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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:
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.”
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.”
As might be expected as political and economic policy failures pile up and citizens become increasingly mad, the status quo is becoming increasingly authoritarian (recall blogger “Mish” was just fined 8,000 euros for a blog post).
In the latest disturbing news from a desperate power structure, the conservative government in Spain has passed an Orwellian bill titled the Citizens’ Security Law, which allows for fines of up to 600,000 euros ($816,000) for “unauthorized” street protests, and a 30,000 fine for merely having signs with “offensive” slogans against Spain or for wearing a mask.
This law is a perfect example of the increasing neo-feudalism being implemented across the globe by a corrupt, decadent and depraved status quo. Such laws must be immediately resisted or they will only get worse, much worse. It is quite obvious what the power structure in Spain in trying to do. It is putting into place an egregious punishment framework that could bankrupt a person by merely protesting. Such a threat is intended to make people not even consider their rights as human beings to express grievances to a crony government.
Instead of eye for an eye, it is like 25 eyes and a limb for an eye. If this does’t tell the Spanish people all they need to know about their government I don’t know what will. Below are some excerpts from a Reuters story covering the law:
(Reuters) – Spain’s conservative government agreed on Friday to toughen penalties for unauthorized street protests up to a possible 600,000 euro ($816,000) fine, a crackdown that belies the peaceful record of the anti-austerity protests of recent years.
Street protests and strikes have became increasingly frequent in recent years following huge cuts to education and health spending aimed at shrinking Spain’s public deficit to adhere to European Union demands.
But in contrast to Greece and elsewhere, where many similar protests have turned violent, Spain’s have remained largely peaceful, despite unemployment of 26 percent, rising poverty, and changes in labor laws that make firing easier.
Among other measures, protesters who cover their faces at demonstrations could be fined up to 30,000 euros while “offensive” slogans against Spain or its regions could reap a similar sanction.
The government also plans a new law restricting labor protests.
“This law … attempts to criminalize the act of protest,” said United Left lawmaker Gaspar Llamazares, questioning whether it complied with Spain’s constitution. “The government is trying to turn its political opponents into delinquents.”
”Compare events in Spain with those of other countries around us,” wrote conservative columnist Jose Antonio Zarzalejos on the website El Confidencial. “This security law … will add the stigma of authoritarianism to the political failure of the PP.”
It’s not just Spain though. This sort of panic attack from desperate members of the status quo is popping up elsewhere. Japan is another example, and over the weekend I read that Liberal Democratic Party Secretary-General Shigeru Ishiba compared demonstrations to “acts of terrorism.” From the Japan Times:
Citizens demonstrating against the controversial state secrets bill are committing “an act terrorism,” according to Liberal Democratic Party Secretary-General Shigeru Ishiba.
In a blog post Friday, he wrote: “If you want to realize your ideas and principles, you should follow the democratic principles, by gaining as much support as you can. I think the strategy of merely shouting one’s opinions at the top of one’s lungs is not so fundamentally different from an act of terrorism.”
My take is that people worldwide will not stand for such nonsense. Increasingly citizens have very little to lose and if they all say no together, there is not much the state can do. Just look at how Ukrainians responded to a ban on protests. Hundreds of thousands of them filled the streets in defiance. Below is a video of just one of the many incredible street scenes from over the weekend. In this case we see demonstrators using a tractor to break police barricades.
Interesting times indeed.