Category Archives: Debt

Cataclysm, by Robert Gore

Collapse generally comes as a surprise, even to those who predict it.

The USSR didn’t just fail one day, as does a person who dies of a sudden heart attack or stroke. It was more like a wasting illness brought on by an unhealthy lifestyle. A physician tells a morbidly obese patient: “Your daily consumption of twelve cocktails, three packs of cigarettes, and 4,000 calories, and your refusal to engage in exercise more strenuous than walking to the refrigerator will kill you, but I can’t say when.” For both individuals and governments, certain choices are incompatible with continued existence, and the Soviet government made plenty of those.

Very few people foresaw its failure when it was imminent, even purported experts. The small group who said Soviet communism wouldn’t work because it couldn’t work were disparaged right up until it didn’t work. However, the deck is always stacked in favor of those predicting this or that government will fail. Ultimately they all do because they all come to rest on a foundation of coercion and fraud, which doesn’t work because it can’t work.

There is both a quantitative and qualitative calculus for individuals subject to a government: what the government takes versus what individuals get back. Government is a protection racket: turn over your money and it promises physical security from invasion and crime, and adjudication and restitution in the event of civil or criminal wrongs. The quantitative calculus: am I getting more back than I put in? The qualitative calculus: what activities and people does the government help or hinder?

Need a good laugh before the shtf?

AMAZON PAPERBACK

KINDLE EBOOK

Protection rackets are often indistinguishable from extortion rackets, the “protector” a bigger threat to the “protected” than the threats against which they’re supposedly protected. Such is the case with the US government, as it was with the former Soviet government. Blessed with naturally defensive geographies and huge nuclear arsenals, the chances of the US being attacked are (or were, in the case of the former Soviet Union) remote. The cost for actual protection provided by those governments has been a tiny fraction of what’s been extracted by force or fraud from their citizenries, the very definition of an extortion racket.

Freedom militates against stupidity; coercion compounds it. Competitive markets and a wide-open intellectual climate either kill the worst ideas or impel their improvement. Power corrupts so completely because those who hold it rarely face negative feedback or consequences. Critics are mocked, stifled, imprisoned, or murdered. The costs of failure are borne by the victims. The perpetrators blame those failures on lack of funding or authority and receive more of the same.

Nothing succeeds like failure in coercive systems. Just look at the US governments “wars” on poverty, drugs, and terrorism. For rational people in free, competitive systems an ever-expanding gap between shining intentions and dismal reality prompts psychological turmoil. The powerful salve outbreaks of cognitive dissonance with arrogance, which expands apace with their failing programs. Just look at Obamacare, which its progenitor hails as his greatest accomplishment.

As the protection racket and its sub-rackets expand, the “protected” receive less and less, but pay more and more. By now, both the quantitative and qualitative calculuses are clear to productive Americans: they’re being reamed by people they despise, who in their arrogance and willful blindness despise them. The government steals trillions directly, but still resorts to financial sub-grifts—debt, fiat money, and central banking—to feed its insatiable money-lust. Like the government’s debt, stupidity compounds exponentially and rational people wonder how long unsustainable rackets can persist. The racketeers, if they realize their rackets can’t last, don’t care; they’re going to milk them as long as they can.

With the world’s most powerful military, largest nuclear arsenal, and most intrusive surveillance apparatus, the ostensible power of the US government is daunting. Yet, if a tenth of the US population ran up their debts, withdrew their funds from the financial system, and then stopped making debt service payments for a few months, it would propel a run on the banking system, choking the government’s financial lifeline and exposing its worthless fiat debt scam. Thus, the government is hardly invulnerable. As stupidity compounds, so too do its vulnerabilities.

The foundation of the global economy and financial system is interlinked debt. Anyone paying attention during the last financial crisis recognized that it took surprisingly few defaults—debt markdowns that marked down the value of the corresponding credit-assets—in a highly leveraged and interconnected system before that system unraveled and imploded. Anyone with a modicum of analytic ability and intellectual integrity realizes that the “solution” to that last financial crisis—more government and central bank debt—was another instance of stupidity compounding itself. Now, there’s more craziness in the debt asylum than there was in 2007.

There probably won’t be a voluntary debt payment moratorium, although for anyone asking how “we the people” can throw off the burdensome yoke of “our” government that would be a fine place to start. There doesn’t have to be; the mechanics of debt implosion guarantee the same result. Most of the world’s financial assets are debt or equity claims. Equity has a lower legal right to a debtor’s assets than debt. A debt collapse will leave the world impoverished, and so too its governments. Many real assets will be tied up in creditors’ squabbles. Governments’ and their central banks’ vaunted abilities to drive interest rates to subzero, go further into debt, and exchange their pieces of paper or computer entries for other pieces of paper or computer entries will mean little in a world submerged in debt, worthless paper and computer entries.

Those who scoff at the notion of cataclysmic collapse ignore ubiquitous signs of deterioration and recent history. Real economic growth and incomes have been trending downward since the turn of the century, even by official statistics. One has to question how much of the growth in either is the product of statistical legerdemain—government statistics leave much to be desired—and debt. If debt grows at 5 percent and the economy and incomes grow at 2, is the economy actually growing? Should some present value accounting be made of the fact that the longer debt growth exceeds economic growth, the greater the burden that debt imposes on the economy?

Some say the last financial crisis proved that governments and central banks can prevent a debt implosion. They’re drawing the wrong conclusion. It “proved” that massive injections of fiat debt defibrillated the patient, and it still serves as essential life support. However, not even life support will keep the patient alive the next time the EKG flatlines. All governments will then have are lots of weapons, worthless debt, millions of angry beneficiaries, and whatever loyalty they can still command, literally, from the police-military-surveillance complexes.

At which point, the calculus becomes intolerable for those long milked and bilked by governments, and offering them only further pain with no gain. Inevitably, they will consider their options: flight, secession, devolution, or revolution. Governments are only temporary arrangement and pendulums swing. Cataclysm should afford, for those inclined, opportunities—if they’re willing to fight for them—to live under arrangements more conducive to individual freedom and voluntary interaction.

THE PINNACLE OF OPTIMISM

AMAZON

KINDLE

NOOK

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Stock Markets Sit Blithely on a Powerful Time Bomb, by Wolf Richter

Speculators on margin add to stock market volatility, because their creditors can force them to either cut their positions or cough up more money when prices go against them. From Wolf Richter at wolfstreet.com:

No one knows the full magnitude, but it’s huge.

How big is margin debt really, and how much of a threat is it to the stock market and to “financial stability,” as central banks like to call their concerns about crashes? Turns out, no one really knows.

What we do know: Margin debt, as reported monthly by the New York Stock Exchange, spiked to another record high of $528 billion. But it’s only part of the total outstanding margin debt – which is when investors borrow money from their broker, pledging their portfolio as collateral.

An example of unreported margin debt: Robo-advisory Wealthfront, a so-called fintech startup overseeing nearly $6 billion, announced that it would offer its clients loans against their portfolios.

“The dream house. The dream wedding. The dream kitchen. The dream vacation.” That’s how it introduced it in a blog post this week. “We want you to have your cake and eat it too,” it said.

Instant debt “without the hassle of paperwork,” it said. “We want our clients to be able to borrow what they need, when they need it, directly from their smartphones.” Secured by “your own investments.”

It’s a great deal as long as stocks are soaring. Clients with at least $100,000 in their account can borrow up to 30% of the account value. It’s seductive: No required monthly payments and no payoff date, though interest accrues and is added to the monthly balance. The rate is as low as 3.25%. “How’s that for flexibility?” it says.

That’s how margin debt is being pushed at the end of the cycle.

This borrowed money can be drawn out of the account to fund vacations or a down-payment of a house. But when stocks spiral down, as they’re known to do in highly leveraged markets, and fall below the margin requirement, clients get a margin call. They either have to put cash into the account to make up for the losses or they have to start liquidating their portfolio at the worst possible time.

To continue reading: Stock Markets Sit Blithely on a Powerful Time Bomb

 

Mexico’s Economy Is Being Plundered Dry, by Don Quijones

Debt and corruption will be the ruination of Mexico. From Don Quijones at wolfstreet.com:

Debt is suffocating the economy, but where did the money go? 

The government of Mexico has a new problem on its hands: what to do with the burgeoning ranks of state governors, current or former, that are facing prosecution for fraud or corruption. It’s a particularly sensitive problem given that most of the suspects belong to the governing political party, the Institutional Revolutionary Party (PRI), which ruled Mexico uninterruptedly from 1929 to 2000. It returned to power in December 2012 with the election of Enrique Peña Nieto. And it clearly hasn’t changed its ways.

Some of the accused governors were so compromised they went on the run. In the last few weeks, two of them, Tomás Yarrington, former state governor of Tamaulipas, and Javier Duarte, former governor of Veracruz, were tracked down. Yarrington, accused of laundering proceeds from drug trafficking as well as helping Mexico’s Gulf Cartel export “large quantities” of cocaine to the United States, was ensnared by Italian Police in the Tuscan city of Florence. He faces possible extradition to the United States.

Yarrington’s successor as governor of Tamaulipas, Eugenio Hernández, a fellow PRI member who is also accused of close ties with narcotraficantes and money laundering, has not been seen in public since last June.

As for Duarte, he was caught this week by police in Guatemala. Like Yarrington, he wasn’t exactly laying low. Among the accusations he faces is that of buying fake chemotherapy drugs, which were then unknowingly administered by state-run hospitals to children suffering from cancer. He and his cohorts purportedly pocketed the difference. He is also alleged to have set up 34 shell companies with the intention of diverting 35 billion pesos (roughly $2 billion) of public funds into his and his friends’ deep pockets.

In just about any jurisdiction on earth, $2 billion is a substantial amount of money, even by today’s inflated standards. But in Mexico, where neither the super rich (accounting for a very large chunk of the country’s wealth) nor the super poor (accounting for roughly half of the population) pay direct taxes of any kind, it’s a veritable fortune.

To continue reading: Mexico’s Economy Is Being Plundered Dry

Creating Another “Crash of 1929” by Jeff Thomas

There are already similarities between the present day and 1929. Jeff Thomas opines there may be more. From Thomas at internationalman.com:

Regarding the Great Depression… we did it. We’re very sorry… We won’t do it again.

– Ben Bernanke

Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road—either too much inflation, financial instability, or both.

– Janet Yellen

In his speech above, future Federal Reserve Chairman Ben Bernanke acknowledged that, by raising interest rates, the Fed triggered the stock market crash of 1929, which heralded in the Great Depression.

Yet, in her speech above, Fed Chair Janet Yellen announced that “it makes sense” for the Fed to raise interest rates “a few times a year.” This is a concern, as economic conditions are similar to those in 1929, and a rise in interest rates may have the same effect as it did then.

So let’s back up a bit and have a look at what happened in 1929. In the run-up to the 1929 crash, the Federal Reserve raised rates to 6%, ostensibly to “limit speculation in securities markets.” As history shows, this sent economic activity south rather quickly. Countless investors, large and small, who had bought stocks on margin, would be unable to pay increased interest rates and would be forced to default. (It’s important to understand that the actual default was not necessary to crash markets. The knowledge that investors would be in trouble was sufficient to send the markets into a tailspin.)

Mister Bernanke was quite clear in 2002 when he stated that the Fed would not make the same mistake again that it made in 1929, yet, then, as now, there’s been a surprise victory by a Republican candidate for president. Then, as now, a wealthy man who had never held elective office was unexpectedly in the catbird seat and had the potential to endanger the control of the political class, at a time when that political class had been complicit in damaging the system by creating massive debt.

To continue reading: Creating Another “Crash of 1929”

So Who Are the Debt Slaves in this Rich Nation? by Wolf Richter

There’s an old joke that if you put one foot in a bucket of ice and one in a bucket of boiling water, on average you’re comfortable. The use of economic averages masks an ugly reality: for every wealthy American there are many Americans with small incomes, a lot of debt, and negative net worths. From Wolf Richter at wolfstreet.com:

The American economy has split in two: how averages of wealth & debt paper over the profound risks.

We constantly hear the factoids about “American households” that paint a picture of immense wealth – and therefore a lack of risk for consumer lenders during the next downturn. We hear: “This – the thing that happened in 2008 and 2009 – won’t happen again.”

For example, total net worth (assets minus debt) of US households and non-profit organization (they’re lumped together) rose to an astronomical $92.8 trillion at the end of 2016, according to the Federal Reserve. This is up by nearly 70% in early 2009 when the Fed started its QE and zero-interest-rate programs.

Inflating household wealth was one of the big priorities of the Fed during the Financial Crisis. It would crank up the economy. In an editorial in 2010, Fed Chair Ben Bernanke himself called this the “wealth effect.” So with this colossal wealth of US households, what could go wrong during the next downturn?

Here’s what could go wrong:

About half of Americans do not have enough savings to pay for even a minor emergency expense. The Federal Reserve found that 46% of adults could not cover an emergency expense of $400, such as a broken windshield. They would either have to borrow the money or try to sell the couch or something. So nearly half of the adults in the US live from paycheck to paycheck.

About 15% of American households have either zero or negative net wealth, according to the New York Fed. Negative net worth means they have more debt than assets.

And nearly 47 million Americans, or nearly 15% of the population, live below the poverty line, according to the Census Bureau.

So who benefited from the “wealth effect”? Those who had the most assets. At the very tippy-top: Warren Buffet. At the other end of the spectrum, in 2016, only 52% of households owned stocks directly or indirectly. The phenomenal stock market boom left 48% – usually those below the poverty line, those who cannot cover emergency expenses, those with zero or negative net worth, etc. etc. – in the dust.

To continue reading: So Who Are the Debt Slaves in this Rich Nation?

Millennials Are Abandoning the Postwar Engines of Growth: Suburbs and Autos, by Charles Hugh Smith

Millennials don’t want live off in the burbs, commute several hours a day, and buy lots of things on credit at the local mall. They represent a dire threat to the American way of life. From Charles Hugh Smith at oftwominds.com:

Where’s the growth going to come from as the dominant generation makes less, borrows less, spends less, saves more and turns away from long commutes, malls and suburban living and abandons the worship of private vehicles?

If anything defined the postwar economy between 1946 and 1999, it was the exodus of the middle class from cities to suburbs and the glorification of what Jim Kunstler calls Happy Motoring: freeways, cars and trucks, ten lanes of private vehicles, the vast majority of which are transporting one person.

Ol’ 55 (freeway cars and trucks) (written by Tom Waits, performed by The Eagles)

The build-out of suburbia drove growth for decades: millions of new suburban homes, miles of new freeways, sprawling shopping malls, and tens of millions of new autos, trucks, and SUVs, transforming one-car households into three vehicle households. Then there was all the furnishings for those expansive new homes, and the credit necessary to fund the homes, vehicles, furnishings, etc.

Now the Millennial generation is turning its back on both of these bedrock engines of growth. As various metrics reveal, the Millennials are fine with taking Uber to work, buying their shoes from Zappos (return them if they don’t fit, no problem), and making whatever tradeoffs are necessary to live in urban cores.

Simply put, the natural progression of this generation is away from suburban malls, suburban home ownership and the car-centric commuter lifestyle that goes with suburban homeownership.

Saddled with insanely high student debt loads imposed by the rapaciously predatory higher education cartel, Millennials avoid additional debt like the plague. Millennials have relatively high savings rates. As for a lifetime of penury to service debt–hey, they already have that, thanks to their “I borrowed $100,000 and all I got was this worthless college degree” student loans.

To continue reading; Millennials Are Abandoning the Postwar Engines of Growth: Suburbs and Autos

Beware the Dogs of War: Is the American Empire on the Verge of Collapse? by John W. Whitehead

John W. Whitehead’s math and statistics are a little sketchy (if the debt is growing at $35 million/hour it is growing at $840 million/24 hours, not $2 billion), but the message isn’t: America’s empire has bled it dry. From Whitehead at rutherford.org:

Of all the enemies to public liberty war is, perhaps, the most to be dreaded because it comprises and develops the germ of every other. War is the parent of armies; from these proceed debts and taxes… known instruments for bringing the many under the domination of the few.… No nation could preserve its freedom in the midst of continual warfare. — James Madison

Waging endless wars abroad (in Iraq, Afghanistan, Pakistan and now Syria) isn’t making America—or the rest of the world—any safer, it’s certainly not making America great again, and it’s undeniably digging the U.S. deeper into debt.

In fact, it’s a wonder the economy hasn’t collapsed yet.

Indeed, even if we were to put an end to all of the government’s military meddling and bring all of the troops home today, it would take decades to pay down the price of these wars and get the government’s creditors off our backs. Even then, government spending would have to be slashed dramatically and taxes raised.

You do the math.

The government is $19 trillion in debt: War spending has ratcheted up the nation’s debt. The debt has now exceeded a staggering $19 trillion and is growing at an alarming rate of $35 million/hour and $2 billion every 24 hours. Yet while defense contractors are getting richer than their wildest dreams, we’re in hock to foreign nations such as Japan and China (our two largest foreign holders at $1.13 trillion and $1.12 trillion respectively).

The Pentagon’s annual budget consumes almost 100% of individual income tax revenue. If there is any absolute maxim by which the federal government seems to operate, it is that the American taxpayer always gets ripped off, especially when it comes to paying the tab for America’s attempts to police the globe. Having been co-opted by greedy defense contractors, corrupt politicians and incompetent government officials, America’s expanding military empire is bleeding the country dry at a rate of more than $57 million per hour.

To continue reading: Beware the Dogs of War: Is the American Empire on the Verge of Collapse?