Prediction: Things May Unravel Faster Than You Think...

Chris Martenson PhD
Part l
By my analysis,we are not yet on the final path to recovery, and there are one or morefinancial 'breaks' coming in the future.  Underlying structuralweaknesses have not been resolved, and the kick-the-can-down-the-roadplan is going to encounter a hard wall in the not-too-distant future. When the next moment of discontinuity finally arrives, events willunfold much more rapidly than most people expect.  
My work centerson figuring out which macro trends are in play and then helping peopleto adjust accordingly.  Based on trends in fiscal and monetary policy, Ibegan advising accumulation of gold and silver in 2003 and 2004.  Ishorted homebuilder stocks beginning in 2006 and ending in 2008.  Thesewere not 'great' calls; they were simply spotting trends in play, onebeginning and one certain to end, and then taking appropriate actionsbased on those trends. 
We happen tolive in a non-linear world; a core concept of the Crash Course. But far too many people expect events to unfold in a more or lessorderly manner, with plenty of time to adjust along the way.  In otherwords, linearly.  The world does not always cooperate, and my concernrests on the observation that we still face the convergence of multipletrends, each of which alone has the power to permanentlytransform our economic landscape and standards of living. 
Three suchtrends (out of the many I track) that will shape our immediate futureare:
  • Peak Oil
  • Sovereign insolvency
  • Currency debasement
Individually,these worry me quite a bit; collectively, they have my full attention.
History suggeststhat instead of a nice smooth line heading either up or down, marketshave a pronounced habit of jolting rather suddenly into a new orbit,either higher or lower.  Social moods are steady for long periods, andthen they shift.  This is what we should train ourselves to expect. 
No smooth linesbetween points A and B; instead, long periods of quiet, followed byshort bursts of reformation and volatility.  Periods of marketequilibrium, followed by Minsky moments. In the language of the evolutionary biologist Stephen Jay Gould, we livein a system governed by the rules of "punctuated equilibrium."


Our economy is acomplex system.  The key feature of such systems is that they areinherently unpredictable with respect to the timing and severity ofspecific events.  For the uninitiated, they can look enormously fragileand prone to flying apart at any minute; for the seasoned observer,there is an appreciation that the immense inertia of the economic systemwill almost always delay and dampen the eventual adjustments. 
Like everybodyelse, I have no idea exactly what's going to happen, or precisely when. Anybody who says they do know should be greeted with afurrowed brow and a frown of suspicion.  As my long-time readers know, Iprefer to assess the risks and then take steps to mitigate those risksbased on likelihood and impact.
Which means thatalthough we cannot predict the size (exactly howmuch) or the timing (precisely when) ofeconomic shifts or world-changing events, we can certainly understandthe risks and the dimensions of what mighthappen.  Just as we cannot predict when an avalanche will release fromsteep slope, or even where or how big it will be, we can readily predictthat constant snowfall coupled with the right temperature conditionswill lead to an avalanche sooner or later, and more likely in this gullythan that one.  Given certain conditions, we might expect one that islarger or smaller than normal.  Although we don't know exactly when orhow much, we do know that when snow accumulates, so do the risks of morefrequent and/or larger avalanches.
Such is thenature of complex systems.  While inherently unpredictable, they canstill be described.  The most important description of any complexsystem is that it owes its order and complexity to the constant flow ofenergy through it.  Complex systems require inputs.  This is one way inwhich we can understand them. 
Given this view,one easy "prediction" is that an economy without increasing energyflows running through it will stagnate.  To take this further, aneconomy that is being starved of energy becomes simpler in the process -meaning fewer jobs, less items produced, and a reduced capacity tosupport extraneous functions.

Accepting"What Is"

The mostimportant part of this story is getting our minds to accept realitywithout our passionate beliefs interfering.  By 'beliefs' I meanstatements like these:
  • "Things always get better and are never as bad as theyseem."
  • "If Peak Oil were 'real,' I would be hearing about it frommy trusted sources."
  • "Dwelling on the negative is self-fulfilling."
While each ofthese things might be true, they also might be false and thereforemisleading, especially during periods of transition.  Our job is toremain as dispassionate and logical as possible.  
Let's nowexamine more closely the three main events that are converging - PeakOil, sovereign insolvency, and currency debasement - using as much logicas we can muster.


Peak Oil is now amatter of open inquiry and debate at the highest levels of industry andgovernment.  Recent reports by Lloyd's of London, the US Department ofDefense, the UK industry taskforce on Peak Oil, Honda, and the Germanmilitary are evidence of this.  But when I say "debate," I am notreferring to disagreement over whether or not Peak Oil is real, onlywhen it will finally arrive.  The emerging consensus is that oil demandwill outstrip supplies "soon," within the next five years and maybe assoon as two.  So the correct questions are no longer, "Is Peak Oilreal?" and "Are governments aware?" but instead, "When will demandoutstrip supply?" and "What implications does this have for me?" 
It doesn'treally matter when the actual peak arrives; we can leave that to theivory-tower types and those with a bent for analytical precision.  Whatmatters is when we hit "peak exports."  My expectation is that once itbecomes fashionable among nation-states to finally admit that Peak Oilis real and here to stay, one or more exporters will withhold some orall of their product "for future generations" or some other rationale(such as, "get a higher price"), which will rather suddenly create aprice spiral the likes of which we have not yet seen. 
What matters isan equal mixture of actual oil availability and market perception.  Assoon as the scarcity meme gets going, things will change very rapidly.
In short, it istime to accept that Peak Oil is real - and plan accordingly.


Once we acceptthe imminent arrival of Peak Oil, then the issue of sovereign insolvencyjumps into the limelight.  Why?  Because the hopes and dreams of thearchitects of the financial rescue entirely rest upon the assumptionthat economic growth will resume.  Without additional supplies of oil,such growth will not be possible; in fact, we'll be doing really, reallywell if we can prevent the economy from backsliding.
Virtually everysingle OECD country, due to outlandish pension and entitlement programs,has total debt and liability loads that ArnaudMares (of Morgan Stanley) pointed out have resulted in a negativenet worth for the governments of Germany, France, Portugal, the US, theUK, Spain, Ireland, and Greece.  And not by just a little bit, butexceptionally so, ranging from more than 450% of GDP in the case ofGermany on the 'low' end to well over 1,500% of GDP for Greece. 
Such shortfallscannot possibly be funded out of anything other than a very, very brighteconomic future.  Something on the order of Industrial Age 2.0, fueledby some amazing new source of wealth.  Logically, how likely is that? Even if we could magically remove the overhang of debt, what newtechnologies are on the horizon that could offer the prospect of a brandnew economic revival of this magnitude?  None that I am aware of.
In the US, thelargest capital market and borrower, even the most optimistic budgetestimates foresee another decade of crushing deficits that will grow theofficial deficit by some $9 trillion and the real (i.e., "accrual" or"unofficial") deficit by perhaps another $20 to $30 trillion, once weaccount for growth in liabilities.  This is, without question, anunsustainable trend.
It's time toadmit the obvious:  Debts of these sorts cannot be serviced, now or inthe future.  Expanding them further with fingers firmly crossed in hopesof an enormous economic boom that will bail out the system is a fool'sgame.  It is little different than doubling down after receiving a badhand in poker. 
The unpleasantimplication of various governments going deeper into debt is that astring of sovereign defaults lies in the future.  Due to theirinterconnected borrowings and lendings, one may topple the next likedominoes. 
However, it iswhen we consider the impact of the widespread realization of Peak Oil onthe story of growth that the whole idea of sovereign insolvency reallyassumes a much higher level of probability.  More on that later.
For now weshould accept that there's almost no chance of growing out from underthese mountains of debts and other obligations.  We must move ourattention to the shape, timing, and the severity of the aftermath of theeconomic wreckage that will result from a series of sovereigndefaults. 


We could trotout a lot of charts here, examine much of history, and make a very solidcase that once a country breaches the 300% debt/liability to GDP ratio,there's no recovery, only a future containing some form of default(printing or outright).
In a recentpost to my enrolled members, I wrote:
The currency wars have begun, and the implications toworld stability and wealth could not be more profound. Fortunately, allof my long-time enrolled members are prepared for this outcome, whichwe've been predicting here for some time.
When pressed, the most predictable decision in all ofhistory is to print, print, print.  So I can't take credit for a'prediction' that was just slightly bolder than 'predicting' which way adropped anvil will travel; down or up?
The only problem is, widespread currency debasements willfurther destabilize an already rickety global financial system wheretens of trillions of fiat dollars flow daily on the currency exchanges.
You can benearly certain that every single country is seeking a path to a weakerrelative currency. The problem is obvious: Everybody cannotsimultaneously have a weaker currency. Nor can everybody have a positivetrade balance.
If a country orgovernment cannot grow its way out from under its obligations, thenprinting (a.k.a. currency debasement) takes on additional allure.  It isthe "easy way out" and has lots of political support in the homecountry.  Besides the fact that it has already started, we shouldconsider a global program of currency debasement to be a guaranteedfeature of our economic future. 

Conclusion(to Part I)

Threeunsustainable trends or events have been identified here.  They are notindependent, but they are interlocked to a very high degree.  At presentI can find no support for the idea that the economy can expand like ithas in the past without increasing energy flows, especially oil.  All ofthe indications point to Peak Oil, or at least "peak exports,"happening within five years. 
At that point,it will become widely recognized that most sovereign debts andliabilities will not be able to be serviced by the miracle of economicgrowth.  Pressures to ease the pain of the resulting financial turmoiland economic stagnation will grow, and currency debasement will prove tobe the preferred policy tool of choice. 
Instead ofunfolding in a nice, linear, straightforward manner, these collidingevents will happen quite rapidly and chaotically.
By mentallyaccepting that this proposition is not only possible, but probable, weare free to make different choices and take actions that can preserveand protect our wealth and mitigate our risks.
What changes inour actions and investment stances are prudent if we assume that PeakOil, sovereign insolvency, and currency debasement are 'locks' for thefuture? 
I explore thesequestions in greater depth inPart II of this report 
Dr. Chris Martenson isan independent economist and author of a popular website,ChrisMartenson.com. His Crash Course video series explores theintertwining significance of the "three E's" - the economy, energy, andenvironment and offers articulate, dynamic insight into the workings ofour monetary system.
Chris earned a PhD in neurotoxicology from Duke University,and an MBA from Cornell University. A fellow of the Post CarbonInstitute, Chris's work has appeared on PBS and been cited by theWashington Post. He is a contributor to SeekingAlpha.com.
Chris is an accomplished presenter who has offered the CrashCourse seminar all over the United States. The online course has beentranslated into several languages, and been viewed over 1.5 milliontimes. His website offers both daily free content as well as anewsletter service for enrolled members. His goal is to help as manypeople understand that we are in the midst of a profound economic shiftand that equally profound risks and opportunities lie in our future. Forthose that can see them coming, tremendous advantages exist.

Rampant Inflation In 2011? The Monetary Base Is Exploding, Commodity Prices Are Skyrocketing And The Fed Wants To Print Lots More Money

The Economic Collapse
Are you readyfor rampant inflation?Well, unfortunately it looks like it might beheaded our way.The U.S. monetary base has absolutely exploded over thelast couple of years, and all that money is starting to filter throughinto the hands of consumers.Commodity prices are absolutelyskyrocketing, and it is inevitable that those price increases will showup in our stores at some point soon.The U.S. dollar has already beenslipping substantially, and now there is every indication that the Fedis hungry to start printing even more money.All of these things aregoing to cause a rise in inflation.Not that we aren’t already seeinginflation in many sectors of the economy.Airline fares for the holidayseason are up 20 to 30 percent above last year’s rates.Double-digitincreases in health insurance premiums arebeing reported from coast to coast.The price of food hasbeen quietly sneaking up even at places like Wal-Mart. Meanwhilethe U.S. government insists that the rate of inflation is close to zero. Anyone who actually believes the government inflation numbers isliving in a fantasy world.The U.S. government has been openlymanipulating official inflation numbers for several decades now.But wereally haven’t seen anything yet.As increasingly larger amounts ofpaper money are dumped into the economy, we are eventually going to seethe worst inflation in American history.The only real question is howfar down the road are we going to get before it happens.
Take a fewmoments and digest the chart below.It shows just how dramatically theU.S. monetary base has been expanded recently....
Up to this pointthis dramatic expansion of the U.S. monetary base has not caused thatmuch inflation because U.S. government borrowing has soaked most of itup and U.S. banks have been hoarding cash and have been building uptheir reserves.
However, thissituation will not last forever.Eventually all this cash will make itsway through the food chain and into the hands of U.S. consumers.
But what is evenmore troubling is the dramatic spike in commodity prices that we haveseen in 2010.
Wheat futureshave surged 63 percent since the month of June.Wheat has recently beenselling well above 7 dollars a bushel on the Chicago Board of Trade.
But wheat is farfrom alone.In his recent column entitled "AnInflationary Cocktail In The Making", Richard Benson listed many ofthe other commodities that have seen extraordinary price increases overthe past year....
*Agricultural Raw Materials: 24%
*Industrial Inputs Index: 25%
*Metals Price Index: 26%
*Coffee: 45%
*Barley: 32%
*Oranges: 35%
*Beef: 23%
*Pork: 68%
*Salmon: 30%
*Sugar: 24%
*Wool: 20%
*Cotton: 40%
*Palm Oil: 26%
*Hides: 25%
*Rubber: 62%
*Iron Ore: 103%
Now, as thoseprice increases enter the chain of production do you think that there isany chance that they will not cause inflation?
Do you thinkthere is any chance at all that producers and retailers will not passthose costs on to consumers?
It is time toface facts.
Those costincreases are going to filter all the way through the system and yourpaycheck is soon not going to stretch nearly as far.
Inflation iscoming.
Many savvyinvestors understand what is going on right now.That is one reason whygold and silver are absolutely soaring at the moment.
The price ofgold set anotherrecord high on Friday for the sixth straight day.
Silver has alsoexperienced extraordinary gains recently, and the U.S. Mint hasofficially raised their wholesale pricing above spot on American SilverEagles from$1.50 to $2.00.
Meanwhile, thereare even more rumblings that the Fed wants to print lots more money. On Friday, the president of the Federal Reserve Bank of New York,William Dudley, stated that the high unemployment and the low inflationthat the United States is experiencing right now are "wholly unacceptable"....
"Further action is likely to be warranted unless theeconomic outlook evolves in such a way that makes me more confident thatwe will see better outcomes for both employment and inflation beforelong."
During hisremarks, Dudley even mentioned what the effect of another $500 billionincrease in the Fed?€?s balance sheet would be.
Now keep inmind, this is not just another "Joe" who is making these remarks.
This is thepresident of the Federal Reserve Bank of New York – the most importantof all the regional Fed banks.
In recent weeksit is almost as if you can hear Fed officials salivate as they considerthe prospect of flooding the economy with even more money.
Up to thispoint, verylittle has worked to stimulate the dying U.S. economy.The FederalReserve and the Obama administration are getting nervous as theAmerican people become increasingly frustrated about the economicsituation.
So will floodingthe economy with even more money and causing even more inflation do thetrick?
Well, no, butwhat inflated GDP figures will do is enable Obama and the Fed to say:"Look the economy is growing again!"
But if a floodof paper money causes the value of goods and services produced in theU.S. to go up by 5 percent but the real inflation rate is 10 percent,are we better off or are we worse off?
It doesn’t take agenius to figure that one out.
So don’t getfooled by "economic growth" numbers.Just because more money ischanging hands doesn’t mean that the U.S. economy is doing better.
In fact, manyAmerican families are going to be financially shredded by the cominginflation tsunami.
Just think aboutit.
How far willyour paycheck go when a half gallon of milk is 10 dollars and a loaf ofbread is 5 dollars?
Already, itis incredibly difficult for the average American family of four toget by on $50,000 a year.
So how muchmoney will we need when rampant inflation starts kicking in?
And do you thinkthat your employers will actually give you pay raises to keep up withall of this inflation?
Not in theseeconomic conditions.
In fact, medianhousehold incomes aredeclining from coast to coast all over the United States.
Earlier thisyear, Ben Bernanke promised Congress that the Federal Reserve would not "printmoney" to help the U.S. Congress finance the exploding U.S.national debt.
Did any of youbelieve him at the time?
Did any of youactually believe that the Federal Reserve would act responsibly andwould attempt to keep the money supply and inflation under control?
The reality isthat the entire Federal Reserve system is predicated on perpetualinflation and a perpetually expanding national debt.
Whatever wealthyou and your family have been able to scrape together is going tocontinue to be whittled away month after month after month by the hiddentax of inflation.
Andunfortunately, as discussed above, inflation is about to get a whole lotworse.
So is there anyroom for optimism?Is there any hope that we will not see horribleinflation in the years ahead?Please feel free to leave a comment withyour opinion below....

Shocking: How Your Political System Works *Video*

Mac Slavo
D.C. lobbyistJimmy Williams joins Dylan Ratigan to discuss what most of us alreadyknow - the political system is flawed and the current model of how ourCongressional Representatives do business must be stopped:
The great news is, is that everybody’s writing a check.
It’s a bad system and it’s got to stop.
You write those checks because that’s the price of playingpolitics in Washington today…This is a system that has to stop.
Money is so invasive in every single thing that we do inthis city.
It really isamazing, though not surprising, that our so-called representatives, oncethey arrive in Washington, throw ethics, morals and even thefundamental principles of this nation out the window just to make abuck.
There can beabsolutely no postive and constructive change in this country until:
  1. We throw all incumbents out of Congress and reset theLegislature. This can be accomplished by either a) voting themall out district by district, or b) forcing bills throughCongress that will enact #2 below.
  2. Enact term limits on all federally elected representativesand appointed federal judges. While this may not be a perfect solution,it offers some level of insurance that no single individual will be inCongress (or the courts) long enough to adversely impact this country inthe long-term. With the current system as it is, we end up withlifetime politicians, rather than representatives of the people, most ofwhom spend decades in their positions.
  3. Ethics violations are dealt with swiftly and severely. Ifyou are arrested as a citizen for a criminal act from possession ofmarijuana or drunk driving to assault on another person, you’re crime isprosecuted in an open court, with all evidence being made publiclyavailable. If you are guilty as charged, you pay the fines, go toprison, do the probation or serve whatever penalty the judge declares.The same should hold true for Congress. Since these are our law makers,they should, at the very least, be held to the same standards as theplebes that elect them.
The currentsystem is setup so that only deep pocketed individuals or corporationscan make changes happen, and generally, those changes are to thedetriment of the people. Money makes the system go ’round, whichobviously leads to corruption and a culture of favoritism. Unless thisis eliminated, we can expect that no meaningful change will happen inAmerica until the entire system comes crumbling down.
It is importantthat individuals like Mr. Jimmy Williams discuss their lobbyingexperiences on news outlets, and we commend him for his efforts. But theonly real solution to these problems are the ones that will leave Mr.Williams and those in similar lines of work unemployed.
Watchthe video:

"A Financial Coup d'Etat"

European Neoliberals Raise Ante in War on Labor; Fateful StruggleWill Set Course for a Generation

Most ofthe press has described Europe’s labor demonstrations and strikes onWednesday in terms of the familiar exercise by transport employeesirritating travelers with work slowdowns, and large throngs letting offsteam by setting fires. But the story goes much deeper than merely areaction against unemployment and economic recession. At issue areproposals to drastically change the laws and structure of how Europeansociety will function for the next generation. If the anti-labor forcessucceed, they will break up Europe, destroy the internal market, andrender that continent a backwater. This is how serious the financialcoup d’etat has become. And it is going to get much worse – quickly. AsJohn Monks, head of the European Trade Union Confederation, put it:“This is the start of the fight, not the end.”
Spain has received most of the attention, thanks toits ten-million strong turnout – reportedly half the entire laborforce. Holding its first general strike since 2002, Spanish laborprotested against its socialist government using the bank crisis(stemming from bad real estate loans and negative mortgage equity, nothigh labor costs) as an opportunity to change the laws to enablecompanies and government bodies to fire workers at will, and to scaleback their pensions and public social spending in order to pay the banksmore. Portugal is doing the same, and it looks like Ireland will followsuit – all this in the countries whose banks have been the mostirresponsible lenders. The bankers are demanding that they rebuild theirloan reserves at labor’s expense, just as in President Obama’s programhere in the United States but without the sanctimonious pretenses.
The problem is Europe-wide and indeed centered inthe European Union capital in Brussels, where fifty to a hundredthousand workers gathered to protest the proposed transformation ofsocial rules. Yet on the same day, the European Commission (EC) outlineda full-fledged war against labor. It is the most anti-labor campaignsince the 1930s – even more extreme than the Third World austerity plansimposed by the IMF and World Bank in times past.
The EC is using the mortgage banking crisis – andthe needless prohibition against central banks monetizing public budgetdeficits – as an opportunity to fine governments and even drive thembankrupt if they do not agree roll back salaries. Governments are toldto borrow at interest from the banks, rather than raising revenue bytaxing them as they did for half a century following the end of WorldWar II. Governments unable to raise the money to pay the interest mustclose down their social programs. And if this shrinks the economy – andhence, government tax revenues – even more, the government must reducesocial spending yet further.
From Brussels to Latvia, neoliberal planners haveexpressed the hope that lower public-sector salaries will spread to theprivate sector. The aim is to roll back wage levels by 30 per cent ormore, to depression levels, on the pretense that this will “leave moresurplus” available to pay in debt service. It will do no such thing, ofcourse. It is a purely vicious attempt to reverse Europe’s ProgressiveEra social democratic reforms achieved over the past century. Europe isto be turned into a banana republic by taxing labor – not finance,insurance or real estate (FIRE). Governments are to impose heavieremployment and sales taxes while cutting back pensions and other publicspending.
“Join the fight against labor, or we will destroyyou,” the EC is telling governments. This requires dictatorship, and theEuropean Central Bank (ECB) has taken over this power from electedgovernment. Its  “independence” from political control is celebrated asthe “hallmark of democracy” by today’s new financial oligarchy. Thisdeceptive newspeak evokes Plato’s view that oligarchy is simply thepolitical stage following democracy. The new power elite’s next step inthis eternal political triangle is to make itself hereditary – byabolishing estate taxes, for starters – so as to turn itself into anaristocracy.
It is a very old game indeed. So it is time to putaside the economics of Adam Smith, John Stuart Mill and the ProgressiveEra, to forget Marx and even Keynes. Europe is ushering in an era oftotalitarian neoliberal rule. This is what Wednesday’s strikes anddemonstrations were about. Europe’s class war is back in business – witha vengeance!
This is economic suicide, but the EU is demandingthat Euro-zone governments keep their budget deficits below 3 per centof GDP, and their total debt below 60 per cent. On Wednesday the EUpassed a law to fine governments up to 0.2 per cent of GDP for not“fixing” their budget deficits by imposing such fiscal austerity.Nations that borrow to engage in countercyclical “Keynesian-style”spending that raises their public debt beyond 60 per cent of GDP willhave to reduce the excess by 5per cent each year, or suffer harshpunishment. The European Commission (EC) will fine euro-area states thatdo not obey its neoliberal recommendations – ostensibly to “correct”budget imbalances.
The reality is that every neoliberal “cure” onlymakes matters worse. But rather than seeing rising wage levels andliving standards as being a precondition for higher labor productivity,the EU commission will “monitor” labor costs on the assumption thatrising wages impair competitiveness rather than raise it. If euromembers cannot depreciate their currencies, then they must fight labor –but not tax real estate, finance or other rentier sectors, notregulate monopolies, and not provide public services that can beprivatized at much higher costs. Privatization is not deemed to impaircompetitiveness – only rising wages, regardless of productivityconsiderations.
The financial privatization and credit-creationmonopoly that governments have relinquished to banks is now set to payoff – at the price of breaking up Europe. Unlike central banks elsewherein the world, the charter of the European Central Bank (ECB,independent from democratic politics, not from control by its commercialbank members) forbids it to monetize government debt. Governments mustborrow from banks, which are create interest-bearing debt on their ownkeyboards rather than having their national bank do it without cost.
The unelected members of the European Central Bankhave taken over planning power from elected governments. Beholden to itsfinancial constituency, the ECB has convinced the EU commission to backthe new oligarchic power grab. This destructive policy has been testedabove all in the Baltics, using them as guinea pigs to see how far laborcan be depressed before it fights back. Latvia gave free rein toneoliberal policies by imposing flat taxes of 51 per cent and higher onlabor, while real estate is virtually untaxed. Public-sector wages havebeen reduced by 30 per cent, prompting labor of working age (20 to 35year-olds) to emigrate in droves. This of course is contributing to theplunge in real estate prices and tax revenue. Lifespans for men areshortening, disease rates are rising, and the internal market isshrinking, and so is Europe’s population – as it did in the 1930s, whenthe “population problem” was a plunge in fertility and birth rates(above all in France). That is what happens in a depression.
Iceland’s looting by its bankers came first, butthe big news was Greece. When that nation entered its current fiscalcrisis as a result of not collecting taxes on the wealthy, EuropeanUnion officials recommended that it emulate Latvia, which remains theposter child for neoliberal devastation. The basic theory is thatinasmuch as members of the euro cannot devalue their currency, they mustresort to “internal devaluation”: slashing wages, pensions and socialspending. So as Europe enters recession it is following precisely theopposite of Keynesian policy. It is reducing wages, ostensibly to “free”more income available to pay the enormous debts that Europeans havetaken on to buy their homes and pay for schooling (hitherto providedfreely in many countries such as Latvia’s Stockholm School ofEconomics), transportation and other public services. Manly suchservices have been privatized and subsequently raised their ratesdrastically. The privatizers justify this by pointing to the enormouslybloated financial fees they had to pay their bankers and underwriters inorder to get the credit to buy the infrastructure that was being soldoff by governments.
So Europe is committing economic, demographic andfiscal suicide. Trying to “solve” the problem neoliberal style onlymakes things worse. Latvia’s public-sector workers, for example, haveseen their wages cut by 30 per cent over the past year, and its centralbankers have told me that they are seeking further cuts, in the hopethat this will lower wages in the private sector as well, just asneoliberals in other European countries hope, as noted above.
About 10,000 Latvians attended protest meetings inthe small town of Daugavilpils alone as part of the “Journey into theCrisis.” In Latvia’s capital city, Riga, Wednesday’s Action Day saw theusual stoppage of transportation and an accompanying honk concert for 10minutes at 1 PM to let the public know that something was happening.Six independent trade unions and the Harmony Center organized a protestmeeting in Riga’s Esplanade Park that drew 700 to 800 demonstrators,relatively large for so small a city. Another union protest saw abouthalf that number gather at the Cabinet of Ministers where Latvia’sausterity program has been planned and carried out.
What is happening most importantly is the nationalparliamentary elections this Saturday (October 2). The leadingcoalition, Harmony Center, is pledged to enact an alternative tax andeconomic policy to the neoliberal policies that have reduced labor’swages and workplace standards so sharply over the past decade. A fewdays earlier a bus tour drove journalists to the most visible victims –schools and hospitals that had been closed down, government buildingswhose employees had seen their salaries slashed and the workforcedownsized. 
These demonstrations seem to have gained votersympathy for the more militant unions, headed by the hundred individualunions belonging to the Independent Trade Union Association. The otherunion group – the Free Trade Unions (LBAS) lost face by acquiescing inJune 2009 to the government’s proposed 10per cent pension cuts (andindeed, 70per cent for working pensioners). Latvia’s constitutionalcourt was sufficiently independent to overrule these drastic cuts lastDecember. And if the government does indeed change this Saturday, theconflict between the Neoliberal Revolution and the past few centuries ofclassical progressive reform will be made clear.
In sum, the Neoliberal Revolution seeks to achievein Europe what the United States has achieved since real wages stoppedrising in 1979: doubling the share of wealth enjoyed by the richest 1per cent. This involves reducing the middle class to poverty, breakingunion power, and destroying the internal market as a precondition.
Latvia’s Harmony Center program shows that there isa much easier way to cut the cost of labor in half than by reducing itswages: Simply shift the tax burden off labor onto real estate andmonopolies (especially privatized infrastructure). This will leave lessof the economic surplus to be capitalized into bank loans, lowering theprice of housing accordingly (the major factor in labor’s cost ofliving), as well as the price of public services. (Owners of monopolyutility services would be prevented from factoring interest charges intotheir cost of doing business. The idea is to encourage them to takereturns on equity. Whether or not they borrow is a business decision oftheirs, not one that governments should subsidize.) The taxdeductibility of interest will be repealed – there is nothingintrinsically “market dictated” by this fiscal subsidy for debtleveraging. This program may be reviewed at rtfl.lv, the Renew TaskForce Latvia website.
No doubt many post-Soviet economies will findthemselves obliged to withdraw from the euro area rather than see aflight of labor and capital. They remain the most extreme example of theNeoliberal Experiment to see how far a population can have its livingstandards slashed before it rebels.
But so far the neoliberals are fully in control ofthe bureaucracy, and they are reviving Margaret Thatcher’s slogan, TINA:There Is No Alternative. But there is an alternative, of course. In thesmall Baltic economies, pro-labor parties are pressing for thegovernment to shift the tax burden off employees and consumers back ontoproperty and financial wealth. Bad debts beyond the reasonable abilityto pay must be scaled back. It may be necessary to let the banks gounder (they are mainly Swedish), even if this means withdrawing from theEuro. The choice is between who will be destroyed: the banks, or labor?
European politicians now view this as being truly afight to the death. This is the ideology that has replaced socialdemocracy.
Michael Hudson is a former WallStreet economist. A Distinguished Research Professor at University ofMissouri, Kansas City (UMKC), he is the author of many books, including SuperImperialism: The Economic Strategy of American Empire (new ed.,Pluto Press, 2002) and Trade,Development and Foreign Debt: A History of Theories of Polarization v.Convergence in the World Economy. He can be reached via his website,mh@michael-hudson.com

Il default greco? Solo questione di tempo

Il Fmi sta valutando di elargire un nuovoprestito alla Grecia per scongiurare il rischio di un default nazionale.Ma proprio a questa ipotesi sembrano credere ormai in molti. E perqualcuno c'è solo da aspettare Il Fondo Monetario Internazionale sta valutando l’ipotesi di garantireun nuovo sostegno finanziario alla Grecia una volta esaurito ilprogramma tuttora in corso. Notizia confermata anche dal Wall StreetJournal che ieri ha citato una fonte anonima vicina all’organismo. Peril Governo di Atene è una prospettiva salubre, considerato che soltantoil Fondo può garantire la salvezza del paese.Per quanto dal Fondo tengano a precisare di non credere nell’ipotesibancarotta, infatti, l’apertura nei confronti di un ulteriore interventosalva-Atene suona implicitamente come un’effettiva ammissione di.................................

Basel III: The Global Banks at The Edge of The Precipice. Trillions of "Toxic Waste" in the Global Banking System

- 2010-09-19


The Global Too Big To Fail Banks are so precarious thatliterally anything can trigger a collapse in the coming months.
I have read recentcommentaries on Basel III posted to various renowned websites andfinancial publication, but they missed (or deliberately misled) the underlyingmessage of the proposals, the implementation of which will bedelayed till 2017 and some till 2019.

Basel III is pure spin andits timing was to assuage the deep-seated fears that there are nosolutions in sight to save the fiat money system and fractional reservebanking.

Themajor global banks are all under-capitalised and this wasall too apparent when Lehman Bros. collapsed. Banks were borrowing somuch and so recklessly to play at the global casino that when the betswent sour, they were staring at a black-hole in the $trillions. In factthe banks are all insolvent.

The problem was compounded when thecentral bankers (all are corrupt without exception) and regulatorsturned a blind eye to how bankers defined what constituted “capital” soas to circumvent the need to maintain the capital ratio.


At its 12 September 2010 meeting, theGroup of Governors and Heads of Supervision, the oversight body of theBasel Committee on Banking Supervision, announced a substantialstrengthening of existing capital requirements and fully endorsed theagreements it reached on 26 July 2010.

These capital reforms,together with the introduction of a global liquidity standard, deliveron the core of the global financial reform agenda and will be presentedto the Seoul G20 Leaders summit in November.

TheCommittee’s package of reforms will increase the minimum common equityrequirement from 2% to 4.5%.

In addition, bankswill be required to hold a capital conservation buffer of 2.5% towithstand future periods of stress bringing the total common equityrequirements to 7%.

This reinforces the strongerdefinition of capital agreed by Governors and Heads of Supervision inJuly and the higher capital requirements for trading, derivative andsecuritisation activities to be introduced at the end of 2011.

Increasedcapital requirements

Underthe agreements reached, the minimum requirement for common equity, thehighest form of loss absorbing capital, will be raised from the current2% level, before the application of regulatory adjustments, to 4.5%after the application of stricter adjustments.

This will be phased in by 1 January 2015.

TheTier 1 capital requirement, which includes common equity and otherqualifying financial instruments based on stricter criteria, willincrease from 4% to 6% over the same period.

The Groupof Governors and Heads of Supervision also agreed that the capitalconservation buffer above the regulatory minimum requirement becalibrated at 2.5% and be met with common equity, after the applicationof deductions.

The purpose of the conservation buffer is toensure that banks maintain a buffer of capital that can be used toabsorb losses during periods of financial and economic stress.

Whilebanks are allowed to draw on the buffer during such periods of stress,the closer their regulatory capital ratios approach the minimumrequirement, the greater the constraints on earnings distributions.

Thisframework will reinforce the objective of sound supervision and bankgovernance and address the collective action problem that has preventedsome banks from curtailing distributions such as discretionary bonusesand high dividends, even in the face of deteriorating capital positions.

Acountercyclical buffer within a range of 0% - 2.5% of common equity orother fully loss absorbing capital will be implemented according tonational circumstances.

The purpose of the countercyclicalbuffer is to achieve the broader macroprudential goal of protecting thebanking sector from periods of excess aggregate credit growth.

Forany given country, this buffer will only be in effect when there isexcess credit growth that is resulting in a system wide build up ofrisk.

The countercyclical buffer, when in effect, would beintroduced as an extension of the conservation buffer range.

Thesecapital requirements are supplemented by a non-risk-based leverageratio that will serve as a backstop to the risk-based measures describedabove.

In July, Governors and Heads of Supervision agreed totest a minimum Tier 1 leverage ratio of 3% during the parallel runperiod.

Based on the results of the parallel run period,any final adjustments would be carried out in the first half of 2017with a view to migrating to a Pillar 1 treatment on 1 January 2018 basedon appropriate review and calibration.

Systemicallyimportant banks should have loss absorbing capacity beyond the standardsannounced today and work continues on this issue in the FinancialStability Board and relevant Basel Committee work streams. [1]


Since the onset ofthe crisis, banks have already undertaken substantial efforts to raisetheir capital levels.

However, preliminary results of theCommittee’s comprehensive quantitative impact study show that as of theend of 2009, large banks will need, in the aggregate, a significantamount of additional capital to meet these new requirements.

Smallerbanks, which are particularly important for lending to the SME sector,for the most part already meet these higher standards.

TheGovernors and Heads of Supervision also agreed on transitionalarrangements for implementing the new standards.

Thesewill help ensure that the banking sector can meet the higher capitalstandards through reasonable earnings retention and capital raising,while still supporting lending to the economy.


Please readall the passages which I have highlighted in bold in the aboveparagraphs. If the banks were at all material times adequatelycapitalised and the central bankers in collusion with these bankstersand fraudsters were prevented from manipulations, there would not be anyneed for Basel III regulations.

In saying this, I am not inanyway conceding that even with these new requirements, the banks willbe adequately capitalised.

The simple truth is that as long asthe derivative casino is still running and banks are allowed to continuetheir off balance sheet activities, nothing will be resolved.

The2 tables below tell the whole story:

Source: Basel iii Compliance Professionals Association (Biii CPA)

How can the ultimate capital requirement of 8percent be adequate when leverage under Basel III is still allowed atthe astronomical rate of 33:1?

In the second table, and it is ano brainer to conclude that the banking crisis (if we are lucky)may be “resolved” by 2015 but it is most likely that itcan be only resolved by 2017/2018 .

This is an expressadmission that all banks would require such a long transition period tocomply with the new requirements!

The stark reality is thatthe Too Big To Fail Banks do not have the ability and or the means toraise capital at this critical juncture.

To use an analogy,the banking patient will be in Intensive Care until 2017, which israther optimistic for the projection implies that the patient may beable to recover.

It is my view that Basel III is pure spin andis intended to convey the impression that the central bankers andregulators have things under control. This is a big lie!

Ihave said in my earlier article that the FED through QEI purchased toxicassets from the banks and part of the monies were used to shore up thereserves and part to purchase treasuries (to give an illusion of betterquality assets in banks’ balance sheet).

There are so much more,$trillions more of toxic waste that no amount of QE (quantitativeeasing) can remove them. This situation does not even take intoconsideration the toxic waste in SPVs – the off balance sheet mumbojumbos. The FED and Accounting Bodies have suspended accounting andregulatory rules that have enabled the banks to hide such toxic waste inSPVs and not having to account for them in the banks’ balance sheet.


QEI has merely enable the Too Big To Fail Banks tocontinue some form of banking activities thus deceiving the public thatthey are solvent and prevent a bank run.

But the central bankerscannot have the cake and eat it as well. In trying to shore up publicconfidence in banks with the introduction of Basel III, they haveinadvertently let the cat out of the bag and as the above two tablesshow, the banks are all insolvent.

Additionally, whateverreserves that have been accumulated are insufficient to stimulatefurther lending, because the banks have reached their limits underthe fractional reserve system.  This is the reason for thecontraction of credit and not as one commentator has postulated thatBasel III would “contract credit”.

Two burdens are weighing downon the banks:

1)    inadequate capital to meet liabilities(borrowings); and

2)    inadequate reserves under fractionalreserve banking.

This is a big mess!


At thismoment, I cannot give a precise time-line as to how long the FED and theglobal central banks can prolong the confidence game, hoodwinking thepublic and sovereign creditors that all is well.

When confidencein banks evaporates for whatever reasons, the consequences will be uglyand there will be massive social upheavals across the globe.

Thefirst indication that the game is up is when US treasuries areincreasingly purchased by the FED to make up for the shortfalls byforeign creditors and to finance the ballooning US deficits.

Allof a sudden, some entities may start to get real nervous and unload thetreasuries, and the FED steps in to shore up treasuries. Then, thetipping point is reached and Hell breaks loose!

China is alsopart of this confidence game.

But, contrary to IMF and otherrenowned economists who are betting on China’s and Asia’s so-calledeconomic strengths, I take the view that when US treasuries collapse, faithin all fiat monies will likewise evaporate and there will be massivecapital flight to commodities, especially gold, silver and oil.

Asianstock markets will be devastated and there will be volatile gyrationsin currency values.

Therefore, it is utter lunacy andrecklessness for the Malaysian central bank (Bank Negara) and thegovernment to even consider allowing the ringgit to be traded.

Whenconfidence in dollar assets vaporises, China will be caught right inthe middle. The third and final phase of the Global Financial Tsunamiwill devastate Asian economies and with it, the greatest depression inhistory will ensue.

Time Line?

Between now and anytime in2011.

At the latest, 2012.

God help us.