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oftwominds-Charles Hugh Smith: Resolution #1: Let’s Call Things What They Really Are in 2014

oftwominds-Charles Hugh Smith: Resolution #1: Let’s Call Things What They Really Are in 2014.

The Status Quo system is failing. Its collapse will be messy. Starting to call things what they really are is a necessary first step to working with this reality.

Longtime correspondent Harun I. has offered a refreshing resolution for 2014: let’s start calling things what they actually are, rather than continue using officially sanctioned half-truths and misdirections. Language defines the context, meaning and agenda–in other words, everything. If we continue using Orwellian language, we get an Orwellian world of officially sanctioned deceptions passing as reality.

Here are Harun’s suggestions should we accept the value of Calling Things What They Really Are. This may well be one of the most insightful explanations of our financial system you will ever read:


“Let’s start off the new year by resolving to call things exactly what they are with words a 5th grader would understand.

Bank Deposit: An unsecured personal loan. The bank can do whatever it wishes with the money. The money may not be returned (ironically, people pay for this “service”).

Fractional Reserve Banking (Lending): Leverage. A bank has only a fraction of what it owes to its depositors. In a 10% fractional reserve system, the bank is only required to have ten cents of every dollar in its vaults.

The IMF is suggesting a 10% default by European banks. In a 10% reserve system, this is a reversal. Effectively, one person is going to get their money back and nine others are not. This may reset the banking system but the economic consequences due to the loss of purchasing power at such a scale will be significant.

Bank Bailout: The bank has lost its depositors money and thence government forces the public to borrow money they have a) already earned, b) from the very banks that supposedly have no money, and c) do so at interest (which must be borrowed). Effectively it is a failure and therefore a default.

Bank Bail-in: Every dollar placed at a bank is a dollar it owes to someone (liability). When the bank has lost all or a portion of its depositors’ money, it cannot return what it owes. Rather than forcing the people that are owed money by the bank to borrow money to put back in their accounts, the bank merely points out that it doesn’t have the money. This is a default.

Default = Default.

Money: Has no other purpose than to allow people to trade things they have worked to make or services they have performed. Holding on to it may allow one to trade for more or less of a particular good or service in the future. Money is a promise but not a guarantee that it will be exchangeable for something in the future. It is credit and debt.

Without a tangible good or service to trade money is worthless. If I have made a fine overcoat and you, with your skills in carpentry, have made an exquisite chair, we can trade these things directly. In this case money is worthless. It does not work the other way around. Goods and services do not become worthless in the absence of money. My coat will still have value even if I choose to wear it to keep warm. Your chair will have value even if you just choose to sit in it.

This is a critical distinction — and it has been completely lost on just about everyone. We have become completely divorced from the goods and services we make and provide and the money we use to trade these goods and services. At the core of this divorce is Fractional or zero Reserve Banking.

Let’s propose that you and I traded our goods and we deposited our goods in a bank. The bank immediately pledges my chair and your coat to ten other people. Some time later I engage in a redecoration of my home and want my chair. Winter comes and you want your coat. Immediately there is a problem. The bank owes our goods to ten other people. The only way for them to resolve this situation is to either get everyone to accept a fraction of the coat and chair, which of course isn’t very practical, reduce their liability by giving one person the chair and one person the coat and the other ten people get nothing (bail in), or get you and I to bail them out by producing eleven more chairs and coats (10 plus interest).

You see, if in the definitions of bailout and bail in we simply substitute the word money with the words goods and services, the situation loses its ambiguity. When we understand internally what money represents, then we understand what the term Bank backstops really mean. A bank can only be backstopped, bailed out or bailed in, by labor because that is the only thing that “money” represents.

If we understand the definition of money then when we discuss the Federal Reserve’s leverage, e.g. 72 to 1, we immediately understand that for each unit of labor performed 72 are owed. If for each hour of labor 72 is owed, how is this ever make that up? The clever person would pipe up and say, I’ll just work for 72 hours straight. But for each of those 72 hours he has worked he now owes 72. When we understand this, we understand that it is an event horizon.

We then understand that every bit of QE (quantitative easing) is a pledge of labor someone must perform at some point in time and that the rate of performance required is impossible.

If we now understand money and leverage and are to propose debt forgiveness then we must embrace rather than bemoan austerity because austerity is the necessary result of 10 other people not getting a chair to sit in or a warm coat for the winter.

With these concepts firmly in tow we begin to see that all of this hand wringing over paying off the $17 trillion in debt is, at best, a fools errand. Yes, in public politicians try to sooth us by appearing concerned. But behind closed doors, the Fed, Treasury, the Congress and the Executive, are all trying to figure out how we are going to borrow more so that over the next doubling period (about 10 years) debt will expand to a necessary $34 trillion.

Some additional clarification may be needed to explain leverage and work. At 72 to 1 the other option is to create 72 units in the time it takes to make one. In other words, if it took you and I one month to create our goods, we must create 72 coats and chairs in that one month. Broken down into hours, if we worked at full capacity 8 hours per day to create one coat and chair, we must do enough work in that 8 hours to create 72 coats and chairs.

Ultimately, work is nothing more than an exchange of energy, and the equation for any exchange of energy is quantifiable and finite (the equation must always balance). If we measured labor output in calories instead of money, the deception disappears. People may not be willing to expend 10 calories for 1. We would also understand that 1 calorie cannot create 10.

These concepts (thermodynamics) are esoteric to the point a 5th grader would have trouble understanding. But what is easily understandable is that if we all did the same work everyday but got less food because of an increase of incoming workers, yes, we would all have food – and we would all soon become malnourished or starved.

How would people react if the Fed said that for every loaf of bread it takes out of the system 72 loafs of bread will disappear?

We must also understand that a lever transmits torque, it does not create more torque.

It is at this point of awareness that it becomes clear that to balance the equation, it is unavoidable that people are not going to get most or all of what they have been promised (austerity). It is at this point that the sober realization arises that we have to dramatically change our expectation of the future.

Credit: Allows trade of something for a promise. Regardless of whatever expectation that may exist, something has been traded or given for no service performed or product yet created. Simply, something has been traded for nothing.

Federal Reserve System: A group of secretly privately owned banks (which, logically were among those who lost all of their depositors money and most certainly compose the primary dealers), that control the global money supply by making more or less credit/money available. It is also supposed to regulate banks within its system.

Even if this system functioned as designed rather than what it has morphed into, it still reads: a subsidiary formed but not funded by member banks and sanctioned by government to lend money to corporations and member banks (to themselves) against strong collateral (which no other bank would touch). Meaning the assets they own are good, but nobody wants them (i.e. the assets are worthless). In essence, this gets those great and wonderful assets off corporation’s and member bank’s books at full value.

Today this subsidiary of the member banks (the banks that own the Fed), loans money to its parent banks to buy all sorts of debt (mostly government debt), then goes about removing that debt (asset) from its parent bank’s balance sheet by buying it from them at full price, regardless of what it would have fetched in the market place.

At the most cursory glance, one begins to see how this farcically incestuous relationship would open the door to cronyism, political capture, monetary dominance, and serious abuses of public trust. Whether there is an awakening on the part of of the public is irrelevant. This system is failing. Its collapse will be messy.

There is no need to fret over debt or the monetary system, or the Feds economic and monetary “models”. There is no need to grouse about their manipulations. These things are destined to fail and are already doing so. What we will do in the aftermath of their complete failure, however, is probably of utmost importance.”


Thank you, Harun, for an excellent start in Calling Things What They Really Are. Off the top of my head, here are two more:
Capitalism: in the U.S. and global economy, this is a cover-word for crony/State capitalism, in which the Central State (rather than the marketplace) chooses the winners and losers.

Growth: Heavily manipulated statistics that reflect the increasing dominance of crony/State capitalism, passed off as “growth” in the real, lived-in economy. Those crony cartels that are receiving the Federal Reserve’s “free money” from quantitative easing (QE) are “growing,” and everything that isn’t receiving the Fed’s “free money” is stagnating.

I am sure you can add your own list of “calling things what they really are.”

Why The Risk of World War Is Rising Washington’s Blog

Why The Risk of World War Is Rising Washington’s Blog.

Can We Avoid the “Thucydides Trap” with China?

Top economic advisers are forecasting war and unrest.

They give the following reasons for their forecast:

  • Countries start wars to distract their populations from lousy economies
  • Currency and trade wars end up turning into shooting wars
  • The U.S. is still seeking to secure oil supplies, and the U.S. doesn’t like any country to leave the dollar standard

Additionally, the American policy of using the military to contain China’s growing economic influence – and of considering economic rivalry to be a basis for war – is creating a tinderbox.

As the New York Times noted in 2011:

For a superpower, dealing with the fast rise of a rich, brash competitor has always been an iffy thing.

Just ask … Thucydides, the Athenian historian whose tome on the Peloponnesian War has ruined many a college freshman’s weekend. The line they had to remember for the test was his conclusion: “What made war inevitable was the growth of Athenian power and the fear which this caused in Sparta.

So while no official would dare say so publicly as President Hu Jintao bounced from the White House to meetings with business leaders to factories in Chicago last week, his visit, from both sides’ points of view, was all about managing China’s rise and defusing the fears that it triggers. Both Mr. Hu and President Obama seemed desperate to avoid what Graham Allison of Harvard University has labeled “the Thucydides Trap” – that deadly combination of calculation and emotion that, over the years, can turn healthy rivalry into antagonism or worse.

Indeed, Allison writes:

The defining question about global order in the decades ahead will be: can China and the US escape Thucydides’s trap?

China is certainly aware of this potential dynamic for world war … and is eager to avoid it.    As Xinuanoted last July:

Greek historian Thucydides described the situation between Athens and Sparta as a combination of “rise” and “fear,” which inevitably resulted in war about 2,400 years ago. Over the past 500 years, when a rising power has challenged a ruling power, war has often followed, reinforcing the concept of “The Thucydides Trap.”

In the 21st century, however, China and the U.S. could and must avoid falling into this trap, especially against the backdrop of ever-deepening economic globalization and interdependence.

***

“The Thucydides Trap” offers a worthy caution, but it is not a tragedy that can not be avoided.

The 21st century will not necessarily mark the rise of China alongside the fall of the U.S., rather, through joint efforts, the two sides can see the great rejuvenation of the Chinese nation, U.S. recovery and a developing world, simultaneously.

And the China Post made a similar point last June.

Obviously, the dispute between China and Japan over oil-rich islands – with the U.S. backing Japan – is a complicated one. Indeed, Japan is threatening to seize another 280 islands whose claim is disputed.

Given that China passed Japan as the world’s second biggest economy in 2010, Thucydides’s trap could very well apply to Japan’s fear and hatred of China’s economic growth.

And China’s threat to “take back” an island occupied by another close U.S. ally – the Philippines – could be another potential flashpoint in Chinese-U.S. relations.

It seems like the U.S. and China are drifting towards war over the long-term, as proxy disputes with Japan, the Philippines and other countries cannot remain cool forever without accident or incident.

Hopefully, cooler heads will prevail on all sides …

project chesapeake | Preparing For The Challenges Ahead

project chesapeake | Preparing For The Challenges Ahead.

By: Tom Chatham

Many people dream of the day when they are wealthy and can leave the workplace behind to enjoy life. But what are they really thinking about when they dream of wealth? What is their definition of wealth? How do they know when wealth has been achieved?

The modern definition that many people would use would be the accumulation of enough money to do what they want without working anymore. To that end, most people build up a savings account, pension account, stock portfolio or other type of retirement account. What do these things have in common? They all represent digits in some computer somewhere. If you had one million dollars in a bank account you might consider yourself moderately wealthy. But what would that mean? If the bank suddenly lost your account information would you still be wealthy? If you had one million dollars in cash and the money suddenly became worthless would you still be wealthy?

Money in the form of cash, computer digits and other types of paper are merely a means to store current excess production for later use. This type of storage carries a considerable amount of counterparty risk and is not necessarily the best means to save for the future.

This type of wealth is potential wealth. That means it does not become actual wealth until you actually use it. A dollar in your pocket or a dollar in the bank is nothing more than a claim on goods. Until you actually cash it in for something it does not matter how many dollars you have in storage. Once you cash it in you become wealthier. This is achieved by getting possession of physical goods. Something you can use for some purpose.

If your neighbor has a million dollars in the bank, a large home with a mortgage and a new Mercedes bought on credit, and he suddenly lost the million dollars for some reason, what would his net worth be? If you lived down the road and owned two acres of land with a clear title, a 35 foot travel trailer and an old pickup truck, and the banks closed or money suddenly became worthless, who would be in the better position?
You can be sure the bank has paperwork showing he does not own the home or the new car so what would they be worth to your neighbor?

True wealth is the possession of real goods. Some people buy more practical things but all physical goods represent your true wealth. Those that are practical will have goods that are not only useful but can actually earn more dollars which can be used to obtain more real wealth. These can be classified as capitol goods. Goods that are worth potentially more than the purchase price. Things that have production capability like an ax, a sewing machine, a set of tools, machining equipment, knowledge,  farming equipment or livestock are things that have some capability to generate money.

Land that can be built on or farmed, an old truck, a rifle, a wood stove, quality furniture, art or antiques, gold and silver, a wood lot and even a pile of scrap metal all represent true wealth. They are physical things that you can hold and use and trade for other things at some future date. When the wealth that many people think they have suddenly disappears and the computer digits no longer exist, the only true wealth that will exist will be the things that people physically hold in their hand and own free and clear. If you want to know how wealthy you really are just look around you at the things you really own. In the end that is the only real wealth you may have if all of the potential wealth you entrust to others suddenly disappears into the make believe world from which it came.

What Blows Up First? Part 1: Europe

What Blows Up First? Part 1: Europe.

2013 was a year in which lots of imbalances built up but none blew up. The US and Japan continued to monetize their debt, in the process cheapening the dollar and sending the yen to five-year lows versus the euro. China allowed its debt to soar with only the hint of a (quickly-addressed) credit crunch at year-end. The big banks got even bigger, while reporting record profits and paying record fines for the crimes that produced those profits. And asset markets ranging from equities to high-end real estate to rare art took off into the stratosphere.

Virtually all of this felt great for the participants and led many to conclude that the world’s problems were being solved. Instead, 2014 is likely to be a year in which at least some – and maybe all – of the above trends hit a wall. It’s hard to know which will hit first, but a pretty good bet is that the strong euro (the flip side of a weakening dollar and yen) sends mismanaged countries like France and Italy back into crisis. So let’s start there.

The basic premise of the currency war theme is that when a country takes on too much debt it eventually realizes that the only way out of its dilemma is to cheapen its currency to gain a trade advantage and make its debts less burdensome. This works for a while but since the cheap-currency benefits come at the expense of trading partners, the latter eventually retaliate with inflation of their own, putting the first country back in its original box.

In 2013 the US and especially Japan cheapened their currencies versus the euro, which was supported by the European Central Bank’s relative reluctance to monetize the eurozone’s debt. The following chart shows the euro over the past six months:

Euro dec 2013

For more details:

Euro rises to more than 2-year high vs. dollar; yen falls 
The euro jumped to its strongest level against the dollar in more than two years on Friday as banks adjusted positions for the year end, while the yen hit five-year lows for a second straight session.

The dollar was broadly weaker against European currencies, including sterling and the Swiss franc. Thin liquidity likely helped exaggerate market moves.

The European Central Bank will take a snapshot of the capital positions of the region’s banks at the end of 2013 for an asset-quality review (AQR) next year to work out which of them will need fresh funds. The upcoming review has created some demand for euros to help shore up banks’ balance sheets, traders said.

“There’s a lot of attention on the AQR, and there’s some positioning ahead of the end of the calendar year,” said John Hardy, FX strategist at Danske Bank in Copenhagen.

Comments from Jens Weidmann, the Bundesbank chief and a member of the European Central Bank Governing Council, also helped the euro. He warned that although the euro zone’s current low interest rate is justified, weak inflation does not give a license for “arbitrary monetary easing.

The euro rose as high as $1.3892, according to Reuters data, the highest since October 2011. It was last up 0.3 percent at $1.3738.

The currency has risen more than 10 cents from a low hit in July below $1.28, as the euro zone economy came out of a recession triggered by its debt crisis.

Unlike the U.S. and Japanese central banks, the European Central Bank has not been actively expanding its balance sheet, giving an additional boost to the euro.

Here’s what a stronger euro means for France, the second-largest and arguably worst-managed eurozone country:

French Economy Contracts 0.1% In Third Quarter
The final estimate of France’s gross domestic product, or GDP, in the third quarter remained unchanged at the previous estimation of a contraction of 0.1 percent, indicating that the euro zone’s second-largest economy is struggling to sustain the rebound it witnessed in the second quarter with a growth of 0.6 percent.

The third-quarter GDP growth was in line with analysts’ estimates. According to data released on Tuesday by the National Institute of Statistics and Economic Studies, the deficit in foreign-trade balance contributed (-0.6 points) to the contraction in the third quarter, compared to the positive (0.1 percent) contribution made in the preceding quarter.

Some thoughts
At the beginning of 2013, most of the eurozone was either still in recession or just barely climbing out. Then the euro started rising, making European products more expensive and therefore harder to sell, which depressed those countries’ export sectors and made debts more burdensome. So now, under the forced austerity of an appreciating currency, countries like France that were barely growing are back in contraction. And countries likeGreece that were flat on their back are now flirting with dissolution.

Recessions – especially never-ending recessions – are fatal for incumbent politicians, so pressure is building for a European version of Japan’s “Abenomics,” in which the European Central Bank is bullied into setting explicit inflation targets and monetizing as much debt as necessary to get there. The question is, will it happen before the downward momentum spawns political chaos that spreads to the rest of the world. See Italian President Warns of Violent Unrest in 2014.

China Takes Another Stab At The Dollar, Launches Currency Swap Line With France | Zero Hedge

China Takes Another Stab At The Dollar, Launches Currency Swap Line With France | Zero Hedge.

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