Has The Crash of 2016 Now Begun?

[conniption]

Information Clearing House

Could This Be “The Big One”?

By Mike Whitney

January 22, 2016 "Information Clearing House" - "Counterpunch" -

Everyone take a deep breath. This isn’t 2007 again. The banks aren’t loaded with $10 trillion in “toxic” mortgage-backed securities, the housing market hasn’t fallen off a cliff wiping out $8 trillion in home equity, and the world is not on the brink of another excruciating financial meltdown. The reason the markets have been gyrating so furiously for the last couple weeks is because stocks are vastly overpriced, corporate earnings are shrinking, and the Fed is threatening to take away the punch bowl. And to top it all off, a sizable number of investors have more skin in the game than they can afford, so they had to dump shares pronto to rebalance their portfolios.

What does that mean?

It means that a lot of investors are in debt up to their eyeballs, so when the market tumbles they have to sell whatever they can to stay in the game. It’s called a “margin call” and on Wednesday we saw a real doozy. Investors dumped everything but the kitchen sink in a frenzied firesale that sent the Dow Jones bunge-jumping 565-points before clawing its way back to a 249-point loss. The reason we know it was a margin call as opposed to a panic selloff is because there was no noticeable rotation into US Treasuries. Typically, when investors think the world is coming to an end, they ditch their stocks and make the so called “flight to safety” into US debt. That didn’t happen this time. Benchmark 10-year Treasuries barely budged during the trading day, although they did stay under 2 percent which suggests that bondholders think the US economy is going to remain in the toilet for the foreseeable future. But that’s another story altogether. The fact is, investors aren’t “rotating”, they’re “liquidating” because they’ve hawked everything but the family farm and they need to sell something fast to cover their bets. Now if they thought that stocks were going to rebound sometime soon, then they’d try to hang on a bit longer. But the fact that the Fed has stayed on the sidelines not uttering a peep of encouragement has everyone pretty nervous, which is why they’re getting out now while they still can.

Capisce?

Here’s how CNBC’s Rick Santelli summed it up on Wednesday afternoon:

“We basically have a global rolling margin call that’s been going on since the 3rd Quarter of last year. It’s gotten a bit more intense since the Fed announced it was ‘normalizing’ because, in essence, a quarter point (rate hike) doesn’t mean anything, but the mentality that we are about to turn the corner on the ‘Grand Experiment’ means a lot.” (Closing Bell Exchange, CNBC)

In other words, investors are starting to believe the Fed will continue its rate-hike cycle which will put more downward pressure on stocks, so they’re calling it quits now.

Santelli makes a good point about “normalization” too, which means the Fed is going to attempt to lift rates to their normal range of 4 percent. No one expects that to happen mainly because the wailing and gnashing of teeth on Wall Street would be too much to bear. Besides, the Fed just spent the last seven years inflating stock prices with its zero rates and QE. It’s certainly not going to burst that bubble now by raising rates and sending equities into freefall. Even so, many investors think the Fed could continue to jack-up rates incrementally to 1 percent or higher. And while that’s still below the current rate of inflation, the shifting perception of “easy money” to “tightening” makes a huge difference in investors expectations. And as every economist knows, expectations shape investment decisions. No one is going to load up on stocks if they think things are going to get worse. That’s the long-and-short of it.

So is the recent extreme volatility a precursor to “The Big One”?

Probably not, but that doesn’t mean that stocks won’t drift lower. They probably will, after all, conditions have changed dramatically. We had been in an environment where hefty profits, low rates and ample liquidity were more-or-less guaranteed. That’s not the case anymore. Stocks are no longer priced for perfection, in fact, valuations are gradually dipping to a point where they reflect underlying fundamentals. Also, for whatever reason, the Fed seems eager to convince people that the hikes are going to persist. So here’s the question: If you take away the punch bowl at the same time that earnings are start to tank, what happens?

Stocks fall, that’s what. The only question is “how far”? And since the S&P has more than tripled since it hit its lowest level in March 2009, the bottom could be a long way off, which is why investors are taking more chips off the table.

It’s also worth noting that one of the main drivers of stock prices has been AWOL lately. We’re talking about stock buybacks, that is, when corporate bosses repurchase their own company’s shares to reward shareholders while boosting their “windfall” executive compensation. Here’s the scoop from FT Alphaville:

“China is slowing, the oil price is getting hammered, the Fed hiked too soon: all reasons for the ignominious start to the year for the world’s stock markets. Here’s another bit of meat for the pot, courtesy of Goldman Sachs chief US equity strategist David Kostin: share buybacks.

“One reason for the recent poor market performance is that corporate buybacks are precluded during the month before earnings are released. Any destabilizing macro news that occurs during the blackout window amplifies volatility because the largest source of demand for shares is absent.”

Share buybacks in the US are on pace for their biggest year since 2007, he adds, estimating $561bn for full-year 2015 (net of share issuance) and a decline to $400bn in full-year 2016.”

“Share buybacks, the markets miss you“, FT Alphaville

By some estimates, buybacks represent 20 percent of all share purchases, so obviously the current drought has contributed to the recent equities-plunge. All the same, G-Sax Kostin expects a robust rebound in 2016 to $400 billion. As long as cash is priced below the rate of inflation, corporations will continue to borrow as much as they can to ramp their own stock prices and rake in more dough. Greed trumps prudent investment decision-making every time.

As for the trouble in China: While it’s true that China’s woes could have been the trigger for the current ructions on Wall Street, it’s certainly not the cause which is the Fed’s failed monetary policy. Besides, the whole China thing is vastly overdone. As Ed Lazear told CNBC on Wednesday:

“A major recession in China that lasted ten years would cost would costs the US 2 % points in GDP. So you’re not going to get a market fall like we’re observing right now based on that.”

Economist Dean Baker basically agrees with Lazear and says:

“Even a sharp downturn in China would not send the U.S. economy plummeting, our total exports to China are only about 0.7 percent of GDP. China’s weakness will have a major impact on other trading partners, especially those heavily dependent on commodity exports. But even in a worst case scenario we are looking at a major drag on the U.S. economy, not the sort of falloff in demand that puts the economy into a recession.”

(“Wall Street Rocks!“, Dean Baker, Smirking Chimp)

As for the plunging oil prices, there’s not much there either. Yes, quite a few high-paying oil sector jobs have been lost, capital investment has completely dried up, and many of the domestic suppliers are probably going to default on their debts sometime in the next six months or so. But are these defaults a significant risk to Wall Street in the same way that trillions of dollars in worthless Mortgage-Backed Securities (MBS) and CDOs were in 2007-2008?

Heck, no. Not even close. There’s going to be a fair amount of blood on the street by the time this all shakes out, but the financial system will muddle through without collapsing, that’s for sure. The real danger is that falling oil prices signal a buildup of deflationary pressures in the economy that isn’t being countered with additional fiscal stimulus. That’s the real problem because it means slower growth, fewer jobs, flatter wages, falling incomes, more strain on social services and a more generalized stagnant, crappy economy. But as we’ve said before, Obama and the Republican-led Congress have done everything in their power to keep things just the way they are by slashing government spending to make sure the economy stays weak as possible, so inflation is suppressed, the Fed isn’t forced to raise rates, and the cheap money continues to flow to Wall Street. That’s the whole scam in a nutshell: Starve the workersbees while providing more welfare to the slobs at the big investment banks and brokerage houses. It’s a system that policymakers have nearly perfected as a new Oxfam report shows. According to Oxfam: “the 62 richest billionaires now own as much wealth as the poorer half of the world’s population.” (Guardian)

Wealth like that, “ain’t no accident”, brother. It’s the policy.
_______

Mike Whitney lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

[Grizzly]

[seemslikeadream]

5 Wall Street Banks Have Lost $219.7 Billion in Market Cap in 7 Months
Morgan Stanley Price Chart Versus Brent Crude Oil
Morgan Stanley Price Chart (Yellow) Versus Brent Crude Oil (White) Since July 2015
By Pam Martens and Russ Martens: January 28, 2016

Yesterday, the U.S. Treasury’s Office of Financial Research (OFR) released its 2015 Annual Report to Congress. OFR was created under the Dodd-Frank financial reform legislation of 2010 to keep the Financial Stability Oversight Council informed on emerging threats to financial stability in the U.S.

Perhaps in an effort not to panic our sleeping Congress, or to further aggravate an already volatile stock market, the report said that “the United States financial system has continued to improve and threats to overall U.S. financial stability remain moderate.” From there, it went on to eviscerate that calm assessment with an endless stream of hair-raising concerns. One of those concerns is the interconnectedness of big Wall Street banks – a matter the OFR released a detailed paper on last February.

One fact you won’t find in the OFR report is that five of the biggest banks on Wall Street, which are also interconnected with one another, have seen their market capitalizations melt away like snow cones in July. Citigroup, Bank of America, JPMorgan Chase, Morgan Stanley and Goldman Sachs have cumulatively lost a total of $219.7 billion in market cap over the past seven months. All of the stocks are trading near their 12 month lows.

The declines in market cap stack up as follows: Citigroup, down $60.74 billion; Bank of America, down $53.3 billion; JPMorgan Chase, down $47.7 billion; Morgan Stanley, down $30.3 billion; and Goldman Sachs, a decline of $27.7 billion.

Not only are all of these Wall Street banks interconnected but they are also sitting with trillions of dollars of exposure to derivatives with the public in the dark as to whom the exposed counterparties are.

Another growing worry is exactly how exposed some of these banks are to the crash in oil prices. (See the chart of Morgan Stanley’s stock price above versus Brent crude oil. They have effectively been trading in a highly correlated manner.)

To listen to the fourth quarter earnings calls of the biggest banks, and the amounts that they have reserved for losses in the energy sector, one would think that this oil price collapse has been a minor blip rather than an unprecedented collapse. Since 2014, the price of crude oil has lost over two-thirds of its value and corporate credit downgrades have escalated.

In a January 14, 2016 report by Dow Jones, writer Michael Rapoport notes that “Even if banks do start building up reserves again, they are still near their lowest levels in recent years,” says Rapoport, adding that “Industrywide, banks’ bad-loan reserves were down to 1.37% of total loans and leases as of last Sept. 30, according to the Federal Deposit Insurance Corp., the lowest level since the end of 2007.”

Not only are the loan loss reserves stunningly low for what is happening in the real world but reserve levels from one bank to another make little sense. Reuters reports that JPMorgan Chase’s oil and gas loan portfolio amounted to $42 billion in the fourth quarter, but according to the transcript of its fourth quarter earnings call, its CFO, Marianne Lake said this about reserves:

“With obviously the biggest area of stress in wholesale being oil and gas, against which we built about $550 million in reserves this year including $124 million this quarter.”

That compares to Wells Fargo which has a far more modest $17 billion of oil and gas exposure but has taken $1.2 billion in reserves for potential losses.

Michael Rappoport hints in his article what might be going on at JPMorgan, writing:

“The buildup [in loan loss reserves] was also notable as it indicates the potential end of an era in which ‘releases’ of loan-loss reserves flowed into and offered a welcome boost to banks’ earnings, at a time when the banks often had difficulty generating profits from their operating businesses. Over the past six years, those releases have contributed nearly $25 billion to J.P. Morgan’s pretax income…”

The most interesting days are still ahead this year for the interconnected Wall Street banks which must undergo their stress tests at the Federal Reserve with depleted equity capital, rising corporate bankruptcies threatening their loan books, and growing calls from the campaign trail to break up these systemically risky institutions.

[Luther Blissett]

Here's Vice mouthing off.

Meet the 'Goldbugs' Hoarding Bullion to Prepare for the Next Financial Apocalypse

"You could buy baked beans, you could buy shotguns," says Daniel Ameduri, who runs futuremoneytrends.com, an investing tips site. "And those would both be handy things to have, but really, we don't foresee martial law lasting more than a fortnight."

The conventional narrative is that we're "out of the woods." Kinda. That the trillions national governments borrowed in 2008 to rescue their drowning banks have done just about enough. Growth has returned. Unemployment is pushing toward pre-crisis levels. Nothing very good is going to happen for a while yet, but far more importantly: nothing too bad, either.

But what if the acre of dry land we thought we'd found was just the back of an angry turtle with daggers for teeth? What if, rather than making us better able to face and predict the next crisis, the last crisis just stored up a raft of unfixably large problems? What if we shot the '08 monster with our biggest bazooka, and now have nothing big enough to defend ourselves against the next one?

We may soon find out. This month, a full seven years on from the Lehman bust, the anxiety around another monster event suddenly seems to be hitting red alert. The Dow has been in freefall all week—it's had its worst January so far since records began. Worse than 2009. Worse than the previous record, when it unexpectedly fell off a cliff in 1950.

All of this is driven by a Chinese stock market that has fallen down a flight of stairs since August of last year. Chinese growth is weakening—only to 6.9 percent—but the developing world depends on selling raw materials to China, and any slowdown there would flatten the already teetering likes of Brazil, South Africa, and Indonesia. Along with the oil price tumble, the pieces are all up in the air, so it's not too surprising that the Royal Bank of Scotland (RBS) recently issued a statement announcing that it saw no prospects for investor growth this year, openly encouraging its clients to sell up, get out of the markets, and seek higher ground.

In 2015's Academy Award-nominated The Big Short, various "outsiders" (read: millionaire Yale-educated traders with goofy hobbies and glass eyes) predict the financial shitmageddon of 2007 on the basis of a few canny calculations. They're heroes because they noticed. "They could see when all around them were blind" is the moral subtext. What Michael Lewis's book says is actually true: At the time, the likes of Michael Burry really were a tiny fraction of the market bulls piling into the mortgage Ponzi scheme.

But since 2008, an entire sub-stratum of professional Jeremiah has grown up to tell us about the next monster event, the next Black Swan. The next crash won't be like the last one. A) It never is. B) There will be hundreds of people trying to figure out how to profit from it.

This new school of shitmageddonpreneur has taken as his baseline the idea that the next crisis won't be houses, it'll be national debt. Greece, but on the scale of America. They've spotted something very true: The US has enormous debts (as does Britain, as does France and Japan), and we're one unknown event away from being pushed into a sovereign debt death spiral.

Hence why Ameduri is right now building up a portfolio of gold and precious metals, encouraging his readers to buy shares in companies that make emergency-ready medical supplies like syringes, or simple, apocalypse-proof companies, "like York Water, which has produced a dividend every year since 1823."

For America, he points out, regardless of your views on a Chinese slowdown or a Eurozone breakup, the math doesn't work—end of story. "The US takes in $2.2 trillion in taxes annually. It spends $3 trillion. We're at the point where—especially if interest rates rise, we'll even be borrowing to pay the interest on our debts. And—the things that most people seem to have lost sight of—the math can never come back into shape. We've outrun that point. Now, even if you taxed the wealthiest Americans at 100 percent of earnings, you'd only have enough money to pay for 14 days of US government spending."

Arguing with the raw figures is one thing, but what happens next is far more up in the air. "I don't buy into the whole Mad Max scenario," says John Rubino, of dollarcollapse.com, a site charting the decline and fall of the greenback while offering investment advice. "I think the big systems will continue to work fine. I just think we have created a lot of policies and institutions that have run their course. But democracy being what it is, we'd need to have a huge crisis before those in charge actually got together and revised those institutions."

Rubino is another prominent collapser voice, author of The Coming Collapse of the Dollar, and The Money Bubble . "I would've thought 2008 was the end for this system. To me, it wasn't clear we'd be able to borrow and print our way out of it. In the end, we did, but if we do that, it just sets the stage for an even bigger crisis."

[seemslikeadream]

https://www.youtube.com/watch?v=SqbGTfndtyE

Published on Jan 31, 2016
Nomi Prins, the Best selling author of All The President's Bankers, joins me to document the collapse of the western banking and economic systems. Nomi says, "We're getting to the end of what's possible in terms of stimulation, I would have thought the end should have happened years ago. But the reason it didn't was because of the epic coordinated efforts between the major central banks... and that element has left markets with the APPEARANCE of health they haven't actually had because of true growth. And there's only so much you can do of that. These are desperate actions."

My Financial Road Map For 2016
DateTuesday, January 5, 2016 at 8:53AM
Happy New Year to All! May 2016 bring peace to you and your loved ones.

Over the holidays, I had the opportunity to stay away from airports and hike Runyon Canyon with my dogs. For those of you that have never traversed Runyon’s peaks and dips, they are nature’s respite from the urban streets of Los Angeles, yet located in the heart of the City of Angels. It’s a place in which to observe, reflect, and think about what’s coming ahead.

As a writer and journalist covering the ebbs and flows of government, elite individual, central bank and private industry power, actions, co-dependencies, and impacts on populations and markets worldwide, I often find myself reacting too quickly to information. As I embark upon extensive research for my new book, Artisans of Money, my resolution for the book - and the year - is to more carefully consider small details in the context of the broader perspective. My travels will take me to Brazil, Mexico, China, Japan, Germany, Spain, Greece and more. My intent is to converse with people in their respective locales; those formulating (or trying to formulate) monetary, economic and financial policy, and those affected by it.

We are currently in a transitional phase of geo-political-monetary power struggles, capital flow decisions, and fundamental economic choices. This remains a period of artisanal (central bank fabricated) money, high volatility, low growth, excessive wealth inequality, extreme speculation, and policies that preserve the appearance of big bank liquidity and concentration at the expense of long-term stability. The potential for chaotic fluctuations in any element of the capital markets is greater than ever.

The butterfly effect - the flutter of a wing in one part of the planet altering the course of seemingly unrelated events in another part - is on center stage. There is much information to process. So, I’d like to share with you – not my financial predictions for 2016 exactly - – but some of the items that I will be examining from a geographical, political and financial perspective as the year unfolds.

1) Central Banks: Artisans of Money

Since the Fed raised (hiked is too strong a word) rates by 25 basis points on December 16th, the Dow has dropped by about 3.5%. Indicating a mix of fear of decisive movements and a market awareness deficit regarding the impact of its actions, the Federal Reserve hedged its own rate rise announcement, noting that its "stance of monetary policy remains accommodative after this increase.”

These words seem fairly clear: there won’t be many, if any, hikes to come in 2016 unless economies markedly improve (which they won’t, or the words would be much more definitive.) Still, Janet Yellen did manage to alleviate some stress over the Fed's inaction on rate rises during the past 7 years, by invoking the slighted action possible with respect to rates.

Projections are past reactions here. The Fed, to save face more than anything or to “appear” conclusive, raised the Fed Funds rate (the rate US banks charge each other to borrow excess reserves, of which about $2.5 billion are with the Fed anyway), to .25-.50% from 0-.25%. And yet, the effective rate stood within the old Fed target range, or at an average of .20% on December 31 for various reasons, the timing of which was not lost on the Fed. It was at .35% or so on the first day of 2016. The Fed’s rate move was tepid, and it’s possible the Fed moves rates up another 25 or 50 basis points over 2016, but less likely more than that and more likely it engages in heightened currency swap activities with other central banks as a way to “manage” rates and exchange rates regardless.

Meanwhile, most other central banks (Brazil being an extreme counter example) remain in easing mode or mirror mode to the Fed. It’s likely that more creative QE measures amongst the elite central banks will pop up if liquidity, markets or commodities head southward. Less powerful central banks will attempt to respond to the needs of their local economies while balancing the strains imposed upon them by the elite central banks.

2) Global Stock Markets

They say that behavior on the first day of the year is indicative of behavior in the year to come. If so, the first trading day doesn’t bode well for the rest. Turmoil began anew with Asian stock markets crumbling at the start of 2016. In China, the Shanghai Composite hit two circuit breakers and China further weakened the yuan.

Yes, there’s the prevailing growth-decline story, a relic of 2015 “popular opinion”, being served as a reason for the drop. But also, restrictions on short selling by local Chinese companies are expiring. Just as in last August, China will have to balance imposing fresh sell restrictions with market forces pushing the yuan down.

The People’s Bank of China will likely inject more liquidity through further reserve requirement reductions and rate cuts to counter balance losses. The demise in stock values is not simply due to slower growth, but to high debt burdens and speculative foreign capital outflows; the story of China as a quick bet is no longer as hot as it was when China opened its markets to more foreign investors in mid-2014, since which volumes and volatility increased. It will be interesting to see if China responds with more capital controls or less, and how its “long-game” of global investments plays out.

Blood shed followed Asian into European markets. Subsequently, the Dow dropped by about 1.6% unleashing its worst start to a year since the financial crisis began. Last year's theme to me was volatility rising; this year is about markets falling, even core ones. This is both a reaction to global and local economic weakness, and speculative capital pondering definitive new stomping grounds, hence thinner and more dispersed volumes will be moving markets.

3) Global Debt and Defaults

As of November 2015, Standard & Poor’s tallied the number of global companies that defaulted at 99, a figure only exceeded by that of 222 in 2009. Debt loads now present greater dangers. Not only did companies (and governments, of course) pile on debt during this zero interest rate bonanza period; but currency values also declined relative to the dollar, making interest payments more expensive on a local basis.

If the dollar remains comparatively strong or local economies weaken by an amount equivalent to any dollar weakening, more defaults are likely in 2016. In addition, the proportion of junk bonds relative to investment grade bonds grew from 40% to 50% since the financial crisis, making the likelihood of defaults that much greater. Plus, the increase in foreign, especially dollar, denominated debt in emerging markets will continue to hurt those countries from a sovereign downgrade and a corporate downgrade to default basis.

I expect sovereign downgrades to increase this year in tandem with corporate downgrades and defaults. Also, as corporate defaults or default probabilities increase, so does corporate fraud discovery. This will be a year of global corporate scandals.

In the US about 60% of 2015 defaults were in the oil and gas industry, but if oil prices stay low or drop further, more will come. Related industries will also be impacted. In mid-December, Fitch released its leveraged loan default forecast of the TTM (Trailing Twelve Month index) predicting a 2.5% rise in default rates for 2016, or $24 billion in global defaults. That’s an almost 50% increase in default volume over 2015, and more than the total over the 2011-2013 period. Besides higher energy sector defaults, the retail sector could see more defaults, as consumers lose out and curtail spending.

4) Brazil and Argentina

Brazil is a basket case on multiple levels with nothing to indicate 2016 will be anything but messier than 2015. Even the upcoming Olympics there have reeked of scandal in the lead up to the summer games.

Brazilian corporations have already sold $10 billion in assets to scrape together cash in 2015, a drop in the bucket to what’s needed. Brazil’s main company, Petrobras, is mired in scandal, its bond and share prices took massive hits last year as it got downgraded to junk, and a feeding frenzy between US, Europe and China for any of its assets on the cheap won’t be enough to alter the downward trajectory of Brazilian’s economy. In fact, it will just make recovery harder as core resources will be effectively outsourced.

Fitch downgraded seven Brazilian sub nationals to junk, with more downgrades to come. Brazil itself was downgraded to junk by S&P with no positive outlook from anywhere for 2016. Falling revenues plus higher financial costs due to higher debt burdens will accentuate trouble. In addition, pension funds are going to be increasingly underfunded, which will enhance local population and political unrest, as unemployment increases, too.

Though Brazil will have the toughest time relative to neighboring countries, Argentina, will not be having a walk in the park under its new government either. The new centrist government removed currency capital controls in a desperate bid to attract capital. This resulted in crushing the Argentinean Peso (a.k.a. “Marci’s devaluation”) and will only invite further speculative and political volatility into the country. It could get ugly.

5) The Dollar and Gold

Despite what will be a year of continued pathways to trade and currency arrangements amongst countries trying to distance themselves from the US dollar, the fact that much of the world is careening toward global Depression will keep the dollar higher than it deserves to be. It will remain the comparative currency of choice, as long as central banks continue to fabricate liquidity in place of government revenues from productive growth.

Outside the US, most central banks (except Brazil which has a massive inflation problem) have maintained policies of rate reduction, lower reserve requirements, and other forms of QE or currency swap activities. As in 2015, the dollar will be a benefactor, despite problems facing the US economy and its general mismanagement of monetary policy. But the US dollar index and the dollar itself might exhibit more volatility to the downside this year, straying from its high levels more frequently than during 2015.

Last year, given the enhanced volatility in various markets, I expected gold to rise during the summer as a safe haven choice, which it did, but it also ended the year lower in US dollar terms. Because the US dollar preserved its strength, the dollar price of gold fell during the year - yet not by as much as other commodities, like oil.

I take that as a sign of gold finding some sort of a floor relative to the US dollar, with the possibility of more upside than downside for 2016, though in similar volatility bands to the US dollar. Gold relative to the Euro was just slightly down for 2015, relative to the approximate 10% decline in value relative to the US dollar. Considering the home currency is important when examining gold price behavior.

Also, it’s important to note that investing in gold requires a longer time horizon - months and years, rather than weeks and months - and should be done through physical gold, coins or allocated bars depending on disposable investment thresholds, not paper gold.

In addition, as I mentioned last year, routinely extracting cash from bank accounts and keeping it in safe non-bank locations, remains a smart defensive play for 2016.

6) The People’s Economies

As companies default and economies suffer, industries will inevitably shed jobs this year around the world. The Fed’s publicly expressed optimism about employment figures and the headline figure decrease in US unemployment will be met with the realities of companies cutting jobs to pay the debts they took on during the ZIRP years and due to decreased demand.

Unemployment is already rising in many emerging countries, and it will be important to note what happens in Europe and Japan, as well as the US in that regard. This Recession 3.0 (or ongoing Depression) could fuel further artisanal money practices that might again be good for the markets and banks, but not for real economies or jobs lost through reactive corporate actions.

7) Oil

With Saudi Arabia and Iran pissed off at each other in a round of tit-for-tat power positioning, it’s unlikely either OPEC heavy weight will reduce oil production, this while tankers worldwide remain laden with their loads and rigs are quiet. Tankers off the coast of Long Beach in California for instance, that used to come in and unload, remain in stalling patterns away from the shoreline, waiting for better prices. This means tankers are making money on storage, but also that extra oil supplies are hovering off shore, and even if prices rise, release of that supply would have a dampening consequence on prices.

Oil futures have been a generally highly speculated product, so I’ve never believed that simple supply and demand ratios drive the price of spot oil as it relates to the futures price of oil. Only in this case, not only is there oversupply and weakening demand, but speculators are playing to the short side as well. That combination seems destined to keep oil prices low, or push them lower in the near future, but should be closely watched.

Meanwhile, signs of knock on problems are growing. In China, for instance, shipyards are struggling because global rig customers don’t need their rig model orders fulfilled.

Europe

While Greece faces more blood-from-a-stone extortion tactics and none of the Troika get why austerity measures don't actually produce local revenues at high enough levels to pay expensive debts to foreign investors and multinational entities, other parts of Europe aren’t looking much better for 2016. Spain is facing political unrest, Italy, despite exhibiting a tenuous recovery of sorts, still has a major unemployment problem, and the Bank of Portugal lowered its growth estimates - for the next two years.

Mario Draghi, European Central Bank (ECB) head decided to extend Euro-QE to March 2017 from September 2016, having had the markets punish his less enthusiastic verbiages about QE late last year, because he has no other game. The Euro will thus likely continue to drop in value against the dollar, negative interest rates will prevail, and potential bail ins will appear if this extra dose of QE doesn’t keep the wheels, big banks and core markets of Europe properly greased.

9) Mexico

The Mexican Peso closed near record lows vs. the dollar for 2015. Much of the Peso’s weakness was attributed to low oil prices and Mexico’s dependence on its oil sector, but the Peso was already depreciating before oil prices dropped. If the US dollar remains comparatively high OR if oil prices continue to remain low or drop, the Peso is likely to do the same.

When I was in Mexico a few years ago, addressing the Senate on the dangers of foreign bank concentration, there were protests throughout Mexico City on everything from teachers’ pay to the opening of Pemex, Mexico’s main oil company to foreign players. The government’s promise then was that foreign firms would provide capital to Mexico as well as industry expertise that would translate to revenues. Oil prices were hedged then at 74 dollars per barrel. With oil prices at half of that, many of those hedges are coming off this year and that will cause additional pain to the industry and Pemex.

That said, though Mexico will feel the global Depression pain this year as a major player, it is still set to have a much better year than Brazil on every level; from a higher stock market to a higher currency valuation relative to the US dollar to lower inflation to lower unemployment to a better balance of trade with the US than Brazil will have with China. Plus, it has far less obvious inbred corporate-government corruption.

10) Elections and Media Coverage

It’s been a minute since the last debate or late night show fly-by from any Presidential hopeful, but this is the year of the US election. I look forward to continuing to post my monthly wrap on TomDispatch as the Democratic and Republican nominees emerge. I will be taking stock of the most expensive election in not just US history, but in the history of the World. Look for more on the numbers behind the politics later this month.

From a financial standpoint, this election has low impact on flows of capital. Given the platforms of everyone in reasonable contention (with the exception of Bernie Sanders’ platform), no one will actually touch excessive speculation, concentration risk in the banking or other critical sectors like healthcare, or meaningfully examine the global role of artisanal central bank policy, particularly as emanating from the Fed.

Elsewhere, economic stress throughout the globe and a general sense of exasperation and distrust with politicians is putting new leaders in place that are pushing for more austerity or open capital flow programs rather than foundational growth and restrictions on the kind of flows that cause undue harm to local economies. That is a recipe for further economic disaster that will fall most heavily on populations worldwide.

[Wombaticus Rex]

Felt compelled to point out:

2) Global Stock Markets

They say that behavior on the first day of the year is indicative of behavior in the year to come.

Yes. Idiots say that. Generally idiots with a "system" to sell you.

[Grizzly]

Too poor to retire, too young to die
http://www.metafilter.com/156772/Too-po ... ung-to-die

America's retirement crisis: 29% of people 55 or older lack savings or pensions, says the Government Accountability Office (GAO). 1 in 4 people aged 65 or older is still working, many because they have no choice but to keep working as Social Security cannot cover their living costs. These working seniors find themselves too poor to retire, too young to die.

Reading the comments is encouraged, here's a few that stood out to me:


But Collinson stressed the need for more people to calculate their projected retirement needs and to plan ahead accordingly
The idea that one can "plan ahead" in an economy where pensions are rarities and student loans a must, is senseless victim-blaming. My parents didn't "plan ahead" to have a pension upon retirement; that was just what workplaces like theirs offered. And now those workplaces don't. The folks I know whose savings were wiped out by vagaries of the stock market didn't suffer from a lack of planning; they suffered from the fact that retirement income is never, has never been, under the control of workers, but always elsewhere. The control is elsewhere, but the blame is always on the worker.
----
Am I the only one that doesn't feel sorry for the generation that fucked themselves and their kids/grandkids over?
There are ways in which my parents benefited from their historical moment, but other ways in which they have been severely screwed. My grandparents did better as members of the "greatest generation" but nothing more luxurious than stable, middle class living with access to some government support, but not nearly enough to negate the need for spending their own savings.

Generational angst is fun, but I put the blame on the kleptocratic top of the wealth pyramid, not the boomers or their parents.
------
Can it really be called a crisis when it's really the planned-for and expected result of 36 years of public policy?

Not to worry, we have a new draft comming...

Are you a female between the ages of 18 and 26?
http://www.metafilter.com/156786/Are-yo ... -18-and-26
Army and Marine Corps chiefs: It’s time for women to register for the draft The top officers in the Army and Marine Corps testified on Tuesday that they believe it is time for women to register for future military drafts, following the Pentagon’s recent decision to open all jobs in combat units to female service members.

[Pele'sDaughter]

I'm one of those over 65 who has to keep working. At least I'm now also collecting SS every month, so I can actually make ends meet for a change. The good news is that I'm in apparent good health. I see a lot of folks my age hobbling around or on scooters and lined up at the pharmacy, so I count my blessings. Most people I know who had pensions coming had that jerked out from under them by company "bankruptcy" or other forms of theft.

[divideandconquer]

I think we've been in the middle of an ongoing collapse/crash for quite some time, but we've been led to believe that "the crash" will appear as it does in the movies: we'll wake up one day to "Grapes of Wrath" America, or worse, a "Mad Max" America. This is the reason why so many Americans close their eyes to, as I see it, the engineered economic instability that is rampant and blatant within our system.

All you have to do is look back a few generations to see how far we've fallen. It used to be, after graduating from high school/college, mostly debt free, people found full-time positions with significant chance for upward mobility, not to mention, lifetime employment, and fairly certain they could retire at 65. Families with umpteen kids and one parent working had little problem making ends meet...and that's without credit cards. My dad worked at the same institution for over 40 years and my mom stayed home to raise us. He didn't make much, but we never missed a meal, always had a decent roof over our head, clothes on our back, etc. The same held true for families all around us.

Today, despite the ever-growing economy, achieving adult milestones takes twice as long, if not longer. Young mostly college-educated adults--because try getting a decent job without a college degree--loaded down with debt are lucky to find a full-time position (forget about a permanent full time position). Most are working part-time jobs (or jobs that fall short of full time employment) that used to require a high-school diploma, if that. For the average young person, buying a house and starting a family or planning for the future must feel like jogging in quicksand....well, that's what it feels like for me as I watch my three young adult children struggle to achieve the milestones that came easily to me in comparison.

[NeonLX]

I always laugh at the low official rate of inflation. What? Shit is really expensive and shit. I don't have cable TV or home internet, and I spend most of my time in the public library where stuff is free. I'm 56 years old and have worked in the same professional position for 27 years. My salary now would have kept me in a big house with a new Chrysler in the driveway every other year back in 1973.

[Grizzly]

[seemslikeadream]

Socialist Venezuela Is Literally Getting Cargo Planes Full Of IMF Cash
Guest Post February 4, 2016 Economics of Liberty

The Venezuelan economy is doing so poorly that three dozen 747 airplanes had to fly in much-needed cash.

Inflation will reach 720 percent this year in the oil rich country, according to the International Monetary Fund. While inflation is reaching an unprecedented rate, Venezuelan currency printing firms are unable to contend with the amount of money needed by the government. It is increasingly common for countries to manufacture currency abroad and have it managed by private companies with expertise in anti-counterfeiting technology.


Venezuelan inflation reached the historic rate of 275 percent in 2015. The OPEC member is contending with low oil prices and an insufficiently diverse economy. The country’s oil production decreased by 25 percent from 1999 to 2013, according to The Independent.

Government-owned oil company Petróleos de Venezuela, S.A. (PDVSA) manages Venezuela’s oil production and has been suffering from chronic mismanagement for several years. In 2003, almost 20,000 experienced employees of the oil firm were fired after they went on strike and protested President Hugo Chavez’s policies. While oil production has decreased, hiring at PDVSA has steadily risen.

As of March 2013 when former President Hugo Chavez died, the national oil firm employs over 110,000 people, and often times loyalty to the ruling Socialist Party is favored over experience. Unsurprisingly, Venezuela’s oil sector has been experiencing a brain drain as the best and the brightest have fled their country.

On the Venezuelan black market, 1,000 bolivars are now worth only $1, according to the Wall Street Journal. However, the Socialist government of President Nicolas Maduro continues to insist through the official exchange rate that 1,000 bolivars amount to $159.

[Belligerent Savant]

.

How 37 banks became FOUR:

[seemslikeadream]

Published on
Tuesday, February 16, 2016
byCommon Dreams
Unlikely Critic Says Banks Still Too Big To Fail, Pose 'Nuclear' Risk to US Economy

Federal Reserve official Neel Kashkari warns "we won't see the next crisis coming, and it won’t look like what we might be expecting."

byDeirdre Fulton, staff writer

"The financial sector has lobbied hard to preserve its current structure and thrown up endless objections to fundamental change," said Neel Kashkari, who is a former executive at Goldman Sachs, in a speech Tuesday. (Photo: ProPublica/flickr/cc)

A former Goldman Sachs executive—one credited as an architect of the 2008 banking bailout—said Tuesday that the country's largest financial institutions are "still too big to fail and continue to pose a significant, ongoing risk to our economy."

In his first speech delivered as the newly appointed president of the Minneapolis Federal Reserve, Neel Kashkari "came out swinging," Business Insider reported.

He likened the risk posed by big banks to that of a nuclear reactor, noting: "The cost to society of letting a reactor melt down is astronomical."

"Enough time has passed that we better understand the causes of the crisis, and yet it is still fresh in our memories," Kashkari said at the Brookings Institution think tank in Washington, D.C. "Now is the right time for Congress to consider going further than Dodd-Frank with bold, transformational solutions to solve this problem once and for all."

There's something in the air...

To that end, Kashkari continued, "the Federal Reserve Bank of Minneapolis is launching a major initiative to develop an actionable plan to end [too-big-to-fail, or TBTF], and we will deliver our plan to the public by the end of the year. Ultimately Congress must decide whether such a transformational restructuring of our financial system is justified in order to mitigate the ongoing risks posed by large banks."

Among the solutions he floated: "breaking up large banks into smaller, less connected, less important entities" and "turning large banks into public utilities by forcing them to hold so much capital that they virtually can't fail (with regulation akin to that of a nuclear power plant)."

While Kashkari acknowledged that the 2010 Dodd-Frank financial reform law has made "significant progress" in strengthening the financial system, he said it "did not go far enough" and warned that "we won’t see the next crisis coming, and it won’t look like what we might be expecting."

Kashkari, who was the 2014 Republican nominee for California governor, also expressed skepticism about whether regulatory tools created in the wake of the bailout "will be useful to policymakers in the...scenario of a stressed economic environment." He said:

Given the massive externalities on Main Street of large bank failures in terms of lost jobs, lost income and lost wealth, no rational policymaker would risk restructuring large firms and forcing losses on creditors and counterparties using the new tools in a risky environment, let alone in a crisis environment like we experienced in 2008. They will be forced to bail out failing institutions—as we were. We were even forced to support large bank mergers, which helped stabilize the immediate crisis, but that we knew would make TBTF worse in the long term. The risks to the U.S. economy and the American people were simply too great not to do whatever we could to prevent a financial collapse.

As the Guardian notes, Kashkari's comments "come as presidential candidates battle over whom has the best solution to prevent another banking crisis, and prevent a repeat of the economic collapse."

"There are lines in your speech that I can imagine Bernie Sanders or Elizabeth Warren saying," David Wessel, director of Brookings' Hutchins Center on Fiscal and Monetary Policy, told Kashkari during a panel discussion after the speech.

"If I'm not willing to stand up and share my concerns, then I wouldn’t be doing my job," Kashkari responded.

[seemslikeadream]

FEBRUARY 17, 2016
The Federal Reserve and the Global Fracture
by MICHAEL HUDSON


This interview with Michael Hudson was conducted by Finnish journalist Antti J. Ronkainen.

Antti J. Ronkainen: The Federal Reserve is the most significant central bank in the world. How does it contribute to the domestic policy of the United States?

Michael Hudson: The Federal Reserve supports the status quo. It would not want to create a crisis before the election. Today it is part of the Democratic Party’s re-election campaign, and its job is to serve Hillary Clinton’s campaign contributors on Wall Street. It is trying to spur recovery by resuming its Bubble Economy subsidy for Wall Street, not by supporting the industrial economy. What the economy needs is a debt writedown, not more debt leveraging such as Quantitative Easing has aimed to promote. But the Fed is in a state of denial that the U.S. and European economies are plagued by debt deflation.

The Fed uses only one policy: influencing interest rates by creating bank reserves at low give-away charges. It enables banks too make easy gains simply by borrowing from it and leaving the money on deposit to earn interest (which has been paid since the 2008 crisis to help subsidize the banks, mainly the largest ones). The effect is to fund the asset markets – bonds, stocks and real estate – not the economy at large. Banks also are heavy arbitrage players in foreign exchange markets. But this doesn’t help the economy recover, any more than the ZIRP (Zero Interest-Rate Policy) since 2001 has done for Japan. Financial markets are the liabilities side of the economy’s balance sheet, not the asset side.

The last thing either U.S. party wants is for the election to focus on this policy failure. The Fed, Treasury and Justice Department will be just as pro-Wall Street under Hillary. There would be no prosecutions of bank fraud, there would be another bank-friendly Attorney General, and a willingness to subsidize banks now that the Dodd-Frank bank reform has been diluted from what it originally promised to be.

AJR: So let’s go back to beginning. When the Great Financial Crisis escalated in 2008 the Fed’s response was to lower its main interest rate to nearly zero. Why?

MH: The aim of lowering interest rates was to provide banks with cheap credit. The pretense was that banks might lend to help the economy get going again. But the Fed’s idea was simply to re-inflate the Bubble Economy. It aimed at restoring the value of the mortgages that banks had in their loan portfolios. The hope was that easy credit would spur new mortgage lending to bid housing prices back up – as if this would help the economy rather than simply raising the price of home ownership.

But banks weren’t going to make mortgage loans to a housing market that already was over-lent. Instead, homeowners had to start paying down the mortgages they had taken out. Banks also reduced their credit-card exposure by a few hundred billion dollars. So instead of receiving new credit, the economy was saddled with having to repay debts.

Banks did make money, but not by lending into the “real” production and consumption economy. They mainly engaged in arbitrage and speculation, and lending to hedge funds and companies to buy their own stocks yielding higher dividend returns than the low interest rates that were available.

AJR: In addition to the near zero interest rates, the Fed bought US Treasury bonds and mortgage backed securities (MBS) with almost $4 trillion during three rounds of Quantitative Easing stimulus. How have these measures affected the real economy and financial markets?

MH: In 2008 the Federal Reserve had a choice: It could save the economy, or it could save the banks. It might have used a fraction of what became the vast QE credit – for example $1 trillion – to pay off the bad mortgages and write them down. That would have helped save the economy from debt deflation. Instead, the Fed simply wanted to re-inflate the bubble, to save banks from having to suffer losses on their junk mortgages and other bad loans.

Keeping these debts on the books, in full, let banks foreclose on defaulting homeowners. This intensified the debt-deflation, pushing the economy into its present post-2008 depression. The debt overhead is keeping it depressed.

One therefore can speak of a financial war waged by Wall Street against the economy. The Fed is a major weapon in this war. Its constituency is Wall Street. Like the Justice and Treasury Departments, it has been captured and taken hostage.

Federal Reserve chairwoman Janet Yellen’s husband, George Akerlof, has written a good article about looting and fraud as ways to make money. But instead of saying that looting and fraud are bad, the Fed has refused to regulate or move against such activities. It evidently recognizes that 2KillingTheHost_Cover_rulelooting and fraud are what Wall Street is all about – or at least that the financial system would come crashing down if an attempt were made to clean it up!

So neither the Fed nor the Justice Department or other U.S. Government agencies has sanctioned or arrested a single banker for the trillions of dollars of financial fraud. Just the opposite: The big banks where the fraud was concentrated have been made even larger and more dominant. The effect has been to drive out of business the smaller banks not so involved in derivative bets and other speculation.

The bottom line is that banks made much more by getting Alan Greenspan and the Clinton-Bush Treasury officials to deregulate fraud than they could have made by traditional safe lending. But their gains have increased the economy’s overhead.

AJR: Do you believe Mike Whitney’s argument that QE was about a tradeoff between the Fed and the government: the Fed pumped the new bubble and saved the banks that the government didn’t need to bail out more banks. The government’s role was to impose austerity so that inflation and employment didn’t rise – which would have forced the Fed to raise interest rates, ending its QE program?

MH: That was a great chart that Mike put up from Richard Koo. It shows that the Fed’s enormous credit creation had zero effect on raising commodity prices or wages. But stock market prices doubled in just six years, 2008-15, and bond prices rose to new peaks. Banks left much of the QE credit on deposit with the Fed, earning an interest giveaway premium.

The important point is that the Fed (backed by the Obama Administration) refused to use this $4 trillion to revive the production-and-consumption economy. It claimed that such a policy would be “inflationary,” by which it meant raising employment and wage levels. The Fed thus accepted the neoliberal junk economics proposing austerity as the answer to any problem – austerity for the industrial economy, not the Fed’s own Wall Street constituency.

AJR: According to a Fed staff report, QE would lower the exchange rate of dollar to the other currencies causing competitiveness boost for the U.S. firms. Former finance minister of Brazil Guido Mantega, as well as the chairman of Central Bank of India Raghuram Rajan, have described the Fed’s QE as a “currency war.” What’s your take?

MH: The Fed’s aim was simply to provide banks with low-interest credit. Banks lent to hedge funds to buy securities or make financial bets that yielded more than 0.1 percent. They also lent to companies to buy their own stock, and to corporate raiders for debt-financed mergers and acquisitions. But banks didn’t lend to the economy at large, because it already was “loaned up,” and indeed, overburdened with debt.

Lower interest rates did spur the “carry trade,” as they had done in Japan after 1990. Banks and hedge funds bought foreign bonds paying higher rates. The dollar drifted down as bank arbitrageurs could borrow from the Fed at 0.1 percent to lend to Brazil at 9 percent. Buying these foreign bonds pushed up foreign exchange rates against the dollar. That was a side effect of the Fed’s attempt to help Wall Street make financial gains. It simply didn’t give much consideration to how its QE flooding the global economy with surplus dollars would affect U.S. exports – or foreign countries.

Exchange rate shifts don’t affect export trends as much as textbook models claim. U.S. arms exports to the Near East, and many technology exports are non-competitive. However, a looming problem for most countries is what may happen when ending QE increases the dollar’s exchange rate. If U.S. interest rates go back up, the dollar will strengthen. That would increase the cost to foreign countries of paying dollar-denominated debts. Countries that borrowed all dollars at low interest will need to pay more in their own currencies to service these debts. Imagine what would happen if the Federal Reserve let interest rates rise back to a normal level of 4 or 5 percent. The soaring dollar would push debtor economies toward depression on capital account much more than it would help their exports on trade account.

AJR: You have said that QE is fracturing the global economy. What do you mean by that?

Part of the flood of dollar credit is used to buy shares of foreign companies yielding 15 to 20 percent, and foreign bonds. These dollars are turned over to foreign central banks for domestic currency. But central banks are only able to use these dollars to buy U.S. Treasury securities, yielding about 1 percent. When the People’s Bank of China buys U.S. Treasury bonds, it’s financing America’s dual budget and balance-of-payment deficits, both of which stem largely from military encirclement of Eurasia – while letting U.S. investors and the U.S. economy get a free ride.

Instead of buying U.S. Treasury securities, China would prefer to buy American companies, just like U.S. investors are buying Chinese industry. But America’s government won’t permit China even to buy gas station companies. The result is a double standard. Americans feel insecure having Chinese ownership in their companies. It is the same attitude that was directed against Japan in the late 1980s.

I wrote about this financial warfare and America’s free lunch via the dollar standard in Super Imperialism (2002) and The Bubble and Beyond (2012), and about how today’s New Cold War is being waged financially in Killing the Host (2015).

AJR: The Democrats loudly criticized the Bush administration’s $700 billion TARP-program, but backed the Fed’s QE purchases worth of almost $4 trillion during the Obama administration. How does this relate to the fact that officially, QE purchases were intended to support economic recovery?

MH: I think you’ve got the history wrong. My book Killing the Host describes how the Democrats supported TARP, while the Republican Congress opposed it on populist grounds. Republican Treasury Secretary Hank Paulson offered to use some of the money to aid over-indebted homeowners, but President-elect Obama blocked that – and then appointed Tim Geithner as Treasury Secretary. FDIC head Sheila Bair and by SIGTARP head Neil Barofsky have written good books about Geithner’s support for Wall Street (and especially for Citigroup and Goldman Sachs) against the interests of the economy at large.

If you are going to serve Wall Street – your major campaign contributors – you are going to need a cover story pretending that this will help the economy. Politicians start with “Column A”: their agenda to reimburse their campaign contributors – Wall Street and other special interests. Their public relations team and speechwriters then draw up “Column B”: what public voters want. To get votes, a rhetorical cover story is crafted. I describe this in my forthcoming J is for Junk Economics, to be published in March. It’s a dictionary of Orwellian doublethink, political and economic euphemisms to turn the vocabulary around and mean the opposite of what actually is meant.

AJR: How do TARP and QE relate to the Federal Reserve’s mandate about price stability?

MH: There are two sets of prices: asset prices and commodity prices and wages. By “price stability” the Fed means keeping wages and commodity prices down. Calling depressed wage levels “price stability” diverts attention from the phenomenon of debt deflation – and also from the asset-price inflation that has increased the advantages of the One Percent over the 99 Percent. From 1980 to the present, the Fed has inflated the largest bond rally in history as a result of driving down interest rates from 20 percent in 1980 to nearly zero today, as you have noted.

Chicago School monetarism ignores asset prices. It pretends that when you increase the money supply, this increases consumer prices, commodity prices and wages proportionally. But that’s not what happens. When banks created credit (money), they don’t lend much to people to buy goods and services or for companies to make capital investments to employ more workers. They lend money mainly to transfer ownership of assets already in place. About 80 percent of bank loans are mortgages, and the rest are largely for stocks and bond purchases, including corporate takeovers and stock buybacks or debt-leveraged purchases. The effect is to bid up asset prices, while loading down the economy with debt in the process. This pushes up the break-even cost of doing business, while imposing debt deflation on the economy at large.

Wall Street isn’t so interested in exploiting wage labour by hiring it to produce goods for sale, as was the case under industrial capitalism in its heyday. It makes its gains by riding the wave of asset inflation. Banks also gain by making labour pay more interest, fees and penalties on mortgages, and for student loans, credit cards and auto loans. That’s the postindustrial financial mode of exploiting labor and the overall economy. The Fed’s QE program increases the price at which stocks, bonds and real estate exchange for labour, and also promotes debt leverage throughout the economy.

AJR: Why don’t economists distinguish between asset-price and commodity price inflation?

MH: The economics curriculum has been turned into an exercise for students to pretend that a hypothetical parallel universe exists in which the rentier classes are job creators, necessary to help economies recover. The reality is that financial modes of getting rich by debt leveraging creates a Bubble Economy – a Ponzi scheme leading to austerity and shrinking markets, which always ends in a convulsion of bankruptcy.

The explanation for why this is not central to today’s economic theory is that the discipline has been captured by this neoliberal tunnel vision that overlooks the financial sector’s maneuvering to make quick trading profits in stocks, bonds, mortgages and derivatives, not to take the time and effort to develop long-term markets. Rentiers seek to throw a cloak of invisibility around how they make money. They know that if economists don’t measure their wealth and the public does not see it, voters will be less likely to bring pressure to regulate and tax it.

Today’s central economic problem is that inflating asset prices by debt leveraging extracts more interest and financial charges. When the resulting debt deflation ends up hollowing out the economy, creditors try to blame labour, or government spending (except for bailouts and QE to help Wall Street). It is as if debtors are exploiting their creditors.

AJR: If there is a new class war, what is the current growth model?

MH: It’s an austerity model, as you can see from the eurozone and from the neoliberal consensus that cites Latvia as a success story rather than a disaster leading to de-industrialization and emigration. In real democracies, if economies polarize like they are doing today, you would expect the 99 Percent to fight back by electing representatives to enact progressive taxation, regulate finance and monopolies, and make public investment to raise wages and living standards. In the 19th century this drive led parliaments to rewrite the tax rules to fall more on landlords and monopolists.

Industrial capitalism plowed profits back into new means of production to expand the economy. But today’s rentier model is based on austerity and privatization. The main way the financial sector always has obtained wealth has been by privatizing it from the public domain by insider dealing and indebting governments.

The ultimate financial business plan also is to lend with an eye to end up with the debtor’s property, from governments to companies and families. In Greece the European Central Bank, European Commission and IMF demanded that if the nation’s elected representatives did not sell off the nation’s ports, land, islands, roads, schools, sewer systems, water systems, television stations and even museums to reimburse the dreaded austerity troika for its bailout of bondholders and bankers, the country would be isolated from Europe and faced with a crash. That forced Greece to capitulate.

What seems at first glance to be democracy has been hijacked by politicians who accept the financial class war ideology that the way for an economy to get rich is by austerity. That means lowering wages, unemployment, and dismantling government by turning the public domain over to the financial sector.

By supporting the banking sector even in its predatory and outright fraudulent behavior, U.S. and European governments are reversing the trajectory along which 19th-century progressive industrial capitalism and socialism were moving. Today’s rentier class is not concerned with long-term tangible investment to earn profits by hiring workers to produce goods. Under finance capitalism, an emerging financial over-class makes money by stripping income and assets from economies driven deeper into debt. Attacking “big government” when it is democratic, the wealthy are all in favor of government when it is oligarchic and serves their interests by rolling back the past two centuries of democratic reforms.

AJR: Does the Fed realize global turbulences what its unconventional policies have caused?

MH: Sure. But the Fed has painted itself in a corner: If it raises interest rates, this will cause the stock and bond markets to go down. That would reverse the debt leveraging that has kept these markets up. Higher interest rates also would bankrupt Third World debtors, which will not be able to pay their dollar debts if dollars become more expensive in their currencies.

But if the Fed keeps interest rates low, pension funds and insurance companies will have difficulty making the paper gains that their plans imagined could continue exponentially ad infinitum. So whatever it does, it will destabilize the global economy.

AJR: China’s stock market has crashed, western markets are very volatile, and George Soros has said that the current financial environment reminds him of the 2008 crash. Should we be worried?

MH: News reports make it sound as if debt-ridden capitalist economies will face collapse if the socialist countries don’t rescue them from their shrinking domestic markets. I think Soros means that the current financial environment is fragile and highly debt-leveraged, with heavy losses on bad loans, junk bonds and derivatives about to be recognized. Regulators may permit banks to “extend and pretend” that bad loans will turn good someday. But it is clear that most government reports and central bankers are whistling in the dark. Changes in any direction may pull down derivatives. That will cause a break in the chain of payments when losers can’t pay. The break may spread and this time public opinion is more organized against 2008-type bailouts.

The moral is that debts that can’t be paid, won’t be. The question is, how won’t they be paid? By writing down debts, or by foreclosures and distress sell-offs turning the financial class into a ruling oligarchy? That is the political fight being waged today – and as Warren Buffet has said, his billionaire class is winning it.

That’s all for now. Thank you Michael!