Olduvaiblog: Musings on the coming collapse

Home » 2013 » October » 17

Daily Archives: October 17, 2013

Draghi On Gold “I Never Thought It Wise To Sell” | Zero Hedge

Draghi On Gold “I Never Thought It Wise To Sell” | Zero Hedge. (FULL ARTICLE)

While Ben Bernanke would prefer not to discuss the barbarous relic, having noted in the past that “nobody really understands gold prices,” it would seem his European brother-in-arms has a different opinion. When asked this week, by the ironically named Tekoa Da Silva, his thoughts on precious metals as reserve assets (and central banks around the world increasing their allocations), none other than the ECB head himself Mario Draghi explained “I never thought it wise to sell [gold], because for Central Banks this is a reserve of safety.” But Draghi did not stop there, and perhaps enlightened by the farce in Washington this week, the unusually truthful central banker explained, “in the case of non-USD countries, it gives you good protection against fluctuations of the USD.” Perhaps that is why China continues to import gold at a record pace? Oh, and don’t fight the ECB…


TransCanada Pipeline Leak Being Investigated

TransCanada Pipeline Leak Being Investigated. (source)

CALGARY – Service on a natural gas pipeline that feeds oilsands producers in northern Alberta has been mostly restored after being disrupted by a leak.

“TransCanada (TSX:TRP) has confirmed that its response personnel successfully isolated the pipeline break section that occurred earlier (Thursday) on our North Central Corridor system, and has now resumed delivery of natural gas to most of its industrial customers in the area,” said spokesman Shawn Howard.

“TransCanada will be working with its remaining customers to restore full service.”

Howard said a drop in pressure on the line, 140 kilometres west of Fort McMurray, was detected about 2:50 a.m. Thursday.

At least one oilsands producer in the area was affected by the leak. A Suncor spokeswoman said its operations have been slowed, but that it was too early to say by how much.

No public safety threat was expected from the leak in the 92-centimetre-wide pipe. It carries sweet gas, which is low in poisonous hydrogen sulphide.

The nearest residence is about 50 kilometres away. Although a work camp is a couple of kilometres from the site, it was not evacuated.

“Natural gas, particularly sweet natural gas, does tend to dissipate quite quickly into the atmosphere,” said Rebecca Taylor, spokeswoman for the National Energy Board.

“You wouldn’t see pooling of product on the ground.”

First Nations in the area were notified of the leak, she added.

A spokesman for the Transportation Safety Board said the agency was aware of the leak and was following up with the company to gather more information. No decision had been made by Thursday afternoon to send investigators.

Howard said the cause of the line break is not yet known and will be determined during a subsequent investigation.

Energy board investigators were on site.


Most RCMP withdraw after shale gas clash in Rexton – New Brunswick – CBC News

Most RCMP withdraw after shale gas clash in Rexton – New Brunswick – CBC News. (source)

The mood has changed at a standoff that turned violent today in Rexton, N.B., between shale gas protesters and the RCMP.

The majority of police at the scene left around 7 p.m., to cheers from a crowd of protesters.

John Levi, a First Nations chief on the scene, had earlier spoken to RCMP officers — trying to reach an agreement on ending the standoff.

It is not known what was said but, at the end of the conversation some 40 officers, who were wearing shields and helmets, left. About a dozen remained.

Levi later said that First Nations may have “lost the battle” referring to the fact that SWN Resources, the company at the centre of the conflict, has not agreed to stop shale gas seismic testing, as the protesters demand.

But “we have not lost the war,” he added.

Earlier in the day, protesters and RCMP clashed, leading to at least five police vehicles being set on fire and the arrest of a First Nations chief.

‘We urge all sides not to resort to violence as history has proven these tactics are not productive.’— Chief Gabriel Atwin, Kingsclear First Nation

In a news release, the RCMP said more than 40 protesters were arrested for various offences including firearms offences, uttering threats, intimidation, mischief and for refusing to abide by a court injunction.

The protesters arrested were taken to three different communities where they are expected in court Friday morning around 9:30 to face charges. Police spread the arrested protesters out in an effort to prevent the courthouses being overwhelmed by protest supporters during the arraignments.

The RCMP said at least one shot was fired by someone other than police and that Molotov cocktails had been thrown at police, while at least five RCMP vehicles were destroyed by fire. Police also investigated suspected explosive devices at the scene.

The clashes started at about 1 p.m. after police fired pepper spray at the protesters, who were trying to push through the police line.

RCMP spokeswoman Const. Jullie Rogers-Marsh said that no rubber bullets were used but that RCMP members used “sock rounds” — also known as bean bag rounds, which are a type of non-lethal ammunition — on two occasions during the clash in an attempt to defuse the situation.

CBC reporter, Jennifer Choi, said thick black smoke was billowing from the scene, and she could hear popping and see sparks in at least one of the flaming vehicles.

It is not known whether ammunition was in the vehicles. Bystanders backed away from the fire as a precaution, Choi said.

First Nations leader arrested

T.J. Burke, the lawyer for the Elsipogtog First Nation, confirmed Chief Aaron Sock was among those arrested in the clash. He and a few of his band council members were released a few hours after their arrests.

Sock is the leader of the band that has beenblockading Route 134 near Rexton since Sept. 30.

On Oct. 1, Sock issued an eviction notice to SWN Resources of Canada. His band and his band council planned to pass a resolution preventing the government and shale gas companies from continuing their work by reclaiming all unoccupied reserve land and giving it back to First Nations.

It remained unclear exactly which land is involved, and how the band council planned to take it back, but Sock said getting SWN to remove its equipment would be a start.

Sock said earlier that, for centuries, the British Crown claimed to be holding the land in trust for his people, but since the land is being badly mismanaged, First Nations people are taking it back.

The road between Rexton and Highway 11 has been the scene of the protest, involving a coalition of natives and non-natives opposed to shale gas exploration.

Protesters moved into the area on Sept. 30, initially establishing a barricade to the staging area used by SWN Resources Canada to park its exploration vehicles and equipment.

The protest progressed to the point where barricades were also established on the road, preventing traffic from going through.

SWN Resources went to the Court of Queen’s Bench and successfully sought an injunction to end the protest.

During a hearing, court was told SWN Resources is losing $60,000 every day its seismic exploration trucks remain blockaded in the compound off Route 134.

NB Shale Gas Protest 20131017RCMP in Rexton, N.B. say at least five police vehicles were set ablaze during a protest against shale gas exploration turned violent Thursday. (Andrew Vaughan/Canadian Press)

The injunction authorized police to arrest and remove anyone contravening the order to allow traffic to pass on the highway. However, with negotiations taking place between the two sides, the RCMP didn’t immediately enforce the injunction.

On Friday, the injunction was extended. A single lane of Route 134 was subsequently reopened.

The RCMP moved in on the protesters on Route 134 in Rexton this morning.

RCMP notified the public at 7:45 a.m. about the closure of Route 134. A subsequent notice at 8:21 a.m. indicated Highway 11 was closed between Rexton and Sainte-Anne-de-Kent, and that delays could be expected.

The RCMP said the court injunction remains in effect and anyone who violates its conditions can be arrested and charged.

Video taken by protesters that was submitted to CBC shortly after the police started enforcing the injunction shows officers with dogs moving toward the protest encampment on the side of road. Protesters are yelling obscenities at police and inform them elders and children are present.

Meanwhile, an Anglophone North school district notice on its website said three schools in the area were open but under lockdown as a precaution. Around noon, the board announced Rexton Elementary, Eleanor W. Graham Middle School and Bonar Law Memorial High School would close for the day, and students would be sent home.

“Safety and security is paramount for our students and staff,” said the school district’s public notice.

N.B. chiefs call for peace

National Chief for the Assembly of First Nations Shawn Atleo released a statement Thursday night, pledging support for the peaceful protest involving Elsipogtog First Nation.

“Please know that we — and First Nations across the country — stand proudly in solidarity with you and your community. Most importantly, the safety and security of our citizens is our foremost concern at this time,’ he said.

Chief Gabriel Atwin said earlier in the day members of Kingsclear First Nation were demonstrating peacefully on Route 105.

In a news release, Atwin said the Assembly of First Nations in New Brunswick “strongly condemns the acts of aggression that have taken place today within the Mi’kmaq traditional territory near Elsipogtog. We urge all sides not to resort of violence as history has proven these tactics are not productive.”

Atwin noted, however, that for the past two years, First Nations in New Brunswick have tried to work within the confines of “a restrictive, compartmentalized consultation process” when it comes to seismic testing in the province.

  • An RCMP cruiser and another unmarked vehicle burn near the shale gas protest in Rexton, N.B.
1 of 13

He said the whole process is “completely unworkable because it runs counter to our customs and traditions.”

In the same release Assembly Co-chair Chief George Ginnish said the consultation process should include “conversation on potential impacts to our constitutionally protected rights, and provide options to mitigate these dangers.”

Ginnish has called on “an immediate end to the violence by all involved, to restart the process taking into account all perspectives in New Brunswick and the inalienable rights of aboriginals.”

Politicians in New Brunswick have also spoken out about the protest.

Opposition Leader Brian Gallant released a statement calling on protesters to respect the injunction and that he hopes for a peaceful resolution.

“I witnessed the protest first-hand this morning. There is much angst and anxiety at the protest site and in the surrounding communities. The dialogue must immediately resume in order to resolve the differences that have arisen,” he said.

New Brunswick Premier David Alward’s office has not returned calls from the CBC, but Alward posted a statement on the government’s website saying he is “deeply troubled that violence has erupted on Route 134 near Rexton.”

“While we respect and defend the right of individuals to protest peacefully, we cannot endorse or tolerate unlawful activity,” he said.

Alward also said the government of New Brunswick will do everything in its power to bring about a peaceful resolution.

Related articles

Fukushima Beta-Radiation Levels Soar To New Record In Aftermath Of Typhoon Wipha | Zero Hedge

Fukushima Beta-Radiation Levels Soar To New Record In Aftermath Of Typhoon Wipha | Zero Hedge. (source)

It is only fitting that on the day the Stalingrad & Poorski 500 rises to a new record high, that that other centrally-planned catastrophe, the exploded Fukushima nuclear power plant, in the aftermath of Japan’s Radioactivetyphoonado reports a completely different record: namely the level of beta radiation levels at Fukushima. Bloomberg notes that the nationalized utility Tepco, which has taken denial to a different superstring dimension altogether, has detected beta radiation levels of 400,000 becquerels per liter in a water sample taken yesterday from a monitoring well near storage tank area H4 at Fukushima Dai-Ichi nuclear plant. This was the highest reading on record. This number compares to Beta radiation levels of 61 Bq/L in the sample taken Oct. 16 and 90 Bq/L in the Oct. 15 sample.

Japan Times has more:

The highest level yet of beta ray-emitting radioactive substances, including strontium, has been detected at one point in a drainage ditch at the crippled Fukushima No. 1 nuclear plant where measurements are regularly taken, Tokyo Electric Power Co. said Thursday.

According to Tepco, a water sample taken Wednesday at a point in the ditch some 300 meters from the ocean was found to contain 1,400 becquerels per liter of beta ray-emitting radioactive substances, the highest level ever detected at that location.

Tepco said water that passed through the ditch may have entered the sea.

A water sample taken Tuesday at the same point contained 19 becquerels of such radioactive substances.

The radiation level surged after heavy rain caused by Typhoon Wipha, which hit the Tohoku region, including Fukushima Prefecture, on Wednesday, Tepco said. It is thought the rain washed out radioactive substances that had been absorbed by the ground.

Radiation levels also hit record highs in water samples collected Wednesday at three upstream points in the drainage ditch, which passes close to the storage tank from which highly radioactive water spilled in August, with the amount of beta ray-emitting radioactive substances ranging from 2,000 to 2,300 becquerels per liter.

And while 400,000 may sound like a lot, keep in mind it is substantially less than the P/E Ratio that Mr. Yellen has in store for the S&P before this whole manipulated farce ends up in a just as radioactive pile of dust.


WHO: Air pollution leading cause of cancer – Europe – Al Jazeera English

WHO: Air pollution leading cause of cancer – Europe – Al Jazeera English. (source)

Outdoor air pollution is a leading cause of cancer in humans, according to the International Agency for Research on Cancer (IARC), an arm of the World Health Organisation (WHO).

The IARC said on Thursday that a panel of top experts had found “sufficient evidence” that exposure to outdoor air pollution caused lung cancer and raised the risk of bladder cancer.

The predominant sources of outdoor air pollution were transport, power generation, emissions from factories and farms, and residential heating and cooking, the UN agency said.

The most recent data, from 2010, showed that 223,000 lung cancer deaths worldwide were the result of air pollution, the report said.

“Our task was to evaluate the air everyone breathes rather than focus on specific air pollutants,” said the IARC’s Dana Loomis.

“The results from the reviewed studies point in the same direction: the risk of developing lung cancer is significantly increased in people exposed to air pollution,” he added.

Industrial pollution

Although the composition of air pollution and levels of exposure can vary dramatically between locations, the agency said its conclusions applied to all regions of the globe.

It said pollution exposure levels increased significantly in some parts of the world in recent years, notably in rapidly industrialising nations with large populations.

The latest findings were based on overall air quality, and based on an in-depth study of thousands of medical research projects conducted around the world over decades.

Air pollution was already known to increase the risk of respiratory and heart diseases.

“Classifying outdoor air pollution as carcinogenic to humans is an important step,” said the IARC’s director Christopher Wild.

“There are effective ways to reduce air pollution and, given the scale of the exposure affecting people worldwide, this report should send a strong signal to the international community to take action without further delay.”

The data did not enable experts to establish whether particular groups of people were more or less vulnerable to cancer from pollution, but Kurt Straif of IARC said it was clear that risk rose in line with exposure.

Diesel exhaust and what is known as “particulate matter” – which includes soot – have been classified as carcinogenic by the IARC.

The IARC said that it was set to publish its in-depth conclusions on October 24 on the specialised website The Lancet Oncology.


You Either Believe In Magic Or You Believe In Math | Zero Hedge

You Either Believe In Magic Or You Believe In Math | Zero Hedge. (FULL ARTICLE)

While Santiago Capital’s Brent Johnson believes “anything is possible,” he warns “there’s a catch.” While it may be true for the individual (climb Everest, win a gold medal, walk on the moon), it is not true for the world at large because, as he so eloquently notes in this brief presentation, “the best thing we can learn from history is… that the world does not learn from history.” And there is indeed plenty that is occurring once again – in oh-so-predictable cycles – that we have seen time and time again… and apparently choose to ignore the conclusion. As Johnson concludes, “you either believe in magic, or you believe in math.”



Something here for everyone… 4th Turnings, Kondratieff Waves, Dalio’s beautiful deleveraging, the unsustainable nature of the current cycle and the pulling forward of our demand… “you either believe in magic… or you believe in math”


Slowly at first, then all at once

Slowly at first, then all at once. (source)

How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”

The dialogue above is from Ernest Hemingway’s 1926 novel, The Sun Also Rises.

It’s often attributed to Mark Twain or F. Scott Fitzgerald, or misquoted as something like “At first you go bankrupt slowly, then all at once.” But the theme is the same.

Nations go bankrupt in the same way. Banking collapses occur in the same way. Currency crises strike in the same way. They all happen gradually… and then suddenly. Sometimes overnight.

History is generous with examples of entire nations that have suffered this fate, from the collapse of the Soviet Union in 1991 to Argentina’s millennial financial crisis in 2001.

The warning signs are always there, even at the beginning. Over a period of years, sometimes decades, a tiny trickle of warning signs turns into a steady stream… and eventually a great flood.

The United States is clearly within this model, somewhere between a steady stream and a great flood. It shows.

Last night, after more than two weeks of utterly embarrassing theater, the government in the Land of the Free inked a deal to kick the can down the road a few more months. And in doing so, they set a very dangerous precedent.

As part of the bargain codified in HR 2775 (which President Obama signed into law), the Treasury Department is authorized to SUSPEND the debt ceiling. In other words, for all intents and purposes, there is now NO LIMIT government borrowing.

This limitless borrowing authority will expire on February 7, 2014. But it sets the precedent that dismissing the debt ceiling is a perfectly viable course of action.

Congress has effectively removed their handcuffs… so you can almost assuredly bet down the road that this provision will be extended, and ultimately become permanent.

No one in the Land of the Free seems to care. But foreigners do. The lead commentary out of China’s state media the other day was very clear in its position:

“It is perhaps a good time for the befuddled world to start considering building a de-Americanized world.”

America’s dominance is coming to an end. Nearly every piece of objective evidence points to this conclusion– from the US government’s absurdly unsustainable finances to the worldwide backlash against their desperate spying tactics.

For several years now, this decline has been happening gradually. But we are quickly reaching the bifurcation point where the steady stream of warning signs will turn into an epic flood of consequences.

As these events unfold, this will become the biggest story of our time. The end of the US dollar hegemony will affect nearly every human being on the planet. And if history is any guide, what follows will be incredibly tumultuous.

The answer depends on what kind of person you are: would you rather be a year early or a day late?

If you agree with this premise and can see the obvious writing on the wall, one thing that’s absolutely critical is to have the right information about the solutions. And there are solutions.

For example, moving a portion of your savings to a safe, stable bank overseas gets your money out of a dying currency and declining country, away from the thieving bureaucrats in your home country.

And this is something that makes sense, no matter what. Even if nothing ‘bad’ ever happens, you won’t be worse off for having some savings in a strong bank overseas.

This is an incredibly sensible, simple step to take. But it’s imperative to have the right intelligence on how to begin. Where to go? Which bank? Who to contact?

Sovereign Man’s Offshore Insider: Starter Edition contains the most critical information and contacts you need to know to start taking action today, distilling years of my own personal experience and contacts into one low-cost action kit.

A small effort right now can make the difference between prosperity and despair down the road.

These are rational steps that prudent people that have seen the writing on the wall have been taking for centuries. I encourage you to take action now and be on the right side of history.


Deflation Land: Why I stopped worrying and learned to love the currency collapse

Deflation Land: Why I stopped worrying and learned to love the currency collapse. (source)

For the past 300 years, the historical pattern has been for the era marked by a century to continue into the following century by fourteen or fifteen years.

Let me explain.  Everyone knows that the 19th Century, its uprightness, its optimism and sense of purpose, the halcyon days of British Empire, came to an end with World War I, starting in 1914 and building to a nasty crescendo by 1916.  The 20th Century had arrived, and it had some real horrors in store for us.

Germans before Kraftwerk



But if we return back another hundred years, we notice that the 18th Century ends in 1815 with the final defeat of Napoleon, that final project of the Enlightenment and of the French Revolution.  With the Congress of Vienna in 1814-1815, we have a new Europe along the lines of Metternich’s plan, and the 19th Century at last is here.



“Sorry, guys.  My bad.”



In 1713 and 1714, we have the Treaties of Utrecht, Baden, and Rastatt, bringing an end to the era of Spain as a major power, and the rise of the Habsburgs.  Louis XIV dies in 1715, after reigning for 72 years.  The Baroque period is over, and we are now firmly in the 18th Century.



War of Spanish Succession



We still live in the 20th Century.  Nothing much significant has changed in our lives in the past twenty years.  Symptoms of a deeper rot are appearing here and there, foreshadowing a larger crisis, but the crisis itself has not arrived yet.  We still live in an era of Pax Americana, the old republic very much a strained and tired Empire now, with the U.S. Dollar as the world’s reserve currency.



That is going to change.



The next task for History is to dismantle the untenable structures and institutions put in place by late Modernity, which have been extended now as far as they can go.  Our debt-based monetary system will collapse, our unbacked fiats will be worthless.  The debts and unmeetable obligations will all default.



There are ironies and great contradictions as the former home and hope of Liberty becomes viciously unfree and increasingly despotic.  Our leaders no longer govern, but try instead to rule us — they are less legitimate with each passing day, their laws corrupt or worse.  They are nearly finished, and will be swept away with the tide.



Just as in 1914, the internationalist system will break down, dashing the hopes of the would-be first-world nations.  We will probably have a pretty good war as well, or many local ones worldwide.  These transitions tend to involve war.



Deflation first — it clears the way for the complete loss of faith and hyperinflation that will follow.  The next big wave down in the financial markets is the battering ram.  The U.S. national debt is about faith, so is quantitative easing, and so is the very idea of magical coins that could ever be “worth” a trillion dollars.  When this is faith breaks, in concert with loss of faith in perpetual growth and unlimited cheap energy, then things will move very, very quickly.



There is nothing any of us can do at this point, except navigate the rapids as well as possible, and to stay out of the way of a dying empire, which is still very dangerous in its death throes.  We are actually very privileged to be alive and witnessing this next transition, to what we do not know just yet.  But what an honor to live at this time, not in ignorance but with an existential resolve to come out of it alive and much the wiser.



Ass Americana



House resumes with NDP targeting secret committees – Politics – CBC News

House resumes with NDP targeting secret committees – Politics – CBC News. (source)

The NDP made Prime Minister Stephen Harper their first target as Parliament resumed today, questioning what he knew about a deal between Senator Mike Duffy and his former chief of staff.

NDP House Leader Nathan Cullen and whip Nycole Turmel also set out a proposal to stop government MPs from pushing committees in-camera.

In question period, New Democrat Leader Tom Mulcair set his sights on Harper, who left Thursday morning for Brussels to sign a tentative trade deal with the European Union.

Mulcair listed a number of people close to Harper who are now under scrutiny over corruption or other allegations of wrongdoing, including senators, Harper’s former chief of staff, Nigel Wright, and his former parliamentary secretary, MP Dean Del Mastro, who faces charges over his election spending.

“These are chosen members of the prime minister’s own inner circle implicated in scandal,” Mulcair said.

“The prime minister needs to take responsibility for the climate of corruption that he created. Instead the prime minister flies off to Brussels … When will the prime minister stand up in this House and tell the truth to Canadians?”

Pierre Poilievre, minister of state for democratic reform, accused the NDP of being anti-trade.

“Once again the leader of the Opposition attacks our prime minister for travelling abroad to conclude the biggest trade agreement since NAFTA,” he said.

“The NDP would simply like to build a big brick wall around Canada. A brick wall that would keep out 80,000 jobs, that would keep away 500 million customers, that would keep away $1,000 in increased income for the average family.”

Limiting secret committee meetings

Earlier Thursday, Cullen and Turmel announced New Democrat MPs would push for committees to be more open.

Committees can go behind closed doors for planning purposes or when preparing a report, but Conservative MPs have been pushing them in-camera more and more than previous governments. They often use the tactic to kill opposition motions in secret. Conservative MPs form the majority on all parliamentary committees.

MPs are also forbidden from discussing what goes on behind closed doors afterward.

“The minute Conservatives don’t like a discussion that’s taking place in any of our committees, they go in-camera and shut the door on Canadians,” Cullen said.

“The abuse of this in-camera tool is undermining the work of all members of Parliament and increasing the skepticism of the Canadian public.”

New Democrat MPs will present motions in all committees next week, Cullen and Turmel said, laying out specific instances in which they can go in-camera:

  • To discuss wages, salaries and other employee benefits, contracts or other labour or personal matters.
  • For briefings concerning national security.
  • To discuss draft reports.

The motion also mandates that minutes be taken, including how each member votes when votes are taken.

NDP on offensive

“As parliamentarians, we must be accountable to those who elected us,” Cullen said, adding that towns and school boards use the same rules the NDP want to see in Parliament.

“In a healthy democracy, shutting the doors on debate should be limited to only the most exceptional circumstances.”

The Official Opposition hit the Hill on the offensive this morning.

NDP ethics critic Charlie Angus raised a question of privilege, which the party announced Wednesday. Angus is asking House Speaker Andrew Scheer to find Prime Minister Stephen Harper misled the House, when he said nobody in the Prime Minister’s Office knew about a deal between Wright and Senator Mike Duffy.

Wright paid back Duffy’s wrongly claimed Senate expenses. An ongoing RCMP investigation into the payment, and into Duffy’s expense claims, alleges Wright told them three other PMO staffers, plus Senator Irving Gerstein, about the agreement.

The Senate committee in charge of financial and administrative matters, the board of internal economy, met Thursday at 9 a.m. ET.

The Senate as a whole will resume at 2 p.m. with a new government leader, Claude Carignan, and deputy leader, Yonah Martin. But unlike his predcessor, Carignan will not sit in cabinet.

Harper has removed the Senate leader from cabinet for the first time in 50 years.

One of the Senate’s first acts was to move to suspend without pay Duffy and Pamela Wallin, who is also under investigation by the RCMP.


Fonzie or Ponzi? One Theory on the Limits to Government Debt | CYNICONOMICS

Fonzie or Ponzi? One Theory on the Limits to Government Debt | CYNICONOMICS. (source)

fonzi 3

If you’re part of my generation and watched enough Happy Days back in the day, you know that “the Fonz” had a keen understanding of human nature. And that projecting confidence was a huge part of his alpha male badassness. He even admitted as much inepisode #45:


Fonzie: I’m gonna do something for you, Cunningham, I never did for anyone before. I’m gonna teach you the secret of being tough.
Richie: Wow, you don’t think I could ever…
Fonzie: WHO told you to talk?
Richie: I’m sorry Fonz.
Fonzie: That’s the secret.
Richie: What? I think I missed it.
Fonzie: You see how nervous you just got.
Richie: Yeah, but I thought you were gonna kill me.
Fonzie: Hey, that’s the point – I intimidated you. That’s because I got a majestic bearing, I got style, I got an attitude, I got a tough voice.
Richie: Let’s face it, you’re a good fighter.
Fonzie: Hey, I’m the best. But in the entire time you’ve known me, have youever seen me in a fight.
Richie: Well no, but that’s just because the other guy backs down first.
Fonzie: I rest my case.

I still remember watching the episode and puzzling over the revelation that the Fonz’s tough guy image was a confidence trick. And in the screwed-up way my mind works, Fonzie became my word association for other confidence tricks. For example, paper currencies are Fonzies because their value rests entirely on confidence in the governments that back them.

But some confidence tricks have characteristics that don’t quite fit the Fonz. Take the swindles known as Ponzi schemes. These are tricks that need an endless supply of participants to sustain confidence and stay alive. Once the participant pool depletes as it eventually must, the tricks are revealed as scams. Whereas Fonzies can persist indefinitely (at least in theory), Ponzis eventually collapse.

This distinction can be especially important for the asset class I’ll discuss here – government debt. Government debt usually fits the Fonzie category, but it moves into Ponzi territory in situations where public finances deteriorate. Needless to say, investors may like to know when this transition occurs. In other words, how can we tell when debt changes from Fonzie to Ponzi? I’ll give our best answers below, first by checking briefly with the late economist Hyman Minsky and then by drawing on a variety of research published on CYNICONOMICS this year.

Although Minsky may or may not have watched Happy Days, he did establish the best known criterion for Ponzi debt. He said that debt becomes “Ponzi finance” when the borrower needs to raise fresh capital just to cover interest on existing loans. But he focused on private rather than public borrowing.  With due respect to the prescient professor, we’ll tweak the definition to apply specifically to government debt.

Defining the “Ponzi point” for government debt

Ideally, governments would cruise along in Fonzie mode at all times, relying on the confidence of their creditors without taking too many liberties with those creditors. This is what we’ve seen in America for long stretches of history, especially in times of peace. In recent decades, though, fiscal discipline has crumbled. Deficit spending has become addictive in America and elsewhere, leaving governments with two choices:

  1. Feed the addiction. Continue to borrow heavily and accumulate debt, kicking the can down the road.
  2. Cure the addiction. Acknowledge and accept the costs of past profligacy, eliminating deficits and possibly also haircutting creditors.

Our definition of the Ponzi point is based on the amount of austerity that’s needed if policymakers were to choose the second option, as well as the effects of that austerity. But we won’t use a numerical measure, at least for now.  Instead, we’ll keep it simple and say that restoring fiscal discipline at the Ponzi point would cause the economy to break down for an unusually long period, failing to create jobs or growth. The downturn may or may not meet the textbook definition of a depression, but it would lead to depression-like joblessness. Think of today’s circumstances in countries such as Greece and Spain.

There are a few similarities between this “no growth, no jobs” scenario and a broken Ponzi scheme in the classic definition. The pipeline of new entrants to the system dries up in each case (in the government debt Ponzi, new graduates are unable to find work), while everyone else scrambles for a share of the dwindling wealth.

But the true Ponzi characteristics of the no growth, no jobs scenario are based on politics. Politicians are sure to second guess austerity in a depression or depression-like economy. Eventually, folks who insisted on fiscal responsibility lose sway and short-term thinking is reestablished. And with austerity considered a bad word, debt resumes its climb towards a different threshold, one that brings a far more devastating collapse.

This ultimate threshold – call it the Keynesian end game – is when investors refuse to lend more money, forcing the government to either default or start hyperinflating (probably with some wealth confiscation added in). It then becomes obvious to all that the government’s borrowing was essentially a Ponzi scheme.

The difference between the Ponzi point and the end game is important. At the Ponzi point, the game isn’t over just yet, but it’s a foregone if not widely-recognized conclusion that you’re on a path in that direction. The path is firmly established because serious action to reign in deficits would wreak havoc on the economy and change the political calculus about austerity. Also, most investors remain in the game at the Ponzi point, happy to hold government debt, in the same way that successful Ponzi schemers are able to find willing participants right up to the end. Large, developed nations such as the U.S. and Japan can sail right past their Ponzi points with nary a flutter in the financial markets. As I’ll argue in a moment, Japan has already passed its Ponzi point.

Think of it this way:

You’re swimming in the ocean on a perfect, sunny day, unaware of a riptide that’s pulling you far beyond a swimmable distance from shore. Once you realize what’s happened, you’ll surely struggle against the current and may pay for your mistake with your life if there’s no help at hand. But the mistake was made earlier when you didn’t pay attention to the water conditions and drifted past your ability to swim back safely. Let’s say it was halfway between the shoreline and where the rescue helicopter pulled you out that you unknowingly let yourself drift too far. That halfway spot was your Ponzi point.

In this swimming scenario, you should have turned around and swam back to shore well before reaching the Ponzi point, even as there may have been no obvious signs of danger. By the same logic, governments should take serious action well before public debt rises to Ponzi levels, even though they, too, may not get a clear warning of the eventual catastrophe.

The Fonzie/Ponzi thresholds

Now for our two cents on where the Ponzi point may lie for today’s large, developed countries. Smaller and emerging countries are a different story, because they often lose the confidence of their creditors and choose to default or restructure debt before the Ponzi point comes into play. But here’s our theory for the big countries:

fonzi ponzi table 1

Needless to say, thresholds are inexact in economics. As stated in earlier articles, that’s why we use big, round numbers. It’s also why we’ve chosen a broad range for the transition from Fonzie to Ponzi. At some point between 100% and 150% debt-to-GDP, we think the sovereign debt of today’s large, developed nations fundamentally changes. Bondholders who were merely perpetuating a confidence trick become participants in a Ponzi scheme.

These conclusions are influenced partly by historical research, with a handful of studies marking the range from 100% to 150% as transitionary:

  • We looked at all historical episodes of countries running debt-to-GDP ratios higher than America’s pre-GDP redefinition level of 105% (recall that the Bureau of Economic Analysis rewrote GDP history in July.) In every large country episode in which debt was successfully reduced below 90% of GDP without slamming creditors, this was achieved by balancing the budget. Not one of the large countries kept its creditors whole with today’s approach of running chronic deficits excused by Keynesian thinking. The small country results are more complicated but no less discouraging. See here for details.
  • We looked more closely at all episodes of countries running debt-to-GDP ratios above 150%. Creditors were kept whole in a few of these episodes, but each one involved wartime debt that was relatively easily managed by either dismantling military apparatus (post-World War II) or exploiting the spoils of military success (19thcentury British Empire). Every other case is either still ongoing or required a debt default or restructuring. What’s more, had we not restricted our threshold choice to a big, round number, we would have reached virtually the same conclusions at a threshold of only 120%. See here for details.
  • Many researchers have found connections between high debt-to-GDP ratios and sub-par economic performance. For example, studies have consistently shown that public debt above 100% of GDP (and usually slightly below) is associated with slow economic growth. Moreover, these results have withstood determined attempts to discredit them, as discussed here and contrary to erroneous reports that flooded the media earlier this year. Here are a few relevant links: Reinhart-RogoffCecchetti-Mohanty-ZampolliCecherita-RotherKumar-WooBaum-Cecherita-Westphal-Rother and Balassone-Francese-Pace.

But history doesn’t do justice to current circumstances, which are more challenging than ever. This isn’t 1946 anymore, when factories could be converted from military to ordinary use and staffed up quickly to meet pent-up demand from years of excess savings. Compared to the relatively painless fiscal retrenchment that followed World War II, the retrenchment that’s needed today will cut to the bone.

Why the thresholds are lower than ever before

In a nutshell, most developed economies have unsustainable tax and benefit structures that are baked into current spending patterns. Due to rising dependency ratios, these tax and benefit structures will become less generous over time. And as they do, the middle class will find it increasingly difficult to maintain the same level of spending, let alone manage any growth.

To some extent, this story has already been playing out in Japan, parts of Europe, and also in the U.S. for the last 15 years or so. As of 2012, American median household income (inflation-adjusted) had fallen 9% below its all-time peak in 1999 and 1% belowthe previous cyclical peak in 1989. That’s 23 years without any growth, whatsoever, even with the benefits of massive deficit spending.

Looking forward, America’s finances are becoming even more challenging as baby boomer retirements bend the debt trajectory upwards, putting more pressure on the average taxpayer. We’ve illustrated this on several occasions, using projections from the Congressional Budget Office as well as our own research to correct for delusions in the CBO’s work. (See here and here, for example.) These pictures show annual increases in debt-to-GDP getting larger and larger as interest costs grow and demographics worsen.

When even the CBO’s optimistic number crunching shows debt ratios climbing exponentially, you have to wonder if Charles Ponzi is looking you right in the eye and making his best pitch.

We’ve also examined the CBO’s projections more closely and put some hard numbers on the potential economic ramifications. The key question is: What are the differences between the primary budget balances that are cooked into existing policies and the balances required to stabilize the real value of debt? The answer is that these differences are bigger than ever and growing, which is disturbing because it tells us that any attempts to truly restore fiscal discipline would require unprecedented austerity.

We’ll share the details of the primary balance analysis separately, as this is a key part of our argument behind the Fonzie/Ponzi theory, at least for the U.S.  We already presented the debt stabilization math and one piece of the analysis, though, in this post. If you’re willing to entertain our theory, we suggest reviewing it together with the other links showing our historical research and future debt projections, while checking back for more research on primary balances. The Fonzie/Ponzi thresholds are based on our interpretation of all of the above.

Note also that the U.S. has already passed its Ponzi point by Minsky’s definition. According to Minsky, borrowing qualifies as Ponzi finance whenever fresh issuance is needed to fund interest on existing debt.  Based on the common assumption that the U.S. would miss interest payments without regular increases in the statutory debt limit, this is indeed the case.

Where we stand today vis-à-vis the Fonzie/Ponzi thresholds

I’ll conclude with a look at the International Monetary Fund’s (IMF) projected debt ratios for 2013 for the ten largest “advanced” economies, ordered from highest to lowest GDP:

fonzi ponzi chart 1

The chart shows two countries in our Fonzie/Ponzi range and one full Ponzi. But these happen to include the two largest of the advanced economies and three of the largest six.

If you’re buying into our theory, this is not a pretty picture.


%d bloggers like this: