We’re in recession

The Commerce Department reports GDP growth has slowed to 1.9 percent.  However, if one employed a more realistic measure of inflation, then growth would certainly be negative.  We are in recession, and I believe headed for worse after the election.  My best guesstimate is that QE III is on its way.  But it is no longer “extend and pretend;” it is now “delay and pray.”  Ben’s prayers will not be answered because the quantity theory of money cannot stimulate an economy saddled with debt saturation.  This is painfully obvious among college graduates carrying heavy debt loads, and reduced job prospects.  There is simply not enough discretionary income to power a recovery.  What we are witnessing is a fall in Americans’ standard of living that began in 1973, but the effects made observable only after 2008.

200 years of uninterrupted economic progress; then gold standard ends

Click on chart for better view

For pretty much the first two hundred years of the nation’s existence, each succeeding generation of Americans could expect a higher standard of living.  For 200 years the general price level remained relatively stable.  Then in 1971, President Richard Nixon closed the gold window of convertibility, and adopted a free floating exchange rate advocated by the likes of Milton Friedman.  Since that time average real wages adjusted for inflation are below those in 1973.

Real wages decline because inflation by definition raises the costs of necessities, and nominal wages do not outpace inflation.  The consequence is that discretionary income, income left to buy the stuff of capitalism is reduced.  That is bad for producers, and especially bad for families driven below subsistence.  America massaged the problem by first introducing women into the work force, then credit cards, and finally mortgage equity withdrawals.  Perhaps we’ll become so desperate we’ll reintroduce child labor. This was not real economic progress (1971 to 2012), but bankster flim flam.  Instead the country imagined it was a grand idea to gamble in derivatives as opposed to producing.  It didn’t work.  There is now less for the 99 percent, while admittedly the 1 percent is faring fine.

Child labor, Alabama 1910

America’s Back to the Future

The debasement of the currency did not help the average worker.  It has clearly resulted in greater polarization between the rich and poor, and the disappearance of a moderating middle class. Without a moderating middle class, as Aristotle remarked long ago, society will become unstable and subject to social upheavals.  Especially by those who were formerly of the middle class.   Some think a return to a gold standard would help.  The gold standard worked because it inhibited wholesale money printing.  But one could accomplish the same thing through outlawing government borrowing, except for legitimate military defense.  Wars of choice are by definition not necessary.  And Americans should understand there is no free lunch in waging them.  Taxes must be raised to pay for them.

As the Darkerside has consistently stressed, the country does not have an economic problem, it has a financial corruption problem that could easily be remedied by not allowing economic actors to have any means other than the market for their reproduction.  When that occurs economic actors are forced to adopt rational strategies of reproduction, like saving, accumulation of fixed capital, innovation, and incessant cost cutting that drives economic progress.  Today corporate America is employing the state to hold its social position through bailouts.  Printing up money does not equate with economic progress, for if that was the case, Zimbabwe would be an economic paragon to be emulated.  Printing money simply puts off the day of reckoning.

Employing the coercive powers of the state for one’s reproduction is quite simply the road to perdition or lowered economic output.  Americans have been pragmatists for 200 years, doing what works, and quasi feudalists for the last 40 years, SABOTAGING THEMSELVES.  Objectively, what do you think worked better?   Banksterism or actual capitalism?

Socialist Keynesians would have you believe, the state can offer you a free lunch.  But it was precisely the state and its politicos, bought off with bankster money, that repealed Glass-Steagall and merged commercial banking with casino investment banking, and the Modernization Commodities Futures Trading Act that deregulated derivatives.  These have proved disastrous for the economy enacted by dim wits like Bill Clinton.  So the next time someone offers you a free lunch, beware of the snake oil.  It is likely to have unforeseen consequences for your wallet—like making it lighter, and life harder.

Something to ponder: rigged markets to keep investors in the bond market

Six years ago the profit margin of Gold Fields was 13.69 percent, and gold was at $610/ounce, and its share price was $25.  Today profit margins are 21.92 percent and gold is setting at $1,572/ounce, and yet its share price is $13.29. 

Therefore in the Wall Street rigged markets world, for the benefit of the Federal Reserve, when gold is selling at a lower price with attendant lower profit margins the stock is worth more than when gold is at much higher prices and profit margins are also much higher?  Now J.P. Morgan Chase has already been caught red handed naked shorting silver, without actually possessing the metal. What is the likelihood the same is taking place in the gold market?  I bethinks—very likely.  In fact, according to the work of Barsky and Summers, gold prices should be at much higher prices if not for what they refer to as “government pegging operations,” or in layman’s terms rigging of gold prices through government intervention. 

The Federal Reserve must employ its operatives Goldman Sachs and J.P. Morgan because the price of gold has been historically linked to the general price level and interest rates, this is the theory put forward by Lawrence Summers and Robert Barsky in their seminal paper  “Gibson’s Paradox.”  Concisely, it maintains:

The price level under the gold standard behaved in a fashion very similar to the way the reciprocal of the relative prices of gold evolves today.  Data from recent years indicate that changes in the long-term real interest rates are indeed associated with movements in the relative price of gold in the opposite direction and that this effect is a dominant feature of gold price fluctuations.

In short, since real interest rates are negative approaching –2 percent (i.e., the rate of inflation is much higher than long term interest rates), gold prices should be some $500/ounce higher and gold shares many multiple times higher.  By capping the price of gold, the “government pegging operations” are desperately trying to keep bond investors in the treasury market by not providing them with an alternative investment that shields them from government money printing operations.  This is made observable from the below chart.  The divergence of the two lines representing government pegging operations. 

Also notice that with –2 percent real interest rates, gold should attain its historical highs in constant  dollars (according to Global Financial Data).  Had we continued to calculate inflation as we did in 1980s, real interest rates would have exceeded minus 2 percent—by quite a bit meaning gold prices would have been higher.  This was not admitted by some lunatic outsider, but by Lawrence Summers, the Treasury Secretary of the U.S. under Bill Clinton, not more than a decade earlier.  

And it is not the conspiracy theorists that cook up the inflation data, but the Bureau of Labor Statistics.  Obviously, if you’re underestimating inflation you’re underestimating real interest rates (in particular negative rates), and affecting gold prices that have historically been tied to those rates. 

This divergence of real interest rates and gold prices occurs after the appointment of Robert Rubin to Treasury Secretary in 1995. 

Unfortunately, Asians are not playing along with this ruse.  They continue to accumulate the precious metals with each bogus “government pegging operation” designed to drive down its price.  For this reason, gold has not broken out to new highs, and is still not the great bull market some analysts have maintained that it is.   The divergence above between gold prices and real interest rates was also studied by Dr. Harry Clawar who found that there were significant mean differences between the London Bullion Market a.m. closing prices and those of New York.  These difference were significant beyond p < .01 using an analysis of variance.  That is the gains in the overseas gold price were being nullified in the American market, consistent again with the above graph.  The claim that there is no empirical proof to gold rigging is simply wrong.

Because Asian investors are stepping away from the U.S. treasury market, the Federal Reserve has thus been forced to purchase 61 percent of all bonds sold by the Treasury Department.  Had they not done so, interest rates would regress back to the historical norm of 5 to 6 percent, and debt service for the increasingly insolvent U.S. would have risen from $400 billion to $800 billion.  That would make debt service two-thirds of all tax revenues.  The mother of all austerity awaits, notwithstanding the pleas of Paul Krugman to print some more . . . and some more . . . ad infinitum.  The problem with the Krugman remedy is that it amounts to a band aid for a missing limb.  It’s not going to stem the bleeding. 

The problem is the manipulation of markets, which otherwise would have disciplined market players with the hidden hand of bankruptcy and default, ending in liquidations.  Free precious metals markets would have long ago warned that the Fed was printing too much money, and it was for this very reason the Fed conspired with J.P. Morgan to cap the silver market, through naked shorts and the gold market through the gold carry trade, the lending of the nation’s gold to bullion banks who sold it into the market and then invested in bonds.  The effect being the capping of the gold price and the lowering of interest rates and increase in bond prices.  This was a win win situation for the speculators as long as gold remained under control.  But nothing lasts forever, not even the stupidity of bond investors.  Asians began buying gold and stepping away from the U.S. treasury market.

Confirmation of market manipulation was revealed by whistleblower Andrew Maguire, a metals trader in London.  He even informed the Commodity Futures Trading Commission of when such illegal trading would take place.  The CFTC failed to act to stem the fraud by J.P. Morgan Chase.  On March 26, 2010 an attempt on his life occurred.  He narrowly escaped a hit and run driver who attempted to flee on foot, but was captured by public bystanders to the incident.  The criminal cartel of J.P. Morgan Chase, Goldman Sachs, and the Federal Reserve are becoming ever more desperate to control the metals market.  The fraud is unsustainable because of the Asians who buy the metals on every dip.  Gold moving inexorably from West to East.

The straightforward answer to holding investors in the bond market would of course be to raise the interest rates above the rate of inflation.  But this cannot be done, since as statistician John Williams correctly notes, if we use the method of calculating inflation before the Gibson’s Paradox paper was written in 1988, inflation is now running above 10 percent.  Therefore, the government first cooks the inflation statistics, underestimating them and therefore overestimating GDP growth, to make things look better, not really better but perceptually better as if reality did not exist and will not assert itself in real consequences. 

Then they suppress gold prices and mining share prices to make it appear there is no alternative to that of the bond market as a viable safe haven, while of course stealing 2 to 3 percent a year in inflation from dumbed down investors.

This is not Gibson’s paradox, but the paradox of perception where up is down, and vice versa.  This will not succeed, as the mortgage crisis has demonstrated.  It must lead to false price signals and malinvestment.  Asians don’t give a damn about perceptions, and know nonsense conjured out of thin air does not have value—it is not appearances that matter but reality, the considerable labor and capital required to get an ounce of gold out of the ground that gives it value.  Why pretty much every ounce that has ever been mined, processed, and cast, still exists.  Paper with a bunch of dead presidents emblazoned on its face will not be able to make the same claim 5000 years hence.  Every empire that has ever squandered its gold has gone the way of the Dodo—that is, become extinct.

If all this sounds familiar, it is because it is the corollary of producing something that does not exist, like weapons of mass destruction, as opposed to in this case making something that does exist, unsustainable growth in the money supply, seemingly disappear.  It is all about the magi’s misdirection.  Producing illusions.  And of course, stealing your money and labor. 

Gold is all about class warfare, convincing workers it is a barbaric relic while at the same time accumulating it.  That is why spot prices for the metal have risen over future prices, or gone into backwardation, most recently in May of this year.  Backwardation indicates gold is going into private storage and withheld from the market.  As Professor Antal Fekete warns, backwardation is a loss of confidence in fiat currency.  It is a very rare event that last occurred in 2008 before the collapse of the mortgage backed security bubble.  Now it has occurred again.  The end game is upon us.

If I read Schiff correctly: Get out of the dollar!

PETER SCHIFF: The Housing Bust Was Just A Preview For The Coming Catastrophe

Read more: http://feedproxy.google.com/~r/PeterSchiffsEconomicCommentary/~3/HQvQq2BVTt0/real_crash#ixzz1viMm7yJb

Frankly empires do not come back, anymore than the same bubble comes back.  The dot.com bubble, the housing bubble all went away because they were economically unsustainable leading to malinvestment and bogus price signals.  They did not return.  The final bubble which is the dollar bubble is nothing more than the pound sterling bubble repeated.  And again, the British bubble could not be resurrected.

In fact there was a guy just like Peter Schiff in the late 19th century named Ernest Edwin Williams who never tired of warning the Brits they were headed for the coral reefs.  In fact this is what he said at the time:

“The industrial glory of England is departing, and England does not know it.  There are spasmodic outcries against foreign competition, but the impression they leave is fleeting and vague.  The phrase, ‘Made in Germany,’ is raw material for a jape at the pantomime, or is made the text for a homily by the official guardians of some particular trade, in so far as the matter concerns themselves.”

In short, it was inconceivable for the Brits to imagine they were in decline in 1896 when Williams published his book Made in Germany.  One need only substitute China for Germany to get America’s blind spot today.  My own assessment is that the goyim have been taken to the cleaners by their own hubris.  Because China dominates industry, it will also dominate commerce and banking.  Obama’s stimulus has had zero effect because quite frankly there was no multiplier effect because we do not make what we consume.  The real beneficiaries of the stimulus have been producers like China, Japan, and S. Korea.  And guess what?  These guys are forming a free trade zone so they no longer rely upon the American market.  They can clearly see the handwriting on the wall. 

The calculus is simple: people cannot buy stuff they cannot afford because of the debasement of their currency.  What we actually have here is American style austerity.  It is only a matter of time before our creditors pull the plug on the dollar.  Or as Schiff humorously notes, the U.S. is like the guy who has lost half his income, but continues to consume using his credit cards, and thinks everything is hunky-dory.  In a word: UNSUSTAINABLE.

America will slowly be marginalized because our governing elites are simply as ignorant as the British elites that Williams attempted to wake from their slumber.

It is over for the American empire.  It is asleep.  That the bilderbergers have so easily conned our elite is not very surprising.  They attended the Ivy League, as the British elite attended Oxford.  Frankly the Anglo graveyards of empires.  The epitome of  miseducation.  However, it does point out how 1 percent controls the other 99 percent.  I would call it the educational institution of record which functions similarly to the newspapers of record. 

The stories of the newspapers of record are picked up by other news outlets leading to the homogenization of reporting, a reiteration of the findings of the authoritative New York Times or Washington Post.  Editors I have known were very reluctant to buck what was reported in those two papers.  It became received gospel that overrode the reporting of local news organizations.  Similarly, Yale, Harvard, Princeton, etc. their curricula forms the touchstone of other college curricula. 

It is the leveling of knowledge, for example in the case of economics, to the neo-liberal Keynesian perspective or the quantity theory of money.  It is not by happenstance that Paul Krugman attended Yale, and Ben Bernanke Harvard.  If you stray outside these two perspectives, your “career” is destined for the Siberian hinterlands of academia—Southwest Missouri State or worse.  It is not that SWM is a bad college, it is that nationally you are unlikely to be heard from again especially if you deviate from the accepted received theories of the institutions of record.

As a sociology graduate representative, I got to sit in on faculty deliberations of prospective new faculty members.  And what I was always struck by was the attempt by faculty to hire members of the former institutions they had themselves attended.  The effect would be to hire similar members who had undergone the same catechism as themselves—that were indoctrinated to the same institutional propaganda or theories, and who therefore would publish articles in received journals of record.  Higher education was dumbing itself down through inbreeding.  Just as inbreeding leads to a lack of genetic diversity that can threaten a species, intellectual inbreeding can threaten a social system through a lack of adaptive capacity.

Why Ernest Edwin Williams and Peter Schiff are the Cassandras of their time.

An important piece of analysis by Charles Hugh Smith

The E.U., Neofeudalism And The Neocolonial-Financialization Model

To fully understand the Eurozone's financial-debt crisis, we must dig through the artifice, obfuscation and propaganda to the real dynamics of Europe's "new feudalism," the Neocolonial-Financialization Model.

Forget "austerity"and political theater--the only way to truly comprehend the Eurozone is to understand the Neocolonial-Financialization Model, as that's the key dynamic of the Eurozone.

In the old model of Colonialism, the colonizing power conquered or co-opted the Power Elites of the region, and proceeded to exploit the new colony's resources and labor to enrich the "center," i.e. the home empire.

In Neocolonialism, the forces of financialization (debt and leverage controlled by State-approved banking cartels) are used to indenture the local Elites and populace to the banking center: the peripheral "colonials" borrow money to buy the finished goods sold by the "core," doubly enriching the center with 1) interest and the transactional "skim" of financializing assets such as real estate, and 2) the profits made selling goods to the debtors.

In essence, the "core" nations of the E.U. colonized the "peripheral" nations via the financializing euro, which enabled a massive expansion of debt and consumption in the periphery. The banks and exporters of the "core" countries exacted enormous profits from this expansion of debt and consumption.

See full article here.

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Feudalism is employing the coercive powers of the state for the exploitation of the peasants’ labor power.  It is the extraction of surplus value, not through the market but through the state’s seigniorage or privilege.  In this case, the manufacture of money out of thin through the extension of credit.  This is a win win situation for the too big to fail banks, as Mr. Smith points out.  If the peasants in the periphery repay the loans, the banks get their pound of flesh in interest, if the peasants default on their loans then banks sweep in with the power of the state at their backs to expropriate actual tangible assets in exchange for money created out of thin air.  And if the peasants in the periphery cannot repay, then the banks’ losses fall on the serf taxpayers of the core countries.

Remarkable! 

All backed up by the coercive powers of the state.  The only thing missing is of course knights sallying forth from the castle draw bridge, and knocking a few heads.  Well, I guess we’re even beginning to see that in Greece with the core’s proxy knights, the Greek police, wielding their batons on what they hope will be Greek slaves.  It is enough to remind this reader of the peasant wars of the 16th century.  We are witnessing a turning point in history—a reproduction crisis of both exploiter and exploited.

Quote of the day: Dmitry Medvedev

“At some point such actions which undermine state sovereignty may lead to a full scale regional war, even, although I do not want to frighten anyone, with the use of nuclear weapons.”—Dmitry Medvedev, May 17 2012

Well there you have it folks.  An indication the American Empire like the British Empire has over reached—thanks in large part to the incompetence of the neoconservatives (i.e., Neocons).  Why did the goyim listen to such bad advice?  Obvious.  Dual loyalty traitors in Congress first voted aid to Israel that then returned to the United States to buy off  Congress through campaign contributions.  The guys are too slick for the goyim.

Iran borders on Russia.  The latter is not going to allow an American puppet right on its border, anymore than we would allow a Chinese puppet to govern Mexico.  Once Israel hits Iran World War III will begin, i.e., thermonuclear war.  That is because the Neocons and Israel lobby have maneuvered the clueless goyim to commit capital crimes against their own citizens.  They can only now initiate World War III and hope they prevail to rewrite international laws again to escape war crime prosecutions.  Not only that, they also have to scrap the Constitution, meaning they will have to govern without an ounce of legitimacy.  The U.S. is clearly headed for some form of dictatorship of the 1 percent against the 99 percent.

Unfortunately, the goyim will not get what they expect, but most likely what they deserve.  Medvedev’s quote is simply an indication that the U.S. hegemon will be the target of alliances as opposed to being part of one.  Not only Russia is fed up, but China, India, and perhaps even Brazil, and Japan are likely to turn on it.   But we will have our good friend Israel, won’t we?  This is like Nazis Germany having Mussolini at its side.  A loser strategy if I ever saw one.

Election unlikely to halt U.S. decline

I was watching the L.A. Lakers the other night and it occurred to me that Americans were pretty much like the Laker front office and players—in denial.  The players in particular are seemingly the last to understand the dynasty is over.  Though it really should have come as no surprise since they were swept from the playoffs last year by the Dallas Mavericks, and Mark Cuban.  Last year J.J. Barea got into the lane and caused havoc, and this year it was OKC’s Russel Westbrook that constantly broke down the Lakers’ defense. 

Unfortunately like Germany previously, Americans will probably have to lose a major war before they wake up and smell the coffee.   Their problem is encapsulated in the below chart, that shows clearly America’s last bubble, that of the dollar.

The printing of money which benefits financial services, banking, insurance and real estate has stoked the debasement of the dollar.  Real wages have declined since 1973, meaning effective demand would have been extremely weak and exposed the charade had it not been for very lose monetary policies and cheap, dare I say, free credit.  However, the key questions regarding the Federal Reserve and foreign policy are beyond critical discussion by either Democrat or Republican in the 2012 election.  With the exception of Ron Paul.

The public has awoken to the fact that cheap credit is nothing more than class warfare by the 1 percent.  As voters have already given notice in France and Greece, the public is no longer willing to follow the bogus policies of international finance.  The hegemon, like the Lakers, is in decline and when that happens, as it did to Great Britain, animosity between countries that had been previously contained reasserted themselves and conflict ensued.  The end of the dollar bubble will be no different.  Dmitry Medvedev has already asserted nuclear war is now possible.  I suspect like all major wars there will be an armaments race first, but the big one is going to come, hook or by crook. This is because the hegemon has taken on too much debt once the gold standard was breached in 1971.  Look at the above chart again.  Inflation accelerates into a parabolic takeoff right after 1971 when the banksters got their way.

Bad behavior that is rewarded with bailouts does not stop, but is repeated as J.P. Morgan’s Jamie Dimon has demonstrated most recently.  Jamie Dimon is America’s Kobe Bryant that wants team America built around his glory seeking.  Like Bryant Mr. Dimon throws the ball away and jacks up bad trades, but now wants to blame everyone else.  The problem isn’t team America but catering to the wishes of too many Jamie Dimons.  Like Bryant is part of the 1 percent of basketball players, Dimon is not part of the solution, but clearly the problem of team America.  Such people undermine social and team cohesiveness leading to defeat in basketball as well as life.

Yes, China is coming for us as OKC had long been coming for the Lakers.

Osama bin Laden and the U.S. economy

In 2011, Barack Obama with a good deal of fanfare announced U.S. Navy Seals had killed the “evil doer”.  That is, the guy reputedly who masterminded the most sophisticated assault on national security, 9/11, from a cave somewhere in Afghanistan.  Now however, a former Turkish CIA operative has come forward to throw more water on the “we got the OBL” narrative.  Berkan Yashar maintains the “evil one” actually died of natural causes five years earlier in 2006.

That they waited five years to kill off the “evil one”—again—in 2011 has more to do with the economy and the 2012 election.  Wouldn’t it be grand, Obama thought to himself, if I actually had something good to boast about in an election year.  So he and I’m sure a select few insiders within his circle concocted the Abbottabad raid—without ever displaying the body which would no doubt be worthy of an episode of Bones, and its intrepid heroine Temperance Brennan.  The problem of course being the decomposed body of OBL would be recognized by any forensic anthropologist for what it was.  “Hey, this guy has been kaput quite a while.”   Not surprisingly, they dumped OBL in the middle of the ocean.

If nothing else, it proved the U.S. could keep someone alive well past their due date.  Unfortunately, they cannot do the same for the U.S. economy that provides Obama nothing to boast about unless you want to yak up the fact this has been the weakest recovery since such statistics were maintained.  The  problem for Obama is that real income, those adjusted for inflation, has been falling since 1973.  The short term bounce in Americans’ economic fortunes was largely the result of borrowing moolah, long maintained by the likes of Paul Sweezy.  Unfortunately, with debt saturation that game is over.  Americans really cannot spend enough to power a real recovery.

It may not be much of a saving grace, but there is one thing Obama can shout about, and it is that he has “saved the banksters.”  By rolling the printing presses Ben and he have rescued the hides of Jamie Dimon and Lloyd Blankfein.  Now you and I might not think much of this accomplishment, but Wall Street has taken notice, and will fill up Obama’s campaign coffers to the gills.  Yes, the money printing produces inflation, as recorded by John Williams at Shadowstats.com*, but it is wonderful for the speculators.  Just ask J.P. Morgan’s Dimon.

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*Note: Williams estimates inflation is running at about 10 percent.  He maintains,

“Usually, when the government changed its methodology, it published an estimate of the change's effect on inflation. If you add all of those changes together, you find that, since 1980, about five percentage points have been taken away from the annual inflation rate. Another two percentage points can be attributed to changes the government did not consider methodological and therefore did not estimate the effect, but they are very much a factor.

So, seven percentage points have been taken out of the CPI. If inflation is being reported at 2.5%, adding that 7% back in puts inflation up around 9.5 to 10% using the 1980 CPI methodology. Using the 1990 methodology, it would be 6% to 7%. That is what people need to be making to stay ahead of inflation.”

The wages of U.S. workers are not growing at 10 percent a year.  The day of reckoning has arrived.  The economy is contracting, as in Greece, and that will mean lower tax revenues and debt.  That will require ever more borrowing until debt service surpasses revenues.  Game over.  But it will not be unexpected.  That is precisely what the powers that be, standing in the shadows, are creating, hiding behind the skirts of the Bilderberg group.

Wages since 1973 simply have not kept pace with inflation.  And inflation has taken off since Nixon closed the gold window, and we went to a floating exchange rate.   As real wages contract because of inflation, there is a lack of consumption to power a recovery in job growth.  They are two sides of the same coin.  The first remedy was to send wives into the labor force, the next could very well be the return of child labor—all hands on board to reproduce the family.