hedge fund managers, investment bankers, media starz, professional athletes, stock swindlers and their various and sundry establishment lackeys. 'Bling America' is a target- rich environment. Anyone with a Ferrari or Aston Martin is a potential victim.

What pop- culture created as figures to be emulated and adored now threatens to become despised, unsympathetic, arrogant creatures to be hunted down like rats. The bodyguard business is going to explode along with the market for armored luxury cars and stylish 'personal body armor', but these are of limited effect. Bodyguards or police escorts in Tucson would have been shot along with the rest.

The easy solutions would be to cut back on the inequality that fuels the class war. Sez Warren Buffett,

“There’s class warfare, all right,” Mr. Buffett said, “but it’s my class, the rich class, that’s making war, and we’re winning.”

Nobody has yet made the connection between the lucrative tax deal cut by the billionaire class and their lackeys on Capital Hill and the Giffords' shooting. The timing is hard to ignore. Maybe ordinary folks have gotten fed up with the looting and maybe not but maybe the uppers might ought to consider hedging themselves while they have the luxury of 'time remaining'. The 'other' class has just fired back and has used live ammunition.

Too bad, Mr Buffett you can't go outside any more.

Meanwhile, there is the ongoing crackdown by 'capital a' Authority on its harmless critics. The establishment and its minions gives its best impression of the buffoonish 'Federation' in Woody Allen's 'Sleeper':





Instead of shutting down militias and 'patriot' groups the FBI focuses on Wikileaks and anti- war activists! It would be funny if not tragic.

Government-created climate of fear

Glenn Greenwald

One of the more eye-opening events for me of 2010 occurred in March, when I first wrote about WikiLeaks and the war the Pentagon was waging on it (as evidenced by its classified 2008 report branding the website an enemy and planning how to destroy it). At the time, few had heard of the group -- it was before it had released the video of the Apache helicopter attack -- but I nonetheless believed it could perform vitally important functions and thus encouraged readers to donate to it and otherwise support it. In response, there were numerous people -- via email, comments, and other means -- who expressed a serious fear of doing so: they were worried that donating money to a group so disliked by the government would cause them to be placed on various lists or, worse, incur criminal liability for materially supporting a Terrorist organization.

At the time, I dismissed those concerns as both ill-founded and even slightly paranoid. From a strictly legal standpoint, those concerns were and are ill-founded: WikiLeaks has never even been charged with, let alone convicted of, any crime, nor does it do anything different than what major newspapers around the world routinely do, nor has it been formally designated a Terrorist organization, nor -- I believed at the time -- could it ever be so designated. There is not -- and cannot remotely be -- anything illegal about donating to it. Any efforts to retroactively criminalize such donations would be a classic case of an "ex post facto" law unquestionably barred by the Constitution. But from a political perspective, the crux of the fear was probably more prescient than paranoid: within a matter of months, leading right-wing figures were equating WikiLeaks to Al Qaeda, while the Vice President of the U.S. went on Meet the Press and disgustingly called Julian Assange a "terrorist."

But more significant than the legal soundness of this fear was what the fear itself signified. Most of those expressing these concerns were perfectly rational, smart, well-informed American citizens. And yet they were petrified that merely donating money to a non-violent political and journalistic group whose goals they supported would subject them to invasive government scrutiny or, worse, turn them into criminals. A government can guarantee all the political liberties in the world on paper (free speech, free assembly, freedom of association), but if it succeeds in frightening the citizenry out of exercising those rights, they become meaningless.

So much of what the U.S. Government has done over the last decade has been devoted to creating and strengthening this climate of fear. Attacking Iraq under the terrorizing banner of "shock and awe"; disappearing people to secret prisons; abducting them and shipping them to what Newsweek's Jonathan Alter (when advocating this) euphemistically called "our less squeamish allies"; throwing them in cages for years without charges, dressed in orange jumpsuits and shackles; creating a worldwide torture regime; spying on Americans without warrants and asserting the power to arrest them on U.S. soil without charges: all of this had one overarching objective. It was designed to create a climate of repression and intimidation by signaling to the world -- and its own citizens -- that the U.S. was unconstrained by law, by conventions, by morality, or by anything else: the government would do whatever it wanted to anyone it wanted, and those thinking about opposing the U.S. in any way, through means legitimate or illegitimate, should (and would) thus think twice, at least.

That a large percentage of those brutalized by this system turned out to be innocent -- knowingly innocent -- is a feature, not a bug: that one can end up being subjected to these lawless horrors despite doing nothing wrong only intensifies the fear and makes it more effective. The power being asserted is not merely unlimited and tyrannical, but arbitrary.

And so it goes, Le Capitaine orders that the 'usual subjects' be rounded up. Good Grief!

Meanwhile, grab a credit card and purchase any number of full- automatic carbines, sub- machine guns and belt- fed machine guns online! It is widely considered unlawful for Americans to own full auto weapons in the US. This is true in some states but in others such as Virginia, machine gun ownership is permitted.





Only full auto weapons manufactured after 1986 are prohibited nationwide. Considering that millions of military weapons were manufactured prior to 1986 including those made during the Second World War by all combatants there is practically an unlimited lawful supply of the tools needed to turn America into Afghanistan.

Keep in mind that a lot of this firepower is flooding into Mexico to equip the drug cartels.

Welcome to the Thunderdome!

Wicked Fairy Tales ...

Marc Davis- Walt Disney Company 'Maleficent and Diablo'

The shooting tragedy in Arizona is set to trigger market revulsion for American finance 'products' in the marketplace. America is now broken politically even as homicide rampages remain an integral part of the cultural landscape. The shooting may be a reality jolt that is extreme enough to destabilize the US stock exchanges.

The five or six people who read this blog know there are two simultaneously operating economies in the US and world, the real economy of production and labor, resources and capital with an abstract and parasitic finance economy attached where the real cannot reach to remove it.

The tapeworm economy is in the spasm of hyperinflation as credit is formed by finance firms with the moral hazard- encouragement of central banks and governments. Finance lends itself trillions so as to bid up assets and create a wealth 'effect' for itself. Ongoing real economy difficulties have so far not been allowed to spoil the wealth creation party. The tapeworm seeks to feed off the real economy more or less permanently rather than kill it outright.

The real economy is deflating, burdened by real costs for inputs alongside the excess debt service that the tapeworm economy refuses or is unable to lighten. The 'container' for both of these economies is a culture that holds out a (so- far false) material utopia of inevitable, endless progress. Advertising which is the lever of culture is a 'diktat': it is not just television or mobility that is demanded and promised but only acceptable types of flat screen televisions and SUV mobility.

Progress is our past: the visions of Hollywood designers and commercial artists of the 1950s. Our present mobility is leveraged to the automobile. The future is not just cars but flying cars: not just flying cars but gigantic flying pickup trucks.

Culture demands, "Carz or social/cultural death" while the real economy insists the choice is between having a car or having a job, then having a car or having something to eat. This is our cultural dilemma: our culture clothes the unreachable as the virtue 'hope' even as hopefulness undermines itself. Meanwhile, our auto- centric culture is intolerant of other 'non- material progress' cultural narratives.

The fairy tale world insists on better lives for all, for children and grandchildren who will possess more conveniences and services and who will lives better than their parents. The real world of inconvenient entropy is shuffled off to the side and ignored. The fairy tale is promoted as real and the real made into a fraud.

The culture dictates and the participants act their appointed roles without question. Bankers look and act in the manner bankers are expected to look and act. The same is true of politicians and wicked fairies. Ben Bernanke is as locked into his central banker role as was Maleficent in her role as a wicked fairy. Alongside both is the role- playing wicked fairy in Tucson.

A difference is the Maleficent is more 'real' than both Bernanke and Loughner: unlike the two flesh- and- blood contemporaries, she is desperate to exit the super- max confinement of her script, even as/because the outcome is her destruction. This is the tension that her character embodies, which in turn reflects the artistry of her animators. Maleficent is the most vibrant of Disney's menagerie of two dimensional, 'No Negroes Allowed' suburban Styrofoam cutouts. Like all theatrical characters, she becomes a carrier of what we bring to her outside of what the script demands. Even as she is trapped within her role, she quivers with the desperate energy of attempting to expand outside it. From ink lines on pieces of cellophane she becomes human then tragic. Maleficent's complexity animates her character and the empathy felt by her viewers. Maleficent destroys herself when the one creature she loves and who loves her is turned to stone. Rejecting the script to the degree that she can, Maleficent lives outside the chances the animators and her two- dimensional world allow her.

Bernanke does the exact opposite, burying himself into the abstraction of the 'central bank dude' role, sacrificing his human identity or ability to act independently in the process. Bernanke is the opposite of the cartoon Maleficent, he abhors existence outside the script. Bernanke cannot separate himself from his role to accept the possibility of risk of any kind. Bernanke has become the establishment zombie without any life outside of what the word 'Fed' on a piece of paper dictates.

Bernanke's role makes destroying the country he pretends to serve a pesky and ignorable externality. Our hyper- materialist culture destroys the country by hollowing itself out while role playing confines 'central banker' to being a voice over. Bernanke's empathy vanishes as does ours for him. He is a blank, a familiar for the tapeworm which gets 'fed' while the country dies.

Loughner is the central banker golem/doppelganger, ranting about gold and hard currencies, submerging himself in the Bernanke role and cannibalizing his identity in the process. The tragedy spirals outward from Loughner who vanishes. Instead of Bernanke's vacuous zombie, Loughner is replaced by a monster with blood on his teeth. Loughner has not seen fit to accept any options beyond what lies behind the Charles Manson mask. Unlike Maleficent's brilliant animator who charged every frame with her impossible desire to escape a deathly life and crushing loneliness, Loughner has engulfed the false promises of the tapeworm economy along with those of its vicious shills. Engulfed in turn, he's strip- mined of identifiable truths then everything else. He is a vapid and avenging thing, banal and outside of ruthlessness, a bowling ball that rolls down the alley then knocks other things over.

The hegemonic nature of our culture creates non- linear roles that carry through to logical (or illogical) conclusions. Loughner's role was to behave in a threatening manner in public, to be menacing and eventually become the central heroic figure in the pop- theater, the gay outlaw: a character from a Truman Capote novel. What destabilizes is that political assassination is not part of the theater, it's too serious. America does not have a gay culture analog of anarchist Gavrilo Princip and his Bosnian- Serb gang.

Markets accept the idea that American politics is dysfunctional and untrustworthy. The shooting tears away the scrim or plausible deniability that is the foundation of the tapeworm economy. It's too real. We are forced to accept that the fake American representative political system was shot in the head in a supermarket parking lot. Acting out has knocked a prop out from under the already hopelessly corrupted political system while amplifying the harmful outcome of the corruption at the same time. It is a short step from role playing to stomping out the roles altogether. At that point there is no need for Fed Chairmen, or Feds or central banks or even markets. Uncertainty becomes the country's only asset.

Here is a chart of M2, by the way, from the estimable John Williams' Shadow Government Statistics:

While all this cheap theater is taking place the foundations of both the finance and 'real' economies are being constantly eroded by increasingly expensive fuel/input costs. Input costs are unsupportable by the output of the real economy which spells an end to the tapeworm version. Finance's output is a demonstrable fraud. The real economy attempts to bootstrap input costs, externalities and profits. What has worked for the economic evil twins in the past of cheap energy inputs and ignorable externalities has been rendered unprofitable by the simple exhaustion of cheap energy.

Margin has been removed from the bootstrapping function. No profits equals no business. No business equals no workers. No workers means no customers for 'other' businesses. So it goes and has gone since fuel was dirt cheap in the 'dollar peak oil days' of 1998. Since then fuel prices have increased almost eight times from $12 a barrel to the current + $95! Eventually, all the businesses that need fuel will fail. There is nothing structural or within the fuel- use 'culture' to prevent this from happening.

High fuel costs are economy killers. Finance cannot parasitize a corpse. This does not mean high fuel costs are killers to all aspects of the real and finance economies at once. Once fuel becomes valuable it will be hoarded like gold, Picassos and all other valuable things. That will be the end of wasting fuel!

The damage done by high input costs emerges outside the strict fuel- supply ambit. People can afford the increased prices at the pump. They cannot afford the house, the vacation, the second car, the jet ski. This effects profits and company survival. Bond yields rise as funds to bid bond prices are diverted toward fuel. Labors' ability to consume disappears along with 'overpriced' jobs that cannot compete with the fuel required to support them. Businesses fail for lack of customers driven off by higher fuel and goods prices. Since all goods are embodiments of petroleum and coal in differing forms, the increase in fuel cost translates into higher store- shelf prices even as the means to afford those increased prices evaporates.

This price squeeze is eroding economies while the waste- enabling culture built upon the scaffold of cheap input remains. Since the culture does not allow any deviation from the 'progress' narrative, non- linear events are either swept into one of the culture's many mansions or ignored.

Our fairy tale fantasies which we have convinced ourselves are useful have unintended consequences. Putting cross-hairs on a map is violently suggestive. Our vitriolic partisanship and organized denial is also suggestive. What makes pop culture powerful is its ability to partner with atrocity as long as the 'pop' part can render the 'atrocity' part fashionably stylish. The American 'love that dare not speak its name' for aggressively militaristic German fascism and its various machine fetishes is just as much a part of Warholian pop culture as Notorious B.I.G., Bonnie and Clyde ... and Thelma and Louise.

This is undermining: our fairy tales are ultimately self- destructive. Loughner's Golem is another denier, equidistant from energy company shills Michael Lynch and Fred Seitz. The fairies pimp a life without work, that our wastes are harmless, that we can fill the world over and over with ourselves, our machines and our agriculture with no consequences; that there is a large and benevolent fairy looking out for us when we should be shouldering responsibilities and looking our for ourselves and our only home. Our fairy tales should give us duties along with handsome princes and beautiful princesses, but they don't. The duties have been scraped off and lost in the shuffle of endless advertising and cheap distractions.

Anarchy suggests the existence of something outside the pop culture narrative. A vulnerable narrative leaves little to inspire future confidence in markets which are the axle around which culture turns. The establishment is given a choice: to tolerate an outlier as part of 'business as usual' or accept that the establishment is fatally flawed cannot defend itself.

Furthermore, the libertarian container for the anarchist narrative and its insistence that the only restraint must be upon the idea of restraint itself becomes auto- destructive when carried to its logical conclusion. American finance is undone by disorder and uncertainty. If disorder is embraced by the establishment ostensibly as part of the progress narrative (along with its neo- fascist fascination with pomp) the establishment is set to annihilate itself as it cannot be comfortably financial and anti- financial @ the same time.

What does this all mean in practical terms? It suggests the injection of anarchism into the heart of the establishment along with violence at the extremities will destabilize the markets. Bond markets are jittery about the tea party activists shutting down the government, not increasing the debt ceiling and now the apparent passive acquiescence toward the use of lethal force against political adversaries.

We have just exited the fairy tale world of permanent growth and progress and entered someplace a lot more real.

Bits and Pieces ...

Here's an addendum to the Yuan article, this is from former Australian Prime Minister Paul Keating:

When Barack Obama announced his champion to rescue the world from economic ruin, it was the first time most Americans had ever heard the name Tim Geithner.

The initial impression was good. The stockmarket surged and the pundits swooned. "Exactly a decade ago, he was Uncle Sam's golden-boy emissary sent into the stormy centre of what was then the world's worst financial crisis [the Asian crisis]," reported The New York Post.

The paper gushed: "Just 36 at the time, he'd been raised in Asia and knew the culture so intimately he scored successes and won confidences that other diplomats couldn't match. Geithner earned widespread plaudits for pulling together quarrelling Asian finance ministers into a $US200 billion rescue of their economies."

"A fantastic choice," said a Bank of Tokyo-Mitsubishi analyst, Chris Rupkey, as the Dow rose by nearly 6 per cent. Even one of Obama's political rivals, the hard-bitten Republican senator Richard Shelby, agreed Geithner was "up to the challenge".

If anyone in the US media had thought to ask a former Australian prime minister for his assessment, they would have heard a different view. And they would not have been so surprised at Geithner's performance since.

In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner's record in handling the Asian crisis: "Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis."

In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.

This is charitable. The IMF and its US hucksters such as Geithner continually apply the same prescription. It's a strategy not a policy error.

The problem was not government debt. It was great tsunamis of hot money in the private capital markets. When the wave rushed out, it left a credit drought behind.

But Geithner, through his influence on the IMF, imposed the same cure the IMF had imposed on Latin America and Mexico. It was the wrong cure. Indeed, it only aggravated the problem.

Keating continued: "Soeharto's government delivered 21 years of 7 per cent compound growth. It takes a gigantic fool to mess that up. But the IMF messed it up. The end result was the biggest fall in GDP in the 20th century. That dubious distinction went to Indonesia. And, of course, Soeharto lost power."

Exactly who was the "gigantic fool"? It was, obviously, the man who wrote the program, Geithner, although Keating is prepared to put the then managing director of the IMF, the Frenchman Michel Camdessus, in the same category.

Worse, Keating argued, Geithner's misjudgment had done terminal damage to the credibility of the IMF, with seismic geoeconomic consequences: "The IMF is the gun that can't shoot straight. They've been making a mess of things for the last 20-odd years, and the greatest mess they made was in east Asia in 1997-98, so much so that no east Asian state will put its head in the IMF noose."

China, in particular, drew hard conclusions from the IMF's mishandling of the Asian crisis. It decided that it would never allow itself to be dependent on the IMF, or the US, or the West generally, for its international solvency. Instead, it would build the biggest war chest the world had ever seen.

China could also recall George Soros' raid on sterling in 1992 and numerous other F/X 'runs' and came to the obvious conclusion.

Keating continued: "This has all been noted inside the State Council of China and by the Politburo. And it's one of the reasons, perhaps the principal reason, why convertibility of the renminbi remains off the agenda for China, and it's why through a series of exchange-rate interventions each day that they've built these massive reserves.

"These reserves are so large at $US2 trillion as to equal $US2000 for every Chinese person, and when your consider that the average income of Chinese people is $US4000 to $US5000, it's 50 per cent of their annual income. It's a huge thing for a developing country to not spend its wealth on its own development."

Is this some flight of Keatingesque fancy? The former deputy governor of the Reserve Bank of Australia, Stephen Grenville, doesn't think so: "After the Asian crisis, the countries of east Asia decided that they would never go to the IMF again. The IMF is taboo in east Asia. Look at the evidence. The revealed preference of the region is that no one has gone to the IMF since, even when they needed the money."

As noted the other day:

Again, the (Chinese) central bank is in a box. If they could somehow push the yuan's value upward, dollar- investments already made in China @ the lower rate would be claimed in more valuable yuan. This would represent a value loss to China and a gain for 'evil' dollar speculators. Avoiding this outcome was the reason for the dollar/yuan peg and increase in dollar surplus in the first place.

The IMF's strategy is to create conditions whereby Wall Street financiers are able to loot by way of foreign exchange the value of another country. The victim's foreign currency reserves are fed into the hopper, loans to banks and firms are paid at the expense of labor, pensions, education and public investment. The outcome is greater debt and diminishing ability to service it.

Here is Michael Hudson @ the Guardian:

Latvia provides no magic solution for indebted economies

Despite being hailed by bankers as a shining example of how to pay off debts, the true picture in Latvia is far from rosy

The "Latvian option" is the buzzword of the moment among European bankers and financial journalists. In October, the Latvian people voted in a coalition headed by the incumbent prime minister Valdis Dombrovskis, whose government had savaged social benefits, cut pay and inflated unemployment in 2009. Was this proof that austerity measures could not only work, but actually be popular? Was Latvia the model that Greece, Ireland and Spain should emulate?

The Wall Street Journal, for one, has published several articles promoting this view. Most recently, Charles Doxbury advocated Latvia's internal devaluation and austerity strategy as the model for Europe's crisis nations to follow. The view commonly argued is that Latvia's economic freefall (the deepest of any nation from the 2008 crisis) has finally stopped and that recovery (albeit very fragile and modest) is under way.

On politics, the standard narrative (as rolled out in the Economist recently) is that Latvia's taciturn and honest prime minister, Valdis Dombrovskis, won re-election in October even after imposing the harshest tax and austerity policies ever adopted during peacetime, because the "mature" electorate realised this was necessary, "defying conventional wisdom" by voting in an austerity government.

Latvia endures its misery so as to make use of the euro. Its own currency, the lat, is accordingly hard to find and extremely valuable, which accompanies the demise of any organic output in that country. Sez Hudson:

As government cutbacks in education, healthcare and other basic social infrastructure threaten to undercut long-term development, young people are emigrating to better their lives rather than suffer in an economy without jobs. More than 12% of the overall population (and a much larger percentage of its labour force) now works abroad.

Children (what few of them there are as marriage and birth rates drop) have been left orphaned behind, prompting demographers to wonder how this small country can survive. So, unless other debt-strapped European economies with populations far exceeding Latvia's 2.3 million people can find foreign labour markets to accept their workers unemployed under the new financial austerity, this exit option will not be available.

So what about the much-quoted 3.3% growth rate? Projected for 2011, it is often cited as evidence that Latvia's austerity model has stabilized its bad-debt crisis and the chronic trade deficit that was financed by foreign-currency mortgage loans. But the real question to ask is whether 3.3% is really enough. Given a 25% fall in GDP during the crisis, such a growth rate would take a decade to just restore the size of Latvia's 2007 economy. Is this "dead cat" bounce sufficiently compelling for other EU states to follow it over the fiscal cliff?

The method by which the EU's creditor nations and banks would like to resolve this crisis is "internal devaluation": lower wages, public spending and living standards to make the debtors pay. This is the old IMF austerity doctrine that failed in the developing world. It looks like it is about to be reprised. The EU policy seems to be for wage earners and pension savers to bail out banks for their legacy of bad mortgages and other loans that cannot be paid – except by going into poverty.

So do Greece, Ireland and perhaps Spain and Portugal understand just what they are being asked to emulate? How much "Latvian medicine" will these countries take? If their economies shrink and employment plunges, where will their labour emigrate?

Apart from the misery and human tragedy that will multiply in its wake, fiscal and wage austerity is economically self-destructive. It will create a downward demand spiral pulling the EU as a whole into recession. What is needed is a reset button on the EU's economic and fiscal philosophy. Bank lending inflated its real estate bubbles and financed a transfer of property, but not much new tangible capital formation to enable debtor economies to pay for their imports.

Hudson leaves out Ireland which is facing its own IMF- driven deflation and a compounding debt spiral. It seems the current Fianna Fail government is going to smashed @ the polls in March, when elections will presumably be held.

Yesterday the Taoiseach's supporters claimed that Mr Cowen was being lined up as a "scapegoat" for what will undoubtedly be the most difficult election for Fianna Fail in living memory.

Mr Cowen's allies remain convinced that the true level of Fianna Fail support will be higher than that recorded in recent opinion polls. A Red C poll last week showed Fianna Fail running neck and neck with Sinn Fein.

The poll for Paddy Power found: Fine Gael (35 per cent), Labour (21 per cent), Sinn Fein (14 per cent), Fianna Fail (14 per cent), Greens (4 per cent), and Others (12 per cent).

Ominously, the Irish establishment still is without a clue:

Last night Mr O'Keeffe, said that while he fully accepted that Mr Cowen had the "best interests of the country at heart" it was abundantly clear that the time had come for him to resign. "The country is experiencing the worst economic crisis of our lifetime but we do not have the strong leadership that is required to address the many major problems," he said.

He added that the future of the country was being squandered because, among other things, there was "still no overall strategic plan for the banking sector two years after the crisis began".

Which is where the rest of the world is, nobody has a plan except for more pursuit of 'growth', more looting and more crossed fingers.

A good place to start a plan would be with the world's energy budget which is completely busted. Expensive crude inputs are effecting everything that uses or embeds fuel. The outcome is high food prices, declining bond yields, onrunning forex imbalances, inflation/deflation and rising worldwide unemployment. The easiest and best first strategy is for economy- wide conservation. Let's cut energy use in half.

How hard can it be?

Here's a quick look @ Brent crude futures weekly front month from the estimable TFC Chartz:

Even though crude prices pulled back a bit toward the end of the week, the traders have this as a manic bull. At the same time, this price level is one where major breakage is happening/going to happen Look for default noise in Europe or bad news such as food riots or a large interest rate rise in China. Ugliness in US politics might scare stocks but the underlying cause is the oil price train- wreck taking place under our noses. The world economy simply cannot make a profit with $90 crude. The lack of profits in the real economy over a short span of time will in turn bring down the price of crude.

The instrument will be business failures along with more workers fired. Same ol' same ol'.

Here is the gold weekly chart:

Gold might be rolling over. I don't see a new bear market in gold as nothing fundamental has changed regarding gold supply or demand. The high value encourages hoarding. Meanwhile, there is a three- way dilemma: a strong bull market in crude is weakening the dollar in the near term, as dollars are 'priced' in crude. This is not a condition that can endure as the high fuel prices strangle both dollar and non- dollar economies.

What, then are gold traders looking at? Are they looking @ the current low value of the dollar or are they savvy to the inevitable high value of the dollar when crude dives? Are there other reasons why gold is pulling back?

Time will tell ...