Best Economic Essay in Ten Years

What have I been saying?  After delineating good and bad credit, finally someone in academia is saying it!

Only then can we understand how the bubble economy’s pseudo-prosperity was fueled by credit flows — debt pyramiding — to inflate asset markets in the process of transferring ownership rights to whomever was willing to take on the largest debt.

Again and again I have pointed out the winners only had to be willing to take on the most debt.  I thought I was the only person pointing this out.  Comes now a couple of professors who explains well why if you have paycheck, property or pension, for the next forty years, you're toast.

That is what makes the seemingly empirical accounting format used in most economic analysis an expression of creditor-oriented pro-rentier ideology. Households do not receive incomes from the houses they live in. The value of the “services” their homes provide does not increase simply because house prices rise, as the national accounts fiction has it. The financial sector does not produce goods or even “real” wealth. And to the extent that it produces services, much of this serves to redirect revenues to rentiers, not to generate wages and profits.

Some will argue, all those tellers and loan officers and Vice Presidents and janitors and rent-a-cops are certainly being paid wages generated and stockholders and Presidents get profits.  No.  They are just minion-rentiers who are tossed some redirected revenues for making actual the redirection in toto.

Here is an important point, upon which I will intrude...

Economic theory today is in some ways a step backward by expunging the nineteenth-century view — and indeed that of medieval economics and even of classical antiquity — with regard to how banking and high finance intrude into economic life to impose austerity and polarize the distribution of wealth and income.

How is this distribution of wealth effected?  Titles.  Ex nihilo credit is available to borrowers from hegemon-chartered entities.  People who are wholly engaged in loaning credit, something from nothing, are able to attach at least a partial lien, if not a clear title, to at least a portion if the means of production and real wealth such as homes.  A slice here, a chunk there, it can add up.  Their slice is purely inflation, but since all loan-involved investments are marginal, and the lender's title is superior, when the economic actor is overwhelmed in his measure, all spoils go to the lender.  It is a neat trick.  Wait a minute.  It is just the pigeon drop scam!

What you don't know at this point is that your new acquaintances are running a scam, and you're the target. The first stranger earned your confidence, so that when the second stranger presented a moneymaking opportunity, you had someone you trusted telling you that it was a good idea. The first tip-off to the pigeon drop, then, is when you find yourself with a new friend, followed soon after by a chance for the two of you to cash in with the help of a third person.

Your new acquaintance is a real estate broker who instills the confidence, and the second stranger is the banker, who can make a money maker happen, a home (or a job ((a degree)) or a car...  you name it.)  It's the same set up over and over, but it is legal.  There is nothing in the bag of value, except what money or title obligations you put in.  Later, you realize you got nothing, they got the titles.  Titles to your future income stream. Except no one hides this, because it is enforced by law.

For example, in one instance, as homes are sold and debt is assigned, who has the title to the goods?  Well, you, as long as you can make payments and pay taxes. But one gross distortion is since the 1980s in USA you cannot get a mortgage without very special circumstances (maybe farmland).  Now you get a deed of trust, which allows banks to fast track foreclose, so they can get the home resold faster.

Onward,

James Tobin already in 1984 worried that “we are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services” (Tobin 1984, 14)

Yes, a specialty retailer who had a storied life was closing down and lamented we lost two, maybe three generations of entrepreneurs.  They went instead for the skim.  After noting a business loan is paid for out of the proceeds from the new means of production created, home loans must be paid out of the current income of the borrower.  The house itself provides no income.

Mortgages are also special in that real estate assets have grown into the largest asset market in all western economies, and the one with the most widespread participation. Following classical analysis, if every real estate asset bought on credit skims off the income of the owner-borrower, then the rise in home ownership since the 1970s has sharply increased rent extraction and turned it into a flow of interest to mortgage lenders. 

Everything changed in the 1970s.  When Nixon took us off the gold standard (lite).

Bank credit to the nonbank “asset” sector (mainly for real estate, but also LBOs and takeover loans to buy companies, margin loans for stock and bond arbitrage, and derivative bets) does not enter the “real sector” to finance tangible capital formation or wages. Its principal immediate effect is to inflate prices for property and other assets. Recent econometric analysis confirms that mortgage credit causes house price to increase (Favara and Imbs 2014) — and not just vice versa, as in the demand-driven textbook credit market theories.

Any real estate agent in the 1990s could have told you that if you could afford a $200,000 house at 9% interest, you can afford a $300,000 house a 6% interest.  Academics figured this out only in 2014? So, when the interest rates dropped from 9% to 6% did people trade up to more or better homes?  No way.  A $200,000 house at 9% interest becomes a $300,000 house at 6% interest.  Imagine how overpriced the homes people are getting now at 4%.  That $200,000 house is now priced at $600,000.  If and when the economy crashes, wages, income, etc goes back to at least lower, one way or another.  But the nominal debt stays at $600,000.  Because of your marginal exposure, Warren Buffett picks it up for pennies of ex nihilo credit on the dollar for Berkshire Hathaway, and you must at best bankrupt your "loss."

How does this asset-price inflation affect the economy of production and wages and profits? In due course this process involves increasing the debt-to-GDP ratio by raising household debt, mortgage debt, corporate and state, local and government debt levels. This debt requires the real sector to pay debt service — a fact that prompted Benjamin Friedman (2009, 34) to write that “an important question — which no one seems interested in addressing — is what fraction of the economy’s total returns … is absorbed up front by the financial industry.”

Yes.  Good question.  And the follow-up question would be, to whom does it go?  The answer will be, the 1%.

To ignore this rising fraction is to ignore debt and its consequence: debt deflation of the “real” economy. Of course, the reason why debt leveraging continued so long was precisely because credit to the FIRE sector inflated asset prices faster than debt service rose — as long as interest rates were falling. The tidal wave of post-1980 central bank and commercial bank liquidity drove interest rates down, increasing capitalization ratios for rental income corporate cash flow.

He is hitting on something here... credit inflation, debt deflation.  Two sides of the same coin? I'll have to turn that over in my mind.  And this is good stuff:

A debt-leveraged rise in asset prices has a liability counterpart on the balance sheet of households and firms. Homes, commercial properties, stocks, and bonds are loaded down with debt as they are traded many times by investors or speculators taking out larger and larger loans at easier and easier terms: lower down-payments, zero-amortization (interest-only) loans and outright “liars’ loans” with brokers and their bankers filing false income declarations and crooked property valuations, to be packaged and sold to pension funds, German Landesbanks, and other institutional investors. Each new debt-leveraged sale may bid up prices for these assets.
But the credit can be repaid (with interest) only by withdrawing payment from the “real” sector (out of profits and wages), or by selling financialized assets, or borrowing yet more credit (“Ponzi lending”). The rising indebtedness approaching the 2008 crest was carried not so much by diverting current income away from buying goods and services or by selling financial assets, but by loading down the economy’s balance sheet and national income with yet more debt (that is, by borrowing the interest falling due, for example, by home equity loans). What kept the “Great Moderation” income growth and inflation levels so “moderate” was an exponential flood of credit (i.e., debt) to carry the accumulation and compounding of interest. It was like having to finance a chain letter on an economy-wide scale, with banks creating the credit to keep the scheme going.

And this...  well, it also constrains the creation of means of production the would generate a surplus from what it produces.  What cannot go on will end at some point.

This is the institutional reality behind the negative correlation coefficient of credit and income growth, reported in the previous section. In fact, to assess credit for its income growth potential is to miss its true function in the rentier economic system. The FIRE sector’s real estate, financial system, monopolies, and other rent-extracting “tollbooth” privileges are not valued in terms of their contribution to production or living standards, but by how much they can extract from the economy. By classical definition, these rentier payments are not technologically necessary for production, distribution, and consumption. They are not investments in the economy’s productive capacity, but extraction from the surplus it produces.

Now this needs a bit of explication.

Financial markets can grow sustainably — that is, without rising fragility — only when loans to the real sector are self-amortizing. For instance, the thirty-year home mortgages typical after World War II were paid over the working life of homebuyers. The interest charges often added up to more than the property’s seller received, but the loans financed about two million new homes built each year in the United States in the early post-war decades, creating enough economic growth to pay down the loans.

Things were very different then. Home loans were for mortgages, not deeds of trust, financed largely by Savings and Loans and Credit Unions in which the interest rate, about the same today, 4.75%. in 1955, barely covered the costs of administration of the loan.  The loan was against money,  the cash in the pay envelope deposited on the first Friday of the month into the S&L or CU, backed by gold and silver.  And the loan terms were usually 20 years, because that is all it took to comfortably pay off a note.  There was no Freddie Mac to create inflation by vacuuming up as much paper as anyone could generate.  That would not come until... wait for it... the 1970s.  But there were assumable loans, meaning instead of flipping homes and inflating values, I might get a job offer in another town and just pass my mortgage onto someone else who continued the payments.  The S&L just wanted its money back, could care less from whom.  So yes real estate markets can grow sustainably, but nothing we have today resembles when last we had a sustainable market.

And this too:

Many U.S. students could not attain a college degree without student loans.

 Not true, false dilemma. The fact is EZCredit is merely more attractive, buy-now pay-later, than a pay-as-you-go degree, granted that ex nihilo credit woefully overpriced an ever degraded degree.

In addition to showing that the financial industry accounted for 7.9 percent of U.S. GDP in 2007 (up from 2.8 percent in 1950), they calculated that much of this took the form of fees and markups — the quintessential transfer payments. 

OK, useful figure, let's call it the 5 point growth.  That 5 point growth generated, as this essay demonstrates, a false economy, unreal GDP proportion reported as GDP. So then we must ask, what per cent of 5 point growth is of the distortion of reported GDP, generated by financial engineering?  And better yet, net of false economy FIRE financial engineering portion, to what does the "7.9% of GDP" truly amount?

This raises a vital question for today’s economies. Can debt-financed rising asset prices make economies richer on a sustainable basis? If the aim of raising asset prices is to increase the capitalization rate of rents and profits by lowering interest rates, can pension funds, insurance companies, and retirees save enough for their retirement out of current earnings, or can they live by capital gains alone?

As for today's economies, the question is moot.  Retirees are being "sicked-in" to hospices, shaken down for all of their assets, and dispatched at necessary rates to help maintain balance.  So the question is not vital for today, today's retirees are being queue'd up for extinction in this Darwinist polity.  The question is vital to whomever makes it through the progressing disintegration.

Financial and other investors focus on total returns, defined as income plus “capital” gains. But although the original U.S. income tax code treated capital gains as income, these asset-price gains do not appear in the NIPA. The logic of their exclusion seems to be that what is not seen has less of a chance of being taxed. That is why financial assets are called “invisibles,” in contrast to land as the most visible “hard” asset.

Yes, as I have been saying here, when we switched from vendor-financing for industry and commerce to bank finance starting in the 1970s, that which was near impossible to tax for the impracticality of it, such diffuse records, now became easy to tax with ex nihilo credit ascendency since the records could be found in one place: banks.

That this was a conscious agenda item is revealed in the fact when the FED was first set up back in 1913, the FED engaged in an intensive campaign for business to switch from vendor financing to Trade Acceptances ostensibly to improve commercial efficiency.  "Let the banks process your receivables for you."  It did not work, USA business did not fall for that ruse.  But with ex nihilo credit after 1971, it worked like a dream. No a ten cent retail purchase can be tracked and taxed.

Here again, as perspicacious as this essay is, it is prolegomenous.  It will be interesting to know what the prescriptions are, just how to save the Hegemon's system from its greediest outliers?  Sure, whoever borrowed the most won for a while, but not any more.  They are dropping like flies.  Now let's discover what the sustainable limits are in the pigreon drop scam.

It is an economy where resources flow to the FIRE sector rather than to moderate-return fixed capital formation. 

Yes, to what I have referred here elsewhere on the blog as "exceptional wealth."  the 1% did not earn their exceptional wealth, in a free market.  They stole it fair an square, legitimately.

Should it be redistributed?  No way!  Simply delegitimize charging interest, that is deregulate finance at least as far as making interest a non-enforceable contract item, just as gambling debts are non-enforceable in USA, and watch the "wealth" first deflate as it is marked to market, and then redistribute perfectly as the accumulators lose the wherewithal to ever corrupt more and more players: economists, politicians, professors, Wall Street actors, industry, religion, law, ad nauseum.  Delegitimize and redistribution happens automatically and fairly.  Will capital fly?  Sure, when it is that light, ligher than air, mere notional, it sure will.  But where?  "I have $10 billion tallied in ex nihilo credit obligations due me, will you give me refuge in Switzerland?"  "Convert it to gold first, then show up in our airport.  Good luck."  Good luck indeed getting away from the Hegemon with that.

Such economies polarize increasingly between property owners and industry/labor, creating financial tensions as imbalances build up. It ends in tears as debts overwhelm productive structures and household budgets. Asset prices fall, and land and houses are forfeited.

A good portion of it forfeited to the state, hence its recurrence.  The Hegemon could care less if this is unwound rationally, fairly peacefully, or if there is a world war.  Note when the Soviet empire crashed, existentially ended, all of the previous players remained at the top. The gentle unwinding process of eliminating the legitimization of interest (for without it ex nihilo credit will disappear too) would be acceptable to the hegemon, just as the surprise insurgency of a Donald Trump is acceptable (and the moment he is not acceptable, he'll get a serious headache, like a Kennedy).

The summary is excellent, I recommend highly clicking on the link up top and reading the whole thing.

Somehow, I haven't figured it out yet, and apparently no one else has either, if ex nihilo credit and negative interest rates are correlated, and the significance thereof.  There may be a clue in ex nihilo credit inflation/price deflation. I dunno. Whoever figures this out will be so far ahead of everyone else.

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Debt Deflation V Credit Deflation

The Bank of International Settlements (BIS) is the hub of all the central banks, the holy of holies among the powers that be.  The FED may be the chief priest, but the BIS is the Sanhedrin.

When their policy wonks put out a study, it does well to read it to see what they know and think.  They can only work within their own narrative.

Well, it turns out there are quite well apprised of what is going on....  and what they have to say is -

1. Credit deflation is happening, and there is a flip side, a good side, for small business etc.

2. If you depend on paycheck, property or pension, you are toast.  For the next 25-40 years at least.

What have I been saying?

You can read it here, it opens as a .pdf.

Some excerpts:

 And even if deflation is seen as a cause, rather than a symptom, of economic
conditions, its effects are not obvious. On the one hand, deflation can indeed
reduce output. Rigid nominal wages may aggravate unemployment. Falling prices
raise the real value of debt, undermining borrowers’ balance sheets, both public and
private – a prominent concern at present given historically high debt levels.
Consumers might delay spending, in anticipation of lower prices. And if interest
rates hit the zero lower bound, monetary policy will struggle to encourage
spending. On the other hand, deflation may actually boost output. Lower prices
 increase real incomes and wealth. And they may also make export goods more
competitive.2

Rigid nominal wages?  Start-ups paying less when less buys more will crush standing businesses paying more.  The $1 an hour more at WalMart and McD was exactly the wrong move, for them.

And then your mortgage becomes sisyphean, you can't afford the mortgage as time goes on...   the asset value regresses to the mean, ouch.    Most will simply jingle-mail, walk away.  And smart people will rent for 20 years and lower the rent on the landlord every year.  Right of first refusal will become popular in rental contracts.

There are two sides to every policy, a winner and a loser.    What Mish and I call credit deflation, the BIS lads are calling from their perspective, the other side, debt deflation. Two sides of the same coin.  Now these lads get it, but note the see the top policy folks still do not get it.   This is important, and good, meaning they will screw it up even more to small business advantage.

His envisaged mechanism, however, operates fundamentally through the impact of the liquidation
and repayment of debt on the money supply (deposit money) and, from there, on prices. Empirical
evidence for the relevance of debt deflation more generally is scant and anecdotal. In their
econometric analysis of the Great Depression, Bernanke and James (1991) do not include debt
deflation explicitly; they simply suggest that the (large) unexplained component in the output
contraction in a sample of countries may reflect its operation. Fackler and Parker (2005) infer the
relevance of debt deflation in the United States from the observation that debt grew rapidly in the
1920s against the backdrop of largely stable prices. That same observation, alongside the strong
increase in asset prices, led Eichengreen and Mitchener (2003), drawing on Borio and Lowe (2002),
to argue that the Great Depression was a credit boom gone wrong – a point subsequently
confirmed by Schularick and Taylor (2012). Meltzer (2003), in turn, argues against the debt deflation
view on the grounds that the fall in goods and services prices should have boosted real balances
and stimulated spending. He sees tight monetary policy as the main cause, as had already been
highlighted by Friedman and Schwartz (1963).

And Friedman and Schwartz were wrong, and Friedman said so before he died.  Unh!  Where are my notes on that!

 Against the background of record high levels of both public and private
debt (Graph 7), a key concern about the output costs of goods and services price
deflation in the current debate is “debt deflation”, ie the interaction of deflation with
debt. The idea is that, as prices fall, the real debt burden of borrowers increases,
inducing spending cutbacks and possibly defaults. This harks back to Fisher (1933),
who coined the term.16  Fisher’s concern was with businesses; today the focus is as
strong, if not stronger, on households and the public sector. This type of debt
deflation should be distinguished from the strains on balance sheets induced by
asset price  deflations.

Yes, distinguish between business debt and household debt.  but business debt problem is your pension assets, including social security hopes, since that is a ponzi scheme depending on the greater fool presently paying in from industry jobs.

So they know, at least at the wonk level, credit deflation, or form the hegemon's perspective, debt deflation, hammers the assets of the powers that be and their selected winners.  It open up opportunity for the small business, by lowering costs of labor and inputs and real estate, while the prices of all things is going down.

If you have your $15 an hour job (or more), in a prime real estate office space, with a wonderful 401K, and a mortgage on a nice house, you are toast because competitors can provide jobs to people who can gain more with less money, whereas you need to maintain status quo on all fronts to maintain your debt based economic status. Your law firm goes down.  Your biotech goes down.  Your real estate office goes down.  Your bank goes down.

Be agile, nimble.  Get a business going, so you can abandon the sinking ship and rebuild after the Spanish Armada like disaster we are sailing into...

And money does not matter, nor gold, credit is the thing.  Extend usury-free asset-backed credit to your customers.  The longer they take to pay, the richer you get.  The game has reversed, and the powers that be, at least their wonks, know it.

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Lacy Hunt and Debt

Below is a very valuable 40 minute lecture on the current situation. The expert talking is a bond dealer, and he knows his stuff.  When Clinton was elected president, full of delusions of grandeur, he summoned the political leaders, the majority leader, the speaker of the house and others, to Arkansas to tell them how it was going to be.  The photos show a beaming Clinton welcoming his guests.  The next set of photos showed a somber Clinton at a farewell to these advisors.  (If anyone can find these..)

What happened at that meeting?

 At a meeting in Little Rock, Arkansas, Rubin and several other members of Clinton's economic team persuaded him to renege on this campaign pledge in favor of deficit reduction. They argued that tackling the deficit, which was then running at close to 5 percent of G.D.P., would impress the bond market, bring down long-term interest rates, and allow the Federal Reserve to cut short-term rates, all of which would boost investment and make the economy healthier. As Bob Woodward reported in his 1993 book, The Agenda, Clinton was initially skeptical of this argument. His face turned red with anger and disbelief. "You mean to tell me that the success of my program and my reelection hinges on the Federal Reserve and a bunch of fucking bond traders?" he said.

Yes, USA economy depends on debt, and debt dealers are commonly referred to in USA as #%çi#g bond traders.

Some capitalists will say the regime is abused and we get malinvestment and misallocation when the state picks winners and losers, by manipulating interest rates, lending credit when it is not backed by assets, and inflating the currency by printing too much. To be sure, all bad things, but they do not note the heart of capitalism which is irredeemably evil: charging interest on a loan.  All versions of capitalism depend on this one constant.

The problem with charging interest is the simple fact it is the perennial means of concentrating ever more economic power in ever fewer hands.  Now, no one denies this, the problem is just about everyone aspires to this.  Nothing new under the sun, most of us want to wield the whip, not take the stripes, fearing a false dichotomy.

Poor Michael Lewis, writing an expose´ on the heart of Wall Street, Liar's Poker, with a view to warning off the next generation from this casino of greed and economic abuse, was overwhelmed by Ivy League graduates all pleading for help getting a job doing what Lewis decried.

The communists noted the great threat of capitalism is when the system fails, as it inevitably does, the capitalists merely start a war, wipe out all of the malinvest and misallocation by bombing it to the stone age, then start over.  Not a bad observation.  And note the capitalists (as well as the communists) call all of this the free market.

Now, a pox on both their houses, the communists and capitalists.  For those of us trying to live genuinely productive lives, there are free markets, free from force and fraud, free to contract.  Free, free free! Would I outlaw usury (charging any rate of interest on any loan)?  No.  I would simply delegitimize it, meaning, should anyone who agreed to pay interest at any time could with impunity not pay it.  Like no court in USA will enforce a gambling debt. As a way to make money, it would shrivel up.

But without concentrating ever more power in ever fewer hands, we'd never have the iPhone!  You do not know that, nor do you see anything better that might be.

Businesses depend on credit!  True, it can be asset backed and private, or asset-less backed and public. The former is good, the latter is bad.  I recall when private asset backed credit came with no interest.  But once banks were allowed to lend asset-less backed credit, credit inflation was a powerful vacuum into which people could pay cash for a hamburger today, or buy a meal tens times as expensive today, and pay only the cost of the hamburger at the end of the month.  Yes, a debt at interest was created, but that is for the future.  Once this proved to be viable, banks in the 1970s began mass mailing live credit cards loaded with $500 limits.  At on point I have about 75 credit cards, for airlines, department stores, bank cards, AEX.  I just managed the balances.  Today people have maybe five, for the powers that be have consolidated banking and lending into ever fewer hands, concentrating power to the point it takes extremely few people to call the shots.  Now we manage the balances on five, instead of 75.  Capitalism marches on!

This expansion of credit, and Mish is one of the first and only to note it, caused credit inflation, a version of the monetary event that occurs when you print too much currency.  Rothbard notes inflation benefits the first to get the excess money, and by analogy this is true of credit.

We are not any longer in credit inflation, we are in credit deflation.  This is news only to people in government, those outside are quite well aware of this.

So what makes the video below very important is, the first time I've heard it said, that deflation of asset-less backed credit has the reverse effect of inflationary asset-less backed credit.  This guy would know: PhD Temple, worked for Rockefeller at Chase, headed up HSBC economics dept when HSBC was the largest bank in the world, and so on... now managed $6 billion in bonds for pensions out of his home in Texas.

Here is his big point:  When deflation is 2%, and the bond yield is 2%, you are netting 4%.  To chase yield by buying junkier bonds at 4% is delusional since those two points are not covering the risk premium.  Even at 2 + 4 = 6 what's available is junk.  (Guess what you pension is loaded up with.)   But but but, it's all rated triple A!  (So you are falling for the bought-off rating agencies scam AGAIN?!) (And as a bond dealer he has nothing to say about equities, currently a fools game.)  You are being scammed into buying junk by dealers who point out the nominal rates, not noting the structural rates.  But so what, those who invest in bonds deserve what they get, the more useful info to we in small business is his other points:

1. The winner in deflation is the opposite of the inflation winner: the last person to get paid is paid in harder dollars.

2. The lowest actors can deal in harder assets (gold instead of currency, currency instead of credit) and benefit the most.  Mr. Hunt notes businesses will rather keep their cash receipts in the safe and pay workers cash from the vault, than keep money in the bank, just like when I was a kid.

So what you need to listen to is his explication of how deflation works, now that we are in it.

In essence, what I have been advocating, extending non-usury credit at retail and wholesale to customers, as an ethical matter, means now in deflation when you do get paid in 30 days, while we are in deflation, you are getting paid later in harder dollars.  The rule of 72 in operative: at 2% deflation, your wealth (the float as accounts receivable) has doubled doing nothing over your career, say 36 years.

Going back to pay packets instead of paychecks is not only a good thing, it is smart money management.

And think about it: more customers will prefer to simply sign for their goods than put it on an interest bearing loan card. They think you are doing them a favor, and you are making 2%, and not losing all those card fees.

Yes, you then have to manage credit, but when I was a kid "blackballed" and "86'd" were common terms.  I recall being asked while entering a shop by a bystander if I would buy something for the fellow, who offered the cash to do so, at the store since he was "blackballed."   Managing credit is a community thing, not a Washington/Wall Street axis of evil thing.

One minor point, Mr. Hunt says:

Three Problem Types of Debt  

1. Borrowing to finance daily living needs

1. Debt that leads to bankruptcy

1. Worst type of debt is where excess debt creation inflates asset prices.  And that only leads to economic instability.

"Good debt" to Lacy is debt that yields an income stream sufficient to pay back principal and interest.

The best debt is the non-interest bearing debt that undergirds all peaceful, prosperous and just comities, that is debt with no "income stream" attached.

Detroit is presently being bailed out in advance of the next crash by the extension of EZ auto credit to unqualified "buyers."

Student loan debt has surpassed credit card debt in USA, student loan debt is not bankruptable.  We lost 4-8 years of productivity while people went to school to learn skills they will never use and pile up debt they lived on and can never pay back.

Turns out those hundreds of billions banks risked to bail out countries has quietly been sold to European pensions.  (Note in the graph it says the banks create money to buy bonds from financial institutions.  Here again is where language has to be abused, for if this was stated accurately, it would reveal the delusion.  Accurate:  "Banks create credit, to buy credit."  If described accurately, it makes no sense, highlighting the delusional basis your pension is funded.  When your pension is useless, you cannot complain, because you wittingly bought into the delusion.

The hard part here is to go with the better unseen than the clearly malicious seen.

Check out this video, hat tip to Mish... it's a 40 minute seminar....



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Experts Wrong On China

You can search Pettis on this blog and find a several part section challenging his views on China.  He's got it wrong again, not in his facts, but in his conclusions.

Debt always matters because it must always be paid for by someone –even if the borrower defaults, of course, the debt is simply “paid” by the lender. This is why the fact that debt in China seems to be growing much faster than debt-servicing capacity implies slower growth in the future. If the debt cannot be fully serviced by the increase in productivity created by the investment that the debt funded, unless it is funded by liquidating state sector assets it must cause a reduction in demand elsewhere, most probably in household consumption. This reduction in demand implies slower growth in the future and, of course, a more difficult rebalancing process.

And here are his facts:

The reason is because in any case debt must either be serviced or the borrower must default. If the assets which were funded by the debt do not create enough wealth with which to service the debt, and if the borrower does not default, then by definition there must have been a transfer from some other entity to cover the difference between the debt servicing cost and the returns on the asset.

Why his academic analysis fails is for the simple reason is the players know both points perfectly well.  But China is competing against the USA, and there are three factors by which China will come out ahead:

1. Not as bad off.  The debt per Chinese, is no where near the debt per American.    Since China is on its way up, when the system fails worldwide, they will have less far to fall and in any event still be growth-oriented.    In USA we'll have rioting over EBT card refills.

2.  Not as far away form poverty.  Some 1/2 of Americans depend on entitlements, and have no other concept of life except entitlement.  I personally met Chinese back in the day who had on pair of pants between the three of them.  Each would wear the pair to work, come home and lend the pair to the next, so he could go work, and then so with the third.  Those people are my age, and can take getting knocked back 1/2 way, because they remember what it once was.

3. Can play the game longer.  No matter how long the FED drags out this dreadful grinding poverty on behalf of the banks, China can play the game longer.  China needs only wait until USA fails, and then comes the cascading cross defaults, which ends up with China as the best investment bet left standing.  A mess, but best relative to everywhere else.

USA can beat anyone in the world economically, because we have the right stuff theoretically.  But we have elected to enslave ourselves to a military industrial complex that guarantees that our best means are literally outlawed, and our worst excesses are the law of the land.

We lose, and you can thank a veteran for that.

Update:

Another difference:  Every over 30 years old in China knows what it means to depend on the government.  They know they are on their own when it comes to support.  No one is depending on, or looking forward to, social security China.  In USA, we look forward to what is not there..

Everybody should be calling the CBO and asking why they’re doing this. This is a pattern, you know. The Clinton administration—we put out the fiscal gap studies for a couple of years on the President’s budget. The Clinton administration then censored it. The guys who’s now head of the National Economic Council, the Chief Economic Advisor to President Obama, was the one who did the censorship back in 1994. President Bush’s Treasury Secretary O’Neil wanted us to do a fiscal gap accounting for the President’s budget in 2003 and he was fired in December 7, 2002, and that study was censored two days after he was fired. So, this is not accidental. This is more or less a conspiracy to hide the truth to keep ourselves and our kids in the dark about what the politicians are really doing, which is trying to garner the votes of older people and then get reelected and leave a bigger mess for our kids to handle.

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Bitcoins as Tallies

Whenever they dig up some lost city wiped out in a flash, they do not gold and silver coins in everyone's pockets, nor buckets of precious metals buried here and there, they find tallies.

Bitcoin is not a money, it is not even a currency, it is a tally.  Here Hugo Salinas Price makes an excellent summary:

The Bitcoin is an example of the tremendous hold that the idea of the omnipotence of technology to solve human problems has upon humanity. However, technology cannot create matter; it cannot create commodity-money, as it cannot create petroleum. Technology may give various forms to matter, but it cannot create matter or substance, and money must be the substance that is most accepted in commerce. All the Ph.D.s and Nobels in Economics are playing games to keep the world entertained. The less their pronouncements make sense, the wiser they think we will consider them.

You tell me: What is the future that awaits a humanity so confused that it can no longer distinguish between an abstract concept and what is real and material? Very confused people are participating in speculations in imitation currencies – dollars, pounds, euros, yen, yuans, Bitcoins - in the hopes of obtaining some profit or benefit, because unable to think for themselves, they can do nothing but speculate – and ruin themselves.

Read Price's whole article.  Mish quotes the above in an article his post on bitcoin where he interviews a merchant building a biz on bitcoin transactions.

How can this be if bitcoin is neither money nor currency?  For most of history, most business transactions required neither money nor currency.  Most business is on creit among the players, very local and trust based.  Everyone kept tallies, and to fool around is to go out of business for lack of trust and cooperation.

With banking, and then lending at usury, and then lending fractional reserve at usury, and then lending only the unbacked fraction of the reserve at usury, "credit" could be lent apparently cheaper ay usury than otherwise, at least for those who pursued foolish risk.  The result is the boom and bust cycles. the bonus to the rise of the state was all this lending took record keeping, and states could use the records to tax transactions.

Another aspect to worsen the economies was selling debt on secondary markets.  Once no one in his right mind would buy debt, and it was not legally permissible anyway for you to sell a loan made to me to a third party.  I have no idea who the third party is, I contracted with no third party, so why would I be obliged to pay that third party anything?  What was once local and immediate consideration of each other's creditworthiness among each other kept busts at check, but once fractional reserve and selling debt on secondary markets occurred, the boom where the damage is done occurs, and then the bust where schmucks are assigned the debt follows.

The fisherman sells his fish for $5 on credit to a trader who sells is for $7 on credit to the fishmonger who sells it for $10 on credit to the restauranteur who sells it for $20.  The customer who extinguishes the fish funds the settling of his bill for $30 with silver.  All those back on up the line who extended credit (at no interest) get paid back eventually.  As you can see of all the economy, most is on credit.

But is was safe and legitimate because it was local ad limited to those who would suffer if there was a default.  None of this "I take the profits, taxpayers take the loss" we have in capitalism.

We need to return to free markets to regain our economy and security.

AS for bitcoins, they are just a tally outside the tax system, like we once had.

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Are Negative Interest Rates Debt Deflation?

I've repented of using the terms malcredit and benecredit, since modifying perfectly good words to account for degeneration cedes ground to the bad guys.  There are apples, and there are rotten apples. There is credit, and then there is ex nihilo credit.  Clear and simple.

Credit and debt necessarily balance out.  If I lend you $20, you owe me $20. Everbody does that.  It is not ex nihilo, cuz if I am not paid back, I've lost $20 in purchasing power.  This is private extension of credit, and there is a debt on the other side.

If I ship you $500 in goods at net 30, you owe me $500, and I have an accounts receivable, an asset, worth $500.  If you don't pay, I am out my income, and the books I sold you. This is commercial extension of credit, and there is a debt on the other side.

That's all just credit.  And debt. At no interest.  All good.

Now, sometimes, some people would extend their $20 at interest. In most of history, this was illegitimate, if not illegal, since lending any amount at any rate of interest for any duration causes damage.    People lending at interest had no recourse to courts for enforcement, any more than a casino operator can enforce gambling debts (hence extra-legal enforcement of gambling debts).

In any event, credit is good, but it can be abused by adding interest.

Now banks, where gold and silver were stored, at first could not lend out their stores, for example, it was illegal in ancient Rome.  In time things change, so just like I might lend you $20, a bank could too. OK, if the owner of the deposit agreed.

But the temptation to lend money out at interest is of course just too strong.  So that happened.   It distorts an economy, but that is not as bad as it can get.

Instead of releasing gold as a loan, the depositor could write a note stating the note-holder was as good as gold.  These notes could move around, the proto-currency.    Nothing wrong with that.  It's a loan, and there is an asset on the other side.  But of course it also could have interest attached.

One currency happened, bankers figured out they could write more currency than there was gold, initially a crime that carried the death penalty.  We call this fractional reserve banking now.   In the measure there is only a fraction of reserve backing loans, that measure is ex nihilo credit.  If your bank holds 100 pounds of gold, and you write 200 pounds in currency notes, then you have a 50% fractional reserve.  Of course this is fraud, and "bank runs" followed discovery.  If ruined depositors did not kill the bankers, it was only because he authorities hanged them first.

Things change.  It's quite common for what is criminal among citizens becomes de riguer for the Hegemon.  Now our entire banking system worldwide is built on fractional reserve, hard to say exactly, but best estimates is 3%.  97% ex nihilo. Fractional reserve is so dicey it is stupid without some insurance premium so to speak, and that is interest on the loans of the fractionally reserved credit.

So imagine that.  For the portion of the economy which depends on bank credit, some 97% is ex nihilo credit.  There is a debt on one side, but no asset underlying credit on the other side.

It sounds like there is.  Ford got credited ex nihilo for the Mustang of which title was transferred to you, upon your promise to make payments, in ex nihilo credit, plus interest, out of your income stream, largely tallied in ex nihilo credit.  Whole lotta ex nihilo credit going' round.  Ford is zeroed out, the bank is zeroed out, you've got a Mustang and payments.  What's wrong with that?

Before I explain what's wrong with that, let me translate the previous paragraph from reality to capitalism.

You get a loan from a bank for the money to buy a Ford Mustang. Ford gets that money for the Mustang and transfers title to you, upon your promise to make payments, in money, plus interest, out of your income stream.  Ford is zeroed out, the bank is zeroed out, you've got a Mustang and payments.  What's wrong with that?

Well, it's not money.  (But experience the social conditioning: the second version sounds correct, but it is utter fiction.) It's ex nihilo credit. It suggests a wealth that is not there, and people calculate economic decisions in prices, prices that are not denominated in money, but in ex nihilo credit.

Ex nihilo credit has no rational limit.  Ex nihilo credit appears to be wealth.  People who would not qualify for asset backed loans certainly qualify for ex nihilo credit.  They want more better cheaper faster, and as ex nihilo credit-based demand grows,  Ford can deliver, at least what is advertised as such.

What's wrong with that?  Well, as Bastiat noted, there is the seen and unseen.  We like what we see.  And as I note, we all love a system that works for us.

Ex nihilo credit is paid into the economy, causing inflation, and an appearance of wealth that is not there.  People overextend.

With false wealth, the most egregious borrowers are necessarily calling forth what array of goods and services we see.  The least perspicacious are the most powerful economic actors, given the leverage ex nihilo credit offers. A Dick Cheney tells us "deficits do not matter" (ex nihilo credit is also deficit spending) as he gleefully prosecutes criminal wars with impunity, and immunity.  The poorest person in USA can whip out his EBT card to pay for a couple of corn dogs and a supersized Coke at a gas station. There is no difference in kind between those two people, only in scale. Neither has any money.  Both are dependent on ex nihilo credit.  Both are economic actors. Both simply put their purchases on the tab denominated in ex nihilo credit.  It all adds to the power, denominated in ex nihilo credit tallies, of the bankers, etc.

Sure auto payment delinquencies are up, but only to 2.6%.  So what?

On the margin, much of the recent growth of auto sales has been attributable to sub-prime borrowers, which are now up to 31% of all loans. These loans carry onerous interest rates—often 20% or more—-and are available primarily due to junk debt financing of non-bank lenders. That is, fly-by-night start-ups organized by Wall Street and private equity funds.

What is unseen is what that 31% would be buying if they were not

A. using credit or money to buy a car (public transportation?  different car?)

B. forking over the 20% interest on their ex nihilo credit loan to the bankers.  We'll never know.  the only thing we do know, is they cannot afford to what they are "buying" with ex nihilo credit.

Their losses go on our tabs.  Recall it is ex nihilo credit, the banks are out nothing. The delinquent buyer may have a note on a credit score, but Ford has the $35,000 in ex nihilo credit on the books as an asset.  Where is the asset underlying the deal?  Why, the Mustang itself, right?  Well, it's been repo'd and sold for $20,000. That's a $15,000 difference.  Is the bank out?  No.....  Is Ford out?  No....  Is the borrower out?  No....  well, then who picks up the $15,000 loss?  If you cannot tell who is the mark in a poker game within the first 20 seconds, it's you.

Hi Ho Hi Ho, it's off to work you go...  You have to work to pay down the tab of everyone from Dick Cheney to the delinquent Mustang short-faller to the unemployed fellow dining on corn-syrup dogs and diabetes-bev at the Mini-mart.  That's capitalism.

What is unseen is what we would have without ex nihilo credit.  Less war?  Less surveillance?  Better medicine, education, clothing, food, housing?    More peace and prosperity?  History says yes, but we see the Mustang in the driveway and say "what's wrong with that?"

We all love a system that works for us. 150 years ago the English would look at the Irish for whom the system did not extend, dining on the 1850s version of corndog and coke, and say they are genetically inferior.   Today we look at those who do so and say the same things.

Ex nihilo credit distorts the array of goods and services we would reckon we could buy.

It retards true wealth creation by tapping into income streams with interest payments.

It concentrates wealth in ever fewer hands, by means of interest stream if no default, and titles returned to the lenders if default, who in turn then hold sway over those who borrowed ex nihilo credit (we've noted in your file), if not enslave them as with student loans.

What do we care?  We have big screen TV, KFC, Mustang, iPhone and a house.  And Romney/Obamacare.  And poverty draft.

Well, you might not care, but the 1% are sure worried.  There was no rational limit to lending ex nihilo credit at interest.  But something that defies understanding, never seen before in history, is happening.  An utterly irrational negative interest rate phenomenon.  With wealth tallied in ex nihilo credit, an undoing could result in all tallies being marked to market.  Pro rata?  Or politically distributed (OK, I know the answer.)  Or war?  If the 1% is worried, you should, because they decide.

Inflation comes from printing too much currency.  We have inflation in housing, medicine, education, some categories of food, and certainly equities.  So what happens when you "print too much credit," or more accurately too much ex nihilo credit?  That is the head scratcher.  Deflation?  We do see prices dropping in shipping, but that is overcapacity based on misallocation of resources and malinvestment due to reckoning prices in ex nihilo credit. Dropping prices is not necessarily deflation.

Perhaps deflation in relation to ex nihilo credit is not in the price of goods, but the price of debt.  The negative interest rates are showing up in bonds, in other words, debt.  So if we had hyperinflation of credit with ex nihilo incontinence, is the reverse hyper-deflation in debt?

Is negative 2/10th of 1% interest on a ten year bond an abberation, or just the beginning?  We can see various actors chafing with ten trillion at negative 2/10ths of 1%. Has anyone studied the impact of negative interest rates to 2%, 5, 10, 25%?    Is that the denouement?  Deflation in debt, the debt on the other side of the balance sheet for ex nihilo credit?

If the hegemon's power is tallied in ex nihilo credit-based debt (for the one who holds the paper is in control) the debt deflation means a commensurate loss of power.  Is that what is going on?  You tell me, I haven't figures it out yet.

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Mosley on Money and Banking

‘The study of money, above all other fields in economics, is the one in which complexity is used to disguise truth or to evade truth, not to reveal it.’ Money, p. 5  J. K. Galbraith

Ivo Mosley is serializing a wonderful book on money and banking.  I have been recommending it highly and quoting it so far, but there is one glaring error he is committing.  I hope he repents of it before he publishes.

Here is a sample of what is so good:

The law which authorised the buying and selling of debt was the Promissory Notes Act of 1704.... Many lawyers, including the then Lord Chief Justice Sir John Holt, were against the new development: they considered that a loan of money was a private agreement between two persons, not an asset to be bought and sold. 

His work is rich in digging up bodies buried, history and explanations.

(I had to elide one sentence from that paragraph:

 It was brought in specifically to put the stamp of legitimacy on money created by banks. 

for reasons that will become clear anon.)

Now, note he mentions debt and money.  He shifts from the topic of debt (promissory notes) and the buying and selling thereof, and loans of money in that quote above.  In 1704 no one confused the two, debt and money, or for that matter, credit and money.  The term money is used dozens of ways today, almost always incorrectly, as Galbraith noted.

A loan of money would have been in the form of silver or gold.  In such a case someone might have borrowed an ounce of gold to buy a horse, with a promise to repay he who lent him the ounce of gold.  The horse seller is out of the deal, he got his ounce of gold, and rid of the horse. The horse was security if the borrower failed to repay the ounce of gold to the lender.  On both sides of the transaction there was an asset: an ounce of gold, a horse.

A promissory note is written when one does not have an ounce of gold to buy a horse, but writes a note  to promise to pay at some agreed upon time.  In this case the assets is the horse on one side, and the word of the buyer, or credit, of the other side.   The buyer's promise to pay is now a debt he owes.  The seller extended credit to the buyer, vendor financing, actually a very common event in history.  Indeed, what is sorely left out of all economic discussions is the simple fact the "vendor financing" is the standard normal in history.

Please pause and note this is simple and clear: there is either money and debt, or credit and debt.  All loans are of either form.  There is nothing in finance, high or low, that falls outside of these two categories, and this has been true for the history of mankind, all places, all times.  When pondering economics, hold fast to these two categories, and everything that comes your way will be clear.

There are many problems in discussing economics, and an immediate one in this subsection of economics, loans, is there is private vendor financing, asset-backed, which might be called bene-credit if not at interest (as is usually the case) and then there is this monstrous asset-less loss-socialized bank credit at interest which might be called mal-credit.

Pynchon said something to the effect "... get them to ask the wrong question and the answer does not matter."  As long as people are arguing over what the term money means and no one asks what the term credit means.

Now, having started off succinctly in the above paragraph, note what Mosley does next, in the same paragraph, the salient items in red:

But Parliament consisted of rich men voted in by other rich men, and it overrode the lawyers. The public justification of the parliamentarians was that new credit-money, created by the Bank of England (founded in 1694), was already enabling the King to go off to war: it was a good development, and the law should catch up. The private attraction was that members of Parliament were already using bank-money to get even richer. When other countries saw the power the new law gave to the English government and to English speculators, they passed similar pieces of legislation. Today, we are living with the ever-worsening, and ever more global, consequences of that development. 

See the unwarranted, hybridized terms? Introducing the debatable terms relating to money, when he means credit? From the clear money and credit to "credit-money" and "bank-money (debt-money I suspect he also means)".  I've put them in red in his paragraph to emphasize what is going on.  This is just plain wrong.

Mosley then gets utterly wrong in his attempt to explicate:

First, take public ignorance. Most people don’t understand how banks create money. In fact, it is very simple. When a bank lends, it creates two equal-and-opposite debts (promises to pay money): one from the bank to the borrower, one from the borrower to the bank. The borrower’s debt to the bank is familiar and easy: it stays with him or her (or ‘it’ if the borrower is a corporation) until it’s repaid. The only difficult bit to get one’s head around is: What happens to the debt from the bank to the borrower? Answer: it becomes money.

Banks don't create money, they do not create gold and silver!  That paragraph is incoherent, a complexity contrary to the real world. His paragraph would be splendid if he simply stuck to the proper definition, as I will rewrite:

First, take public ignorance. Most people don’t understand how banks create credit and debt. In fact, it is very simple. When a bank lends, it creates two equal-and-opposite tallies: one from the bank to the borrower, one from the borrower to the bank. The borrower’s debt to the bank is familiar and easy: it stays with him or her (or ‘it’ if the borrower is a corporation) until it’s liquidated. The only difficult bit to get one’s head around is: What happens to the credit from the bank to the borrower? Answer: it becomes a bank asset.

My rewriting is both simple and correct. Mosley is a better thinker, scholar and writer than I am.  But he is making a fundamental error with his maldefinitions.  Is not my reworking of his paragraph not splendidly clear, even revelatory?  Well, Mosley wrote it, I just put in the correct terms where he uses incorrect terms.  (I wonder if I use the rewritten paragraph in my next book it would constitute plagiarism?)

Mosley recognizes something is wrong with his explanation, but he gets the problem wrong, explaining it away by calling it counter-intuitive:

That sounds counter-intuitive: ‘the debt from the bank becomes money’. But it’s the very essence of banking. If I have ‘money in a bank account’, it means simply that the bank owes (promises to pay) me money. The numbers in my bank account indicate how much the bank owes me. If I pay someone, I arrange it so the bank owes the other person some of that money, instead of me. When payment is made, the bank simply moves numbers from my account into the other person’s account. The other person feels paid – they have been paid! That is how banking works – and how it always has worked. Debt owed by a bank circulates among people, and becomes money. ‘We the people’ are happy to use it as money, because it is convenient and because banks have, in the past, put some of their massive profits into making their services cheap to use.

No, not counter-intuitive, just wrong.  But it's good except for the badly used terms, so let me fix this too:

It's simple... If I have ‘tallies in a bank account’, it means simply that the bank keeps track of my putative accumulation of credit. The numbers in my bank account indicate how much the bank says I have in tally. If I pay someone, I arrange it so the bank credits the other person some of that tally, instead of me. When payment is made, the bank simply moves numbers from my account into the other person’s account. The other person feels paid – they have been paid! That is how banking works – and how it always has worked. Credit tallied by a bank circulates among people, and remains credit. ‘We the people’ are happy to use it as money, because it is convenient and because banks have, in the past, put some of their massive profits into making their services cheap to use. 

I left that last reference to money in for the simple reason it is true, people are happy to consider it as "money" (it cannot be used as money,  any more than a bowling ball can be used to play a violin) and in the effort to obfuscate economics, some people have been convinced credit and money are one and the same.  Mosley's point gets to the reality that bad credit can crowd out good money.  Also, Mosley is right this time. if the terms are corrected, that "this is how banking has always worked."

Now, let's move on to the "so what" over banks lending credit.

1. The bank lent you nothing.  You use the credit to build a house.  Bank loans of mal-credit ruin the economy (see below).  You cannot repay the debt.  You lose the house, and owe the net shortage between the amount of credit you borrowed, and for what the asset was liquidated (short sale, foreclosure, etc.).  The bank lost nothing, but gets the house. You still owe the bank a payment from your income stream for the difference.  Heads they win, tails you lose.   Simply can't pay?  It gets worse:  you owe the IRS income tax on the part you cannot pay the bank, since it is imputed income.  That is the law.  Can't pay the IRS?  Then kiss your passport good-bye.  That is the law.  Syrian refugees are better off than American citizens under capitalism.  Syrian refugees can at least escape to anarchy, the free market.

2.  More, from Mosley -

Governments like, and in some cases need, to compete with each other in arms acquisition. Banks happily finance this competition: ... because repayment is guaranteed out of taxes. They are also happy to fund arms manufacture because if demand is guaranteed, a profitable outcome is more likely.
...
Nearer to home, a domestic example: London property. In a rising market, banks happily ... lend: they feel secure that the loan will be repaid. ...rising prices: speculators profit, and everyone else is relatively poorer. So much so, that most young people in London today cannot dream of owning the house in which they live. (My note: same everywhere capitalism rears its ugly head.)
...Booms-and-busts ... legally-authorised, starting with the South Sea and Mississippi Bubbles (both 1720). The pattern has stayed the same ever since. During a boom, ... assets of the majority dwindle in comparison: they cannot afford to consume enough to make existing capital profitable, let alone for the creation of more. Recession follows. The incomes of workers are further eroded by unemployment, as unprofitable businesses collapse. A vicious circle sets in. At this point, the assets of the rich must also shrink if they consist of productive investments: only speculative hot air and puff will produce profits (an example is the London property bubble referred to above). This kind of economic collapse all-too-often leads to totalitarianism and war: the twentieth century provided enough examples of that, for us all to hope that the need for monetary reform will be noticed soon.

Lastly, we might notice the plight of poor nations vulnerable to predators... governments are corrupted, displaced peoples migrate (or attempt to migrate) ... in search of survival. The potential for a fairer, more just and prosperous world is squandered. Much more could be said about this process, so vast and damaging to the human race, and to prospects for our future.

This is quite good, and to make it even better, if you read the original, I elided any time Mosley used the word money.  Heck sake, Mosley could entirely skip the use of the word money, and he'd be a superior expositor! But better he simply use the terms correctly.

When vendor financing is in any way touched by non-market forces (the hegemon), the economy is distorted by misallocation and malinvestment.  Whereas in vendor financing failure to pay results in the lender taking a loss, or getting back the horse he wanted to sell, only the lender takes a loss.  Any risk and loss exposure is limited to the two parties.  We can call this free market phenomena "bene-credit" to distinguish it from the hegemon-backed fraudulent loans which we might call "mal-credit."

Here is another error, which seems inconsequential at first:

This leads to the theme of how the law supports banking. Banking was, and still is, very distinct from money-lending. Banking creates money: money-lenders lend money which already exists. For many centuries, banking was practiced as a series of agreements between consenting adults (so to speak). Those consenting adults were the rich and the powerful: merchants and bankers, monarchs and princes.

Ungh!  Banking was always money-lending.  The work bank (banque) comes from the shelves in a jewelers shop (usually the strongest building in town), where in gold deposits of gold owners were stored. (Banquettes are shelf seating.) Stored gold was noted on a receipt, in essence a warehouse receipt.  If the owner of the gold desired it be lent out as an act of charity, the "banker" would manage the affair. In time some depositors allowed the shop owners to lend the gold at interest (criminal activity - usury) and those deposits, sitting on the shelf, were specially marked for the purpose.  People holding warehouse receipts sometimes would endorse the receipt over to another, and in time this practice morphed into currency, with one note moving from hand to hand and over time creating and extinguishing many debts.  But observe, in every instance, the note is backed by gold.

These bankers then began to put out these notes fraudulently without any gold backing them. Fraud on top of usury! This distorted the market, calling forth goods and services pleasing to fraudsters, to sop up this fraudulent currency, fraudsters whose demands run to the corrupt, whimsical and destructive.  In time, these fraudsters were found out, a run on the bank occurred, and the malefactors were executed.  Now they are bailed out, and the losses are socialized onto those who actually pay taxes from productive pursuits, and their children, unto the third and fourth generation.  This is capitalism.

But since the practice is so powerful, it became state-sponsored, and protected by law.  The state kept the term banking, since it was originally a respectable term, and adopted the process of first writing currency against gold and silver deposits, then at fractional reserve (maybe 10% fraud), and now lending fraudulent notes at near 97% fraud, 3% asset.

I've noticed in my reading of the ancients, how religion and banking were one and the same, or became so.  The word money comes out of Latin, and the Goddess of Memory, Juno, at whose temple gold and silver was stored and money was minted (moneta, mint, money).  What does memory have to do with  money?  Keeping straight who owes what to whom, and who has claim on what money is stored, is critical to commerce and order. Mafiosi and Pilipino bookies rely on memory to keep accounts straight, nothing new.  In time tallies were used, up to this day, now digitally.  In 1836 Parliament was burn down after burning tallies got out of control.  We no longer mention tallies, although they are a critical today as ever.

Judaism and memory (zakar) are inextricably linked. Israel also kept its money, the obligatory payments to the priests, in the Temple, naturally, the most secure place, where people were struck dead by God if they violated the space.  Until recently banks were designed to look like religious buildings, mainline catholic (note the small c) churches, or at least like Roman temples with granite and classical columns.  You still see these all over USA in cities and towns, now used as coffee shops and such.  Since calvinists legitimized usury, now banks look like calvinist churches, ignoring the first act of Jesus after being proclaimed King by the masses was to overthrow the money changers in the Temple.  (I have Vedic scholars keeping an eye out for instances in that milieu.)

Mosley's book will call for a change in the laws, and I hope he agrees with me, the change is to eliminate all banking regulations.  The task is not to tweak at the edges, but to withdraw the support, a complete separation of money, credit, banking and state, as thorough, and for the same reasons, as the separation of church and state.

There will still be people agreeing to both sides of the worst deals, but like gambling debts, when such deals go bad there will be no force of law behind them.  The damage inherent in banking today will be limited to the players, with none of the "privatizing the profits, socializing the losses" we have today.  Our children, and future generations, will have nothing to fear from us.

What do do about the damage done, the 1% who hold 80% of the worlds' wealth?  Nothing.  Within weeks of withdrawing the hegemon's support, the greatest wealth transfer in the history of mankind will begin, as Warren Buffett has to pay out of his own pocket to protect his assets as tallied, and economic squatters and looters take over his assets as assuredly they would when no sheriff evicts a squatter from a home Buffett "owns" but has never seen and can never get around to visiting.  We have this already in law, it is called "adverse possession."  If Buffett himself can show up and sleep there and paint the living room, he can keep it.  If you show up, sleep there and paint it, as long as you make clear it is Buffett's and you taking it contrary to his wishes, then it is yours after ten years.  Buffett has so many houses now, you'd be safe.  So goes the rest of his assets.  And also of all the other 1%.

Minions will object in such a world there would be no wealth.  Well, there would be no wealth defined as personal accumulation.  We'd have wealth defined as an ever-widening range of goods and services, ever more tailored to specific demand, ever more affordable within the personal earnings of an ever widening range of people.  The former is bad wealth, which crowds out the latter, which is good wealth.  The latter is only possible in a free market, capitalism forbids it, and socialism fails to achieve it.

(As an aside, but central to my current investigations, is the central ethical premise that all loans are charitable events, and may never be at interest, at any rate, at any amount, at any length of time whether money or credit is lent.  Loans cannot ever be a business activity.  But set that aside for now.)

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Busted and Coming Back

Had a delightful discussion with a fellow yesterday whose 15-some-year successful business folded last Fall, and all of his assets with it.  It failed the same way most people are failing:  he borrowed to finance expansion, did well during the boom, but the bust cut income lower than what was needed to finance the debt.

This is precisely what "loose money" policies engender: malinvestment and overinvestment.  By setting up a false economy, people invest based on the signals the contrived market sends out.  The signals are false because the underlying productivity is not there.  Such a false economy cannot go on forever, and at some point it stops, or gets too out of whack to continue.  As he described the last few months, debt mounting, income decreasing, I said "that's no fun..." to which he readily agreed.  Successful people do not start businesses for fun, it is for the joy of solving a problem.  But when money is short, it's no fun.  Time to quit, abandon the position, regroup, restart.  His business solved a problem, but it was overwhelmed by debt in a busting economy.

So, he is restarting, working out of his apartment, with a kid to support.  His kid will watch dad, and pick up cultural capital: never build a business on debt.

Of course, this seems silly since most of those who are super-wealthy did it with debt.  But remember, in a free market it is impossible to get extraordinarily wealthy, in terms of money.  In a free market, we all get wealthy, in terms of access to goods and services, in terms of opportunity.

Right now the USA government at all levels is destroying small business and opportunities in order to transfer wealth from the working to the wall street/banker cartel.  There is nothing you can do about it, part of the reason the powers that be ran Obama was to show you that you have no hope, no change.

The most radical thing you can do to fight back, is in spite of it all, start a business.  The powers that be fear nothing more.  Check out what kids in an apartment are doing with used equipment to make hundreds of thousands of dollars...  they do it because they love it.  Watch till the end, when the song is done, and watch another business get launched, by accident.  Love. That is where you start.

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$200 Trillion Debt: How You May Thrive

My next book is delayed for a desire to incorporate absolutely cutting edge info on how to navigate this profoundly changed economy.  Read this and then see my comments...

Global debt is now in the region of $200 trillion. The McKinsey Global Institute recently published a report highlighting the bloated, unsustainable levels of debt that have been accumulated globally and the huge risks when interest rates begin to rise again.McKinsey concluded that total global debt was $199 trillion and the little covered report was released in February - 3 months ago - meaning that the figure is likely over $200 trillion. With a global population of 7.3 billion this works out out at over $27,200 of debt for every man, woman and child alive in the world today.Almost 29% of that debt - $57 trillion - has been accumulated in the relative short period since the financial crisis erupted in 2007 - just 8 years.

Interest rates will not rise again for the next 40 years, anymore than they will issue four trillion dollar Zimbabwe currency units.  Credit is in hyperinflation, and it is worthless to the economy, the real economy.

In Zimbabwe, they also worried over the false economy.

I realize I have been saying "credit deflation" but the last week was a revelation.  Credit is beyond hyperinflation, it is now worthless.  But prices are dropping in the real economy, deflation, as currency is destroyed, and fewer dollars are chasing the same amount of goods and services, inside the real economy.

First time I ever used italics in this blog.

Worthless credit is chasing worthless assets making up for most of the reported economy and growing that massive debt.  When a person who simply will never pay for a new car he "bought" from a company that is on life-support, like GM, who offers unneeded cars of inappropriate design to the market, then multiply that across our entire economy, and worldwide.

And this explains why GE has abandoned its credit division.  Creating debt through off-balance sheet, no reserve requirement stand-by letter of credit facilities (technically how they do it) has no future.  GE is throwing junk overboard to focus on real economy machinery and equipment.

Read on in the article to see the angst and worry over the right "policy."  The policy will focus on fighting over what real assets are, who owns them, once marked to market.  It is absurd the notional debt above the value marked-to-market assets will ever be paid.  So there will be amazing fighting over who gets what, when the simple solution will be to start your own business.

Count on it, if capitalists experience any emotion at all, it is entitlement. They will struggle perniciously to keep what they imagine is their due, and will end up with ashes.  We non-capitalists, we few free marketers, will thrive beyond imagination and under the radar, without ever breaking a rule (in capitalism, almost all small businesses necessarily are at least bending the rules).

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