News & Analysis
DB Briefs: Danger of a Deteriorating Social Mood / China's Shifting Economic Sands / Is Bank Recapitalization the Answer?
The Deflationary Hurricane Of Deteriorating Social Mood
Deteriorating social mood is like a very slow-building, very slow-moving hurricane: The longer it goes on, the stronger it gets. And while some policymakers may be praying like St. Augustine for chastity, and others for a book of dry matches, I'd be moving to higher ground to stand on. The path I am most worried about is not the long-term sustainable inflationary economic one, but the much nearer-term deflationary storm path that comes with deteriorating social mood. For the northeast, Irene may have now passed. But for all of America, there is another, much bigger storm that bears watching closely. – Minyanville.com
Dominant Social Theme: Everything is OK and don't you worry. The elites know how to handle the economy, and you will retire rich, even if you don't think so now.
Free-Market Analysis: The writer of this article, Peter Atwater, has hit upon a kind of anti-meme. He believes that "Everything we [in the West] need to do for long-term economic, if not societal, success and stability comes with very severe short-term consequences." And thus it has not been done. Fed Chairman Ben Bernanke's monetary stimuli are not the answer, he argues. More radical solutions are required. What is necessary is a severe reinforcement of economic "chastity." Banks must be strengthened; nations must cease to spend; citizens must accept austerity.
Of course, this is a power elite theme of itself: that the larger world (and Western) economy is an irresponsible one and that the West's leadership has proven inadequate to the task. Here at the DB, we disagree. The issue is not austerity or cost-cutting. Responsible leadership in our view is that which demands an end to the elite's ruinous central banking economy and a return to some sort of competitive money, which would inevitably feature silver and gold.
Somehow, despite Atwater's concerned gloom, we don't sense he's ready for the really radical reconfigurations necessary to build healthy economies. He apparently feels that reshuffling the proverbial deck chairs is a revolutionary act.
China's Shifting Economic Sands
Is China's economic miracle built on sand or cement? It won't exactly make world headlines, but in the Chinese port city of Dalian there was another accident today in the city's sprawling petrochemicals development zone. This time a fuel tank caught fire in an oil refinery belonging to state major PetroChina. This is the same city, you'll remember, that was hit by serious protests a fortnight back after a paraxylene chemical plant was nearly breached by a storm surge caused by a passing typhoon. In that case, the local government caved in and agreed to shut down the plant. What's amazing – and disconcerting for many living in Dalian – is that this is the FOURTH major safety alert in the petrochemicals complex in the last 12 months or so. – UK Telegraph
Dominant Social Theme: Don't worry about China. This is one powerful and far-sighted country.
Free-Market Analysis: This article in the Telegraph about China is an interesting one because unlike many mainstream articles it dares to ask the question whether the "Chinese Miracle" is nothing but hype and the proverbial madness of crowds.
Every night when he goes home to his Beijing apartment, the author writes, he catalogues the way that the apartment is "quietly crumbling." Look carefully, he writes, "and you'll see the flagstones in the public areas are subsiding drunkenly, the access road to the rear is shot to pieces, the bathroom fittings are corroding and the façades are starting to peel. With an apartment that hardly matters, but when it comes to railways, bridges, petrochemical complexes, 40,000 dams (as my colleague Malcolm Moore reported this week) and even nuclear power stations, we'll have to pray higher standards have been enforced."
Actually, the article's feedback comments are even more alarming, speculating that the same sort of sloppy construction may doom modern Chinese dams to catastrophic failure within the next ten years. As for domestic harmony, we find the article has generated the following feedback from Scott Jensen: "In 2005, China stopped publicly reporting how many riots occur each year in its country because the rate of increase was rapidly increasing year after year. Some now speculate there are at least 120,000 riots in China a year. That's over 10,000 a month."
We've been writing about the demise of the Chinese Miracle for several years now. And articles like this one only reinforce our conclusions. China's old communist leaders simply don't know what to do. They've thrust China into the modern era, but in a manipulative and controlled way (see Sino-Forest Corp.) that is merely storing up problems for the future. Eventually, the dam is likely going to break – metaphorically and in reality. The catastrophic results may shake the world.
Is Bank Recapitalization the Answer?
European banks set cash test by IMF chief ... European banks face ordeal by fire this week after the International Monetary Fund called for "urgent" action to shore up their defences, if necessary with state money and under legal compulsion. Recovery is in danger if we don't shore up defences, says Christine Lagarde – UK Telegraph
Dominant Social Theme: Strengthen the banks to strengthen the EU.
Free-Market Analysis: One of the problems with gaining Christine Lagarde as the IMF's new chief, is that she seems to believe it is incumbent on her to be vocal about the Western economic system. Thus, she set off what the Telegraph calls "tremors" at a recent financial conference by warning that the global economic system was on "thin ice."
"We are in a dangerous new phase. The stakes are clear: we risk seeing the fragile recovery derailed, so we must act now," she said. "Banks need urgent recapitalisation. If it is not addressed we could easily see the further spread of economic weakness to core countries, even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalisation," she said.
Lagarde is a lawyer by training, so perhaps we should give her the benefit of the doubt. But such warnings are merely part and parcel of a larger elite charade in our view (and Lagarde now works directly for the elite). The "reserves" a bank holds in the modern era are nothing but paper certificates. It is difficult to see how holding more or fewer of them contributes to a bank's solvency.
If she were to demand that banks hold gold or silver reserves, we would be more impressed. But that would be too sensible. Instead, she will no doubt continue to offer this sort of nonsensical rhetoric. In the age of central banking, a bank's solvency is far more dependent on the largesse of central banks.
If Lagarde were truly sincere about bank recapitalization, she would examine the linkages between central bankers and their commercial banking brethren. Those with the strongest relationships would been seen as having the healthiest banking prospects. No doubt, this is an overly cynical recipe. But it is a realistic one.
Posted by Dave Jr on 08/31/11 02:44 PM
The inflation is happening through default because this places money into circulation permanently because it does not get paid back. To fuel the inflation by this method requires a constant recharging of the banks by measures like QE. If inflation is the goal, then it is a win win for the banks as they accumulate assets as well. They need inflation to offset deflation caused by offshore cheap labor and high tech automation.
So we pay more for resources and recieve less for our labors, decreasing our standard of living just like they promised us 15 years ago.
Posted by David_Robertson on 08/31/11 07:59 AM
I agree entirely with these sentiments and observations. The contractual laws that the bankers have created through their legislator puppets over the centuries have given them a hammer lock on the money and the assets and the property and the land of the nation.
They are merely middlemen, brokers, but they have inveigled themselves through legislation into the position of principals in all the critical points in their transactions. However they have now gone one step beyond even this chicanery and reverted to their role as brokers in order to avail themselves of public funds to re-establish themselves as principals. They have so perverted every notion of lawful behaviour it has bedazzled their hapless victims who now believe that up is down, right is wrong, good is evil, and versa-vice.
If you find it difficult to make sense of the foregoing and would rather just get on with your life and forget about the whole thing then you have personally discovered the true purpose in all of their crooked dealings.
Posted by David_Robertson on 08/31/11 07:44 AM
As you say silver has many industrial applications and on this basis you question its utility as a store of value. What we have to bear in mind however is that the silver in use in manufactured goods is already a store of value since it can be recovered from them.
At the moment gold has a higher stock to flow ratio as you indicate but that assumes that gold in a vault is "stock" whereas silver in a computer motherboard is not. It is also true that gold is more portable because the gold:silver ratio is currently 1:43 or thereabouts and has been as high as 1:70 in the past two or three years. This can of course change quite rapidly if the historic ratio of 1:15 re-asserts itself. Indeed it is entirely feasible that silver may enter an entirely new phase of monetary value and reach a ratio of 1:1. In that event the silver recycling industry would go into high gear.
China always operated on a silver standard as did other nations of the ancient world. Silver was de-monetised in the 1870's in the USA due I believe to the discovery of the Comstock Lode which threatened the dominance of gold and the global bankers. [Gold itself was de-monetised 100 years later and the present gold:silver ratio reflects this time gap I believe.] As I recall there was quite a controversy about silver vs. gold at the time and as usual the bankers won that round. Their day however is drawing to a close and the actions we take as investors and as normal, usual, humdrum, ordinary human beings should reflect this reality. If we place our trust in the existing world system we shall go down with the ship when it reaches perpendicularity. That day is not far off, indeed it is much closer than many might think.
Posted by speedygonzales on 08/31/11 12:14 AM
Do not forget that China is not playing game as world moral leader. Compare to nuclear tests on US population, Funge fever, MK Ultra, sterilization and so on
Posted by Dave Jr on 08/30/11 11:27 PM
I agree, but we need to tell it to 90% of the population that willingly supports it.
When the loans do not get paid back en masse, it blows the cover off their scheme and have to blantantly print, monetize directly, QE.
Posted by John Danforth on 08/30/11 08:35 PM
Yes, it's theft, and it destroys lives.
Posted by NAPpy on 08/30/11 07:59 PM
This is the part that should really anger people. A bank prints money from nothing to give an individual a loan, using that individual's real property as collateral. If that individual defaults on the loan, the bank gains a real asset while providing... nothing... in return. This is counterfeiting. This is wrong. This is evil.
DB has mentioned this many times, but it bears repeating. If banks can counterfeit, why can't I? If enough people ask this question, we'll know the information war has been won.
Posted by John Danforth on 08/30/11 06:26 PM
It's not their capital. The banks hold title to property and they didn't do anything to earn it. And the money they loaned was not the savings of depositors.
Posted by Dave Jr on 08/30/11 02:04 PM
To recapitalize the banks, would be to enable them to keep up with the default and foreclosure spree. They are not auctioning off the foreclosed assets to the public, where they could recapture their capital and the public could recapture the assets at bargain prices. With new private sector owners and lower prices, a recovery could then happen. No, the banks are accumulating and retaining the assets, maintaining high prices and need the cash to clear their books and prolong the operation.
Posted by Adam on 08/30/11 11:55 AM
'They really should be called slavery notes, since whatever temporary value you grant each one as you accept it in payment becomes the measure of the coercion that will be applied to you to extract that value out of your work.'
Indeed. Tribute: Click to view link
Posted by memehunter on 08/30/11 11:31 AM
The penultimate sentence should read "all around the world", sorry (I started with a different formulation... ).
Posted by memehunter on 08/30/11 11:28 AM
"which would inevitably feature silver and gold."
Gold is perhaps inevitable. Silver, not so sure.
One reason why gold is now a better store of value than silver is that it has a much higher stock-to-flow ratio. Apart from the fact that gold has fewer industrial applications than silver (or, to be more precise, that silver and/or other cheaper metals can replace gold for most of these applications), thus making it a better store of value (it's better to choose as long-term store of value something that is not immediately useful - see John Locke's discussion on that topic), we should keep in mind that it is gold, not silver, that is held in the vaults of central banks all around of the world.
See FOFOA's blog for a detailed and refined discussion of these issues.
Click to view link
Reply from The Daily Bell
Silver has a history of thousands of years as money. Why propose an exception now?
Posted by rossbcan on 08/30/11 08:46 AM
"Strengthen the banks"
The predators have consumed the proceeds of their past crimes, and now, must be fed again? Seems to me, they have reversed the REAL dependency relationship, an inevitable consequence of going off the gold standard where currency used to be "stored productivity" (asset) and is now "stored servitude" or debt.
The productive are not dependent on anyone or anything except to be left alone and keep the fruits of their labors (property rights). They will voluntarily (peacefully) trade with anyone who offers mutually agreed value and increase the scope of prosperity and civilization, to the degree that they are free to do so.
Banks are dependent on the productive to create the wealth. It is the job of banks to provide safekeeping and, if requested, invest the fruits of labor of the productive.
It is not the REVERSE: No productively without banks (counterfeiters, coin shavers). It is true that when it is DECREED that only X is "legal tender" and, those who barter with anything else are criminals that, when X is withheld, those who "obey" cannot trade equals survive. Those who take the "or else" option are decreed criminals.
Posted by rossbcan on 08/30/11 08:18 AM
"demise of the Chinese Miracle"
Potemkin Economy? Major trading partner, US. Ponzi?
Not to mention the fact that China has been moving up the manufacturing food chain, beyond trinkets and their products are everywhere, even in some of our key infrastructure.
Perhaps our civilization will just implode by incompetence and reliance on the unreliable?
After all, that is what command and control hierarchy is: single point of control, at the top of all functions of civilization. For instance what if (actually has) our judges at the "top" become corrupt? I have had judges personally confide to me: yes, you are absolutely correct, factually and legally, but, I will be overruled. You LOSE. To an engineer such as myself, this is a major reliability risk and very stupid design which serves only the purpose of "extracting an unearned commission" from the productive. THINK about it:
Click to view link
she's gonna blow, captain.
Then, we'll be back where we started: freedom to control our own lives, solve our own problems and organize in an ad-hoc, for mutual self-interest manner, without meddling "experts" who simultaneously claim but cannot prove they know better, rationalizing OUR guns, pointed at US.
The inevitable cannot happen soon enough, IMHO.
Posted by John Danforth on 08/30/11 07:57 AM
Re: The Banks --
The paper the banks hold represents not wealth already earned, but debt to be paid out of future earnings by the hapless residents of whatever country they issues the currency. The last decades of bubble expansion ran so far ahead of popular awareness that the entire banking system is hopelessly insolvent.
The attempt to paper the whole episode over is being done on a tightrope - too slow and people will see the insolvency of the banks (who report their asset values with pretend-fantasy numbers), too fast and people will see what their currency really is (not wealth).
So, it's rather comedic to see the IMF call for re-capitalization. With what? More debt laid on an unwilling populace whose ability to create it has been destroyed? Every FRN, Franc, or Peso in existence is a debt note, though debt is really the wrong term for it. Debt implies a freely accepted obligation in return for some consideration. They really should be called slavery notes, since whatever temporary value you grant each one as you accept it in payment becomes the measure of the coercion that will be applied to you to extract that value out of your work.
We've got a French Revolution on steroids brewing worldwide. When the offal hits the shan, it will be up to us to begin accepting and offering only gold and silver, and refusing to trade in the new slavery notes that are probably already being printed up.
Posted by rossbcan on 08/30/11 07:37 AM
"The Deflationary Hurricane Of Deteriorating Social Mood"
In the grand scheme of things, we have already been through pumping up bubbles. Some are trying to re-inflate, but major forces are preparing for "dump" and deflation, where "we, the peons" are so financially stressed that we have to start selling real, hard assets to survive, into a buyers (extremely cheap) market, for the simple reason that a predatory minority is flush with ill gotten cash (worthless "decrees of value") and the majority is near impoverished and decreed to be "on the hook" for state debt to which they have neither consented, nor benefited.
A "perfect storm" has been decreed for the productive classes. Feudalists are preparing to divest us of all of our property by either forced to sell by economic stress or, "eminent domain" or, tax delinquency (failure to pay our decreed fair share).
It is not "necessary" to identify the perps, nor to understand their detailed methodology, nor to understand which elements of the system (all) are corrupt.
It is very simple. When forceful / fraudulent forces (criminals) gain control, civilization, prosperity and peace IS OVER:
Click to view link
So, keep your eye on the ball and deal with your own predators, in your own small slice of reality, as best you can.
And, if you choose to push back, insist on restoration of the "rule of law":
Click to view link
... while simultaneously insuring "crime does not pay" by making it as difficult for predators, as possible.