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The Global Economy: It’s All About Increasing Leverage

Charles Hugh Smith, of two

If the global State/finance Empire can’t increase systemic leverage, it will implode.
If we look at the global economy with unclouded eyes, we reach this conclusion: “This whole thing is about leverage.” If leverage doesn’t increase, the system implodes. But since collateral is disappearing from the global economy like sand castles in a rising tide, and disposable income has stagnated, there is no foundation for more leverage.

As a result, the State/finance cartel has only one choice: increase leverage by whatever means are left. There are only two:

1. Allow banks to claim phantom assets as capital/reserves

2. Lower interest rates so stagnant income can leverage ever greater quantities of debt

The State/finance Empire and its army of academic toadies (economists) must cloak this reliance on leverage from the citizenry, lest they grasp the precariousness of the entire financial system. As the economic Establishment is discredited by reality (that their sputtering reflation policies have come at an unbearable cost is now undeniable), their attempts to discredit their critics become increasingly comic: only PhD economists in the employ of the Empire are qualified to comment on the Empire’s policies, etc.

Most discussions of leverage focus on the role of capital or reserves as the basis for leverage. This is the basis of the fractional reserve banking system: $1 in capital (cash, reserves) can be leveraged into $15 of debt.

The easiest way to “grow” is to increase leverage so more money/debt can be created. If a bank was constrained to only loaning the cash it held in deposits, that would severely limit the amount of money available in the system for purchasing villas in Spain, BMW autos manufactured in Germany, etc.

If we magically enable 25-to-1 leverage, then every euro supports 25 euros in debt (mortgages, auto loans, etc.)

The danger is obvious: if 1 of the 25 euros of debt goes bad, the lender has zero reserve. If 2 euros of debt go bad, the lender is insolvent.

The only way to “save” an over-leveraged system is to increase leverage and lower interest rates. If we claim phantom assets as real and increase leverage from 25-to-1 to 50-to-1, we have enabled a doubling of loans. All that wonderful new money will flow into the economy as spending, fueling “growth.”

This explains why the State/finance Empire in Europe keeps lowering reserve requirements for its insolvent banks. If the reserve requirement is 10%, then you need 100 million euros on deposit in cash to support 1 billion euros in loans. If you lower the reserve requirement to 1 euro, then the contents of a child’s piggy bank supports 1 billion euros in debt.

The other game is to claim phantom assets have market values that justify their substitution of cash. Let’s say a bank owns a villa in Spain since the mortgage went bust. The market value of the villa is 100,000 euros and the bank’s mortgage was 300,000 euros. If the bank sold the villa, it would have to absorb a 200,000 euro loss…
(10 July 2012)

China exports yet more excess capacity to crippled West

Ambrose Evans-Pritchard, the Telegraph
Very quickly – since the German constitutional court awaits this morning:
China’s trade surplus jumped 43pc to almost $32bn in June. Imports for domestic consumption fell sharply.

This is exactly the sort of development that I alluded to in yesterday’s blog, subject to all the usual health-warnings about a single month’s data.

It implies that China is no longer consuming enough of its own output. It is exporting excess manufacturing and industrial capacity – with an undervalued currency – into a world that is already grappling with a deep secular slump.

(China is not the worst or only offender in this respect. Germany’s current account surplus under the fixed D-Mark racket – the euro – is far higher as a share of GDP. But China is the world’s second largest economy, so it matters.)

It transmits a fresh deflationary impulse to a world already dangerously close to deflation. This is a greatly under-estimated risk
It is an open question whether China can navigate its way calmly through this post-bubble downturn over coming months, but that is not really my point. Can a fragile world cope with the consequences?

Just to clarify a misunderstanding, I am not in the “China is doomed” camp at all.

(Nor am I in the “China will take over the world” camp. I am in between.)..
(10 July 2012)
Part 1 of Ambrose’s China series is here.

Rio+20: Tim Jackson on how fear led world leaders to betray green economy

Jo Confino, the Guardian
Professor Tim Jackson is not in the mood to mince words. Not only did Rio+20 fail to offer new hope to humanity but the author of the influential book Prosperity Without Growth believes the 190 heads of state and ministers who signed the final document have betrayed the vision of a green economy.

Rather than questioning the existing economic model, which is leading us to environmental and social disaster, Jackson believes the final text showed that politicians have let fear rather than courage gain the upper hand, which will result in us being driven even further into the arms of a bankrupt belief system.

The University of Surrey professor, who was in Rio to present the initial findings of his modelling work aimed at showing an innovative green investment led economic system is possible, says: “The most staggering linguistic turnabout for me is the one that equates green economy with ‘sustained economic growth’.

“There are 15 mentions of this term, occasionally with inclusive and once or twice with equitable added as a qualifier. But sustained rather than sustainable.

“This is hidebound recidivism at its very best. We’re no longer even using the terminology of green growth or sustainable growth. Instead of accepting the responsibility of the richest to develop a new economic model, this language has set back by a decade any attempt to question the model that led us to the brink of financial disaster, perpetuates huge consumption inequalities and is driving us towards ecological collapse.

“Disappointment doesn’t quite cover it. It’s a staggering failure of responsibility. I signed the NGO’s Future We Don’t Want article out of sheer frustration and will now have to redouble my efforts to show that another economy is possible.”…
(25 June 2012)

The Future /Who/ Wants (or needs)?

Jules Peck, nef
As the dust settles on Rio+20 what are we to make of it? What key elements of the Sustainable Development debate might have been missing and what signs of hope are there outside the official treaty making world?

A failure of epic proportions?

Commentators are fairly unanimous that the Rio+20 talks have been a failure. Expectations had of course been low. And because of this most developed country leaders stayed away. In opening the summit Ban Ki-Moon admitted the draft outcome was ‘disappointing’ due to the conflicting interests of member states. China’s Sha Zukang, the UN’s lead on the conference agreed calling the statement “an outcome that makes nobody happy”.

NGOs were unanimous in their disgust with the conference outcome statement, The Future We Want and Greenpeace’s Kumi Naidoo spoke of “the longest suicide note in history…the last will and testament of a destructive twentieth century development model…a failure of epic proportions.”

So what was missing from the talks what hope might there be coming from outside official negotiating rooms?

The end of an era of global diplomacy?

There seemed to be some consensus that the era of global treaties might be over, at least for the time-being. George Monbiot concluded his roll call of Rio failures by calling for us to give up on global agreements. Barbara Stocking, head of Oxfam called on civil society to “pick up and move on… take action”. Lasse Gustavasson, WWF’s Executive Director of Conservation agreed there had been a fundamental failure of “sophisticated UN diplomacy.”

UN Environment Programme Director Achim Steiner said the conference was evidence of “a world at a loss what to do” and that “we can’t legislate sustainable development in the current state of international relations.” Of course it is not just on Sustainable Development that global agreement is failing – the same is true of solutions to the financial system and issues such as Syria.

US Delegation Lead Todd Stern seemed to agree that global multi-state solutions no longer hold out much hope. Todd joined others in suggesting that the failures of Copenhagen and now Rio+20 signal the end of the post-Cold War global treaty era.

Both Stern and WWF’s Gustavasson noted that far more commitment and leadership had been shown at Rio+20 by civil society, city mayors and the private sector. Indeed, Stern spoke of the early stages of a new era of new forms of global co-operation linking nations with business and civil society that is now flourishing in the shadow of the hollowing-out of formal processes. Some commentated that there was far more of a meeting of minds between some business and civil society folk in the 3000 odd fringe events at Rio+20 than in the negotiating rooms.

It is perhaps hard to see how such one-off, informal co-operation between the private sector and civil society will replace binding global treaties, but perhaps there is some small reason to be hopeful still? If, for the time being at least, we have to give up hope for action from Governments, then what signs are there that civil society and the private sector might take up some of the slack?

Reason to be hopeful?

John Vidal has written a slightly more upbeat and optimistic post-conference view than Monbiot. One reason for Vidal’s optimism comes from conversations with legendary campaigner Richard Sandbrook who told Vidal after the first Rio summit that he was not as downbeat as NGOs and commentators at the time. Sandbrook’s view was that it is not at summits that change happens. For Sandbrook change always happens in the aftermath of seemingly disappointing events with new debates and global understandings emerging from the ashes…
(10 July 2012)

Libor was a criminal conspiracy from the start

ilargi, the automatic earth
So far, everybody who’s said anything about the Libor rigging affair appears to have been lying. And if Nouriel Roubini can call for “somebody hanging in the streets”, I can at least call for all the Libor liars to go to jail for it. AND lose all their money, benefits, pensions, everything.

And while we’re at it, why not also throw in jail anyone who suggests that Barclays “might not” have been the only bank rigging the rates. Might not? As if Barclays could have manipulated Libor significantly all on its own?! Against scores of other major banks reporting their daily rates?!

Look, when calculating Libor rates, the British Bankers Association (BBA) throws out the 4 highest and 4 lowest of rates reported by 18 banks. Hence, one single bank cannot possibly manipulate rates down; that is, not on its own. The only way this could have worked, it’s pure and simple math, is if a substantial number of banks were involved. A majority of them, to be precise.

Indeed, it is worse than that: all the evidence over the past week, if not long before, suggests that Libor was set up the way it was, BECAUSE the idea was to make it prone to manipulation. It was a criminal conspiracy from the start, and a whole slew of regulators and politicians were in on it. And still are.

Bankers were left free, legally, to call each other every morning and set Libor rates where it suited them. There was no outside control. None.

Why, and why did it happen when it did? You could make a solid case that the 1986 beginnings of Libor fall seamlessly in line with the – true – advent of the derivatives markets, where Libor manipulation is the most lucrative for the banking industry. And all politicians and regulators at the very least looked the other way, deliberately. They will continue to do so, if given half a chance. Let’s not give it to them…

…Confidence in Libor matters, because the rate system plays a vital role in the global economy. Central bankers follow it closely as a barometer of the banking system’s health, and to decide how much to adjust interest rates to keep their economies growing. Payments on nearly $90 trillion in dollar-denominated mortgage loans, corporate debt and financial contracts rise and fall according to Libor’s movements….
(10 July 2012)

Photo credit: flickr/micmol