Dark Skinny

In the plethora of various articles that I’ve been reading, the common theme that escapes from, particularly,  the modern dumbed-down US media is that the only way to defeat this incumbent and seemingly tenacious recession is to chuck vast quantities of fiat paper at all the corrupt, insolvent and unreliable banks and corporations  in America. Even certain posts here propose and support the same as America’s only salvation from the closing economic jaws of its persistent and devastating recession.

Time and time again, I’ve been warning that the economic policies as suggested by Summers, Krugman, Stiglitz and Reich will never work in the long term. The US government’s departure from sensible, logical, tried-and-true economics into the dark, stinking alley of extreme and never-before-tried-or-tested Monetarist debt-promoting policies such as the artificially depressed interest rates and massive QE, combined with the blind, ineffective, pandering and expensive social policies of Obama will undoubtedly lead to slow but sure economic ruin for America. This persistent conflict between democracy and practical government economics was identified some years ago by Alexander Tyler, a Scottish economist:

‘A democracy will continue to exist up until the time that voters discover they can vote themselves generous gifts from the public treasury. From that moment on, the majority always vote for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.’

So what are these ‘generous gifts’ then? These may be clearly defined as generous  government tax handouts and social policies (which the government simply cannot afford) that always steer  towards pleasing its citizens rather than making sound economic sense — now clearly extended to the massive, unending bailouts and spend for all the insolvent, too-big-to-fall banks and industrial corporations of America. And that the only purpose of these soft and economically uninspiring policies is simply to get elected. The American public’s inevitable support for these debt-promoting ‘generous gifts’ is what is presently garotting the American economy and the dollar now. After all, and I’ve said this before, how can you possibly cure a massive credit and debt crisis by adding more huge debt to the problem? This is completely insane.

Even in my regular reads of Krugman articles in the New York Times, within his articles and  blogs that supposedly emit profound opinions from the hallowed halls of academia, he consistently supports his buddy Larry Summers (The Mr Infix of Wall Street) and, in his criticism of current policy,  urgently proposes a much higher spend and debt that must be accrued by the US government for success. But in Krugman’s fuzzy economic critique, amongst all his exacting mathematical graphs, formulas and the continuous Monetarist spoutings in promoting that  government debt and spend — via trickle-down economics –  as the only cure, I have yet to read his value definition of Enough Debt. Krugman, as do the rest of the Monetarist flock,  consistently avoid accurately defining the exact necessary amount of vast debt injection that is required for a recession cure-all (which Krugman curiously and deliciously refers to as ‘The Optimum’). He even admits, in several of his articles and blogs, that he honestly doesn’t know the answer to this. Also, when asked “How are we going to address and pay back all this massive spend and debt that he proposes?”, Krugman avoids this one like the plague. The Big Spend Monetarists have no sufficient  or appropriate answer to this question, probably still oddly  believing and desperately hoping in their souls that, as before, the rest of the world — through its own heavy dependence on the US dollar and Treasuries  within the ‘Dollar Trap’ — will so joyfully and continuously submit to paying back America’s ever-growing and self-inflicted debt mountain forever, just as it has always done since the Nixon era.

And, as I’ve consistently bleated in many of my articles, why should the likes of China, Russia, Europe and the Middle East so enjoy paying back America’s own rampant, ever-growing debt? Therefore this assumption by Monetarists  is very flawed indeed, and can hardly be seriously promoted as good, sound economic policy.

If Krugman still believes in this form of indirect debt payback as legitimate, necessary and deserved, I would urgently suggest that he obtains his economic news and data from a more neutral and accurate source (from outside the biased US media would be useful), since the likes of Russia, China and the Mid-East all appear to have clocked the US Government’s intention of inflating away  their Treasury savings in a puff of smoke and are now all slowly but most definitely disentangling themselves from America’s tragically weakening dollar.  Isn’t it odd that major debtor consumer Nations such as the US or UK  all seem to follow Monetarist or Keynesian debt-driven policies whereas the creditor nations all seem to follow economic principles that are so shy of massive  national debt promotion. If these creditor nations all ruthlessly continue to rebel and reduce their purchase of US Treasuries, then what  other economic strategies do the Friedmanites and Keynesians have up their dirty sleeves to rescue debt-ridden America ? As I see it, Monetarist slight-of-hand economics will no longer work for all reasons given here, the trick has been revealed, so what other legal economic contingencies would Mr Krugman suggest ?

Perhaps the best and simplest common-sense economic  view on monitoring the effects of debt that I’ve ever read was from an article by Professor Antal Fakete called The Marginal Productivity of Debt(MPD). This article is so easily understood. MPD is defined very simply as the effect on an economy or GDP, when an additional amount of GDP arises from an injection of an additional amount of debt into the economy over a period of time.  This is, therefore, a quality measurement which directly measures the success or failure of the effects of debt on an economy. When the MPD ratio  goes negative, then no further amount of additional credit or debt will have any effect whatsoever on an economy and it therefore becomes a huge waste, which creates further significant monetary problems within the economy,  manifesting itself as money thrown  into a voracious Black Hole. Bye the way, the MPD of the US economy has been negative since 2006.

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The Wizard of All Bailouts

It is certainly true that everyone from the Keynesians, Monetarists and the Austrian Schools of economics all seem to promote the wonders of  Free Markets. These ancient and revered tenets are also widely amplified in the media by the likes of Paul Krugman, Milton Friedman, Larry Summers, Ben Bernanke et al. But, strangely, and from the economic opposition, this very same esteemed principle is urgently and heavily shouted by the likes of Peter Schiff, Jim Rogers, Marc Faber, Joseph Stiglitz, Doug Casey and Congressman Ron Paul. So, I guess something smells fishy in Kansas, something is a bit awry, evidently these free market principles are perhaps being played with and twisted or bluffed for some particular advantage. And when economic principles become thus bastardized, abused and two faced, the common-sense simplicity of economic Free Market principles.becomes lost and wayward  to  simple understanding, wherein government planners and schemers are able to shamelessly steer the markets, and  all trusting citizens are misled and fooled. So, perhaps a proper definition is in order for those of us who are utterly flummoxed. Here are several simple definitions of Free Market:

Definition 1

Business governed by the laws of supply and demand, not restrained by government interference, regulation or subsidy.

Definition 2

A foreign exchange market that is not controlled by the government.

Definition 3

A security with sufficient liquidity that its price is not significantly affected by availability.

When you read these definitions, is it any wonder that ordinary people are so confused with the complex economic activities of the US government? And although the likes of Geithner, Summers and that know-all President Obama resolutely preach Free Market principles out of the left-hand side of their faces — all you have to do is dig down a little into the current stinking US economic septic pit to expose all the dirty, gross market manipulations that have been perpetuated by these paragons of free markets.  If you want to read about this then this link is a good starter. But don’t mistake what I’m saying here, the governments of most other developed countries in Europe and elsewhere also manipulate the Free Markets to some much smaller extent. After all, they’ve had a good teacher haven’t they? But, in my opinion, the US government throughout the last century has been The King Daddy of Market Manipulators.

Perhaps, as an American, you might feel that this economic interference and malpractice is OK, –  Hey, what’s all the fuss about ? — that’s simply the way the economic game is now played, since it ’s  all part of the capitalist principle to win economic advantage by any clever and innovative means possible. Perhaps the US government is only trying to help America to lead economically from the front, so all can be forgiven with these manipulations. And maybe this is all true. But there is also a great danger here. America’s economic lead is undoubtedly waning and the likes of Russia, China and the other emerging market countries are all playing catch-up with a vengeance now. Soon the global economic baton and lead  may well pass to the likes of China and what then? China has been watching America’s economic activities and is now very aware of the American Governments blatant hands-on manipulation of the dollar. So, when China eventually moves to the front of the Global economic pack — as she must through sheer un-leveraged manufacturing productivity and savings — how will America cope? China has been a patient, fast learner. On his last visit to China, Geithner was laughed at, hooted and booed when, during a speech,  he assured the Chinese government that US Treasuries were a safe bet. Well he tried the bluff, but crashed and burned mightily. Fairly clear that the Chinese now fully realize what America is up to, that China must pay heavily  and sacrifice all her savings for America’s re-emergence without any other choice. The point here is that political sway and influence relies heavily on the economic performance and riches of any country — this is certainly one form of power — and so if America has been playing The King Daddy of Market Manipulators then what’s to stop China or Russia or India or The Middle East — as they eventually overtake America’s falling, failing economy — playing by the same dirty manipulative market rules? Will Americans then cry “Foul !!” when China or Russia start to manipulate the markets heavily in their own favor. And maybe Russia and China will then laughingly respond with “Hypocrite!! Hypocrite !!”. Who could blame them? The current “rules” of modern economics seem more likely derived from Sun Tzu than they are from the essays and works of Maynard Keynes, Milton Friedman or Ludwig von Mises. Anything goes, it seems.

In the first definition of free markets — defined as markets which are not interfered with, manipulated or subsidized by governments — it is quite evident that the US government(as well as governments in Europe and other developed countries) clearly have not abided by this rule. This simple rule defines that the markets are an economic jungle, and when left alone as they should be,  if any business or stock doesn’t perform, then that business is inefficient, uncompetitive, non-productive, over-leveraged  or corrupt and rightly deserves to die. So, according to the Darwinian free market principles, only the strongest and best performing businesses should survive. But what have we got instead? In a word — Bailout after bailout. The US Government is not only rescuing Wall Street and huge corporations, the Fed is also buying up all their dirty toxic assets as well !! In effect, the US government now clearly supports all the corrupt, fraudulent, insolvent and too-big-to-fall business institutions of America which is quite the opposite of Free Market principles.

As further evidence of  US Government market manipulations — all you have to do is take a peek at the recent performance of commodities like oil, gold, soyabeans and wheat. I won’t spend time on more evidence, there’s too much evidence really. But I will describe how it is done.

From my readings the US FED is supposedly responsible for the maintenance and regulation of US banks, price stability, inflation and the US money supply. Little known is how the FED maintains the strength of the US Dollar. The FED maintains the US dollar, not only by suppressing interest rates,  but  by entering into large currency swap arrangements via the Federal Open Market Committee. This Committee is allowed to interfere and play the currency exchange markets as much as they like to maintain the strength of the dollar. And, according to the second definition of Free Markets — A foreign exchange market that is not controlled by the government — again, this FOMC activity directly offends and contradicts the definition of  “Free Markets” doesn’t it ?  

There is also a very little known arm of the US Treasury called the Exchange Stabilization Fund(ESF), which discreetly though massively manipulates the US stock markets by their very secretive and hard-working Plunge Protection Team(PPT). Recent activities of the ESF seem to be concerned with dollar price stabilization via direct gold manipulation in the commodities market. From the Market Skeptics site:

Originally funded out of the profits from the 1934 gold confiscation, the little known ESF is available for intervention in the foreign exchange markets. In the absence of a Congressional appropriation, the Clinton administration used funds from the ESF to finance the 1995 U.S. bailout of Mexico. However, accepting the Greenspan dictum that it “would be wholly inappropriate” for the Fed ever to intervene in the gold market to manipulate the price, it is hard to imagine any situation in which such intervention would be appropriate by the ESF, never mind one involving large profits for the former investment bank of the Secretary himself.

Last week, in response to an inquiry from Bridge News, Secretary Summers “categorically denied” that the Treasury was selling gold. With all due respect to the Secretary, this is not the allegation that knowledgeable gold market participants and observers are making. Their allegation is that the ESF — by writing gold call options or otherwise — is making sufficient gold cover available to certain bullion banks to allow them safely to take large short positions in gold, thereby putting downward pressure on the price and in the process making huge profits for themselves.

So, how does the ESF manipulate the free markets, what is its modus operandi ?
From an interview in the Americans for a Free Republic website:

The PPT [Plunge Protection Team] operation has access to unlimited funds because it was formed by the Treasury which can create money out of thin air. My guess is that the organization is structured through an offshore hedge fund established by the ESF as a front group. They do their buying and selling from perhaps the Bahamas or the Cayman Islands. One thing we know is that they place their orders through several of the big brokerages in New York such as Goldman Sachs, JP Morgan, or Merrill Lynch. This way no one at the brokerage houses or on the exchange floors actually sees any massive buy orders from Washington bureaucracies.

The way they work the scheme is whenever the market is going too low and threatening to crash, the PPT initiates buy programs on margin for S&P futures contracts in large enough volume to check the market fall and panic short sellers into covering their short positions. This creates a “short squeeze” and explodes prices upward. Hedge funds and institutional buyers then rush into the market to buy in order to catch the rally. This extends the rally and effectively ends the potential market crash as investor mood shifts from bearish to bullish. The rally is created in the way that lighting a match to kindling ignites a roaring fire. The S&P futures contracts are so highly leveraged that a $200 million buy can be initiated for $10 million in the PPT account with JP Morgan. A $500 million buy can be initiated for $25 million. These margins are chump change for the Treasury-ESF-PPT operatives. As the rally proceeds, the PPT then sells their contracts back to the hedge funds and institutional buyers that follow after them. The PPT then goes to the sidelines to await the next crisis when they will need to stem a potential crash.

Is this not also outright market interference and manipulation? This makes me laugh very sarcastically concerning one of President Obama’s past stated policy dictums. Early on in his reign,  when Obama first came  to power — he made much rhetorical sound and thunder concerning  sterner rules, regs and transparency regarding offshore bank accounts and businesses in places such as the Cayman Islands. Can anyone now see  that this was all BS — because without these non-transparent offshore accounts and businesses the ESF simply could not function or do its covert job. So, folks, anyone with an offshore account will be safe enough in the future. This empty and hollow promise by Obama seems to be just one more ineffective and deliberate distraction for his people.

So, please, let’s not have anymore babble about how we have Free Markets.  We haven’t had Free Markets in over a century and they will never return. But I will give you a new economic rule:

The Free Market principles are dead. But whichever country is at the top of the global economic pyramid will always endeavour to control and manipulate the global markets without fail — in any  dark, selfish and illicit manner they choose. Sadly, this rule seems already to be the accepted economic norm. And, like it or not, global leadership always changes according to economic circumstance because the Global Markets will forever remain a black, complex and unpredictable jungle and  one that is still very capable of teaching harsh lessons against the greater follies of both stupidity and greed versus risk.

And so it goes on, through all this continual massive government market interference, with all the usual   stupidity, folly or greed,  such that with this greater risk  and leverage comes  a much deeper decent into the economic abyss. In truth, The Markets can certainly be manipulated but their final timing and outcome can never be accurately predicted. This is how lessons are learned,  from the simple failed investor to the massive slide into Hell of a complete economy.

Such is the timeless  nature and behaviour of The Markets which, even though economically bound and manipulated like a great tiger,  are still able to behave remarkably freely and so unpredictably. Somehow, even with all this manipulation, the US government still manages to screw up the markets regularly. After all, that most illusive of all predictables — Market Confidence — is surely derived from nothing more than human action and human behaviour.

And there is no accurate economic or mathematical model for that one. Right ?

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Other References:

The Exchange Stabilization Fund

The Exchange Stabilization Fund: Slush Money or War Chest ?

The first assessments of the current G20 Financial Summit are out. And amid the muddle and fumblings of other countries as to what can be done, one leader seems to have quietly taken the reins of this gathering with a definitive plan. Gordon Brown, the current PM of UK, introduced this financial plan to the EU last month. A few European countries, then virtually all states decided to run with it because it was so good. Now he has introduced this plan to the G20 Meeting. I certainly don’t agree with all of his plan, but at least Mr Brown has brought the G20 together with a reasonably focused response. This, after all, is what a leader should do. President Bush is hosting the meeting - and reportedly all he brought to the meeting table was a neat haircut and a weary smile. He also served tea and coffee during the intervals (without any help at all, so they say). The following short article is from the UK Guardian, which includes quotes of high praise from Paul Krugman, the well known and highly respected US economist.

“From the way Gordon Brown was talking about the G20 summit at his Downing Street press conference this week, you could be forgiven for thinking that he sees it as his chance to audition for the role of chancellor of the exchequer for the world. But if that doesn’t work out, and if the voters boot him out at the general election, he has brilliant future as a university professor.

That’s not my verdict but Paul Krugman’s - and he’s just won the Nobel Prize for economics, so he should know. Krugman hailed Brown as the saviour of the world economy in a New York Times column last month and last night he and other economists met the prime minister after he arrived in New York for the G20 summit.

After the meeting, Krugman told the BBC’s Nick Robinson, for a Today programme interview, why he was so impressed by what Brown had done.

We had this completely muddle-headed response from the United States, the US Treasury: “Something must be done, the markets are frozen up.” But then the plan made no sense. It was really great confusion, and not much coming out of the eurozone. Then Gordon Brown comes along and says we are going to recapitalise the banks, which is what economists like myself had been saying. It provided the signal that we could do a straight-forward, well-focused response to this crisis. Britain is not one of the world’s biggest economies but Britain has ended up setting the template for everyone else’s response, which is quite amazing.

Then Robinson asked Krugman how Brown had gone down with the academics. Krugman was effusive.

He’s pretty good. If this prime minister thing doesn’t work out, he’s got a pretty good career as an academic [ahead of him]. It was amazing. The level of discussion was, particularly for someone accustomed to the US for the last few years, awesome.”