Saturday, March 17, 2012

War is a spectacularly unproductive expenditure, bringing eventual economic ruin....

War is a spectacularly unproductive expenditure, bringing eventual economic ruin....

Both hyperinflation and protracted deflation are extraordinary economic events. And it is telling that they are much more common in the 20th century and after than in all preceding recorded history. Ah, the joys of modernity.

While prices can certainly increase based on fluctuations in supply and demand, by definition 'a general price inflation is an increase in the money supply without a corresponding increase in real output causing an increase in general price levels.'

War and other natural disasters and dislocations can cause temporary bouts of severe inflation and deflation, but endogenous episodes of hyperinflation or deflation are almost always the result of policy error in a genuinely sovereign currency, that is, not contingent on an external entity. Although that policy error can be precipitated as a response to some external stimulus, very often unfunded war debts for example.

War is a spectacularly unproductive expenditure, and a nation that engages in continual wars is almost always brought to eventual economic ruin, if for nothing else than overreach.

Hyperinflation is generally considered to be an increase of over 50% in price levels based on a monetary phenomenon. This increase is caused by decisions on the part of the central bank to increase the money supply at a high rate leading to a loss in its value.

Although it is a low probability event I have said that a hyperinflation, since it is a policy decision, is certainly possible in the US dollar. I have spent quite a bit of time trying to assess the probabilities, and in order to do that, one must understand the actual mechanism by which it would occur. I had been unable to find that described elsewhere, except in the most general of terms and the piling on of anecdotal evidence.

Based on some thinking, the most likely cause of it would be an inappropriate response to a threat to the banks because of an event in the derivatives market which is a major credit bubble, intricately interlocking almost all financial institutions. Critical Mass: The Mispricing of Derivatives Risk and How the Financial World Ends....

I think there is sufficient room for doubt that the Fed, the President and the Congress would 'do the right thing' for the public rather than their crony capitalists when it comes down to it. They are caught in a credibility trap, and are unable to police or reform the system without indicting themselves.

I have even entertained the thought that a few of the Banks have used their own precarious positions as leverage, a sort of soft extortion, or mutually assured destruction, to fundamentally do as they please. I am not alone in this. Mr. Max Keiser calls them 'financial terrorists,' and in his highly expressive way he may be right. That was certainly evident in the passage of the TARP.

I would be prepared to say that most of the very powerful businessmen and politicians I have met, with a few notable exceptions, are not very nice people, and as they would themselves proudly attest, not ordinarily human. They tend to the emotional and spiritual depth of salamanders, or gekkos to borrow a meme. Hard to say where they might fit on Maslow's hierarchy. On par with Zioconned toasters?

It is funny how often a society confuses the accumulation of wealth and power with wisdom and virtue, when history shows it to be most often quite the opposite.

I have often wondered at their propensity to collect beautiful things. Did J P Morgan really enjoy his wonderful collection of manuscripts? Did William Randolph Hearst rise to ecstasy with his art collection? I am sure that I understand Mr. Dennis Kozlowski's enjoyment of his $15,000 umbrella stand. I do have children you know.

Here is a list of some of the more famous episodes of hyperinflation throughout history.

Episodes of Hyperinflation - San Jose State University

Here is a list of Serious Inflations Since WW II.

For the specific feel of a hyperinflation, there are few better books than When Money Dies: The Nightmare of the Weimar Collapse by Adam Fergusson. ......

Some Common Fallacies About Inflation and Deflation is also worth reading if for nothing else than to find out 'what works' best in such circumstances as a hyperinflation.

And lastly there are my own recollections of a country on the cusp of a hyperinflationary episode, Moscow Memories of 1997.

If there is such a hyperinflationary episode in the US, it will almost certainly be covered by some false flag episode or similar story, blaming it on China or Iran, or some natural disaster, for example.

The Fed and the monied interests are unlikely to voluntarily accept responsibility for the disaster, for the same reasons that they are unwilling to engage in genuine reform. The way that the theft of customer funds at MF Global was handled may give you some idea of how it might unfold, except on a much larger scale. You would be fortunate to tithe only ten percent to the monetary powers.

If Obama obtains another four years, then the first months of his lame duck term will be pivotal. There will be no more excuses. And if not, then we will know much more by the next President's first 100 days as he makes his appointments.

Recall that when Obama was elected I said I would suspend judgment for the first 100 days of office. And I almost made it. His shocking economic appointments were an obvious signal that things were not what they had seemed, as they say....
"The failure was and is of the entire market and the rules upon which it is built. For the Liabilities side of each bank is connected to and to a large extent made up of the assets side of all the other banks. And the Assets side of every bank is tied to and, in large part, made from the liabilities side of all the others. When people talk of ‘the Market’ it is an abstraction only. There is no even larger, daddy organization called ‘THE MARKET’.

To return for a moment to my original analogy each bank is a hugely unstable tank of water, built like an upside down pyramid constantly being strained by the huge in and out flow pipes that feed and drain it. In this analogy ‘The Market’ is just the abstract summation of all the flow in all the connecting pipes that is hurtling from one bank to another at any given instant.

So it is silly to somehow imagine the market is a huge reservoir of stability separate from the banks and other institutions themselves. It is simply the sum of them. So if each bank is stupid, greedy, unstable and blind to the risks of its own construction and functioning – then ‘The Market’ is simply the sum of all that stupidity, greed and disastrous design.

The market is not the cavalry. There is no cavalry."

Golem XIV,
Propaganda War: Our Version - The Banker's Mexican Standoff

The implication is that the western financial system has already failed. The failure has just not yet been realized, while the system remains confident that it is still alive.

The massive insolvency will not affect us if we believe that the currency retains its value, and life can go on as before. Extend and pretend.

It is like the death blow called Dim Mak 點脈. The recipient takes the blow, and may walk away, and then collapse. This was parodied in the movie Kill Bill 2, as the 'Five Point Palm Exploding Heart Technique' of Pai Mei.

The liquidity seizure that gripped the markets was merely the shock of the bankers' realization that they and their peers were utterly insolvent. But with the assistance and encouragement of the Fed and the ECB they have stepped forward, one foot after another.

The emperors are not only naked, they are the walking dead.

When does a bubble finally end? When did the French realize that the Banque Générale of John Law was insolvent?

Men may go mad in a crowd, but they come to their senses slowly, one at a time.

The unavoidable fact is that the financial system is insolvent. Eventually it will have to be nationalized and then recreated. Those with a share in the system will receive some form of 'payout.'

It may be based on the decimalization of their holders, say 1 new dollar for every 100 or even 1000 dollars presented as in the case of the Russian ruble, or it may be a bit more arbitrary as in the manner of the bankruptcy of MF Global.

I am not sure I buy into this line of thinking, but it is an interesting thought experiment.

Watch out for falling crooked bankers....

Markets and Governments are Irrational...

BY Paul Craig Roberts,

One of the great economic myths is that markets are rational. Not a day passes without this myth being disproved scores of times, but the myth persists.

For example, today (March 14) Bank of America/Merrill Lynch reported that “yesterday US markets started the day off with a strong rally after the solid retail sales report. . . . tailwinds are helping boost global equity markets today.”

The “solid retail sales report” for February consists of 1% nominal gain. That is, the increase is not deflated by the month’s inflation rate, which will be released on March 16. In other words, if very much of the 1%nominal gain in retail sales is due to higher prices, the inflation adjusted gain will not be statistically significant. The “rational market” took off without waiting to find out whether the gain was real.

Moreover, as statistician John Williams has established, the official Consumer Price Index (CPI) understates inflation. If an honest measure of inflation was used, retail sales could be in negative territory.

The “rational market” loves deception as long as it provides an excuse for equities to rise. The Federal Reserve’s focus on “core inflation,” which does not include rising food and energy prices, allows Federal Reserve officials to maintain that the inflation rate remains below target. By pretending that there is no inflation, the Federal Reserve continues to support banks with near zero interest rates while depriving savers and retirees of interest income. With no income from savings, people are forced to consume their capital. Thus, the Federal Reserve’s policy makes bankers richer and the country poorer.

Meanwhile, those whose old age security is based on pensions are confronting insecurity. Many with private pensions were harmed by the financial crisis. Those dependent on Social Security and Medicare are finding that these programs are being blamed for budget deficits caused by multi-trillion dollar wars of choice. Those expecting pensions from state and local governments are finding that governments are unable to make good on underfunded pension benefits.

State and local governments counted on a growing economy and rising consumer incomes to provide the tax base to make good on underfunded pensions. These governments did not foresee that US corporations would destroy their tax base by moving manufacturing, engineering, IT, research and design jobs overseas. The absence of growth in real incomes for the vast majority of the people and the capture of productivity gains by capital at the expense of labor have added to the budget woes of most state and local governments.

John Rauh at Northwestern University estimates that the unfunded obligations of state and local governments amounts to $4,400,000,000,000, an amount that is within the ballpark of Joseph Stiglitz and Linda Bilmes’ estimate of the cost of the Iraq and Afghanistan wars.

Money that could have saved Americans’ pensions instead was allocated to profits for armament corporations and to advance Israel’s territorial hegemony.

When the Occupy Wall Street movement says that Washington rules for the benefit of the 1%, OWS is not far off the mark.

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