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The Case for Pragmatism

Exclusive: Since American neocons emerged in the 1980s, they have pushed an aggressive “regime change” strategy that has left bloody chaos in their wake. The cumulative impact, including Mideast refugees flooding Europe and overuse of sanctions, is now contributing to a global economic crisis.

by Robert Parry

https://consortiumnews.com (August 24 2015)

Crashing global stock markets –  punctuated by the bracing 1,000-plus point drop in the Dow Jones Industrial Average at the start of Monday’s trading before a partial bounce-back –  are a reminder about the interdependence of today’s world economy and a wake-up call to those who think that the neocon-driven ideology of endless chaos doesn’t carry a prohibitively high price.

The hard truth is that there is a limit to the amount of neocon-induced trouble that the planet can absorb without major dislocations of the international economic system –  and we may be testing that limit now. The problem is that America’s neocons and their liberal interventionist sidekicks continue to put their ideological priorities ahead of what’s good for the average person on earth.

In other words, it may make sense for some neocon think tank or a “human rights” NGO to demand interventions via “hard power” (military action) or “soft power” (economic sanctions, propaganda or other non-military means). After all, neocon think tanks raise money from self-interested sectors, such as the Military-Industrial Complex, and non-governmental organizations always have their hands out for donations from the US government or friendly billionaires.

But the chaos that these neocons and liberal interventionists inflict on the world –  often justified by claims about “democracy promotion” and “human rights” –  typically ends up creating conditions of far greater horror than the meddling was meant to stop.

For instance, the Islamic State butchers and their former parent organization, Al Qaeda, are transforming Iraq and Syria into blood-soaked killing fields. But the neocons and liberal hawks still think the higher priority was and is to eliminate the relatively stable and prosperous dictatorships of Iraq’s Saddam Hussein and Syria’s Bashar al-Assad.

There is always a fixation about getting rid of some designated “bad guy” even if the result is some “far-worse guys”. This has been a pattern repeated over and over again, from Libya to Sudan/South Sudan to Ukraine/Russia to Venezuela (just to name a few). In such cases, we see the neocons/liberal hawks release a flood of propaganda against some unpleasant target (Libya’s Muammar Gaddafi, Sudan’s Omar al-Bashir, Ukraine’s Viktor Yanukovych, Russia’s Vladimir Putin, Venezuela’s Hugo Chavez or Nicolas Maduro) followed by demands for “regime change” or at least punishing economic sanctions.

Anyone who tries to provide some balance to offset the propaganda is denounced as a “(fill-in-the-blank) apologist” and pushed out of the room of acceptable debate. Then, with no one in Official Washington left to challenge the “group think”, the only question is how extreme should the punishment be –  direct military assault (as in Iraq, Libya and Syria), a political coup d’etat (as in Ukraine and almost in Venezuela) or economic sanctions (as in Russia and Sudan).

For many Americans trying to do international business, it can be confusing as to where the legal lines are, who is or who isn’t on some black list, what kinds of transactions are allowed or forbidden. I know of one counselor who helps people overcome stuttering who had to reject Skype lessons with a prospective patient in Iran because it wasn’t clear whether that might violate the draconian US sanctions regime.

Spreading the Chaos

Arguably some narrowly focused sanctions against a particularly nefarious foreign leader might make sense. Even a limited military intervention might not upset the entire world’s economy. But the proliferation of these strategies has combined to destabilize not just the targeted regimes but nations far from the front lines and is now contributing to global economic chaos.

In tracing these patterns, you can go back in time to such misguided fiascos as the CIA’s huge covert operation in Afghanistan in the 1980s (which gave rise to the Taliban and Al Qaeda). However, for argument’s sake, let’s start with the neocon success in promoting President George W Bush’s invasion of Iraq in 2003. Not only did that war divert more than $1 trillion in US taxpayers’ money from productive uses into destructive ones, but it began a massive spread of chaos across the Middle East.

Add in President Barack Obama’s 2011 “humanitarian” interventions in Libya (via Western bombing operations to topple Muammar Gaddafi’s regime) and in Syria (via covert support for rebels and sanctions against President Assad’s government) –  and you have two more Mad Max scenarios in two once relatively prosperous Arab states.

These human catastrophes have sent waves of refugees crashing into other Mideast countries and into Europe where the European Union was already stumbling economically, still trying to recover from Wall Street’s 2007 & 2008 financial crisis. After tasting the bitter medicine of austerity for years, Europeans now find their fairly generous welfare systems stretched to the breaking point by refugees seeking asylum.

Having just returned from a visit to Europe, I was struck by the intensity of feelings about the refugee crisis. Some EU nations are throwing up anti-migrant barriers while everyone seems to be squabbling over who should foot the bill at a time when there are financial crises in Greece and other southern-tier countries, which coincidentally are bearing the brunt of the refugee problem.

Toss into this volatile mix of a Europe seemingly close to explosion the Obama administration’s “neocon/liberal interventionist” policies toward Ukraine, where neocon holdover Assistant Secretary of State for European Affairs Victoria Nuland helped orchestrate a 2014 coup to remove democratically elected President Yanukovych after he was demonized in the US mainstream media as corrupt.

Citing “democracy promotion” and “anti-corruption”, the Obama administration backed the creation of a coup regime that has relied on neo-Nazi and Islamist militias {1} to serve as its tip of the spear against ethnic Russian Ukrainians who have resisted the ouster of Yanukovych. Thousands –  mostly eastern Ukrainians –  have died. Of course, all this was explained to the American people as a simple case of “Russian aggression”.

After the coup, when the ethnic Russians of Crimea voted to secede from Ukraine and rejoin Russia, that became a “Russian invasion”, justifying harsh economic sanctions against Moscow, with the Obama administration strong-arming the Europeans to forgo their profitable trade relations with Russia to punish the Russian economy. But that also added to the pressure on the European economy.

As this madness has escalated, the neocons and their liberal-hawk pals now envision destabilizing the Putin government in nuclear-armed Russia. They don’t seem to recognize that the guy who might follow Putin may not be some obliging Boris Yeltsin but a hard-line ultranationalist ready to brandish the Kremlin’s nuclear arsenal in defense of Mother Russia.

Misguided Interventions

While these various US “hard” and “soft” power interventions are justified by the principles of “human rights”, they often end up working against that goal. A discrete example is the case of Sudan and South Sudan, a crisis that traces back to the demands for a “humanitarian intervention” over Sudan’s alleged genocide in Darfur in 2003.

That horrible conflict was painted in stark black and white colors in the US press, innocent good guys versus evil bad guys, but was actually much more nuanced than what was shown to the American people. The war was touched off by Darfur rebels, but the Sudanese army struck back brutally. The “human rights” community settled on Sudan’s President Bashir as the designated villain, who now faces an indictment in the International Criminal Court.

So, there was great sympathy for carving South Sudan away from Sudan in 2011 and making it an independent country (although oddly Darfur remained part of Sudan). But South Sudan, which possesses significant oil reserves, could sustain itself only if it could get its oil to market and the pipelines went north through Sudan.

And, since the United States and other countries were busy sanctioning Sudan for not turning over Bashir to the ICC, oil companies were unable to assist South Sudan in exploiting its valuable resource, which in turn caused hardship in South Sudan and contributed to a bloody civil war pitting one tribe against another. That led to, you guessed it, calls to sanction South Sudan.

The ongoing tragedy of Sudan/South Sudan is horrific enough, but it is only emblematic of the unintended consequences of rigid neocon/liberal interventionist ideology, which rejects negotiations with “bad guys”, insisting instead on “regime change” or endless punishment of entire populations through sanctions even when those “solutions” inflict more hardship and death.

But now these destructive strategies are going global. They are threatening the economic well-being of the entire planet –  taking their place along with other misguided theories such as “free-market” absolutism and “austerity” in the face of recessions. The cumulative impact from these various follies has been to put the West’s Middle Class under severe pressure regarding income and purchasing power, which finally has slowed China’s growth and prompted a crash of its financial markets.

That, in turn, is reverberating back across the rest of the world’s stock markets, erasing trillions of dollars in wealth and further reducing the savings of the Middle Class. As this vicious cycle starts spinning, that could mean even less consumer spending and further economic retrenchment.

The prospects for a global recession, if not a full-scale depression, can no longer be ignored. And such economic hardship would only contribute to more death, devastation and destabilization.

Pragmatic Solutions

So what can be done? As dark as the gathering economic storm may be, one silver lining could be that Americans and other Westerners will finally begin pushing back against the powerful neoconservatives and their liberal-interventionist fellow-travelers.

Perhaps, instead of President Obama’s Iranian nuclear deal being a one-off affair that may barely survive a determined neocon assault in the US Congress, it could become a model for pragmatic approaches to other international crises. The core of this pragmatism would be that one doesn’t have to love or even like the leadership of another country to cooperate on global concerns, whether they are economic, geopolitical or environmental.

There also should be a recognition that no country has all the answers or a monopoly on morality. American self-righteousness is not only hypocritical –  given the many flaws in the US political system from the buying of our [election] campaigns to our repeated violations of international law –  but it is self-defeating, requiring the endless expenditure of blood and treasure to act as self-appointed global “policeman” whether the world wants it or not.

If pragmatism replaced exceptionalism as the focus of US international relations, there would be some obvious moves that could reduce world tensions and alleviate some of the economic dislocations that are contributing to the deepening economic crisis.

For instance, instead of a potential nuclear confrontation with Russia over Ukraine, what’s wrong with the eastern Ukrainians receiving more autonomy and the right to keep their Russian language? Why shouldn’t the people of Crimea have the right to break their political bonds with Kiev and renew them with Moscow? Why has President Obama bent to the neocon prescriptions of Assistant Secretary Nuland when a little give-and-take could make life better for Ukrainians, Russians and Europeans?

Similarly, why can’t the United States accept a compromise in Syria that includes power-sharing for whatever moderate Sunnis remain and accepts at least the temporary continuation of President Assad’s rule as part of a secular state protecting the lives and interests of Christians, Shiites, Alawites and other minorities? Why not a joint US-Russian-Iranian effort to stabilize the war-torn country, block the expansion of the Islamic State and Al Qaeda, and ease the refugee crisis in the Mideast and Europe?

Yes, I realize that geopolitical pragmatism is anathema to many power centers of Official Washington, particularly the influential neocons, their benefactors in the Israel Lobby and the Military-Industrial Complex, and the many self-interested NGOs of the “human rights” community which favor “humanitarian wars” and seem to care little if their purity leads to even more suffering.

But –  as the world’s economy teeters and global markets tumble –  the American people no longer have the luxury of intervening willy-nilly around the globe. International pragmatism, including working with adversaries, may be the only way to prevent the swelling geopolitical pressures from building into a devastating financial crash.

Link:

{1} https://consortiumnews.com/2015/07/07/ukraine-merges-nazis-and-islamists/

_____

Investigative reporter Robert Parry broke many of the Iran-Contra stories for The Associated Press and Newsweek in the 1980s. You can buy his latest book, America’s Stolen Narrative (2012), either in print or as an e-book. You also can order Robert Parry’s trilogy on the Bush Family and its connections to various right-wing operatives for only $34. The trilogy includes America’s Stolen Narrative.

https://consortiumnews.com/2015/08/24/the-case-for-pragmatism/

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Financial Times Calls For Abolishing Cash

Eliminating physical currency necessary to give central banks more power

by Paul Joseph Watson

Info Wars (August 28 2015)

The Financial Times has published an anonymous article which calls for the abolition of cash in order to give central banks and governments more power.

Entitled The Case For Retiring Another ‘Barbarous Relic’, the article laments the fact that people are stockpiling cash in anticipation of another economic collapse, a factor which is causing, “a lot of distortion to the economic system”.

“The existence of cash –  a bearer instrument with a zero interest rate –  limits central banks’ ability to stimulate a depressed economy. The worry is that people will change their deposits for cash if a central bank moves rates into negative territory”, states the article.

Complaining that cash cannot be tracked and traced, the writer argues that its abolition would, “make life easier for a government set on squeezing the informal economy out of existence”.

Abolishing cash would also give governments more power to lift taxes directly from people’s bank accounts, the author argues, noting how “Value added tax, for example, could be automatically levied –  and reimbursed –  in real time on transactions between liable bank accounts”.

The writer also calls for punishing people who use cash by making users “pay for the privilege of anonymity” so they will, “remain affected by monetary policy”. Dated bank notes would lose their value over time, while people would also be charged by banks for swapping electronic reserves for physical cash and vice versa.

The article echoes an argument made by Kenneth Rogoff, former chief economist of the International Monetary Fund, who has called for high denomination banks notes such as the 100 euro and 500 euro notes to be phased out of existence.

As we previously reported, Rogoff attended a meeting in London earlier this year where he met representatives from the Federal Reserve, the ECB as well as participants from the Swiss and Danish central banks. The issue of banning cash was at the forefront of the agenda.

Last year, Rogoff also called for “abolishing physical currency” in order to stop “tax evasion and illegal activity” as well as preventing people from withdrawing money when interest rates are close to zero.

The agenda to ban cash was also discussed at this year’s secretive Bilderberg Group meeting, which was attended by the Financial Times‘ chief economics commentator Martin Wolf.

Former Bank of England economist Jim Leaviss penned an article for the London Telegraph earlier this year in which he said a cashless society would only be achieved by “forcing everyone to spend only by electronic means from an account held at a government-run bank”, which would be, “monitored, or even directly controlled by the government”.

In the UK, banks are treating the withdrawal of cash in amounts as low as GBP 5,000 as a suspicious activity, while in France, citizens will be banned from making cash payments over 1,000 euros from Tuesday onwards. The withdrawal and deposit of cash over the amount of 1,000 euros will also be subject to ID verification.

“There is no more egregious anti-liberty economic policy imaginable than banning cash”, writes Michael Krieger.

Of course, if cash were involuntarily “ended”, there would be a surge in demand for physical gold and silver, which would then necessitate a ban on those items. Then the cycle of economic and financial tyranny would be complete, and crawling our way out of it, nearly impossible.

_____

Paul Joseph Watson is the editor at large of Infowars.com and Prison Planet.com.

http://www.infowars.com/financial-times-calls-for-abolishing-cash/

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Central Banks

Have Become a Corrupting Force

by Paul Craig Roberts and Dave Kranzler

Institute for Political Economy (August 23 2015)

Are we witnessing the corruption of central banks? Are we observing the money-creating powers of central banks being used to drive up prices in the stock market for the benefit of the mega-rich?

These questions came to mind when we learned that the central bank of Switzerland, the Swiss National Bank, purchased 3,300,000 shares of Apple stock in the first quarter of this year, adding 500,000 shares in the second quarter. Smart money would have been selling, not buying.

It turns out that the Swiss central bank, in addition to its Apple stock, holds very large equity positions, ranging from $250,000,000 to $637,000,000, in numerous US corporations –  Exxon Mobil, Microsoft, Google, Johnson & Johnson, General Electric, Procter & Gamble, Verizon, AT&T, Pfizer, Chevron, Merck, Facebook, Pepsico, Coca Cola, Disney, Valeant, IBM, Gilead, Amazon.

Among this list of the Swiss central bank’s holdings are stocks which are responsible for more than 100% of the year-to-date rise in the S&P 500 prior to the latest sell-off.

What is going on here?

The purpose of central banks was to serve as a “lender of last resort” to commercial banks faced with a run on the bank by depositors demanding cash withdrawals of their deposits.

Banks would call in loans in an effort to raise cash to pay off depositors. Businesses would fail, and the banks would fail from their inability to pay depositors their money on demand.

As time passed, this rationale for a central bank was made redundant by government deposit insurance for bank depositors, and central banks found additional functions for their existence. The Federal Reserve, for example, under the Humphrey-Hawkins Act, is responsible for maintaining full employment and low inflation. By the time this legislation was passed, the worsening “Phillips Curve tradeoffs” between inflation and employment had made the goals inconsistent. The result was the introduction by the Reagan administration of the supply-side economic policy that cured the simultaneously rising inflation and unemployment.

Neither the Federal Reserve’s charter nor the Humphrey-Hawkins Act says that the Federal Reserve is supposed to stabilize the stock market by purchasing stocks. The Federal Reserve is supposed to buy and sell bonds in open market operations in order to encourage employment with lower interest rates or to restrict inflation with higher interest rates.

If central banks purchase stocks in order to support equity prices, what is the point of having a stock market? The central bank’s ability to create money to support stock prices negates the price discovery function of the stock market.

The problem with central banks is that humans are fallible, including the chairman of the Federal Reserve Board and all the board members and staff. Nobel prize-winner Milton Friedman and Anna Schwartz established that the Great Depression was the consequence of the failure of the Federal Reserve to expand monetary policy sufficiently to offset the restriction of the money supply due to bank failure. When a bank failed in the pre-deposit insurance era, the money supply would shrink by the amount of the bank’s deposits. During the Great Depression, thousands of banks failed, wiping out the purchasing power of millions of Americans and the credit creating power of thousands of banks.

The Fed is prohibited from buying equities by the Federal Reserve Act. But an amendment in 2010 –  Section 13(3) –  was enacted to permit the Fed to buy AIG’s insolvent Maiden Lane assets. This amendment also created a loophole which enables the Fed to lend money to entities that can use the funds to buy stocks. Thus, the Swiss central bank could be operating as an agent of the Federal Reserve.

If central banks cannot properly conduct monetary policy, how can they conduct an equity policy? Some astute observers believe that the Swiss National Bank is acting as an agent for the Federal Reserve and purchases large blocs of US equities at critical times to arrest stock market declines that would puncture the propagandized belief that all is fine here in the US economy.

We know that the US government has a “plunge protection team” consisting of the US Treasury and Federal Reserve. The purpose of this team is to prevent unwanted stock market crashes.

Is the stock market decline of August 20 and 21 welcome or unwelcome?

At this point we do not know. In order to keep the dollar up, the basis of US power, the Federal Reserve has promised to raise interest rates, but always in the future. The latest future is next month. The belief that a hike in interest rates is in the cards keeps the US dollar from losing exchange value in relation to other currencies, thus preventing a flight from the dollar that would reduce the Uni-power to Third World status.

The Federal Reserve can say that the stock market decline indicates that the recovery is in doubt and requires more stimulus. The prospect of more liquidity could drive the stock market back up. As asset bubbles are in the way of the Fed’s policy, a decline in stock prices removes the equity market bubble and enables the Fed to print more money and start the process up again.

On the other hand, the stock market decline last Thursday and Friday could indicate that the players in the market have comprehended that the stock market is an artificially inflated bubble that has no real basis. Once the psychology is destroyed, flight sets in.

If flight turns out to be the case, it will be interesting to see if central bank liquidity and purchases of stocks can stop the rout.

Copyright (c) 2013 PaulCraigRoberts.org. All rights reserved.

http://www.paulcraigroberts.org/2015/08/23/central-banks-become-corrupting-force-paul-craig-roberts-dave-kranzler/

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The Greatest Con Job

In Central Banking History

by Phoenix Capital Research

Zero Hedge (August 28 2015)

One of the greatest con jobs in history was convincing ordinary people that Central Bankers care about the “economy” or Main Street.

Aside from the complete lack of relevance that Main Street has for Central Bankers from a professional perspective (more on this in a moment), when do you think was the last time that Janet Yellen or her ilk spent an evening with non-banker/financial types? Years ago? Decades ago?

Yellen lives in a super-affluent, gated part of Washington DC. And even within that subset of the US population she lives in a higher echelon: her entourage of security annoys her wealthy neighbors … though I suspect part of the annoyance stems from jealousy.

Regard professional significance … why would Janet Yellen care about ordinary people? They’re just data points in her financial models. Ordinary people didn’t place her at the Federal Reserve (the big banks did). And they didn’t place her as Fed Chair (the financial/ political elite did … with the express intent of gaining future favors).

Think of it this way … imagine there was a super cartel of English Professors who controlled what words you or I could use in daily conversation. These individuals literally could change the structure of the human language if they wanted … removing words or adding words at random.

Now imagine that they randomly pick out a low level English Professor who they elevate to being the face of their organization. Do you think this professor would give a damn about how her decisions/ words affected speech? She literally was made one of the most powerful people in the world by this cartel.

This is case worldwide. Most Central Bankers came up from the Too Big To Fails or Primary Dealers (or they are academics like Yellen or Banenke who get their first taste of the “real world” when they’re literally running the financial system).

Literally their entire personal net worth … their professional clout … and their sense of accomplishment was derived from working at these organizations.

And somehow they’re supposed to give a hoot about Joe the Plumber or Bob the Boilermaker? They don’t even deal with those people face to face when they have a problem with their homes. “Hello this is Mario Draghi … the man who controls the currency in your economy … could you please come fix the sink?”

This is why Yellen, Draghi and the like can say with a straight face that maintaining ZIRP or NIRP benefits the economy. It’s why they can spent trillions to bail out and prop up banks without batting an eyelid. It’s why no one who committed fraud went to jail. It’s why lying and cheating in the financial system is allowed … even applauded … because the ones lying and cheating are the same people who picked out or promoted the regulators.

And this is why we’re heading for another Crisis … one that will be even bigger than 2008. The fraud that caused 2008 was not solved. Instead it was allowed to spread into the public sector. Today most Central Banks are sporting leverage ratios that would put Lehman Brothers (pre-crisis) to shame.

So the next time something breaks in the financial system … it won’t be just individual banks going belly up. It will be entire countries.

Indeed, consider China, where the Central Bank is pumping $29 billion per day into the financial system … and the stock market continues to Crash. There are in fact situations that are so dire that Central Banks cannot fix them.

What’s happened in China is coming to your neighborhood … wherever you are.

If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis “Round Two” Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.

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http://www.zerohedge.com/news/2015-08-28/greatest-con-job-central-banking-history

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Looting Made Easy

The $2 Trillion Buyback Binge

by Mike Whitney

CounterPunch (August 28 2015)

Corporations are taking the retirement savings of elderly public employees and using them to inflate their stock prices so wealthy CEOs and their shareholders can enrich themselves at the expense of their companies. And it’s all completely legal. Under current financial regulations, corporate bosses are free to repurchase their own company’s shares, push stock prices into the stratosphere, skim off a generous bonuses for themselves in the form of executive compensation, and leave their companies drowning in red ink.

Even worse, a sizable portion of the money devoted to stock buybacks is coming from  “massively underfunded public pension” funds that retired workers depend on for their survival. According to Brian Reynolds, Chief Market Strategist at New Albion Partners,  “Pension funds have to make 7.5%”, so they are putting their money “in these levered credit funds that mimic Long-Term Capital Management in the 1990s”. Those funds, in turn, “buy enormous amounts of corporate bonds from companies which put cash onto company balance sheets … and they use it to jack their stock price up, either through buybacks or mergers and acquisitions … It’s just a daisy chain of financial engineering and it’s probably going to intensify in coming years”.   {1}

So, once again, ordinary working people are caught in the crosshairs of a corporate scam that could blow up in their faces and leave them without sufficient resources to muddle through their retirement years.

The amount money that’s being funneled into buybacks is simply staggering. According to Dave Dayen at the Intercept:

Last year, companies spent $553 billion to repurchase outstanding shares, just short of the record $589.1 billion in 2007. Large companies like Apple, General Motors, McDonald’s, Pfizer, Microsoft and more have engaged in buybacks in recent years.

Returning profits to shareholders through buybacks and dividends accounted for 95 percent of all earnings in 2014. As a result, each additional dollar of corporate earnings now translates to under ten cents of reinvestment, according to a study by J W Mason of the Roosevelt Institute. {2}

This explains why business investment (Capex) is at record lows.  It’s because the bulk of earnings is being recycled into buybacks, over $2.3 trillion dollars since 2009 to be precise. And it’s all connected to the Federal Reserve’s zero rate policy.  Zero rates have created an environment in which corporations no longer look for ways to grow their businesses, expand operations, hire more employees or improve productivity.  Instead, they look for the quick fix, that is, load up on debt, buy more shares, goose the stock price, and walk away with a bundle.

It’s all about incentives. The Fed has created incentives that encourage financial engineering and stock manipulation as opposed to growth and productivity. And keep in mind that repurchasing shares is a form of margin buying, the same type of margin buying that triggered Stock Market Crash of 1929.

According to Dayen:

Prior to the Reagan era, executives avoided buybacks due to fears that they would be prosecuted for market manipulation. But under SEC Rule 10b-18, adopted in 1982, companies receive a “safe harbor” from market manipulation liability on stock buybacks if they adhere to four limitations.

We won’t go over the regulations now because, as you can see,  they obviously don’t work or these corporations wouldn’t be $2 trillion in the hole. But it is interesting to note that, at one time,  policymakers saw how destructive buybacks were and were prepared to prosecute offenders for manipulation. I doubt that any of our regulators today would even dream of bringing a case against these corporate behemoths, after all, they pretty much own the whole show lock, stock and barrel.

The real danger of this buyback phenom, is that the corporations have piled on so much debt that any sharp decline in the market could push one or two of these giants into default.  That, in turn, could quickly take down other counterparties touching off another financial crisis. So, the question regulators should be asking themselves,  is how much red ink are these corporations hiding on their balance sheets and what are the risks to the public if they’re unable to repay their debts.  According to Henry Blodget at Business Insider:

As corporations have borrowed more and more money, the level of corporate debt relative to the size of the economy has continued to increase. As the chart below shows, this ratio is now at its highest level ever –  even higher than it was in 2007, before the last debt-fueled economic implosion. Importantly, corporate net debt –  the amount of debt that corporations are carrying minus the cash they have on hand (green line below) –  is also at its highest level ever as a percent of the economy. {3}

http://uziiw38pmyg1ai60732c4011.wpengine.netdna-cdn.com/wp-content/dropzone/2015/08/debtloads.jpg

Let’s summarize:

1. Buybacks are driving the stock market higher.

2. Corporations purchase buybacks with credit.

3. “The level of corporate debt relative to the size of the economy … is now at its highest level ever”.

What can we deduce from these three observations?

First, that stock prices are a bubble and, second, that a significant stock market shakeout could leave some of the nation’s biggest corporations teetering towards insolvency.

Of course, none of this is going to stop corporations from engaging in the same risky behavior. Heck, no.   In fact,  CEOs are actually looking for ways to speed up the buyback process. I’m not kidding. Check clip from yesterday’s Wall Street Journal:

Companies are increasingly turning to accelerated share repurchase agreements … to return cash to shareholders and secure an immediate boost to per-share profits … But these turbo-charged stock buybacks can backfire, especially when a steep market plunge – such as the 5.3% drop in the markets over the past two trading days. That’s because a steep plunge in stock prices can force the companies to potentially pay more to buy the shares through an ASR than what they would pay if they purchased the shares over time on the open market.
 
    “Things can go wrong”, said Robert Leonard, head of specialty equity transactions at Citigroup Inc … {4}

You’re darn right, they can go wrong, but who gives a rip? Not America’s insatiable CEOs, that’s for sure. They’re just looking for faster ways to cash in, that’s all that matters to them. These guys aren’t even thinking about the health of their companies, let alone their customers. “Making widgets for the masses, is for suckers”, right?  Corporate honchos have bigger fish to fry, like leveraging up their whole operation to its eyeballs, skimming the cream off the top, stuffing the moolah in an unmarked Caymans account, and slipping out the backdoor before the whole rickety structure comes crashing to earth. That’s modern-day capitalism in a nutshell. Slash and burn, Baby, just like big boys at the Pentagon.

One last thing: Just to show the extent to which these corporate mandarins will go to enrich themselves at their company’s expense, check out this blurb from this 2014 article at Bloomberg:

International Business Machines Corporation (IBM) is reducing stock buybacks after an $8.2 billion first-quarter splurge … IBM said last week it won’t sustain its rate of share repurchases in the first quarter, when buybacks more than tripled from a year earlier to the most since 2007. The company plans to spend less than $5.8 billion total in the final nine months of this year … IBM’s sales have fallen from a year earlier for eight straight quarters … Declining sales and rising buybacks have squeezed IBM’s free cash flow … The repurchases, meanwhile, have taken a toll on IBM’s balance sheet. Total debt climbed to $44 billion in the first quarter, up from $33.4 billion a year ago … During the first quarter, IBM issued $4.5 billion of new bonds, clearly used to fund buybacks, Black said … “The company tapped the bond market five different times last year, then you have a pretty sizable February issuance”, Black said in the interview. “I feel like there is investor fatigue on the name”.  {5}

Okay, let’s translate this into English: IBM spent $8.2 billion in first-quarter on stock buybacks, even though “sales have dipped “from a year earlier for eight straight quarters”; even though “declining sales and rising buybacks have squeezed IBM’s free cash flow”; even though buybacks “have taken a toll on IBM’s balance sheet”; and even though “Total debt climbed to $44 billion in the first quarter, up from $33.4 billion a year ago”.

Unbelievable, right? And that’s not even the best part. The best part is the fact that “The company tapped the bond market five different times last year”.  In other words, they went to the bond market with ‘cup in hand’ and appealed to gullible investors to lend them more money to pay their lavish executive bonuses, to shower more dough on their worthless, do-nothing shareholders, and to keep this whole ridiculous farce going on a bit longer.

Talk about balls!

Tell me this, dear reader, when can we stop referring to this activity as “buybacks” and call it by its real name; looting?

Links:

{1} http://www.financialsense.com/contributors/fs-staff/public-pension-crisis-epic-credit-boom

{2} https://firstlook.org/theintercept/2015/08/13/sec-admits-monitoring-stock-buybacks-prevent-market-manipulation/

{3} http://www.businessinsider.com/stock-buybacks-and-stock-prices-2014-8#ixzz3k339m0u8

{4} http://blogs.wsj.com/cfo/2015/08/24/accelerated-buybacks-less-favorable-during-market-swoons/

{5} http://www.bloomberg.com/news/articles/2014-04-21/ibm-ceo-loses-tool-to-reach-profit-goals-as-buyback-splurge-ends

http://www.counterpunch.org/2015/08/28/looting-made-easy-the-2-trillion-buyback-binge/

Categories: Uncategorized

Is the Global Financial System …

On the Verge of Collapse?

by Michael Snyder

EFT Daily News (August 21 2015)

Yields on the riskiest junk bonds are absolutely soaring and the price of copper just hit a fresh six year low.  To most people, those pieces of financial news are meaningless.

But if you understand history, and you are aware of the patterns that immediately preceded previous stock market crashes, then you know how how huge both of those signs are.

During the summer of 2008, junk bond prices absolutely cratered as junk bond yields skyrocketed.

This was a very clear signal that financial markets were about to crash, and sure enough a couple of months later it happened.

Now the exact same thing is happening again.

The following comes from a Wall Street On Parade article that was posted on Tuesday:

According to data from Bloomberg, corporations have issued a stunning $9.3 trillion in bonds since the beginning of 2009. The major beneficiary of this debt binge has been the stock market rather than investment in modernizing the plant, equipment or new hires to make the company more competitive for the future. Bond proceeds frequently ended up buying back shares or boosting dividends, thus elevating the stock market on the back of heavier debt levels on corporate balance sheets.

Now, with commodity prices resuming their plunge and currency wars spreading, concerns of financial contagion are back in the markets and spreads on corporate bonds versus safer, more liquid instruments like US Treasury notes, are widening in a fashion similar to the warning signs heading into the 2008 crash. The $2.2 trillion junk bond market (high-yield) as well as the investment grade market have seen spreads widen as outflows from Exchange Traded Funds (ETFs) and bond funds pick up steam. {1}

And right now we are seeing the most volatility in the junkiest of the junk bonds.

The following comes from Wolf Richter, and my jaw just about dropped to the floor when I first saw this …

This chart of yields at the riskiest end of the junk bond market –  bonds rated CCC and below –  shows what happened. These bonds have been selling off over the past twelve months, with exception of the sucker rally earlier this year, and their yields more than doubled from less than 7.9% in June a year ago to 16.2% by Thursday evening. And Thursday was a massacre:

On Thursday, yields jumped 2.6 percentage points, from 13.58% to 16.18%, as these junk bonds plunged. Those kinds of single-day vertigo-inducing sell-offs are rare in normal times, and there haven’t been any since the Financial Crisis. {2}

Amazingly, the Federal Reserve is actually thinking about raising interest rates in this environment.

If that sounds like a really bad idea to you, that is because it is a really bad idea.

Raising interest rates would just add fuel to the fire of this junk bond rout. DoubleLine Capital’s co-founder Jeffrey Gundlach agrees with me. {3} “To raise interest rates when junk bonds are nearly at a four-year low is a bad idea,” Gundlach said in a telephone interview.

Gundlach, widely followed for his prescient investment calls, said if the Fed begins raising interest rates in September, “it opens the lid on Pandora’s Box of a tightening cycle”.

Gundlach said the selling pressure in copper and commodity prices driven by worries over China’s growth outlook “should be a huge concern. It is the second-biggest economy in the world.”

Meanwhile, as Gundlach mentioned, the price of copper continues to plunge.

On Tuesday, it set a brand new six year low.  It is now the lowest that it has been since the days of the last financial crisis.

And as you can see from this excerpt from a recent Investment Research Dynamics article, the price of copper started crashing before the stock market crash of 2008 …

I wanted to keep this simple and just look at what is considered perhaps the best barometer of global economic activity:

You’ll note that the price of copper is headed lower and is back to the price level where it was in the middle of 2008, right before the great financial collapse.  You’ll note that $3.6 trillion in Federal Reserve money printing –  on top of trillions in Bank of Japan, ECB and People’s Bank of China money printing –  has not been able to keep the price of copper from crashing again. {4}

In case you haven’t figured it out by now, the global financial system is in real trouble.

Another sign that rough waters are ahead is the fact that global shipping has fallen into a dramatic slump.

The following comes from the Telegraph

World shipping has fallen into a deep slump over the late summer, dashing hopes of a quick recovery from the global trade recession earlier this year and heightening fears that the six-year economic expansion may be on its last legs.

Freight rates for container shipping from Asia to Europe fell by over twenty percent in the second week of August, even though trade volumes should be picking up at this time of the year. The Shanghai Containerized Freight Index (SCFI) for routes to north European ports crashed by 23 percent in five trading days. {5}

Global economic activity is clearly slowing down, and there are 23 nations around the planet that are already experiencing stock market crashes. {6}

The financial markets of the western world have not totally crashed just yet, but they are more leveraged and more vulnerable than ever.

The following comes from Zero Hedge …

* The REAL problem for the financial system is the bond bubble. In 2008 when the crisis hit it was $80 trillion. It has since grown to over $100 trillion.

* The derivatives market that uses this bond bubble as collateral is over $555 trillion in size.

* Many of the large multinational corporations, sovereign governments, and even municipalities have used derivatives to fake earnings and hide debt. NO ONE knows to what degree this has been the case, but given that twenty percent of corporate CFOs have admitted to faking earnings in the past, it’s likely a significant amount.

* Corporations today are more leveraged than they were in 2007. As Stanley Druckenmiller noted recently, in 2007 corporate bonds were $3.5 trillion … today they are $7 trillion: an amount equal to nearly fifty percent of US GDP.

* The Central Banks are now all leveraged at levels greater than or equal to where Lehman Brothers was when it imploded. The US Federal Reserve is leveraged at 78 to 1. The ECB is leveraged at over 26 to 1. Lehman Brothers was leveraged at thirty to one.

* The Central Banks have no idea how to exit their strategies. Fed minutes released from 2009 show Janet Yellen was worried about how to exit when the Fed’s balance sheet was $1.3 trillion (back in 2009). Today it’s over $4.5 trillion. {6}

As I explained during a recent interview with Kate Dalley of Fox News radio {7}, what is coming should be obvious to anyone that is willing to look at the numbers honestly.

The global financial system is going to crash.

Yes, this crisis is going to take years to fully play out, but by the time it is all said and done it is going to be much worse than what we experienced back in 2008 and 2009.

So buckle up tight and hold on for your life, because we are in for one wild ride.

Links:

{1} http://wallstreetonparade.com/2015/08/keep-your-eye-on-junk-bonds-theyre-starting-to-behave-like-08/

{2} http://wolfstreet.com/2015/08/15/riskiest-end-of-junk-bond-market-just-blew-up-ccc-rated-yields-spike/

{3} http://www.thefiscaltimes.com/latestnews/2015/08/18/Gundlach-says-bad-idea-Fed-hike-rates-when-junk-bonds-four-year-low

{4} http://investmentresearchdynamics.com/how-bad-will-the-financial-collapse-be-this-time/

{5} http://www.telegraph.co.uk/finance/economics/11808488/World-shipping-slump-deepens-as-China-retreats.html

{6} http://theeconomiccollapseblog.com/archives/23-nations-around-the-world-where-stock-market-crashes-are-already-happening

{7} https://soundcloud.com/canyonmedia/economic-collapse-michael-snyder

http://etfdailynews.com/2015/08/21/is-the-global-financial-system-on-the-verge-of-collapse/3/

Categories: Uncategorized

Behind the Market Crash

The Smoke and Mirrors of Corporate Buybacks

Michael Hudson interviewed

by Sharmini Peries

CounterPunch (August 26 2015)

Sharmini Peries: The Dow Jones trading took a deep drive this week, dropping over 1,000 points in the first twenty minutes of trading. It is now slowly reversing itself, but it was the greatest loss in trading since the 2010 crash. Here to discuss all of this, we’re joined by Michael Hudson. Michael Hudson is a distinguished research professor of economics at the University of Missouri, Kansas City. His latest book, which we promise to unpack in detail very soon, is Killing the Host: How Financial Parasites and Debt Destroy Global Economy (2015). You can get a digital download of it at CounterPunch. Michael, thank you so much for joining us.

Michael Hudson: Good to be here. And the hard print will be out in another two weeks from Amazon.

Peries: Look forward to it, Michael. So Michael, some mainstream news outlets are saying that this is the China contagion. They need someone to blame. What’s causing all of this?

Hudson: Not China. China’s simply back to the level that it was earlier in the year. One of the problems with the Chinese market that is quite different from the American and European market is that a lot of the big Chinese banks have lent to small lenders, sort of small wholesale lenders, that in turn have lent to retail people. And a lot of Chinese are trying to get ahead by borrowing money to buy real estate or to buy stocks. So there are these intermediaries, these non-bank intermediaries, sort of like real estate brokers, who borrowed big money from banks and lent it out to a lot of little people. And once the small people got in it’s like odd lot traders in the United States, small traders, you know that the boom is over.

What you’re having now is a lot of small speculators have lost their money. And that’s put the squeeze on the non-bank speculators. But that’s something almost unique in China. Most Americans and most European families don’t borrow to go into the market. Most of the market is indeed funded by debt, but it’s funded by bank lending and huge, huge leverage borrowings for all of this.

This is what most of the commentators don’t get. All this market run-up we’ve seen in the last year or two has been by the Federal Reserve making credit available to banks at about one-tenth of one percent. The banks have lent to big institutional traders and speculators thinking, well gee, if we can borrow at one percent and buy stocks that yield maybe five or six percent, then we can make the arbitrage. So they’ve made a five percent arbitrage by buying, but they’ve also now lost ten percent, maybe twenty percent on the capital.

What we’re seeing is that short-term thinking really hasn’t taken into account the long run. And that’s why this is very much like the Long-Term Capital Management crash in 1997, when the two Nobel prize winners who calculated how the economy works and lives in the short term found out that all of a sudden the short term has to come back to the long term.

Now, it’s amazing how today’s press doesn’t get it. For instance, in the New York Times Paul Krugman, who you can almost always depend to be wrong where money and credit are involved, said that the problem is a savings glut. People have too many savings. Well, we know that they don’t in America have too much savings. We’re in a debt deflation now. The 99 percent of the people are so busy paying off their debt that what is counted as savings here is just paying down the debt. That’s why they don’t have enough money to buy goods and services, and so sales are falling. That means that profits are falling. And people finally realized that, wait a minute, with companies not making more profits they’re not going to be able to pay the dividends.

Well, companies themselves have been causing this crisis as much as speculators, because companies like Amazon, Google, or Apple especially, have been borrowing money to buy their own stock. Corporate activists, stockholder activists, have told these companies, we want you to put us on the board because we want you to borrow at one percent to buy your stock yielding five percent. You’ll get rich in no time. So these stock buybacks by Apple and by other companies at high prices can push up their stock price in the short term. But when prices crash, their net worth is all of a sudden plunging. And so we’re in a classic debt deflation.

Peries: Michael, explain how buybacks are actually causing this. I don’t think ordinary people quite understand that.

Hudson: Well, what they cause is the runup – companies are under pressure. The managers are paid according to how well they can make a stock price go up. And they think, why should we invest in long-term research and development or long-term developments when we can use the earnings we have just to buy our own stock, and that’ll push them up even without investing, without hiring, without producing more. We can make the stock go up by financial engineering. By using our earnings to buy [their own] stock.

So what you have is empty earnings. You’ve had stock prices going up without corporate earnings really going up. If you buy back your stock and you retire the shares, then earnings per shares go up. But all of a sudden the whole world realizes that this is all financial engineering, doing it with mirrors, and it’s not real. There’s been no real gain in industrial profitability. There’s just been a diversion of corporate income into the financial markets instead of tangible new investment in hiring.

Peries: Michael, Lawrence Summers is tweeting, he writes, as in August 1997, 1998, 2007 and 2008, we could be in the early stages of a very serious situation, which I think we can attribute some of the blame to him. What do you make of that comment, and is that so? Is this the beginnings of a bigger problem?

Hudson: I wish he would have said what he means by ‘situation’. What people don’t realize usually, and especially what Lawrence Summers doesn’t realize, is that there are two economies. When he means a bad situation, that means for his constituency. The one percent. The ibe percent think oh, we’re going to be losing in the asset markets. But the one percent has been making money by getting the 99 percent into debt. By squeezing more work out of them. By keeping wages low and by starving the market so that there’s nobody to buy the goods that they produce.

So the problem is in the real economy, not the financial economy. But Lawrence Summers and the Federal Reserve all of a sudden say look, we don’t care about the real economy. We care about the stock market. And what you’ve seen in the last few years, two years I’d say, of the stock runup, is something unique. For the first time the central banks of America, even Switzerland and Europe, are talking about the role of the central bank is to inflate asset prices. Well, the traditional reason for central banks that they gave is to stop inflation. And yet now they’re trying to inflate the stock market. The Federal Reserve has been trying to push up the stock market purely by financial engineering, by making this low interest rate and quantitative easing.

The Wall Street Journal gets it wrong, too, on its editorial page. You have an op-ed by Gerald  O’Driscoll, who used to be on the board of the Dallas Federal Reserve, saying gee, the problem with low interest rates is it encourages long-term investment because people can take their time. Well, that’s crazy Austrian theory. The real problem is that low interest rates provide money to short-term speculators. All this credit has been used not for the long term, not for investment at all, but just speculation. And when you have speculation, a little bit of a drop in the market can wipe out all of the capital that’s invested.

So what you had this morning in the stock market was a huge wipeout of borrowed money on which people thought the market would go up, and the Federal Reserve would be able to inflate prices. The job of the Federal Reserve is to increase the price of wealth and stocks and real estate relative to labor. The Federal Reserve is sort of waging class war. It wants to increase the assets of the one percent relative to the earnings of the 99 percent, and we’re seeing the fact that this, the effect of this class war is so successful it’s plunged the economy into debt, slowed the economy, and led to the crisis we have today.

Peries: Michael, just one last question. Most ordinary people are sitting back saying well, it’s a stock market crash. I don’t have anything in the market. And so I don’t have to really worry about it. What do you say to them, and how are they going to feel the impact of this?

Hudson: It’s not going to affect them all that much. The fact is that so much of the money in the market was speculative capital that it really isn’t going to affect them much. And it certainly isn’t going to affect China all that much. China is trying to develop an internal market. It has other problems, and the market is not going to affect either China’s economy or this. But when the one percent lose money, they scream like anything, and they say it’s the job of the 99 percent to bail them out.

Peries: What about your retirement savings, and so on?

Hudson: Well, if the savings are invested in the stock market in speculative hedge funds they’d lose, but very few savings are. The savings have already gone way, way up from the market. And the market is only down to what it was earlier this year. So the people have not really suffered very much at all. They’ve only not made as big of gains as they would have hoped for, but they’re not affected.

http://www.counterpunch.org/2015/08/26/behind-the-market-crash-the-smoke-and-mirrors-of-corporate-buybacks/

Categories: Uncategorized