America’s Financial Porn

I remember the seedy thrill the day my buddy took me into his garage to pull out his dad’s stash of Playboy magazines. It was the 60s and we were but eleven year old boys. Yet I knew that day that I had become a voyeur into something that was at once both titillating and dreadfully wrong.

Though the thrill factor dulled as I aged, I do recall other events that triggered the same eerie mix of raw emotions within me. It wasn’t until after the smell of burnt timbers left the interior of our car minutes after passing a tenant building engulfed in flames that my excitement turned to shame. My mother let out a gasp of horror as she slowly passed over the rail road track and our family all witnessed this old building lit ablaze. From the back seat, now thirteen, I was still awed by the sight of it. Moments later I realized that what had titillated me was the same monster that had destroyed those poor renters who shockingly watched their life’s possessions turn to ashes.

Quite removed from the magical aura of first emotions, as a young man I still once again felt a confusing haze when witnessing the collapse of the Soviet Union. It was unsettling watching Mikhail Gorbachev being consumed like a noble grasshopper enshrined in swarming ants as the Putin mob emerged from the fall. The collapse of this nemesis empire emoted feelings of both grotesque forewarnings and of patriotic sentimentalities. And my voyeuristic curiosities were once again amazed as I witnessed how the wealthy of even an extremely socialistic society would circle the wagons to protect their own.

And now I can’t help but watch in awe as America follows the Soviets down the Afghani trail and our financial thugs manage to pull the strings of the “Federal Reserve” (as if calling it Federal whitewashes its role as the elite mob’s hit man). Once again, I find myself in my buddy’s garage, at once both titillated by what crudeness is possible of mankind while at the same time drenched in the filth of America’s financial porn.

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Float Reality for Just a Moment…… Could America be in an Extremist Bubble? (Revised)

Have you ever taken a jigsaw puzzle down from the closet on a rainy day and worked on its 1,000 pieces to completion? Ever stare at the puzzle that you have worked on for hours, only to find it is missing one important piece right in the middle of the puzzle? That missing puzzle piece might tempt you to insanity, first looking incessantly around the table, and then in the box, and in the closet where you kept the box, and in the garage where you originally stored the box before putting it the closet prior to bringing it out one rainy afternoon to spend hours working on the puzzle before realizing that one piece was missing!

To many, the Tea Party and Occupy Wall Street movements are frustrating puzzles with missing pieces. Some aggravatingly wonder why the Tea Party holds to their pledge of less government spending and taxes and why they are so willing to let America lunge over the cliff like a herd of possessed swine as they hold fast to their quest. It leads many to believe that Tea Partiers are just right wing ideologues blindly doing the bidding of globalist capitalists. Others question why Occupy Wall Streeters kept fluttering their fingers in free form street democracy even after authorities shut down their camps. They sensed that Occupiers were whiny idealists disrupting Middle America, following like sheep the directives of international Anarchists and Marxists who intend to destroy the capitalist foundations of America.

Many in America view these movements as extremist. But letting reality drift for a moment, what we found that these movements were actually Centrists and that America was the extreme one? If America were extreme, then under this remote scenario at least one of these two groups could actually be Centrist. If that were so, and if America could be tolerant for a moment, we might find that these movements were not irritating puzzles with missing pieces after all. We might conclude that they were truly two of the missing puzzle pieces that we are seeking in the midst of crisis, and that they were actually patriots trying to cajole America back to Centrism.

But many Americans don’t trust at least one of these movements for good reason. Those aggravated by the Tea Party surmise that it has accepted, as part of its platform, a globalist agenda that obfuscates itself in a cloak of Patriotism. Globalists solder Constitutional words like freedom onto words like trade so that the resulting power of the phrase “free trade” confuses America from a more prosperous course. Those annoyed by the Occupiers surmise that the Occupiers are influenced by Marxists who blame capitalism for harming America instead of the abuse of capitalism that has actually done the damage. However, if America paused for a moment to see that both movements were growing beyond their Globalist and Marxist roots, could we not find that they both have salient messages that could help turn-around America’s drifting course?

For the moment, let’s assume that both Occupy Wall Streeters and the Tea Party are solidly Centrist. Each appears extreme to some in America, so that is a difficult assumption. But if we suppose that America has indeed veered into extreme territory then we could imagine that they appear extreme because of America’s drift. Suppose that the bell curve of Western culture has shifted so far from true Centrism that America now stands on shifting sands of extreme change. If this were true, then America could perceive these two movements that might be chanting their centrist warnings from the terra firma, as if they are extremists spouting extremities, when in actuality they are not. If this were true, then America’s perception of itself being Centrist could also be quite extreme.

The following example might shed light on the pretense that America could already be extreme. As housing prices skyrocketed during the first half of the decade, their relative prices compared similarly. As prices shot into the stratosphere like a runaway freight train, mid priced homes continued to price in the middle of the mayhem, perhaps Centrist if you will. We now know however that what appeared as moderately Centrist home prices were actually quite radically priced.

Yet, while many Americans entered the house flipping craze, a few held steady mortgages for years. They did not refinance to meet material wants and they lived within their long term means. Many at the time viewed their peculiar steadfastness as ultra conservative. Yet we now know that they were only conservative through the lens of America’s momentary lapse of judgment. They were in fact true Centrists by historical terra firma standards.

If one example of misinterpreted centrism exists, might there be others? When a tsunami slams the shore, it forever rips the landscape from its modest history into a extreme future. The two World Wars of the 20th century that swept 80 million people off the face of the earth was a social tsunami. In its deadly wake, America produced Boomer Babies that disrupted the balance of everything in their path. Some would say that this Baby Boom tsunami swept America’s culture to extremes in unobservable slow motion, except to those who deliberately paused to reflect how Boomers ripped the world from its foundation.

If the two Great War tsunamis that destroyed 80 million souls and the subsequent tidal wave of Baby Boomers did in fact violently sweep America off its centrist foundation, perhaps the view from our shifted reality is now not Centrist at all, but instead radical. We tend to think of progress as forward motion. Any reversion of progress to a former era is viewed as radical. However, if we are really already radical, then placing America’s path back on the centrist foundation it would have had been on if not for our Baby Boomer tsunami should not be labeled as a radical reversion but rather as a righting of our true Centrist progression.

History shows that America did not return to our stable, pre-WWII Centrist path after the war. In fact, an objective examination of history would show that our entire generation embarked on a path that could in objective hindsight only be labeled as extremist, whether observed through the prism of either the conservatives or the progressives. If we are to find a way back to a growing and secure future in America, it is now time to honestly reflect on our history. That reflection might conclude that America did get caught up in a tsunami of extremism.

Our first post-war extremist thrust by both conservatives and progressives was to barrel down the path of building a military greater than all other nations combined. After WWII, America determined that an overwhelming military, more powerful than had ever existed before, was the correct measured response to the 20th century’s industrial unleashing of mankind’s destructive nature that had twice swarmed its deadly will. Our obsession with military superiority imbedded itself into our culture of defense and created a partially planned economy in America centered on our military complex. In the process of creating this modern dynasty of protection, our collective extremism sacrificed our economy to stave off the inevitability of man’s destruction.

We then recklessly spent our children’s future hoping not only to prevent the war that might otherwise end humanity, but also hoping to end poverty and oppression. After decades of budget increases, we were able to provide our poor with material consumption that made them wealthier than 85 percent of the rest of the world, but at what cost? Our national debt is now over 100 percent of our GDP. A centrist review of America’s deficit spending would have to conclude that we have not been Centrist in our spending.

Our extremism was not confined to the military and the Great Society. Baby Boomers also naively lived in the moment without securing our retirement. We now have a crisis over the empty coffers of Social Security and Medicare but we knew for decades it would come because America’s Baby Boomer generation chose not to save even knowing doing so would end in crisis. Was it not extremist to plan to bankrupt our children, forcing them to enjoy only half of our materialism so that we could consume half of their future? This extremist denial of responsibility to pay for our own military and Great Society excesses glaringly contradicted our perception that we were centrist champions of social equity.

Our generation spent our children’s’ future to extend the great society, to stave off Armageddon, and to enjoy the fruits of our parent’s frugality. Having forsaken our foundation of Centrism by indenturing future generations to pay for our excesses, how could we judge others who found it acceptable to gut America of jobs and factories, or who built banking Ponzis that indebted Americans to feed our capital to China. Who were we to judge when the Federal Reserve shook down other nations to fund our excesses or when the two reigning parties of Congress sold their souls to secure continuing re-elections.

With such moral ambiguity, we became trapped in relativism. Our nation was then unchained from any semblance of fiscal restraint and was free to drift toward a new norm of extremism, one in which we could argue amongst each other the relative turpitude of our choices while at the same time viewing our own progressive or conservative ideas as Centrist. In this drift toward a conscious denial of extremism, there were too few of our generation that publicly warned America for having been as extreme as posterity will most undoubtedly judge us to have been.

Finally in desperation, Tea Partiers exclaimed that this nation had drifted so far from its original moorings that they had to stand up to America’s extremism. Aghast, America bemoaned this movement’s presumption of claiming they were the purveyors of True North. Yet, if America has drifted into extremism, then the Tea Partiers actually were most clearly viewing our danger, and should be regarded as heroes for having identified our nation’s drift before it destroyed us.

Some claim that the Tea Party’s adoption of Globalist ideas has kept it from winning over America to reverse our joblessness, a symptom of our excess. Even though their keen observation of our extremist drift did help to fight the expansion of our extreme Federal budget deficit, it did not give them the ability to see all excesses and to find a way to bring America back fully to Centrism. As such, the Wall Street Occupiers have emerged to help identify a possible course correction, and I suspect other movements will emerge as well.

America is annoyed by these two movements’ persistence, almost like an alcoholic would be annoyed by an intervention. Yet intolerantly scapegoating these movements will not change the fact that we are floating on debris of relative progress. However, if our entire Baby Boomer generation is “the bubble” and all of these economic bubbles that were and that are unfortunately imminently yet to come, are just exacerbations of our true bubble, then our Baby Boomer bubble must, as all bubbles do, return to its point of trend origin so that the world can begin again its balanced progression.
We can continue to argue in the extreme that housing prices should remain high but they will not. We can argue in the extreme that the stock market should stay inflated but it will return to its historical trend. We can argue that our national budget should continue artificially bloated to fund our Baby Boomer experiments of the war on poverty and a military to end all wars but it cannot. A few of our elite will continue to argue that unemployment will have to drift sideways for years to come, but it cannot. Instead America will drift back to what can be funded by the normal and Centrist progression of tomorrow’s workers and we will once again find our Centrist path.

We can continue our disdain for the “extremists” of our country, yet they are the Centrists of True North and we are unfortunately the extremists. To disdain ourselves would be unhealthy and thus we must return to a path of Centrism. Our nation was thrown excessively off course by world events and our Centrist Tea Party pointed out our excesses. Our Centrist Occupiers are searching for a way back to a Centrist capitalist democracy. Can we, having taken this journey of disorientation, now find our way back to true Centrism as well?

Inevitably, we will revert to the world’s centrist progression whether through the relative comfort of a blazoned and enlightened trail of American determination or through the precipitous fall of continued denial leading to economic implosion. However, the sooner we stop pointing fingers at our skewed perception of each other’s extremism and begin pulling our collective weight toward our historic and future Centrist progression, the sooner we will begin our nation’s reorientation to True North and the sooner we can begin our recovery.

Ashes, Ashes, We All Fall Down

If we choose to continue a stagnation of political will, American’s children of the 21st century and beyond may not have to worry about riches that could crush their human spirit. Instead their children and children’s children may spin around in the summer’s fields and recall their ancestor’s macabre poems.

Ring around the bank moats,
Pockets full of bank notes;
Cash’s crashes,
We all fall down.

Or perhaps America could get on with cleaning up the rats’ droppings before they bring the plague of financial destruction upon us. Unlike the poor inhabitants of feudal villages that took for granted their lives had to be shared with pestilent rodents, we do not have to share ours with diseased vermin of Wall Street. We know the right course is to restructure the banks. In 1932, FDR restructured the industry in 100 days after his election. Today, we watch dumbstruck and carry our financial, job and mortgage dead to the front door steps for our law officers to cart off, while the ongoing financial shenanigans of these disease bearing rats continues to plague us after 3 years of stagnation that seems to have no end in sight.

Certainly, one can argue that the right thing for Hank Paulson to have done was to save the banks from utter destruction by massive injections of capital in 2008 when public officials had no clue the depth or breadth of the calamity before them. Yet now after three years, can we honestly say that we do not know the extent of the devastation, and if so, why? Does it make sense to sit helplessly by watching the banks trying to put out this monetary wildfire that has swept through their industry without trying to carve out a safe zone of financial capitalism that can survive when the whole thing comes crashing down? Rather than keep too big to fail banks in place while they continue to falter and continue to fail in their needed support of an economic recovery, perhaps America should once again act paternally to break up the banks and cull out the ones that have healthy balance sheets to help them to grow under the tighter restrictions of reinstituted banking regulations.

For those banks that continue to bleed with poor capitalization after such revitalization, they can continue to wallow in a sidelined non-lending stagnant existence or die as America gets on with its historical culture of survival of the fittest. There is no need for America to wait for the next financial virus to scourge all of Western Culture when we can instead systematically yet expeditiously put our financial house in order.

European Bank Announcement is the Latest Step in Deleveraging the China Bubble from Debt to Equity

In 1979 when China opened its doors to prospectors, millions rushed in bug-eyed on the prize. They scurried for trillions of dollars of capital to plop down factories on their newly acquired claims. Those trillions first came from EurAmerica’s savings, that currency that had already been acquired through decades of previous achievements. When that was not enough to satisfy the frenzy, they buggered trillions more in future obligations of EurAmerica’s citizens on the promise that these glorious gold seams of the East would make EurAmerica rich beyond its wildest dreams.

And why not…EurAmerica had grown obese on other stakes plopped down around the world. We created equity from thin air to offset the obligations of third world and emerging countries and spent the arbitrage from our financial creations to feast in our homeland for decades. Yet none of these opportunities held a candle to China’s mother load. China would once again be the feast to engorge all our known senses with pleasure and reward. So EurAmerica indebted herself beyond all reasonable abilities to repay, knowing that this gold seam would pay off by its own merit.

But how could it pay off? Were not these same factories supplying EurAmerica with goods that their own citizens would have otherwise supplied? Were not these same factories paid for by the obligations of “EurAmerica’s citizens to work into the future to pay off the debts they had incurred in order to build these factories? And if these EurAmericans could not work to pay their debts to gain the riches they had hoped for from these factories, how could they buy the products that would eventually pay them the riches they had sought? It seems this time around, the door that was opened in China was the hinge of a Venus Fly Trap and EurAmerica was the fly.

Now that we have incurred this massive debt and our scheme for getting rich was found to be yet another Ponzi of get rich quick avarice to be piled on the heap of human foibles, it is now time to clean up the mess from the last three decades’ party. People will have to pay for this latest excess just as all in human history before us. Europe languished for 22 years after its 1871 financial extraction to fund America’s railroads. Some countries like Russia rose up from those excess in political system revolutionary defiance. Others chose military aggression while still others congregated in socialist shifts of wealth redistribution to deleverage the world from its dilemma.

We cannot yet predict the world shifting power struggle that will ultimately emerge from this great crisis. However, what started as Europe’s riots and later erupted into an Arab Spring in reaction to Wall Street’s grand foray was again played out in yesterday’s announcement by Europe’s leadership as another step in the unraveling puzzle. The information age has shifted the balance of power and bankers can easily see that 2011 will not be a repeat of 1871. Infighting will continue as EurAmerica sorts out who will pay the costs of financial obligations from this great extraction. But Europe’s announcement was a break through nonetheless.

European Banks will eat a distasteful sum. Their shareholders will pay the price as much as they can. Some banks will call upon the European Financial Stability Facility, which will in turn call upon governments, which will look for handouts and push for further austerity, which will in turn lower GDP growth, which will further exacerbate the debt crisis. In the end, a massive debt overhang will have to be managed by all of EurAmerica in a deleveraging and slower GDP growth, if not retracting, environment.

Banks only have so much in reserves and even those may be grossly overstated as a result of credit reserve requirement manipulations during the 1990s including bank reserve sweep accounts and parent/subsidiary loans that have as of now extended bank credits 1.1 trillion beyond bank deposits. EurAmerican governments could take all their reserves and destroy our international banking functions just as banks could take much of the housing stock, destroying millions of lives and our nation’s economic futures. Governments and central banks could print money throughout EurAmerica and destroy national economies for decades. And then what….

When a debt load becomes so excessive that it cannot be paid by the annual output of its guarantors, it becomes in essence equity. All of this past three decade Great EurAmerican Capital Extraction creditors, from our wealthy elite to retirees on fixed incomes, “own” pieces of the thousands of factories on the shores of the East. They may not have bargained for that outcome but that is what they got. Right now, rather than accept this eventuality, creditors are willing to shave their loan returns in order to keep their position of being first to be repaid rather than suffer what is amounting to an even greater uncertainty for equity shareholders. And thus we have the announcement from Europe’s banks.

In the end, accepting that their loan position is untenable and must be converted to equity will be the ultimate solution. That position is hard to swallow for many reasons just yet. European banks and governments had been playing a dangerous game of chicken, both refusing to budge on movement toward resolving this debt leverage. For now, the dangerous game of chicken stalemating any movement toward the final solution and putting the entire world in jeopardy has had a “great” move among many more to follow.

My solution for America’s turnaround: Convert debt overhang to equity. Clean up credit through credit amnesty. Put all unemployed people in domestic work opportunities through free market job voucher program. Turn on the switch and go.

Ben Bernanke Conducts an Economics Demonstration

Standing behind a lectern in front of a distinguished group of economists, Bernanke explains his maneuvers. He pulls out a good sized, clear glass vase and sets it atop the lectern, explaining, “This vase represents America’s monetary system. It seems empty but it is not. In fact it is full to the brim with air molecules. These molecules represent the Fed’s every day monetary function, creating money out of thin air and placing it in circulation. How much more monetary function do you think we could put into this vase?”

An economist raised his hand and said, “None I suppose. It seems the vase is pretty full of air right now.”

“Ah,” exclaimed Bernanke as he pulled out a bag of river stones. “But what if these river stones represented stimulus?” He neatly placed stones one atop the other till they filled the vase. “You see, we can fill this economy to the brim with stimulus and it does not overheat to create hyperinflation. But now that stimulus did not create the desired economic effects, is the vase full?”

A colleague raised his hand and stated, “It appears to be full but about to start emptying because the Chinese are beginning have stopped buying our short term debt.”

Bernanke determinedly remarked, “Yes but with unrest stirred up by an Arab Spring, a bit of European unruliness, and a horrific tsunami, we have a mixture for reserve currency absorption.” He then pulls out a jar of small round pebbles. “These pebbles represent Quantitative Easing.” With that, he pours the pebbles into the vase and begins to gently shake the vase letting the pebbles penetrate the crevices of the larger river stones until all have filled the empty spaces. “With quantitative easing, we are able to fill the longer tranches of debt, pushing out the treasury maturities beyond a year. Now does it look like our vase is full?”

“Seems so,” states a dissenting Fed board member. “The markets are now beginning to wane and more countries are beginning to question their holdings of U.S. dollars.”

“True!” exclaims Bernanke as he pulls out a pitcher of little steel BBs. “But what I have here is QE2.” With that, he pours the contents over the vase and gently shakes the BBs into the crevices between small pebbles and larger river stones, until the entire pitcher of BBs finds their way into the vase. “As you can see, I am able to push more and more of our nation’s debt into the out year treasuries, all the while propping up the markets, and yet we have no hyperinflation. Is the vase full now?”

“Definitely.” Remarks a marketeer as he reacts to Bernanke’s remarks that there will be no QE3 by pulling out of the market, sending it south. Sensing a potential slide into deflation, Bernanke reaches down under the lectern and pulls out a pitcher of sugary white fine Florida sand and begins to pour it over the vase, shaking the sand into the tiny crevices left in the vase, then waves his hand over the vase telling the market that interest rates will hover at zero for the next two years. “You see, I have more tricks up my sleeves. I call this Operation Twist. By this concurrent Fed and Treasury action, I can shove more and more of America’s debt way out into the treasury curve without hyperinflation.”

“But no one else is buying the debt and you are talking about creating even more debt by buying into the European’s crisis. Won’t this finally create hyperinflation?” shout the prime metal buyers as they watch the market tank and their metal prices dropping.

“Aha,” exclaims Bernanke gleefully as he pulls out his last pitcher containing crystal clear water which he promptly pours over vase and it seeps into the last known air pockets within the confines. “You see by packing the out years full of debt, I have effectively made more room in the early periods for a bit more room to conduct QE3. Call it by any name you want but the Fed will solidify Europe’s crisis and shore up America’s failing economy as long as I have space in the vase and the dollar does not hyper-inflate. To do otherwise would be to subject the banks to deflation and collapse.”

(Soooo…Europe may breathe a sigh as the can kicks further down the road, the markets may have a mini rally, the metals may trail off for a bit as other short term hedges seem a better bet, and then what? Your vase really does seem to be full now Dr. Bernanke.)

My 100th Post!! – America’s Superiority Complex May Have Precipitated the Next Great Depression

EurAmerica has created a banking bubble that will be very difficult to unwind. We allowed the bubble to evolve because we have never relented from our grander perception of the European civilization in the community of civilizations. As such, after mercantilism resulted in the slave trade, industrialization ended in colonialism, and Bretton Woods preceded post-colonial national indenturement via the IMF and the World Bank, it seems EurAmerica boxed ourselves into an aggrandized monetary corner.

America singularly fell into the superiority trap when we assumed that our obsessive post war desire for a military to overwhelm all other militaries was desired of us by the rest of the world as well. At the end of WWII, America found herself having to fund our re-establishment of our international commerce by rebuilding the rest of the world including vanquished and allies alike. As we built our communist protectorate, it seemed infeasible that we could collect payments from other nations to both pay for our policing powers and for the Marshall plan, for earlier post war reparations beget Weimar Germany and WWII.

Yet America had most of the gold and the world had not yet let go of the concept of gold backed currency so all other nations needed gold backed dollars post war. It seemed only natural for a superior minded America then to charge other nations a fee through a debasement of our dollar. As a logical next step, when America desired to fund our Great Society and Vietnam, it was easy for our superior government to rationalize borrowing through additional money creation.

This exuberance and arrogance of easy money printing finally gave way to a misguided concept held by America’s central bank that perhaps the world’s first worldwide dollar reserve currency could actually be inflated to curb the $50 trillion dollar credit default swap bubble that dwarfed the worlds $15 trillion dollars of trading currency by comparison. We have now seen that this superior thinking was just folly.

America lost sight that money is just a place holder for people’s commitment to create real value in the future to offset the creation of money today. By our superior actions, we now risk causing even the first world reserve currency to hyperinflate. If by chance, the world is able to sustain stability of this current superior monetary system a bit longer even with a weakened Yen, a weakened Euro, and a weakened Dollar, the Yuan will likely emerge to complement the global mix.

Asia has already developed into a center of commerce within itself and the Yuan will easily surpass the dollar there. China has been wildly accumulating gold as a precursor to that eventuality. She recognizes that her strategy of keeping the value of the Yuan low to ease interest rates in America has run its course and that at a point, a strengthened Yuan will benefit hegemonic relationships more than continued reliance on exports to an overly debt ridden America. Therefore, the Yuan may soon take its position center stage in a sharing of reserve currency status with the other global currencies.

However, if something like a Greece default thrusts EurAmerica and thus the rest of the World into the Greatest Depression, our credit will be ruined for the foreseeable future. This mountain of credit default swaps will collapse, the current structure of banking and insurance industries will be awash. An accounting of which individual financial companies will continue to remain solvent will take time. Hard assets in America will quickly revert to true or even severely depressed values. A new American currency may evolve.

Asia will return to strength much more quickly than EurAmerica, and we may emerge in a more hegemonic subservience to Asia. A return to bilateral trading contracts backed by gold stores may be inevitable. The exponential growth of debt derived money creation will be reset to a slower slope of escalation. Nations will once again separate money and credit formation functions from investment banking, perhaps creating a non-profit incentive for central and commercial banks to curb the escalation of debt required to feed interest payments.

China’s concept of money creation will endear itself to the world with the idea that money is created by the commitments of emerging countries, not the supply of hegemonic capital. The promise of the emerging nation creates money, and that promise is solidified by the emerging nation’s ability to create laws, infrastructure, and education to support it. Without causing nations to be indentured solely to the needs of the empire, China may emerge from the Greatest Depression spawning a new monetary system that grows healthier worldwide communities in which money is truly a unit of commitment to future value created and not a political tool to indenture the world to a perceived EurAmerican superiority.

America’s Future – Building Block #1: U.S. Debt – Do we increase, decrease or default?

One of a few critical building blocks of American policy that will be required to right our ship of state is stabilization of America’s debt. The seeming annual deadline to vote on raising the debt ceiling is set for August 2nd. While the Republicans have threatened to default unless the ceiling increase has corresponding cuts to the budget, and while the world anticipates corrective action, we may only see hollow political chatter without material cuts because it is not yet America’s season for freefall from treasuries default.

However, it should be the season for reason. Some economists tell us that recent fear of historic deficits comes only from those ignorant of economics. They say we can print money at will without retaliation because of our sovereignty and world reserve currency status, that we owe this debt to ourselves, and that we can inflate the debt away. They surmise that we are nowhere near an insurmountable debt maximum. But how can they be so confident that America’s ballooning debt is not an issue?

Learned pontifications have confounded us through continued clamoring of countering arguments since 1990, when the debt ceiling was raised 33% to 4.1 trillion to contain our previous housing bubble, the savings and loan crisis. We have just exceeded our latest federal debt ceiling of $14.29 trillion dollars. Total American obligations of all public and private debtors are over $55 trillion, and including government’s unfunded liabilities, we owe $168 trillion. Even if we could balance the budget today, each working American is already obligated in some form to pay the world one million dollars. Who is right? How much American debt is too much debt?

In placing their faith in the pseudoscience of modern economics, our scholars fail to mention that the majority of currencies in history no longer exist. Hyperinflations do occur with regularity, 21 countries in the last 25 years. Debt levels do collapse governments, small (Zimbabwe) and large (USSR). Unfortunately, by the time societies recognize they have reached the beginnings of hyper-inflation, their currencies are already on a glide path to extinction. How close are we?

Prior to WWII, America paid down its debt between wars but our perception of debt changed in 1945. Backed by 70% of the world’s gold, the dollar was the world’s hope for rebuilding, and hence became its reserve currency. In 1944, the architects of Bretton Woods envisioned the dollar as the lynchpin to a system in which central banks maintained stable exchange rates to support balanced trade between industrialized countries, with minimal international indebtedness. They did not foresee the corrupting power they entrusted to the United States that would later subjugate the emerging world to a devaluing dollar.

Control of the world’s reserve currency proved too powerful an elixir for America. Perhaps we convinced ourselves that exporting inflation was a fair trade for granting Europe and Japan seed capital, and for our supplying our trading partners with military security. Nonetheless, for the past six decades the U.S. taxed the world $15 trillion through devaluation, and borrowed another $14 trillion, diverting substantial growth capital from emerging countries to fund America’s sustenance.

Without a realistic alternative, the world reluctantly accepted losses of their reserve currencies, but devaluation has not been without cost to America. The collapse of Bretton Woods spurred the growth of a $300 trillion FX market that has quickened the demise of the dollar’s reserve currency role. FX arbitrage and speculative volatility also precipitated the Asian crisis, causing the Asian monetary zone to closely align, lessening a need for dollar reserves. Including Europe’s drive to a common currency and China’s rise, all reduced the dollar’s power and made the possibility of an alternate monetary system possible. And America’s choice to drastically export dollar devaluation to provide investment banks buffer for unwinding of credit default swaps has brought the world to the brink.

While largely diminished, the dollar still yet dominates but for how much longer? After $2.6 billion of quantitatively eased dilution, Bernanke has fatefully claimed an end to QE, but only after President Obama announced a decade long expansion of trillion dollar budget deficits, replacing QE in name only. Is there no limit? If a limit is reached and the world fully rejects the dollar, history has shown that its fall will be too rapid to save. We now have imminent signs of that moment’s approach:

• China rejecting the dollar – For eight years, China purchased 20% of the U.S.’s deficit, buying 50% in 2006. However, for the last year, China has been a net seller of U.S. debt, reducing its total holdings 30%, and dropping its treasuries 97%. China has signaled that its risk of holding U.S. debt is greater than its risk of causing U.S. interest rates to rise, which will limit our investment in China, and will cause us to purchase less Chinese goods. Their risk equation has pivoted.

• Fed’s acquisition of treasuries – In 2011, the Fed has been the chief buyer of U.S. treasuries, purchasing over 70%, as opposed to 10 % during the last decade.

• Private investment shies away from the dollar – Investment firm Pimco, managing the largest bond fund in the world, cut its holdings of US government-related paper from $237 billion to zero for the first time in the history of the firm, stating the U.S’s problem is worse than Greece’s.

• Regionalization of reserve currencies – Asian, European, and Middle Eastern trading blocs all are all moving away from dollar denominated trades. As an example, China’s and India’s central banks agreed to direct currency exchange as of 2011.

• Commodity inflation – While the U.S. government quoted core inflation is up a mere 0.4 percent, Americans have felt the results of a real 12% inflation and much higher commodity inflation.

• Debt rating concerns – As of June, 2011, Moody’s has threatened to reduce the U.S.’s debt rating unless imminent progress is made on reducing America’s deficit

• American public losing faith – Most telling is the behavior of the American people. With 28% of home prices lower than the underlying mortgages, record numbers of Americans have chosen strategic foreclosures. 25% of foreclosures are from those that have chosen to walk away from debt obligations even though they still have the wherewithal to pay them. Feeling betrayed by America’s financial institutions’ “contract” with Americans for stable money, stable employment, and stable pricing, Americans increasingly no longer feel compelled to honor their financial contracts. The underpinnings of the dollar are on shaky grounds.

Our political and financial leadership now have choices to make. The Fed has signaled no more QE and the President has signaled a decade of continued historic deficits, but those announcements are political balloons that have been lofted toward their constituents. What should America’s true strategy be for our mounting debt?

We have but limited choices. 1) Debt can continue to increase at historic rates, perhaps preserving our banking system in its zombie state, but risking the loss of world credit, a spike in interest rates, crowding out of government services, and the march toward hyperinflation. 2) The rate of increasing debt can be reduced by either budget cuts or tax increases, but either measure may precipitate a return to America’s recession, increasing unemployment, decreasing GDP, and without substantially austere measures, continuing down a path toward loss of world reserve currency status. Or 3) America can take drastic measures to eliminate the deficit and to begin reducing the debt, most likely causing a rapid downward spiral of GDP which, similar to Greece’s predicament, will create an imploding cycle of further austerity measures and GDP reduction.

Considering that credit agencies have already fired lowered debt rating shots hair-raisingly close to America’s bow, the first option of continuing down our current path of printing money to fund our federal deficit is daring fate to draw us into the abyss. The world is quickly shutting off America’s Fed spigot of money printing. If we continue printing money, we risk paying higher interest on existing debt, crowding out needed government services and shocking America back into recession. The EU’s prescription for Greece has enlightened us that the third option of severe austerity is a prescription for thrusting America into obscurity with little hope of return. Therefore, we must now immediately embark down the second path of significant but directed deficit reduction. Sound choices of which reductions to make is a topic for a near future building block post and would be an interesting response from readers.

While the middle choice of materially lowering the rate of increase in our debt and over time reaching balance is our hope of recovery, it risks sending America into a double dip recession. If we reduce public spending without subsequently increasing private spending, demand will decrease, most certainly causing a downturn. Increasing taxes, without correspondingly increasing earnings of those paying them, will crowd out private spending, also decreasing demand. To successfully navigate our debt hazards, any decrease in government spending must be accompanied by a similar increase in private spending.

To increase private spending, either consumer demand must be increased with corresponding availability to credit, or private business spending must be increased with a corresponding potential for demand for its goods or services and a corresponding availability of credit. To keep this post to a reasonable limit, these issues are items for a future building block post.

Consumer credit is maxed out. Historic consumer debt combined with loss of housing and stock market equity and lowered prospects for employment have dried up any chances of a consumer led recovery. Loosening of credit without a corresponding increased demand for employees is unwarranted and spurring demand for employees is unfortunately another building block topic.

State and local governments are operating outside of constitutional authority in the red, and foreign governments have reduced credit to the federal government. Therefore, deficit reduction must initially be accompanied by increased domestic business spending if we are to avoid a recession. Increased spending must have the potential for successful creation of new profits. Sources of new spending must come from private providers of debt and capital, bank debt in combination with private business equity. America can no longer allow our banks to set the agenda for the path forward. The current prescription of repairing bank balance sheets while limiting credit is no longer feasible. These issues are also a subject for another building block discussion.

Some in Congress suggest we have a fourth option, that of initially maintaining the deficit by cutting taxes to spur growth while reducing government spending accordingly, eventually growing tax revenue through increased growth of the economy. While the idea has much conceptual merit, its implementation in previous Congresses was spurious. Private capital from lowered taxes was siphoned into overseas investments with little if any net benefit to the domestic economy. Much work from Congress, the courts, our executive branch, including trade negotiators and national strategists, business and labor must be done together as a community if we are to establish the real environment that can actually benefit from reduced taxes. (yet another building block discussion)

Initial prescription: Material reductions in government spending with corresponding highly incentivized, private investment that directs spending to domestic projects and increases domestic employment. Ultimately, in a timeframe considered realistic by world markets, the deficit must be eliminated through combination of reduced spending and increased GDP that strategically grows the domestic economy, creates full employment, and retains innovation. (More meat in future building block discussions)

Will EurAmerica Enter a Cold Financial Winter? (Revised)

When China announced to the world that it would open its doors to foreign investment, multinational corporations from both Europe and America rushed to stake a claim to a unique gold rush opportunity of historic proportions. China offered EurAmerican MNCs that agreed to share trade secrets and intellectual capital, that had capital to expand China’s manufacturing infrastructure, and that could open their own countries to China’s goods, the opportunity to participate in China’s newly opened special economic zones, with the hope of marketing to their 1.3 billion people.

Requiring massive investment to capitalize on the opportunity, MNCs sought the support of international investment banks and lobbied home governments to provide looser, deregulated capital markets as well as to submit to opening home markets to “free trade”. MNCs then began a three decade long extraction of wealth, factories, and jobs from EurAmerica to build China’s manufacturing infrastructure and GDP.

At the beginning of China’s historic rise, American politicians freed capital for China investment by reducing taxes of the investment class of Americans; through a reduction of the top tax income rate from 70% to 50%, through reduction of capital gains tax from 28% to 20 %, and through tripling of estate tax exemptions. As more and more capital was needed, America’s baby boomer retirement investments were developed for ease of use in China. In America, 401Ks, started in 1980, and IRAs, made available to all citizens in 1981, siloed middle class investments into the stock market that directed a majority of retirement funds toward China.

Later in China’s growth cycle, EurAmerican banks devised ways to extract even more capital through debt instruments from their citizens. EurAmerican interest rates were set low, creating the credit to extract maximum capital to fund the growth of China’s manufacturing infrastructure through home equity and business development loans. Yet, to meet China’s capital needs in the exponentially growing latter stages of growth, extreme capital extraction through maximum borrowing of a majority of private citizens and public entities was required.

Investment banks created a method of extracting maximum capital from EurAmericans’ main investments, their homes. To accomplish this, Investment banks restructured the banking industry. They first created methods of incentivizing consumers to take as many and as large of loans as possible through risky, low interest, no income verification loans and other, more predatory loans. They also rid commercial banks of their traditional, credit restricting roles by incentivizing them to make as many loans as possible, with minimal risk because they could simply resell the mortgages to the investment banks for a profit. Finally, they developed complex, (and unfortunately faulty) derivatives to buy mortgages from commercial banks and repackage them for profits.

In the process, a majority of consumers that could afford it were lured through ease of access and Ponzified greed into their debt web. Greed played its part with commercial banks as well, as most became willing accomplices of the role that investment banks created in transforming them into maximum credit authorizing, debt creating factories to feed the raw commodities of capital that China needed for her later growth stages. As beneficiary of EurAmerica’s capital, China became a strategic partner to the process by supporting low EurAmerican inflation and interest rates through:

• Accepting free flow of manufacturing infrastructure into her economic development zones
• Funding infrastructure debt payments through sales of low costs goods back to EurAmerica
• Mitigating international demands to revalue the Yuan higher by maintaining historic trade imbalances with EurAmerica and reinvesting Yuan back into EurAmerica
• Keeping internal inflation low through internally enforced savings of wage controls and removing excess Yuan from circulation through funding trading countries deficits
• Managing external commodity inflation through aggressive development of international Greenfield commodity projects to supplement absorption of long term international commodity contracts and relationships that were left unattended by EurAmerica.
• Reinvesting surplus capital into EurAmerica, keeping world interest rates low to extract last vestiges of EurAmerican capital through historic levels of corporate and private debt

When this historic, debt driven, extraction of two great empires’ wealth reached its zenith, like all financial bubbles finally do, public, private and corporate debt had stretched beyond its ability to pay, exceeding $50 trillion dollars in America alone. The financial herd had stretched so thin that it simply required a few debt ridden gazelle to nervously default to start the whole herd stampeding frenzily toward the bank runs that inevitably follow peak excess. This time in history, it was the unraveling of the predatory American home loans that toppled EurAmerica’s financial house of cards. Nonetheless, if not for this gazelle, another would have jumped to take its place, for no exuberant and irrational credit binge ever stands in the longer term.

When this Rube-Goldberg loan scheme supporting the massive capital transfer from EurAmerica to China finally collapsed, investment banks were pushed to the precipice of default. Acting independently of government mandated goals, central banks, with the Federal Reserve out front, stepped in to protect the banking industry by providing liquidity to those investment banks most at risk. They did so claiming that not providing liquidity would have caused domestic businesses and private citizens to default through massive foreclosures, bankruptcies, layoffs, financial and operational restructuring.

Unlike previous historical investment bubbles, in which many investment banks failed, EurAmerican central banks temporarily saved the vast majority of investment banks through simultaneous, massive expansion of the money supply, staving off a rapid disintegration of public, private and corporate debt, recorded as assets on their balance sheets. Recognizing further monetary support was required, the Federal Reserve attempted to mount another widespread EurAmerican expansion of money supply but Europe, intent on preserving its courtship of unification and now dealing with the crisis of PIIGS deficits, did not concur. Without palatable alternatives, the Fed embarked on a Romanesque fait accompli of reserve currency monetary expansion, attempting to reverse the entire world’s contraction of money supply through what they termed Quantitative Easing.

It appears that temporarily at least the Fed’s Quantitative Easing policy have strengthened EurAmerican banks’ balance sheets, transferring some toxic assets to sovereignties, and have girded them to endure the coming double dip recession. However, it failed to accomplish their stated long term debt stabilizing goals. Unemployment is once again increasing, housing prices have reversed and are falling, and while some European countries have begun to institute austerity programs, America is projecting trillion dollar deficits for the remainder of the decade.

Unfortunately, the Fed does not have the magic bullet to repair the only ways to truly provide long term stabilization of massive EurAmerican debt supporting their balance sheets. To do that, EurAmerica must stabilize the underlying ability and desire of their debt holders to make debt payments. This can only be accomplished by:
• Maintaining and growing EurAmerican economies
• Reducing real EurAmerican unemployment
• Increasing the nominal values of EurAmerican Housing or restructuring housing debt
• Eliminating public deficits
• Reducing non-value generating debt
• Maintaining minimum interest on existing debt while incentivizing its reduction and saving

Without immediate and urgent prescriptive measures to meet the above objectives and to mitigate the impact of EurAmerica’s retreat from previous financial investment and consumption patterns, a cold, worldwide economic winter most likely ensue. American direct foreign investment has already begun its inevitable descent. Europe’s protectionism has kept available resources flowing to China but EU will soon follow with fewer investments in China as well. China will react with less support for EurAmerican deficits, severely restricting EurAmerica’s monetary managment options.

If we do not act soon, our political systems will be forced into severe austerity measures. The world will enter a deep and disruptive recessionary cycle from which countries and entire regions will eventually emerge in an entirely new trading pattern; one that is China centric, developed around its newfound industries that were funded by EurAmerica at the turn of the 21st century. China will emerge first, building on its excess modern manufacturing capacity and hegemonic commodities relationships. When at last EurAmerica exits from the long winter of debt riddled recession, it will follow the path to the Asian economies.

Prescriptions to follow…

QE2 Has Precipitated the End of Post-Bretton Woods Money

The worldwide economy runs on a Post-Bretton Woods concept of money. Central banks create enough new currency out of thin air to provide adequate money velocity. This new money is then inserted into the banking system that then lends it out according to the public’s credit potential to pay it back with interest. The public then multiplies money through purchases of goods and services that create economic output and that redistribute currency back into banks for relending to other members of the public who demonstrate a viable ability to repay.

When an economic shock stalls the money engine, it must be restarted while the economy is on a glide path prior to freefall. When money supply is temporarily pulled from the economy, loan creation that multiplies money is temporarily halted, shrinking the supply of money required to pay back existing loans. When this occurs, although the public still has the skills required to create value to pay back loans, it loses access to money to repay the loans.

If temporary money supply disruption is allowed to fester, enough unpaid debt cycles accumulate to create collapsing credit, toxic debt, shrinking money supply and deteriorating markets. When the economy stalls, one of two government interventions must occur to reverse the trend and right the world’s money growth. Either credit limits must be loosened to allow for borrowing to cover unpaid debt plus future growth, or demand must be increased to create enough credit under existing credit conditions to cover unpaid debt plus future growth. Which process is most viable depends on the extent to which the markets have been allowed to fester.

In the first days of the Great Recession, banks knee jerked in response to collapsing real estate and slammed the credit market shut. Worldwide central banks quickly responded by attempting the first of two interventionist tools. By infusing currency from thin air, they hoped to provide cover for free-falling real estate prices, and to re-establish credit into the market. Had banks re-established loose credit, businesses would have bet on an increasing economy and would have used the new credit to increase production, thereby maintaining employment and multiplying money. However, the toxic asset load from the housing Ponzi was of such historic proportions that central bank loans did not repair bank balance sheets enough to incentivize re-establishment of credit. Without forgiving insolvent bank debts that would have correspondingly collapsed the world’s money supply and depressed world markets, governments indefinitely stalled the traditional banking engine of money growth.

Each month that banks remained functionally insolvent, increased business risk. As money supply collapsed, demand decreased correspondingly decreasing the willingness of businesses to bet on producing supply before demand. When the risk chasm became too great, the economy stalled and then collapsed.

Government Keynesian central planners then attempted a correction through the second of their interventionist tools. However, the stimulus packages they devised to attempt to bridge the demand gap created artificial demand in too concentrated pockets of industry and created too small an artificial demand to restart an economic engine that requires the credit and faith of every able consumer, worker and business in the world pulling on the ropes of credit derived money multiplication.

Both traditional methods of reversing money collapse, central Keynesian planning and central bank capital infusion, proved ineffective. Without effective worldwide government and central banking tools, festering turned parts of the world’s economy gangrene. No single government had the ability to re-start the world’s engine, and no worldwide consensus of political will existed to simultaneously and aggressively create the size of artificial stimulus required.

In desperation, the United States Federal Reserve has embarked on an unrealistic attempt to float the entire world’s money collapse by inflating the world’s Post-Bretton Woods reserve currency through what it coined “Quantitative Easing”. However, any attempt by one country, even the United States, to singlehandedly recover the world’s economy, even with an untried policy as aggressive as quantitative easing, has fluidly dissipated to fill the world’s credit gap without the desired stimulus effect. The temporary momentum created through massive QE creation of dollars out of thin air allowed for a temporary, mild upward glide of the economy, but anticipating the June, 2011 end of QE2, the world adjusted its glide path and its real economy is beginning another freefall.

The Post-Bretton Woods system of worldwide money supply being introduced through fiat currency backed by the simultaneous introduction of credit enhanced value creation has, in effect, been severed. Now that the United States has raced ahead of the world’s traditional money supply, the Fed must either continue down the slippery slope of additional quantitative easing leading ultimately to the collapse of the dollar, or revert to an alternative, non-traditional, never before tried fiscal or monetary tool, to escape from its trap. Any alternative tool will invariably destroy the world’s faith in the dollar as the reserve currency, and will mark the end of the Post-Bretton Woods concept of money.

Fed Chairman Bernanke has to Choose between Three Ugly Paths

One of the fallacies of gross domestic product (GDP) is that it doesn’t differentiate between those activities that advance a society and those that do not. Over a period of centuries, as nations have increased their GDP, they have increased the life span of their citizens, a valid argument for an investment of a people’s national effort to advance their society. Over the last three decades while America has suffered epidemics of obesity, diabetes, heart disease, Alzheimer’s, and cancer, dramatically reducing our national health, our share of GDP for healthcare has escalated, obviously a bubble by societal advancement standards. Similarly, while trillions were spent on housing stock during the past decade, the resulting bubble measured as a grand GDP, yet it actually produced excessive, obsolete housing and a mountain of debt created money that collapsed as the bubble popped.

While Japan’s tragedy will undoubtedly produce jobs for many and wealth for a few as it registers a higher GDP for Japan and her suppliers, all of the expended labor to rebuild what once was is just that. The labor expended is labor that otherwise would have advanced Japan beyond the point of which she will merely return. Similarly, the world’s finite commodities will be lessened just to bring her back to square one. After a period, Japan’s infrastructure will return as a result of expending hundreds of billions of additional debt. However, the leaking nuclear reactors will damage her real value creating GDP for decades. Brands from fish to cars to computer chips may well be negatively impacted by leaking radioactive isotopes.

Japan is a nation of savers and will ultimately recover. America is a nation that is struggling to even determine what marginal debts to expunge from its massive core debt. Unfortunately, as a result of our inaction, Bernanke has a lose-lose choice to make regarding monetary policy. His three choices for quantitative easing no longer can increase America’s real GDP but could destroy it considerably.

If he actually stops quantitative easing and contracts the money supply, as he earlier promised, our economy is going to tank, and inflation will still continue to erode our purchasing power. With a falling stock market, rising consumer prices, lower wages, lower home prices and higher unemployment, Bernanke will singlehandedly give a landslide election to the Republicans in 2012.

If he continues with QE3, he will stave off recession and buoy stock prices for a bit but he will commit America to a path of accelerating inflation. He may be able to postpone a crash until after the election, but without a disciplined monetary policy and implementation, the choice of when America crashes, as Standard and Poor’s has alluded, will be taken from him as the world financial community imposes discipline on America.

If Bernanke simply quits QE2 and begins to slowly raise interest rates to keep pace with the EU, as is his stated course, he will give Congress time to act boldly before the world reacts. But his sacrifice will be for not because Congress won’t follow his lead. He will certainly douse the already tepid economy. With no hope of recovery, and no signs of life from Congress, America’s middle will grow restless and her uberwealthy will use the calm before the storm to race offshore. America’s enemies and opponents will act boldly during our internal distraction.

We now ask Bernanke to decide our fate after a generation of our decisions placed this burden on him. WWII led to too many baby boomers who believed our parents when they told us we would have a better life because of their sacrifices. Determined to create that better world, we continued to fight a two front war against the communists and poverty while choosing to create wealth from ideas instead of factories, and implementing our vision of schools that would fail to graduate a third of our would be thinkers. If our parents created wealth in houses and the stock market, we would create more wealth by borrowing to invest in bigger houses with walk in closets, and in bulging stock markets whose mavens convinced us our borrowed funds would create more wealth in overseas factories than in American workers.

Sure, to have it all, we would have to agree that our government should borrow almost as much as we contributed through taxes to pay for lost jobs, poverty, and a military so gargantuan that no-one who picked on our parents would ever think to pick on us again. Our concepts of wealth creation worked for some, but for most… not so much.

And now that our failed middle aged ideas have threatened to end our dreams of creating a better world through an endless expansion of the money supply, we have pulled the slot machine handle with our last three quarters of Stimulus, QE1 and QE2. Peaking through our government issued rose colored glasses, we hoped to see but failed to get even a single cherry.

After watching our post war babies mature into elected officials who failed to cut even 100 billion from this year’s budget deficit of 1,500 billion, we must now solemnly ask Bernanke to make his decision… in this moment…. just after his first ever Fed press conference. Please, Dr. Bernanke, choose what’s behind door number 1, door number 2, or door numberrrr 3.