Archive for January, 2016

Cash Is King …

… as Europe Adapts to Negative Interest Rates: Chart

by Oliver Suess and Jana Randow

Bloomberg Business (January 27 2016)

* Record 1.1 trillion euros of banknotes in use at end of 2015

* Euro banknote circulation boosted by economic growth, markets

Europe’s ATMs worked overtime in 2015. A record 1.08 trillion euros ($1.17 trillion) of banknotes were in circulation, almost double the value ten years ago, according to data compiled by the European Central Bank. That’s a counterargument to some bankers who say that electronic forms of cash will replace paper money sooner rather than later.

ECB Balance Sheet Banknotes in Circulation, value of notes in billions of euros.

The value of banknotes in circulation rose 6.5 percent last year, the most since 2008. There are financial reasons – including negative rates on deposits – but part of the increase could be related to the influx of refugees, who don’t have bank accounts.

“Stronger economic growth, low interest rates as well as maybe some worries about more turbulence on financial markets are driving cash holdings”, said Johannes Mayr, an economist at BayernLB in Munich.

Categories: Uncategorized

Donald Trump and the Politics of Resentment

2016/01/31 1 comment

by John Michael Greer

The Archdruid Report (January 20 2015)

Of all the predictions I made for the new year in my post two weeks ago, the one that seems to have stirred up the most distress and derision is my suggestion that the most likely person to be standing up there with his hand on a Bible next January, taking the oath of office as the next president of the United States, is Donald Trump. That prediction wasn’t made to annoy people, entertaining as that can be from time to time; nor is it merely a reaction to Trump’s meteoric rise in the polls and the abject failure of any of his forgettable Republican rivals even to slow him down.

The rise of Donald Trump, rather, marks the arrival of a turning point I’ve discussed more than once in these essays already. Like the other turning points whose impending appearance on the stage of the future has been outlined here, it’s not the end of the world; it’s thus a source of amusement to me to recall all those Republicans who insisted they were going to flee the country if Obama won reelection, and are still here, when I hear Democrats saying they’ll do the same thing if Trump wins. Still, there’s a difference of some importance between the two, because in terms of the historical trajectory of the United States, Trump is a far more significant figure than Barack Obama will ever be.

Despite the empty rhetoric about hope and change that surrounded his 2008 campaign, after all, Obama continued the policies of his predecessor George W Bush so unswervingly that we may as well call those policies – the conventional wisdom or, rather, the conventional folly of early 21st-century American politics – the Dubyobama consensus. Trump’s candidacy, and in some ways that of his Democratic rival Bernard Sanders as well, marks the point at which the blowback from those policies has become a massive political fact. That this blowback isn’t taking the form desired by many people on the leftward end of things is hardly surprising; it was never going to do so, because the things about the Dubyobama consensus that made blowback inevitable are not the things to which the left objects.

To understand what follows, it’s going to be necessary to ask my readers – especially, though not only, those who consider themselves liberals, or see themselves inhabiting some other position left of center in the convoluted landscape of today’s American politics – to set aside two common habits. The first is the reflexive resort to sneering mockery that so often makes up for the absence of meaningful political thought in the US – again, especially but by no means only on the left. The dreary insults that have been flung so repetitively at Donald Trump over the course of his campaign are fine examples of the species: “deranged Cheeto”, “tomato-headed moron”, “delusional cheese creature”, and so on.

The centerpiece of most of these insults, when they’re not simply petulant schoolboy taunts aimed at Trump’s physical appearance, is the claim that he’s stupid. This is hardly surprising, as a lot of people on the leftward end of American culture love to use the kind of demeaning language that attributes idiocy to those who disagree with them. Thus it probably needs to be pointed out here that Trump is anything but stupid. He’s extraordinarily clever, and one measure of his cleverness is the way that he’s been able to lure so many of his opponents into behaving in ways that strengthen his appeal to the voters that matter most to his campaign. In case you’re wondering if you belong to that latter category, dear reader, if you like to send out tweets comparing Trump’s hair to Cheese Whiz, no, you’re not.

So that’s the first thing that has to be set aside to make sense of the Trump phenomenon. The second is going to be rather more challenging for many of my readers: the notion that the only divisions in American society that matter are those that have some basis in biology. Skin color, gender, ethnicity, sexual orientation, disability – these are the lines of division in society that Americans like to talk about, whatever their attitudes to the people who fall on one side or another of those lines. (Please note, by the way, the four words above: “some basis in biology”. I’m not saying that these categories are purely biological in nature; every one of them is defined in practice by a galaxy of cultural constructs and presuppositions, and the link to biology is an ostensive category marker rather than a definition. I insert this caveat because I’ve noticed that a great many people go out of their way to misunderstand the point I’m trying to make here.)

Are the lines of division just named important? Of course they are. Discriminatory treatment on the basis of those factors is a pervasive presence in American life today. The facts remain that there are other lines of division in American society that lack that anchor in biology, that some of these are at least as pervasive in American life as those listed above – and that some of the most important of these are taboo topics, subjects that most people in the US today will not talk about.

Here’s a relevant example. It so happens that you can determine a huge amount about the economic and social prospects of people in America today by asking one remarkably simple question: how do they get most of their income? Broadly speaking – there are exceptions, which I’ll get to in a moment – it’s from one of four sources: returns on investment, a monthly salary, an hourly wage, or a government welfare check. People who get most of their income from one of those four things have a great many interests in common, so much so that it’s meaningful to speak of the American people as divided into an investment class, a salary class, a wage class, and a welfare class.

It’s probably necessary to point out explicitly here that these classes aren’t identical to the divisions that Americans like to talk about. That is, there are plenty of people with light-colored skin in the welfare class, and plenty of people with darker skin in the wage class.  Things tend to become a good deal more lily-white in the two wealthier classes, though even there you do find people of color. In the same way, women, gay people, disabled people, and so on are found in all four classes, and how they’re treated depends a great deal on which of these classes they’re in. If you’re a disabled person, for example, your chances of getting meaningful accommodations to help you deal with your disability are by and large considerably higher if you bring home a salary than they are if you work for a wage.

As noted above, there are people who don’t fall into those divisions. I’m one of them; as a writer, I get most of my income from royalties on book sales, which means that a dollar or so from every book of mine that sells via most channels, and rather less than that if it’s sold by Amazon – those big discounts come straight out of your favorite authors’ pockets – gets mailed to me twice a year. There are so few people who make their living this way that the royalty classlet isn’t a significant factor in American society. The same is true of most of the other ways of making a living in the US today. Even the once-mighty profit class, the people who get their income from the profit they make on their own business activities, is small enough these days that it lacks a significant collective presence.

There’s a vast amount that could be said about the four major classes just outlined, but I want to focus on the political dimension, because that’s where they take on overwhelming relevance as the 2016 presidential campaign lurches on its way. Just as the four classes can be identified by way of a very simple question, the political dynamite that’s driving the blowback mentioned earlier can be seen by way of another simple question: over the last half century or so, how have the four classes fared?

The answer, of course, is that three of the four have remained roughly where they were. The investment class has actually had a bit of a rough time, as many of the investment vehicles that used to provide it with stable incomes – certificates of deposit, government bonds, and so on – have seen interest rates drop through the floor.  Still, alternative investments and frantic government manipulations of stock market prices have allowed most people in the investment class to keep up their accustomed lifestyles.

The salary class, similarly, has maintained its familiar privileges and perks through a half century of convulsive change. Outside of a few coastal urban areas currently in the grip of speculative bubbles, people whose income comes mostly from salaries can generally afford to own their homes, buy new cars every few years, leave town for annual vacations, and so on. On the other end of the spectrum, the welfare class has continued to scrape by pretty much as before, dealing with the same bleak realities of grinding poverty, intrusive government bureacracy, and a galaxy of direct and indirect barriers to full participation in the national life, as their equivalents did back in 1966.

And the wage class? Over the last half century, the wage class has been destroyed.

In 1966 an American family with one breadwinner working full time at an hourly wage could count on having a home, a car, three square meals a day, and the other ordinary necessities of life, with some left over for the occasional luxury. In 2016, an American family with one breadwinner working full time at an hourly wage is as likely as not to end up living on the street, and a vast number of people who would happily work full time even under those conditions can find only part-time or temporary work when they can find any jobs at all. The catastrophic impoverishment and immiseration of the American wage class is one of the most massive political facts of our time – and it’s also one of the most unmentionable. Next to nobody is willing to talk about it, or even admit that it happened.

The destruction of the wage class was largely accomplished by way of two major shifts in American economic life. The first was the dismantling of the American industrial economy and its replacement by Third World sweatshops; the second was mass immigration from Third World countries. Both of these measures are ways of driving down wages – not, please note, salaries, returns on investment, or welfare payments – by slashing the number of wage-paying jobs, on the one hand, while boosting the number of people competing for them on the other. Both, in turn, were actively encouraged by government policies and, despite plenty of empty rhetoric on one or the other side of the Congressional aisle, both of them had, for all practical purposes, bipartisan support from the political establishment.

It’s probably going to be necessary to talk a bit about that last point. Both parties, despite occasional bursts of crocodile tears for American workers and their families, have backed the offshoring of jobs to the hilt. Immigration is a slightly more complex matter; the Democrats claim to be in favor of it, the Republicans now and then claim to oppose it, but what this means in practice is that legal immigration is difficult but illegal immigration is easy. The result was the creation of an immense work force of noncitizens who have no economic or political rights they have any hope of enforcing, which could then be used – and has been used, over and over again – to drive down wages, degrade working conditions, and advance the interests of employers over those of wage-earning employees.

The next point that needs to be discussed here – and it’s the one at which a very large number of my readers are going to balk – is who benefited from the destruction of the American wage class. It’s long been fashionable in what passes for American conservatism to insist that everyone benefits from the changes just outlined, or to claim that if anybody doesn’t, it’s their own fault. It’s been equally popular in what passes for American liberalism to insist that the only people who benefit from those changes are the villainous uber-capitalists who belong to the one percent. Both these are evasions, because the destruction of the wage class has disproportionately benefited one of the four classes I sketched out above: the salary class.

Here’s how that works. Since the 1970s, the salary class lifestyle sketched out above – suburban homeownership, a new car every couple of years, vacations in Mazatlan, and so on – has been an anachronism: in James Howard Kunstler’s useful phrase, an arrangement without a future. It was wholly a product of the global economic dominance the United States wielded in the wake of the Second World War, when every other major industrial nation on the planet had its factories pounded to rubble by the bomber fleets of the warring powers, and the oil wells of Pennsylvania, Texas, and California pumped more oil than the rest of the planet put together.  That dominance went away in a hurry, though, when US conventional petroleum production peaked in 1970, and the factories of Europe and Asia began to outcompete America’s industrial heartland.

The only way for the salary class to maintain its lifestyle in the teeth of those transformations was to force down the cost of goods and services relative to the average buying power of the salary class.  Because the salary class exercised (and still exercises) a degree of economic and political influence disproportionate to its size, this became the order of the day in the 1970s, and it remains the locked-in political consensus in American public life to this day. The destruction of the wage class was only one consequence of that project – the spectacular decline in quality of the whole range of manufactured goods for sale in America, and the wholesale gutting of the national infrastructure, are other results – but it’s the consequence that matters in terms of today’s politics.

It’s worth noting, along these same lines, that every remedy that’s been offered to the wage class by the salary class has benefited the salary class at the expense of the wage class. Consider the loud claims of the last couple of decades that people left unemployed by the disappearance of wage-paying jobs could get back on board the bandwagon of prosperity by going to college and getting job training. That didn’t work out well for the people who signed up for the student loans and took the classes – getting job training, after all, isn’t particularly helpful if the jobs for which you’re being trained don’t exist, and so a great many former wage earners finished their college careers with no better job prospects than they had before, and hundreds of thousands of dollars of student loan debt burdening them into the bargain. For the banks and colleges that pushed the loans and taught the classes, though, these programs were a cash cow of impressive scale, and the people who work for banks and colleges are mostly salary class.

Attempts by people in the wage class to mount any kind of effective challenge to the changes that have gutted their economic prospects and consigned them to a third-rate future have done very little so far. To some extent, that’s a function of the GOP’s sustained effort to lure wage class voters into backing Republican candidates on religious and moral grounds. It’s the mirror image of the ruse that’s been used by the Democratic party on a galaxy of interests on the leftward end of things – granted, the Democrats aren’t doing a thing about the issues that matter most to you, but neither are the Republicans, so you vote for the party that offends you least. Right? Sure, if you want to guarantee that the interests that matter most to you never get addressed at all.

There’s a further barrier, though, and that’s the response of the salary class across the board – left, right, middle, you name it – to any attempt by the wage class to bring up the issues that matter to it. On the rare occasions when this happens in the public sphere, the spokespeople of the wage class get shouted down with a double helping of the sneering mockery I discussed toward the beginning of this post. The same thing happens on a different scale on those occasions when the same thing happens in private. If you doubt this – and you probably do, if you belong to the salary class – try this experiment: get a bunch of your salary class friends together in some casual context and get them talking about ordinary American working guys. What you’ll hear will range from crude caricatures and one-dimensional stereotypes right on up to bona fide hate speech. People in the wage class are aware of this; they’ve heard it all; they’ve been called stupid, ignorant, et cetera, ad nauseam for failing to agree with whatever bit of self-serving dogma some representative of the salary class tried to push on them.

And that, dear reader, is where Donald Trump comes in.

The man is brilliant. I mean that without the smallest trace of mockery. He’s figured out that the most effective way to get the wage class to rally to his banner is to get himself attacked, with the usual sort of shrill mockery, by the salary class. The man’s worth several billion dollars – do you really think he can’t afford to get the kind of hairstyle that the salary class finds acceptable? Of course he can; he’s deliberately chosen otherwise, because he knows that every time some privileged buffoon in the media or on the internet trots out another round of insults directed at his failure to conform to salary class ideas of fashion, another hundred thousand wage class voters recall the endless sneering putdowns they’ve experienced from the salary class and think, “Trump’s one of us”.

The identical logic governs his deliberate flouting of the current rules of acceptable political discourse. Have you noticed that every time Trump says something that sends the pundits into a swivet, and the media starts trying to convince itself and its listeners that this time he’s gone too far and his campaign will surely collapse in humiliation, his poll numbers go up?  What he’s saying is exactly the sort of thing that you’ll hear people say in working class taverns and bowling alleys when subjects such as illegal immigration and Muslim jihadi terrorism come up for discussion. The shrieks of the media simply confirm, in the minds of the wage class voters to whom his appeal is aimed, that he’s one of them, an ordinary Joe with sensible ideas who’s being dissed by the suits.

Notice also how many of Trump’s unacceptable-to-the-pundits comments have focused with laser precision on the issue of immigration. That’s a well-chosen opening wedge, as cutting off illegal immigration is something that the GOP has claimed to support for a while now. As Trump broadens his lead, in turn, he’s started to talk about the other side of the equation – the offshoring of jobs – as his recent jab at Apple’s overseas sweatshops shows. The mainstream media’s response to that jab does a fine job of proving the case argued above: “If smartphones were made in the US, we’d have to pay more for them!” And of course that’s true: the salary class will have to pay more for its toys if the wage class is going to have decent jobs that pay enough to support a family. That this is unthinkable for so many people in the salary class – that they’re perfectly happy allowing their electronics to be made for starvation wages in an assortment of overseas hellholes, so long as this keeps the price down – may help explain the boiling cauldron of resentment into which Trump is so efficiently tapping.

It’s by no means certain that Trump will ride that resentment straight to the White House, though at this moment it does seem like the most likely outcome. Still, I trust none of my readers are naive enough to think that a Trump defeat will mean the end of the phenomenon that’s lifted him to front runner status in the teeth of everything the political establishment can throw at him. I see the Trump candidacy as a major watershed in American political life, the point at which the wage class – the largest class of American voters, please note – has begun to wake up to its potential power and begin pushing back against the ascendancy of the salary class.

Whether he wins or loses, that pushback is going to be a defining force in American politics for decades to come. Nor is a Trump candidacy anything approaching the worst form that could take. If Trump gets defeated, especially if it’s done by obviously dishonest means, the next leader to take up the cause of the wage class could very well be fond of armbands or, for that matter, of roadside bombs. Once the politics of resentment come into the open, anything can happen – and this is particularly true, it probably needs to be said, when the resentment in question is richly justified by the behavior of many of those against whom it’s directed.


John Michael Greer is the Grand Archdruid of the Ancient Order of Druids in America – – and the author of more than thirty books on a wide range of subjects, including peak oil and the future of industrial society. He lives in Cumberland, Maryland, an old red brick mill town in the north central Appalachians, with his wife Sara.

Categories: Uncategorized

Could Your Plane Be Hacked?

by Bruce Schneier


CNN (April 16 2015)

Imagine this: A terrorist hacks into a commercial airplane from the ground, takes over the controls from the pilots and flies the plane into the ground. It sounds like the plot of some “Die Hard” reboot, but it’s actually one of the possible scenarios outlined in a new Government Accountability Office report on security vulnerabilities in modern airplanes.

It’s certainly possible, but in the scheme of Internet risks I worry about, it’s not very high. I’m more worried about the more pedestrian attacks against more common Internet-connected devices. I’m more worried, for example, about a multination cyber arms race that stockpiles capabilities such as this, and prioritizes attack over defense in an effort to gain relative advantage. I worry about the democratization of cyberattack techniques, and who might have the capabilities currently reserved for nation-states. And I worry about a future a decade from now if these problems aren’t addressed.

First, the airplanes. The problem the GAO identifies is one computer security experts have talked about for years. Newer planes such as the Boeing 787 Dreamliner and the Airbus A350 and A380 have a single network that is used both by pilots to fly the plane and passengers for their Wi-Fi connections. The risk is that a hacker sitting in the back of the plane, or even one on the ground, could use the Wi-Fi connection to hack into the avionics and then remotely fly the plane.

The report doesn’t explain how someone could do this, and there are currently no known vulnerabilities that a hacker could exploit. But all systems are vulnerable – we simply don’t have the engineering expertise to design and build perfectly secure computers and networks – so of course we believe this kind of attack is theoretically possible.

Previous planes had separate networks, which is much more secure.

As terrifying as this movie-plot threat is – and it has been the plot of several recent works of fiction – this is just one example of an increasingly critical problem: As the computers already critical to running our infrastructure become connected, our vulnerability to cyberattack grows. We’ve already seen vulnerabilities in baby monitors, cars, medical equipment and all sorts of other Internet-connected devices. In February, Toyota recalled 1.9 million Prius cars because of a software vulnerability. Expect similar vulnerabilities in our smart thermostats, smart light bulbs and everything else connected to the smart power grid. The Internet of Things will bring computers into every aspect of our life and society. Those computers will be on the network and will be vulnerable to attack.

And because they’ll all be networked together, a vulnerability in one device will affect the security of everything else. Right now, a vulnerability in your home router can compromise the security of your entire home network. A vulnerability in your Internet-enabled refrigerator can reportedly be used as a launching pad for further attacks.

Future attacks will be exactly like what’s happening on the Internet today with your computer and smartphones, only they will be with everything. It’s all one network, and it’s all critical infrastructure.

Some of these attacks will require sufficient budget and organization to limit them to nation-state aggressors. But that’s hardly comforting. North Korea is last year believed to have launched a massive cyberattack against Sony Pictures. Last month, China used a cyberweapon called the “Great Cannon” against the website GitHub. In 2010, the US and Israeli governments launched a sophisticated cyberweapon called Stuxnet against the Iranian Natanz nuclear power plant; it used a series of vulnerabilities to cripple centrifuges critical for separating nuclear material. In fact, the United States has done more to weaponize the Internet than any other country.

Governments only have a fleeting advantage over everyone else, though. Today’s top-secret National Security Agency programs become tomorrow’s PhD theses and the next day’s hacker’s tools. So while remotely hacking the 787 Dreamliner’s avionics might be well beyond the capabilities of anyone except Boeing engineers today, that’s not going to be true forever.

What this all means is that we have to start thinking about the security of the Internet of Things – whether the issue in question is today’s airplanes or tomorrow’s smart clothing. We can’t repeat the mistakes of the early days of the PC and then the Internet, where we initially ignored security and then spent years playing catch-up. We have to build security into everything that is going to be connected to the Internet.

This is going to require both significant research and major commitments by companies. It’s also going to require legislation mandating certain levels of security on devices connecting to the Internet, and at network providers that make the Internet work. This isn’t something the market can solve on its own, because there are just too many incentives to ignore security and hope that someone else will solve it.

As a nation, we need to prioritize defense over offense. Right now, the NSA and US Cyber Command have a strong interest in keeping the Internet insecure so they can better eavesdrop on and attack our enemies. But this prioritization cuts both ways: We can’t leave others’ networks vulnerable without also leaving our own vulnerable. And as one of the most networked countries on the planet, we are highly vulnerable to attack. It would be better to focus the NSA’s mission on defense and harden our infrastructure against attack.

Remember the GAO’s nightmare scenario: A hacker on the ground exploits a vulnerability in the airplane’s Wi-Fi system to gain access to the airplane’s network. Then he exploits a vulnerability in the firewall that separates the passengers’ network from the avionics to gain access to the flight controls. Then he uses other vulnerabilities both to lock the pilots out of the cockpit controls and take control of the plane himself.

It’s a scenario made possible by insecure computers and insecure networks. And while it might take a government-led secret project on the order of Stuxnet to pull it off today, that won’t always be true.

Of course, this particular movie-plot threat might never become a real one. But it is almost certain that some equally unlikely scenario will. I just hope we have enough security expertise to deal with whatever it ends up being.

Categories: Uncategorized

Who Gets to Pay …

… for the Italian Banking Crisis?

by Don Quijones {1}, Spain & Mexico, editor at Wolf Street

Wolf Street (January 27 2016)

The Missing Capital Buffer

Six years after Europe’s sovereign debt crisis began, the Eurozone’s third largest economy, Italy, has finally decided to do what just about every other country has done when facing a full-blown, almost out-of-control banking crisis: to set up a bad bank to hide its worst debt.

It was only a matter of time: in the last six years, Europe’s economies have been drowning in an ever-expanding vitrine of bad debt – and none more so than Italy, where non-performing loans have soared to more than 350 billion euros {2}, a fourfold increase since the end of 2008. At eighteen percent, Italy’s ratio of non-performing loans is more than four times the European average (and Europe’s banks are in worse shape than America’s). It’s the equivalent of 21% of GDP in a country that boasts Europe’s second highest public debt-to-GDP ratio (130%), just behind Greece, and where the banks hold over seventy percent of the country’s debt.

To make matters even worse, if Brussels gets its way, Italy’s government will not be able to dip into future taxpayer funds to stop its debt-laden banks from dropping like flies. European law no longer allows that sort of thing. Well, not really. Now, in the wake of new regulations that came into effect at the beginning of this year, collapsing banks in Europe will be “resolved” with the funds of stockholders, bondholders and other investors, including account holders with deposits of more than 100,000 euros – instead of classic bailouts that would raid directly or indirectly the taxpayers of other countries.

It might even make bank creditors realize that investing in a bank is not a risk-free venture.

That’s not to say that the bail-in approach doesn’t have its share of problems – chief among them the “super-priority” status covertly granted to derivative claims in recent international banking regulation. In other words, as the former hedge fund manager Shah Gilani warns in Money Morning:


If your too-big-to-fail (TBTF) bank is failing because they can’t pay off derivative bets they made, and the government refuses to bail them out, under a mandate titled “Adequacy of Loss-Absorbing Capacity of Global Systemically Important Banks in Resolution”, approved on November 16 2014, by the G20’s Financial Stability Board, they can take your deposited money and turn it into shares of equity capital to try and keep your TBTF bank from failing. {3}


There’s also the niggling little fact that Europe’s banks have not yet built up the capital buffers needed to comply with the EU’s new bail-in rules.

“In an ideal state we would like to find ourselves in a situation where banks have all built their financial buffers in terms of MREL {4} (…) but we are not there yet”, one EU official told Reuters {5}. “It’s a challenging situation because we may be confronted with a situation when there is a (resolution) case but the buffer has not been built”, the official added.

That didn’t stop four small regional banks in Italy from being semi-bailed-in late last year, with the bulk of the losses imposed on unsecured investors, including many small-time retail clients who were conveniently “miss-sold” complex financial products they did not understand, just as happened to hundreds of thousands of pensioners in Spain’s multi-billion-euro preferentes scam. {6}

Meanwhile, the race is on to get hundreds of billions of euros worth of toxic assets off the big banks’ balance sheets and into a safer place – that is, a bad bank. As experience in Spain and Portugal has shown, setting up a bad bank serves as little more than an accounting gimmick to cloak reality. As Wolf Street reported last year, Spain’s bad bank, Sareb, is hemorrhaging funds at a frightening rate while taxpayers are likely to be on the hook for roughly half of its decomposing assets for at least another ten years to come. {7}

Despite all that, a new agreement {8} has just been reached between Italy’s Finance Minister Pier Carlo Padoan and Europe’s Competition Commissioner Margrethe Vestager that will establish a new bad bank in which to bury, mafia-style, some of Italy’s most toxic financial waste.

“We believe that a measure to create a market for non-performing loans would be useful, but if it is done, it has to be done right away”, said a shrill sounding Giovanni Sabatini, director-general of the Italian Banking Association.

There’s good reason for the haste: since the year began, the shares of Italian Banks are down on average by more than twenty percent, and shares of Monte dei Paschi di Siena, the country’s oldest and third-largest lender, plunged more than fifty percent, before recovering gingerly toward the end of last week. The bank’s non-performing loans are estimated at nearly 100% of its tangible equity (a sentence that bears re-reading).

Bankers say concerns about new bail-in rules, which came into force on January 1, are only adding to market jitters. “It is a perfect storm for Monte dei Paschi”, one senior banker told the Financial Times {9}.

By applying the bail-in model across the board at a time that most banks do not even have the required capital buffers in place, Europe’s new financial regulations could end up producing the exact outcome they were supposedly designed to avoid. By imposing losses on creditors of a failing bank, the authorities could end up unleashing the mother of all bank runs as depositors and creditors across the land finally cotton on to the fact that their savings and investments might no longer get bailed out by unwitting taxpayers in other countries!

Things are likely to get a whole lot uglier in Spain. Read {10}.












Who Gets to Pay for the Italian Banking Crisis?

Categories: Uncategorized

Seven Years of Monetary Quackery

Can the Federal Reserve (“Fed”) Admit it Was Wrong Yet?

by Mike Whitney

CounterPunch (January 28 2016)

America’s richest investors are betting trillions of dollars that the US economy will stay lousy for years to come.

Who are these wealthy investors?

Bondholders. And their views on the state of the economy are reflected in the yields on long-term US Treasuries. At present, the yields on long-term debt are very low which means that investors think the economy will continue to underperform while inflation remains in check.

This pessimistic outlook is not new for bondholders, in fact, yields have remained stubbornly low since the onset of the financial crisis in 2008, which means that investors were never swept up in the hype about “green shoots” or an “economic recovery”. They knew it was baloney from the get-go and their opinion hasn’t changed. There’s no sign of recovery anywhere except for the fake government payroll numbers that don’t jibe with any of the other data. By any rationale measure, the economy is stuck in a long-term slump that shows no sign of relenting any time soon. Bondholders seem to grasp that fact and have made a ton of dough betting on crappy growth and perennial stagnation, which are the logical corollaries of the Fed’s goofy monetary policies. (Stephen Roach explains low yields on thirty-year US Treasury Bonds at {1}.)

In any event, bond yields are a heckuva lot more helpful in forecasting the future than the cheerleading pundits on the business channel. Yields – which are the amount of return that bondholders receive for lending the government their money – reveal investors expectations of future economic activity and inflation. They are a barometer for measuring the health of the economy. If growth is strong and the future looks rosy, yields will rise as the demand for money increases and the prospects of higher inflation seem more likely. But if investors expect growth to fall-short and disappoint, then yields are going to drop reflecting lower expectations for future activity. The fact that the yields on thirty-year US Treasury Bonds are below three percent at this phase of the game suggests that policy makers either don’t understand how the economy works or simply refuse to initiate the changes that will spur growth. Either way, it’s a damning indictment of the Central Bank’s role as steward of the system.

At present, (January 26) the yield on benchmark ten-year Treasuries is just a whisker below two percent at 1.98 percent. That means that investors will get 1.98 dollars annually per every $100 invested, which is nearly nothing. Think of it this way: Let’s say your buddy Ernie wants to borrow $5,000 to open a Gelato stand in Granite Falls. So you’re wondering how much you need to charge him above the price of the loan to be fairly compensated for the risk you’re taking (since Ernie has had a few bad ideas in the past that blew up in his face). If you decide to charge him two percent per year, then you’re barely making ends meet since inflation is currently running at roughly 1.5 percent. So you need to charge something above two percent or you won’t even break-even.

The point is, when you lend your money to the US Government for a paltry 1.98 percent, you’re basically getting bupkis on your investment. The only upside to the deal is that you can be reasonably certain that the government will pay you back, unlike Ernie.

The focus on interest rates as the only means for fixing the economy should have run its course by now, but, of course, it hasn’t because the Big Money that runs the country likes things the way they are. Low rates and easy money mean bigger profits for Wall Street regardless of their impact on the real economy. What matters most to bondholders is not growth or inflation, but policy. That’s what keeps the boodle flowing into the coffers. Policy. And as long as they’re confident that the Fed’s “accommodative” policies are going to be coupled with fiscal belt-tightening (which has been adopted by both Democrats and Republicans), then they can rest assured that the economy will continue to sputter while bonds “rip the cover off the ball”.

But the Fed’s loosey goosy monetary policies do come at a cost, and that cost is borne by businesses and working people alike. For example, there was an op-ed in last week’s Wall Street Journal about the knock-on effects of low rates on capital investment by Michael Spence and Kevin Warsh. The title of the article tells the whole story: “The Fed Has Hurt Business Investment”. Here’s an excerpt:



Extremely accommodative monetary policy, including the purchase of about $3 trillion in Treasuries and mortgage-backed securities during three rounds of “quantitative easing” (“QE”), pushed down long-term yields and boosted the value of risk-assets. Higher stock prices were supposed to drive business confidence and higher capital expenditures, which were supposed to result in higher wages and strong consumption. Would it were so.

Business investment in the real economy is weak … In 2014, S&P 500 companies spent considerably more of their operating cash flow on financially engineered buybacks than real capital expenditures for the first time since 2007 … We believe that QE has redirected capital from the real domestic economy to financial assets at home and abroad. In this environment, it is hard to criticize companies that choose “shareholder friendly” share buybacks over investment in a new factory. But public policy shouldn’t bias investments to paper assets over investments in the real economy. {2}



This is a fairly typical complaint, that the Fed’s policies have lifted asset prices but hurt business investment which requires strong demand for their products. The fact is, businesses can’t grow unless people are employed, wages are rising, and money is exchanging hands. None of that is happening currently, in fact, according to the Atlanta Fed, the Fourth Quarter GDP is expected to come in below one percent (.06 percent) which means the US economy should probably be wheeled down to the morgue ASAP so the embalming process can begin pronto. For all practical purposes, the economy is kaput.

Of course, President Obama rejects that type of negativity outright. In the State of the Union Speech in January, Obama waved his finger threateningly at the teleprompter saying: “Anyone claiming that America’s economy is in decline is peddling fiction”.

Fiction?? Not according to economist James Hamilton. Here’s what he said this week on the Oil Price website:



The global economy is slipping into recession. The evidence is showing up in all the usual ways: slowing output growth, slumping purchasing-manager indexes, widening credit spreads, declining corporate earnings, falling inflation expectations, receding capital investment and rising inventories. But this is a most unusual recession – the first one ever caused by falling oil prices. {3}



And then there’s this from the Wall Street Journal:



Every US recession since World War Two has been foretold by sharp declines in industrial production, corporate profits and the stock market. Industrial production has declined in ten of the past twelve months, and is now off nearly two percent from its peak in December 2014. Corporate profits peaked around the summer of 2014 and were off by nearly five percent as of the third quarter of last year. The Dow Jones Industrial Average is down 7.6% so far this year …

unlike past declines in industrial production, today’s decline has been driven primarily by the collapse in the oil industry … mining output has fallen over ten percent, driven by a 62% decline in oil- and gas-well drilling …

“Manufacturing tends to lead the economic cycle and it tends to be an indicator of the swings”, said Thomas Costerg, senior economist at Standard Chartered. {4}



The truth is that the economy is still very weak and the Fed’s monetary hanky-panky hasn’t produced the credit expansion that was expected. Adding excess reserves at the banks was supposed to boost lending which would lead to stronger growth, but it hasn’t happened mainly because households and consumers aren’t borrowing like they did before the crisis. Instead they’re setting more money aside and trying to pay down their debts. Take a look at the chart on bank loans which illustrates how lending is basically flatlining:

No bank loans means no borrowing. No borrowing means no credit expansion. No credit expansion means no new activity, no new spending, no new hiring, no new business investment, no stronger growth. Nomura’s chief economist Richard Koo summed it up succinctly saying, “When no one is borrowing money, monetary policy is largely useless”.

Bingo. It is useless. We know that now. Neither QE nor zero rates promote growth. The ‘Grand Experiment’ has failed. Keynes was right and (Milton) Freidman was wrong. Here’s Keynes:



For my own part I am now somewhat skeptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organizing investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest. {5}



Keynes is just stating the obvious, that you can’t pull the economy out of a severe slump by tinkering with ‘good old fashion’ fiscal stimulus mainlined into the economy through ambitious federal infrastructure programs that stimulate activity, boost employment and keep the economy moving forward until private sector balance sheets are repaired and personal spending returns to normal.

The Fed has wasted the last seven years trying to reinvent the wheel when the solution was always right under its nose. Are we really going to waste another seven implementing the same failed strategy?







Categories: Uncategorized

Sweden to Become World’s First Cashless Country

by Erin Lace

The CoinTelegraph (October 22 2015)

A study by the KTH Royal Institute of Technology in Stockholm shows that Sweden is on track to become the world’s first cashless country. Today, five of six major banks in Sweden are already refusing to operate with cash. As a result, and considering the latest Tax Authority guidelines, Bitcoin has the potential to become a commonly used currency in Sweden.

Fully Digital

People are becoming increasingly accustomed to using bank cards to pay even for the smallest purchases in Sweden with four out of five purchases made electronically. Now, with the increasing penetration of mobile and P2P payment systems, the necessity to use cash is quickly becoming obsolete.

Niklas Arvidsson, a researcher in industrial economics and management at KTH, stated:


Cash is still an important means of payment in many countries’ markets, but that no longer applies here in Sweden.


Moreover, the recent launch of mobile payment application Swish from several major Swedish and Danish banks is already revolutionizing the local banking system, says Arvidsson. As a result, several major banks are refusing to accept cash at all.

According to Arvidsson, there are less than eighty billion Swedish crowns in circulation (about eight billion euros) and out of that amount, only somewhere between forty and sixty percent is actually in regular circulation. To compare, there was around 106 billion Swedish crowns in circulation only six years ago.

“We’re leading the world in cashless trading”, explains Bengt Nilervall from the Swedish Federation of Trade in an interview with The Guardian.


It’s safer this way and it saves us money, as handling money and transporting cash is costly. The Payment Card Industry [PCI] has taken many security measures to ensure that people are safe and we have good protection in place, so Swedes feel confident paying electronically.


Bitcoin & Sweden

Considering the confidence displayed by the Swedes in electronic payments, bitcoin also has an opportunity to become a commonly used currency in Sweden, especially considering today’s ruling that Bitcoin exchange is exempt from VAT across Europe.

Back in May 2015, the country’s Tax Authority also published guidelines for Income Tax on bitcoin mining operations. This type of income would only be considered as economic activity, and thus subject to tax, if the miner “carries out the mining in a professional and cost efficient manner over a longer period with appropriate equipment”, or if “the activity is expected to create a surplus as measured over the full financial calculation period” and “the computing capacity can be expected to generate more than 25 bitcoins a year”. The only prohibited activity included the usage of bitcoin in waste and scrap metal transactions.

Moreover, as politics in Sweden also warm to bitcoin following the establishment of the BitcoinPartiet, the entry of foreign payment startups such as Stripe vying for market share, numerous Bitcoin-themed social events, as well as neighboring Denmark set to abolish the printing of cash by 2016, it will be exciting to watch which payment methods take off in Sweden and Scandinavia as a whole.

Links: The original version of this article, at the URL below, contains links to further information not included here.

Categories: Uncategorized

The Future is Blivets

by Dmitry Orlov

Club Orlov (January 26 2016)

If you have been paying attention, you may have noticed that the global financial markets are currently in meltdown mode. Apparently, the world has hit diminishing returns on making stuff. There is simply too much of everything, be it oil wells, container ships, skyscrapers, cars or houses. Because of this, the world has also hit diminishing returns on borrowing money to build and sell more stuff, because the stuff we build doesn’t sell. And because it doesn’t sell, the price of stuff that’s already been made keeps going down, lowering its value as loan collateral and making the problem worse.

One solution that’s been proposed is to convert from a products economy to a services economy. For instance, instead of making widgets, everybody gives each other backrubs. This works great in theory. The backrub industry doesn’t generate an ever-expanding inventory of backrubs that then have to be unloaded. But there are some problems with this plan. The first problem is that too few people have enough money saved up to spend on backrubs, so they would have to get the backrubs on credit. Another problem is that, unlike a widget, a backrub is not a productive asset, and doesn’t help you pay off the money you had to borrow to pay for the backrub. Lastly, a backrub, once you have received it, isn’t worth very much. You can’t auction it off, and you can’t use it as collateral for a loan.

These are big problems, and one proposed solution is to create good, well-paying jobs that put money in people’s pockets – money that they can then spent on backrubs. This is best done by investing in productivity improvements: send people to school, invest in high technology and so on. It’s an intuitively obvious idea: productive workers are easier to employ than unproductive workers, because the stuff they make ends up cheaper, and people can afford to buy more of it. Whether they do buy more of it is debatable, especially if there is more than enough of it already and nobody has any extra money saved. Still, the theory makes sense.

But this theory doesn’t seem to be working all that well: no matter how much money we put into automation – robotic assembly lines, internet-based virtualization, what have you – the number of unemployed workers isn’t going down at all. And it’s even worse with driverless cars. In theory, they are great: if the driver doesn’t have to do the driving, then she can spend the time giving her passengers backrubs. But no matter how much money we throw at driverless cars, the number of unemployed drivers, or unemployed massage therapists, isn’t going down.

But even if we give up on trying to stimulate demand through job creation and just let everyone starve, we can still put our faith in rich people. There are people who are as rich as entire countries! Surely they can spend and consume on everyone else’s behalf, and make the economy boom. But it turns out that it’s very hard for just one person to consume as much as an entire country. To make that happen, it’s necessary to pay people to consume on one’s behalf. But if other people can spend your money just like you, then that defeats the purpose of being wealthier than everyone else, and all that hard work of swindling people and of gaming the markets would turn out to have been in vain.


* * * * *


But here is a solution that is so stunningly simple and elegant that somebody must have thought of it already. Alas, make a note: I am the first!

A Blivet

The solution is this: sell everything and go long blivets. Blivets are geometrically impossible objects: they can be drawn, but, by their nature, they cannot be manufactured. This solves a major problem with the futures markets, which is that people can actually take delivery of their futures contracts. This means that the stuff being speculated on actually has to exist. And this means that what some people have the audacity to call “the real economy” actually has to exist. What a nuisance!

For example, the gold futures market trades 300 times more gold than physically exists. [Update: the number just went up to 542.] This means that if just 0.3% [Update: 0.18%] of futures contracts resulted in deliveries, the vaults would be empty and there would be nothing to trade. The horrible thing is, unreasonable people, who take delivery of their gold, do exist: the Chinese, the Russians and various other nations with cash on hand or US Treasuries to liquidate keep doing this. Promoting “regime change” and looting various countries’ gold reserves helps a bit (Iraq, Libya and Ukraine have been looted already; Syria should have been looted by now if it weren’t for those pesky Russians!). But the eventual outcome of all this is force majeur: somebody wants to take delivery, but the vaults are empty.

Source: Zerohedge

A similar problem exists with the biggest futures market in the world: in crude oil. Here, traders have been having a merry old time taking advantage of a notional glut, driving the price of crude lower and lower. They could drive it as low as $1 a barrel, but then what? The problem is, nobody on earth can produce oil that cheaply, and so a day will come when somebody will demand delivery on their $1 per barrel crude contract, and the only response will be an echo, as tumbleweeds blow across the abandoned oil fields.

You should have guessed the moral of the story by now: if you are going to “ephemeralize” the entire economy – the workers/consumers along with their productive capacity – you better switch to trading in things that are ephemeral too, or you’ll risk a market implosion, deflation, deleveraging and financial collapse followed by poltitical, commercial, social and cultural collapse in four-part cacophony with many screaming refrains and a shrieking, tumultuous coda. I am not kidding. I wrote the book on that.

This is where blivets would be such a great help. A blivet is by definition a “paper blivet” because a “physical blivet” is a physical impossibility. If you demanded physical delivery of your blivets, people would simply laugh at you, twirl their fingers around their temples and roll their eyes. That would be cra-cra, like demanding your rights under the US constitution, or pretending that climate change is a conspiracy theory.

Blivets are composed of the purest financial ether – even more ethereal than Bitcoins (those long strings of magical digits that get their value from an algorithm, a block chain, and a “coolness factor”). Bitcoins are ethereal too, but they have to be physically mined by burning lots of electricity in running big computer farms, and this causes a big problem: Bitcoins are scarce.

Now, some people claim that scarcity is what gives things value, but that’s clearly nonsense. Look at the US dollar: the number of dollars has been expanding out of all proportion to the growth of the US economy, but has there been any hyperinflation? Of course not! The problem isn’t with printing money; the problem is with giving it to regular people, who don’t know that they should only invest it in blivets. Instead, they do economically destructive things – like buying food for their children and heating their houses during winter. That’s what causes hyperinflation, not the money-printing! There are only two potential problems with money-printing: not printing enough money, and not printing it fast enough.

There are still a couple of problems with my proposed blivetization of the global economy, but these too can be solved by dint of financial innovation.

First, there is the problem of the blivet futures market potentially going down instead of up. We don’t like it when markets go down; so how do we prevent that from ever happening? Here’s an idea: introduce the so-called Schrodinger’s Blivet: if you are short blivets, then, when your contract expires, the clearing house may demand that you deliver on it, in which case a simple rule applies: based on a flip of a coin, it is determined whether your blivets exist or not. This requires those who are shorting blivets to maintain a rather large reserve, and would make them a lot less interested in wrecking the market. Because of this, blivet prices may stagnate sometimes, but over time they should go up monotonically.

Second, there is the problem of where to get additional capital to sink into blivets. You’ve liquidated all your other holdings, you are long blivets, but how is the blivet market supposed to expand? If it doesn’t expand, then that means a lack of growth, and we don’t like it when there isn’t growth. With all other productive capacities idled and no wealth generation occurring outside the blivet market, where is that new investment capital going to come from? Here’s an idea: it’s called Auto-Rehypothecation. Whenever you pledge blivets as collateral for a loan (which you invest in blivets, of course) the loan itself automatically becomes available to be used as collateral for another loan.

Thanks to these financial innovations, blivet valuations should go through the roof in no time, and keep going. In fact, they may go up so high that it may become necessary to start quoting blivets in scientific notation instead of simple decimals. Eventually it may even make sense to drop the mantissa and just quote the exponent. Why, with all physical constraints removed, the number of blivets being traded will be set free to exceed the number of atoms in the observable universe!

Problem solved! I’ll take 10**82 blivets, please!

Categories: Uncategorized