Capital-ist Economies to Capital-less Economies

A farmer who eats the seed corn over the winter must borrow to plant in the spring. He must repay the loan from the harvest, leaving him with even less to live on come the following winter if the crop does not yield a greater harvest. The misfortune of one bad harvest can start a cycle of decline that leads to permanent penury. Sharecropper plantation owners have exploited and impoverished sharecropper farmers on this principle for centuries.

Is it different for nations?

“It is the aim of good government to stimulate production, of bad government to encourage consumption.” – Jean Baptiste Say

In the classical conception of economics, capital is the surplus of production over consumption. Only by consuming less than is produced can a person, or a company, or a nation accumulate capital for reinvestment, growth and continued prosperity. Capital cannot be borrowed, because borrowing implies repayment from the proceeds of the endeavour at a rate which – on the whole – precludes accumulated surplus.

A gambler might get lucky and make enough to both repay the debt and hold a surplus over his consumption, but gambling erodes investment discipline and prudence, and so over time proves a poor basis for economic management in the home, the boardroom or the Treasury.

A thief or con-artist might steal or defraud enough to repay the debt and hold a surplus over his consumption, but theft and fraud erode commerical confidence and invite retribution, and so over time prove a poor basis for economic management in the home, the boardroom or the Treasury.

A defaulter can simply refuse to repay the debt, and keep any surplus for himself, but defaulting erodes investors’ confidence and leads to bankruptcy, and so over time proves a poor basis for economic management of the home, the boardroom or the Treasury.

Borrowing implies risk, for both the lender and the borrower.

Somehow neo-classical economics was able to finesse this principle to convince a generation of consumers, bankers, regulators, legislators and investors that debt should be considered capital too, and that more debt than savings could be good for economic growth and prosperity.

For a time, the neo-classical economists appeared to have found a financial perpetual motion machine. As consumers, companies and governments borrowed more, they appeared to prosper more. Leveraging the accumulated equity in their homes, the consumers got bigger houses and bigger cars. Leveraging their fixed assets and future revenues, the companies got bigger balance sheets, bigger executive remuneration and bigger shareholder dividends. Leveraging their power of taxation and monetary creation, the governments got bigger militaries, bigger bureaucracies, bigger scope for patronage projects. The bankers intermediating all this debt got bigger too, with bigger bonuses for “loan origination”, bigger fees from M&A, bigger commissions and income from securities and derivatives dealing, and bigger influence with their supervisors to loosen any inconvenient accounting, reporting, audit, scope or expansion rules that might have impaired their freedom to keep the party going.

Free Market became the rallying cry of those who believed in perpetual motion. They passionately decried regulation as impairing the market’s freedom to allocate “capital” to the best likely return. They passionately decried taxes as diminishing the “capital” held by those who would reinvest it in growth. They passionately exhorted consumers, businesses and governments to borrow as much “capital” as they could possibly bear, and to err on the side of profligacy, so that more “capital” would be working to grow their revenues and balance sheets in the “free market”.

But the problem with this perpetual motion machine was that it was all the time grinding the seed corn. The “capital” it was pumping out was not the surplus of production over consumption, but the borrowed surplus of greater fools who believed in the hawkers’ pitch of perpetual motion and laid their meagre savings and accumulated assets on the barrelhead in faith the machine would return them multiplied.

The reality of the American, UK and other heavily leveraged economies is that we have eaten our seed corn and eaten the seed corn of those who have financed our profligacy. Over the past twenty-five years there has been a quiet conspiracy among those bankers profiting from the process to promote gambling, stealing, fraud and default as solutions to disguise the implications of a failure of perpetual motion.

Financial markets have morphed over this time from mechanisms for efficient allocation of scarce investment capital to promote greater production through rewarding foresight and diligence into casinos that reward those with a system that beats the unwary and beats the house. Leverage has been used to overcome bad judgement, rewarding those willing to risk more at the expense of the prudent. Modern markets have arguably never been less transparent, with fragmentation, off-exchange dealing, derivatives, structured finance, hedge funds and other ill-transparent innovations making it all but impossible for the average Joe Investor to assess activity and prospects with any confidence.

Companies were urged to borrow for sprees of mergers and acquisitions, and then either declare bankruptcy to shed their inconvenient pension liabilities or move production offshore to reduce expenditure on labour or both, emerging from these contortions as desirable prospects for more mergers and acquisitions. Any setback resulted in the generous retirement of one incompetent executive and the more generous appointment of another that would borrow the company into future prosperity.

Consumers and consumer finance companies were urged alike to feed the machine by overstating house values, overstating incomes, understating debts, juggling credit cards, and continually recycling any proceeds from the mania’s inflation of asset prices back into more accumulated debt through regular refinancing. Workers were forced to give any surplus savings from labour to the machine as mandatory pension contributions or cajoled into it through tax breaks on 401Ks and other ruses funnelling seed corn to the machine.

Governments were urged to finance wars, social welfare spending, police state intelligence technologies, infrastructure and excess, defaulting through loose monetary policy, defrauding through massaged official statistics, and deregulating the financial sector and capital markets when credit constraint threatened to stem the tide. A government that got into trouble was urged to “privatise” by leveraging or selling government assets, the seed corn of past accumulations, or to put services out to tender in the private sector so that they could pay more to receive less through the miraculous efficiencies of free market fulfillment of social needs. Any difficulty or disruption was overcome with tax breaks, subsidies and public underwriting of yet more debt creation – with mortgage interest deductions, corporate debt interest deductions, FNMA, FHLC and other ploys all feeding more seed corn to the machine.

All of this will someday unwind. It may be this year. It may be next year. It may be several years hence if central bankers can scrape together more seed corn from ever greater fools to keep the perpetual motion machine turning over. At some point, indebted societies must revert to the discipline of consuming less than they produce to repay their debts, or these societies will suffer the even worse consequences of the social dislocation and commercial disruption that follows gambling, theft, fraud and default.

Globalisation has allowed the bankers to hawk their perpetual motion wares to a wider pool of greater fools. This is a dangerous policy. Warren Buffett has long warned that as long as the US has major foreign trade deficits, it has to “give away a little part of the country” each year. He warned America was becoming a “sharecropper economy,” where Americans largely work for foreign-owned firms – or governments. The profusion of sovereign wealth funds represents the rational diversification of states with surplus production over consumption – capital – to preserve that wealth through equity investment that unlike debt will be secure from the debtor’s attempt to inflate away his obligation through the expedient of monetary laxity. Owning equity means a permanent claim on American production. Like the sharecropper, foreign equity ownership implies permanent want and decline to penury for the borrower nation.

Worryingly, globalisation has increased the likelihood that debt will lead to political instability and international conflict. The wars for resource, long a “Great Game” but now increasingly a violent and expensive gamble, are only one outcome. Food riots and inflation encourage governments to resort to intervention and oppression. Internal economic decline and dissent reinforces calls to patriotism, theocracy and militarism over reason. Lately I find myself wondering if the “beggar thy neighbour” policies of the 1930s weren’t a result of a similar dynamic, following, as they did, a similar era of massively irresponsible bank-fuelled credit growth and deflation.

When I was young and in debt, an old mentor of mine enjoined me to pay off my loans and my credit cards and to never again “borrow for consumption”. Investment that would confidently yield a good return, such as buying an education in a profession or purchasing a home for the long term, could be financed, but a new TV or a holiday must always be earned and paid for from present income.

Strange to say, but his advice shocked me. I had grown up with debt. My parents were always in debt. My earliest memory of economics is my father explaining to me that he loved inflation because his salary would get bigger and his debts would get smaller.

Nonetheless, I took my mentor’s advice and have lived within my income, whether large or modest, ever since. Perhaps I have missed out on having a grander house, or a flashier car, or the trendiest gadgets, but I have slept remarkably well for over twenty years and feel confident of withstanding the challenges and profiting from the opportunities that the future may bring.

Hat tip to Capone (the blogger formerly known as JMa) for suggesting the title in his comment on Professor Roubini’s blog on 2008-05-13 14:39:49.

I’ve been given a regular Friday slot here on Finance & Markets Monitor. This allows us to carry on the chitter chatter over the weekend when the Professor’s blog is quiet for the most part. There may be some weeks when I don’t post, but the team at RGE now has enough depth that there will always be something worth reading here.

51 Responses to "Capital-ist Economies to Capital-less Economies"

  1. richinar   May 23, 2008 at 8:45 am

    I can only believe that the lack of responses speaks for itself on this subject. Consumers will not retrace their spending habits until forced to do so.

  2. London Banker   May 23, 2008 at 8:50 am

    @ RichinarYou get the free beer for being first!I was late getting this up today, being out on the river messing around in a boat too long.

  3. fiuman   May 23, 2008 at 9:12 am

    LBanker – nice comment. I agree we might see the great unwinding, especially in the US. But do you think the outcome could be softened by SWF capital inflows, after all they have little options for their USD cash – equity or debt. Or, more worringly for the US, could Frankel be right, and we are at the beginning of a move away form the USD as world reserve currency?

  4. Broadcloth   May 23, 2008 at 10:04 am

    "Nonetheless, I took my mentor’s advice and have lived within my income, whether large or modest, ever since. Perhaps I have missed out on having a grander house, or a flashier car, or the trendiest gadgets, but I have slept remarkably well for over twenty years and feel confident of withstanding the challenges and profiting from the opportunities that the future may bring."Sleep of a clear conscience and the ability to hold one’s head high, knowing that one is not beholden to another for daily bread — that is wealth beyond any mansion, carriage, or temporary ornament to vanity. Sometimes the greatest among us humbles himself to the lowest position. Conspicuous abstention. And sometimes denying yourself the world and endeavoring to make it better for others brings just the treasure you spurn while not impoverishing your soul. Good for you, LB

  5. Anonymous ibid.   May 23, 2008 at 10:10 am

    LB, check your links. The last two I have tried have had incorrect URLs. It’s possible that when you copy the links, they break. As for the post, I affirm your general picture of what has happened, namely that finance people saw that they could harness debt to generate profits. You do identify a key point, namely that crisis is profitable to certain kinds of players. Ruining companies may enrich shorts, loading the ruined companies with debt and looting their pension funds may pay the meal ticket of M&A specialists, and then exploiting diminished competition caused by the ruining of companies may enrich longs. But I think the causes can be more precisely defined. Finance always degenerates into piracy unless there are checks and balances. The abuses you describe are simply variants of what happens when political power is too tightly held. In a nominally democratic system, that in turn is what happens when financial power equates to political power. The middle class is inherently conservative in the best sense of the term, while laissez faire is radical in the worst sense. The American middle class did not, for the most part, willingly load itself with debt. It did so because it was unable to achieve real wage gains. Medical costs had to be paid, kids needed to be sent to college, a second car was needed because Mom had to enter the workforce and there was no public transportation, families broke up under the stresses of having both parents working and the costs. Similarly, the cure is more participatory democracy, a lessening of the polarization of wealth, a dilution of the power of wealth to manipulate media and elections. These are not cures to be gladly undertaken, but undertaken they must be. IMHO, of course.

  6. London Banker   May 23, 2008 at 10:41 am

    @ RichinarApologies. The goblins who guard the RGE servers seem to have decided to prevent any of my links from working today. As it says above many a bar around here, "Free Beer Tomorrow"[email protected] fiumanI think the dollar is definitely in decline as a reserve currency. The collapse of Bretton Woods I happened 7 years into the Vietnam War. The collapse of Bretton Woods II should arrive on schedule in [email protected] BroadclothMany thanks for the kind words, but are you spoofing my prose style? :-)@ Anon IbidOne the things that gives me hope right now is the democratisation of the political process as more and more people, and especially young people, take an active interest in politics. In the USA, this is epitomised in the Obama campaign, which has fuelled direct participation through the prolonged primary process. Elsewhere it is evidenced through more activism in issue politics. These movements, if sustained and broadened and deepened, have huge potential to counteract the corrupt alliance between big business and big government that has prevailed too long. Corporations don’t vote, so why should they dictate our laws and public policies?

  7. London Banker   May 23, 2008 at 11:20 am

    Hellasious makes a similar point about leverage and structured finance:Clearly, structured finance was the most profitable product coming out of the great salami factories in Wall Street and the City. With the production lines now idle, there are no more financial sandwiches made; and thus, no need for bread, tomatoes, or condiments – and no need for all those deli counter employees, either.So, what’s next on the menu? After all, the financial industry is nothing if not quick in manufacturing new products out of the same pig. I believe this time it will take longer, however. We have killed too many piglets to make salami and the next litter is not yet on the horizon. The sow is not even trying her new lipstick on…Posted by Hellasious at Thursday, May 22, 2008 http://suddendebt.blogspot.com/

  8. 2cents   May 23, 2008 at 11:45 am

    @ LBI must say I haven’t witnessed a better concise cause/effect synopsis anywhere! Bravo!Now, not that what you just wrote was by any means easy to compile, it is relatively the easier part of the continuum and the necessary first step to catharsis. It’s the ‘how we got here’ piece. What we need to do is write the ‘where do we go from here’ piece.

  9. Guest   May 23, 2008 at 11:47 am

    LB—Thank you once again for telling it like it is. In finance it’s called “unwinding” but in world affairs it has been seen as dominos falling, a metaphor that works in finance too, as one shaky pillar gives up the struggle and collapses onto the next in succession.The current debt situation of the US makes me think of the corrosive effect of Prohibition and the Versailles Treaty. Everyone knew each of these would be impossible to enforce and so cynicism and hypocrisy undermined respect for laws as they were not kept. This makes “gambling, theft, fraud and default” inevitable. I wonder, is it humanely possibly to actually repay the US debt? Will we need to try to negotiate it down with our creditors? I can’t stop thinking about German reparations and eventual default… and…. as you seem to be yourself.–An amateur but kindred spirit in this field

  10. London Banker   May 23, 2008 at 12:02 pm

    @ 2cents and Kindred SpiritThanks for dropping by. It’s still a bit unnerving to hit the publish button, not knowing whether my blatherings will resonate in the blogosphere.

  11. Free Tibet   May 23, 2008 at 12:07 pm

    Liked your last column too.We can go too far into these text book definitions of capital, debt, greater and/or lesser fools, etc. There is a simpler explanation. Capitalism is a pyramid scheme in which one person’s labor is used to accrue to the benefit of another. We are all part of it. Here in the US the benefits are increasingly accruing to the top 1%. That’s not me. But even I benefit disproportionably when viewed against the global backdrop. There was a wonderful post accessed here through RGE about a week ago about how higher food costs would have to be absorbed by the world’s poor because food costs are of much smaller consequence to us in the developed world. In other words, the rest of the world (TROTW) is forced to cut back on food so that I can burn it in my SUV.The solution is to flatten the pyramid (reduced amplitude). That smacks of “class struggle”. I doubt that we’re ready to take that on. The “free market” thinks a high amplitude pyramid provides incentive to the “greater fools”.

  12. London Banker   May 23, 2008 at 12:53 pm

    @ Free TibetI expect my next column might be about food. I read an extremely interesting analysis this week that I want to follow up.

  13. Alessandro   May 23, 2008 at 1:34 pm

    @London Banker and allIf you didn’t already read the last post by Steve Waldman, he has an interesting idea about the commodities run that IMHO go hand in hand with your posts."A run on central banks?When I see what commodity prices are doing, I don’t think "low interest rates" or "skyrocketing demand". I think about a loss of confidence.There is that old saw about gold, that it is the only money that is no one’s liability. Wheat is no one’s liability, and neither is corn. Oil is no one’s liability….So, we lose faith. When we lost faith in Northern Rock, Bear Stearns, Citigroup, or Lehman, the central bankers stepped into the fray, and stood behind them. So, we ask, who stands behind the central bankers? We take a peek, and all we see is our own money. Which we quickly start exchanging for something else."http://interfluidity.powerblogs.com/posts/1211451502.shtmlBTW: great post, keep up the good work!

  14. London Banker   May 23, 2008 at 1:46 pm

    @ AlessandroI read Steve’s piece and think it interesting, but still expect that commodities are in the last car on the roller coaster. They will follow everything else down if deflation takes hold. Commodities generally fall well after equities have crashed, and this time will likely prove no different.As Free Tibet notes, however, the transference of leveraged bubble betting into soft commodities has very real consequences for the world’s poor, and historically this has always preceded political instability. Events can overtake even Ben Bernanke’s careful choreography when parents watch their children go hungry.

  15. quintum   May 23, 2008 at 1:54 pm

    Chapeau! that pretty much sums it all and I happen to humbly agree. how did we get here though? …to this point where we’re stolen on all sides and fraudsters get called bankers or financiers.so one works hard to earn a fraction of the value added through a salary, skimmed by taxes that go to repay fraudsters’ losses, and spent on inflated assets all the while the real buying power gets eroded by that hidden tax inflation.how did we come to accept it? why does it seem normal?and more importantly how do we get out of here?

  16. alexcanuck   May 23, 2008 at 2:39 pm

    London Banker for world president!On second thought: World Benevolent Dictator! (He would need dictatorial powers to get the job done.) Probably get assassinated before getting much done. Hmmmm, maybe he’d be best to putter on his boat and post anonymously. I am going to attempt to get his current post published in our local paper, with proper credit given, of course. The more people read this the better. We truly may be at historical turning point here, not just a little blip in the middle of a cycle.I am very pessimistic this will have an easy way out, but TPTB will try them all, just making the pain worse.

  17. MA   May 23, 2008 at 3:20 pm

    Refresh… refresh….. refresh….Hey LB, I put my debate shoes on, and went to work on your article! I just finished it, and found I had nothing to debate. …so it has lead me to think about the sharecropper, and for what reasons (other then consuming less the production) that the debt wouldn’t need to be paid. (outside of the gambling, theft, fraud, and default world) All I keep coming up with is “the write off” by the lender. This is easily accomplished when the lender has sooooooo much seed corn, that they don’t need to collect from you. If that seed corn is dollars, and those lenders are SWF’s… maybe they’ve got that much money???I’m just speculating.Miss America….then again, we could always beat up the lender and take his seed corn too. There’s something about cornering an injured animal!?!?!? Maybe that debt forgiveness can be easily coerced? …especially with a large missile pointed at you. I can’t picture this being the preferred route, but I don’t make the decisions around here. Hell, I don’t even get to choose what color to paint the den or which movie to see!!!p.s. June 1st rapidly approaching!!! 29billion to go on the books. How to collateralize it? Mtgs sales? T-sales? I think this has a lot to do with this weeks sell off. It’s a 1 week in advance prep move by those in the know! Stay ahead of the game.

  18. MA   May 23, 2008 at 3:22 pm

    p.p.s. Good work again.

  19. Guest   May 23, 2008 at 3:27 pm

    I know "seed corn" is a common economic term, but perhaps, David Walker read your column today?http://www.cnbc.com/id/15840232?video=751528470&play=1

  20. Guest   May 23, 2008 at 3:29 pm

    @MAexpand on the "29 billion to go on the books" please.

  21. Guest   May 23, 2008 at 3:38 pm

    @Quintim"how do we get out of here?"said the juggler to the thief…

  22. interested reader   May 23, 2008 at 3:56 pm

    Very nice piece. I think that the reason why economic agents prefer to systematically over-consume instead of investing in productive capacity is that the rate of return they receive from their capital investment may not cover their costs, such as e.g. depreciation costs and time preference. In that situation it is more profitable to consume or lend and leverage your money rather than investing in capital units. I read Paul Kasriel making that argument some time ago. I wonder if the paradigm shift in the 1980s towards inflation targeting and ensuing low nominal interest rates (=rate of return on capital) has something to do with it. Fact is that since then many developed economies systematically embarked on the path of dynamic inefficiency.

  23. Guest   May 23, 2008 at 3:57 pm

    @ MAI was trying to suggest that lender write-off might be the ONLY way out of US debt now. And not by treats or coerction (only makes the lender irritable). To my mind it is the path not taken that would have stopped the rise of Hitler and World War II.Look at the history of the London Conference of 1933 (if anyone looks at history anymore). The direction FDR took, as the lender with all the eggs in his basket, is only justifiable if you think a U.S. bid for world dominance and fighting a world war for it was the right thing to do. (I hope the Chinese don’t think like that.) Even so by 1933 Germany was about to totally default. Probably needed to have been done sooner.Kindred SpiritPS. By the way I’m the one who posted the JP Warburg quote on the last thread. He was the monetary planner and resolution writer for the US for the London Conference. Brilliant prescient thinker, like his father, and worth reading today.

  24. Guest   May 23, 2008 at 3:58 pm

    Make that "threats or coercion". Treats might be what works!

  25. London Banker   May 23, 2008 at 4:07 pm

    @ QuintumHow did we accept it? Well, it’s so much easier to take debt than earn savings that few have the fortitude to resist, whether in the home, the boardroom or the Treasury. Americans are great at doing the Scarlett O’Hara thing, "I’ll think about that tomorrow!"@ AlexcanuckWe are at a turning point, but be optimistic. A lot of good came out of the political rebalancing and regulation that was precipitated by the GD. We are capable of great innovation and inventiveness, but instead of debt and derivatives, it needs to be aimed at productive uses and encourage savings. If all those rocket scientists had gone into alternative energy and engineering, America would be a different country. But maybe when they’re laid off from the banks, they’ll start to innovate in better ways. Great things can happen, even [email protected] MASomeone in Japan hinted that June was going to be very ugly, with not everyone having a chair when the music stops. You’re cryptic as ever, but I guess you’re confirming this lines up with your [email protected] Guest on 2008-05-23 15:27:26David Walker is a brave man and a true patriot. I’ve no idea if he reads RGE Monitor, but if so, I’m glad we’re of like [email protected] Guest on 2008-05-23 15:38:02Kudos for the Dylan reference! History doesn’t repeat itself but it sure does rhyme.ALL ALONG THE WATCHTOWER"There must be some way out of here" said the joker to the thief"There’s too much confusion", I can’t get no reliefBusinessmen, they drink my wine, plowmen dig my earthNone of them along the line know what any of it is worth."No reason to get excited", the thief he kindly spoke"There are many here among us who feel that life is but a jokeBut you and I, we’ve been through that, and this is not our fateSo let us not talk falsely now, the hour is getting late".All along the watchtower, princes kept the viewWhile all the women came and went, barefoot servants, too.Outside in the distance a wildcat did growl Two riders were approaching, the wind began to [email protected] Interested reader and Kindred SpiritVery interesting about Kasriel and Warburg. I’m off to bed here now, but I’m grateful to learn new things from comments every time I post.

  26. psyops   May 23, 2008 at 6:00 pm

    It’s wonderful to be able to read LB’s beautiful english prose every week. I have been enjoying the NR blog for several months and I really feel priviledged to have access to the matrix code, given that I am of no economic training myself.If I may attempt at a small contribution…It has always puzzled me how several sacred cows were kept intact, in a blog that is just about prepared for everything…Namely, the rule of law, honouring ones debt and contracts, the american constitution and those wise forefathers, representative democracy in the west…People on this blog pretty much take the current political framework of our economic saga for granted…as if it could be kept in place in the event of systemic financial collapse…I myself think nothing should be taken for granted. As Miss America correctly pointed out, America is armed to its teeth. Whoever has brute force at his disposal can default on loans and obligations and basically plunder the loot…hard work is a hard way of amassing wealth, stealing it is far easier. Some would even claims it feels better too. Still, lets hope America will keep its hand off the (panic) button. Cheers!psyops

  27. Michael   May 23, 2008 at 7:22 pm

    LB – The best, most accurate short summary of how we got into this mess I’ve seen.Any time the growth rate in the aggregate value of equities is rising faster than the growth rate of real GDP minus equities, you know the only thing that’s really growing is credit. This credit is speculative, and results in overpriced (speculative) stock valuations. Similarly, any time the rate of growth of business debt is growing faster thatn the rate of growth of real business investment minus financial sector investment, you know the only thing that’s growing is credit. This credit, too, is speculative, and results in underpriced debt valuations (corporate bonds, Treasuries, etc). One of the classic places for excess business credit to go is funding excess household debt. Q.E.D.

  28. Mark   May 23, 2008 at 8:30 pm

    I feel privileged to post here.The "seed corn" analogy is dead on. As a matter of fact, everything is essentially based on our ability to feed ourselves; and, this ability to feed ourselves is grounded in energy (after all, energy is everything). The moment that mankind started consuming/expending more energy than distributed by the sun on a given day is the moment at which we exceeded our REAL ability to amass capital. Depletion of stored carbon (banked energy) is no more than debt accumulation. Nature is the other side of the balance sheet; climate change is the "late fee" charge. And if we default?Whether we and our politicians know it or not, Nature is party to all our deals and decisions, and she has more votes, a longer memory, and a sterner sense of justice than we do. — Wendell BerryYou see, there’s a much bigger picture unfolding. LB is closing in on it, perhaps getting close with his next article on food.From Capitalism to Kaputalism…Mark

  29. Average Jane   May 23, 2008 at 10:10 pm

    I’m frightened, Auntie Em. I’m frightened.

  30. Anonymous   May 24, 2008 at 3:00 am

    LB – good to see your thoughts on higher profile here on the Roubini mega-blog.Re: absence of capital and saving, and the next stage of looting of assets -The ‘saving’ mentality only makes sense in an environment where the ‘savings’ are genuinely secure, and the US has not provided that for some time.In my last years working in the US – resigned from last banking job there in 2003, began to pack up and move to Europe – I came to understand from the US people, that it was actually ‘rational’ for most US consumers to not save.The reason is, the whole US society is a crooked rigged game on a level that Americans can feel very deeply, though not articulate.Americans feel, with some justification, that any assets they try to save long-term, may be easily stolen either by corrupt US lawyers and judges (the true American mafia) or by ‘crises’ put upon them by a mis-arranged health care system.In other words, anyone in the US, who merely had several hundred thousand dollars, and no political connections, was liable to having those assets evaporated and seized in some bogus lawsuit or divorce case, or when arrested on some bogus charge. (Remember that in the US, 1 out of every 45 working-age males is already imprisoned, they have 2.3 million prisoners, 25 % of all imprisoned in the world.)Or, in another scenario, those assets would be lost by needing to pay for health care, after a middle-age job loss, which led to loss of health insurance, which then led to inability to buy new insurance, which then led to needing to drain assets in a health crisis before they could access government benefits.These scenarios are very real, and felt subconsciously by the populace, although the media hides these criminal rackets. The US consumer ‘spend-now’ mentality, is because they do not have the security of life that exists here, at least in some parts of Western Europe.So, US people buy flat-screens and vehicles, because US people have long felt there is no tomorrow. The US citizenry feels it likely that they will be raped and robbed tomorrow, so better to enjoy today, at least have the memory of some fun.With assets evaporating in the US in the current crisis, the army of about 1 million US lawyers and the bribed US judges – in truth, the world’s largest organised crime gang – will be increasing the seizures from asset holders who don’t have political connections. This is already happening on a significant scale, but is largely unremarked, because victims of legal corruption cannot get major media coverage. Media companies in the US are flooded with judicial corruption stories they don’t print, afraid of the US judges themselves if they don’t submit.A significant question is now in play, as to the decreasing security of foreign assets invested in the United States, including investments by sovereign wealth funds. There has always been some looting of foreign companies and asset holders by the US legal system, but it has been generally ‘managed’ by the US judges to a limited level, so as not to excessively discourage new investment and lending to the United States.As US economic failure increases, and political frictions heighten, the US lawyers and judges will not only engage in increased looting of domestic victims. The next stage will be that the mafia of US lawyers and judges will go for the throat and directly begin looting the foreign asset-holders on a large scale, once it is decided that the foreign cows would not be sought to provide any more milk after the current supply has been drained.A background trump card will be the US military might, ready to back US asset looting and financial extortions.The looting of European banks and governments and investors, via the Wall Street frauds of ‘AAA-rated investments’, was a major first stage of this looting of foreign assets. Later stages may be even uglier.In a couple of dozen months, after crises expand to great severity, the US might be quite at the stage to simply renounce its foreign debt, thus completing a USD 10 trillion ‘mother of all frauds’, the US will additionally seize foreign assets on which it can lay hands, and hunker down in an expanded North American empire.Related to that, it is well-documented that the rather quisling leaders of the gentle Canadians, have signed away sovereignty rights, giving US troops the right to operate on Canadian territory and impose martial law upon a new ’11 Sept’ type incident of ‘terra-rism’, that will perhaps be arranged at a convenient moment.A US not paying debts and having seized foreign assets, may try to operate for a while using Mexican labour, and Canadian resources such as tar sands oil, with the decade after 2010 perhaps seeing an internal resistance struggle against fascism within the North American continent.Anyone with assets inside North America should consider getting them out.

  31. Anonymous   May 24, 2008 at 4:17 am

    The above post, as follows, was from me, I forgot to sign it. – Euro-GuestLB – good to see your thoughts on higher profile here on the Roubini mega-blog.Re: absence of capital and saving, and the next stage of looting of assets -The ‘saving’ mentality only makes sense in an environment where the ‘savings’ are genuinely secure, and the US has not provided that for some time.In my last years working in the US – resigned from last banking job there in 2003, began to pack up and move to Europe – I came to understand from the US people, that it was actually ‘rational’ for most US consumers to not save.The reason is, the whole US society is a crooked rigged game on a level that Americans can feel very deeply, though not articulate.Americans feel, with some justification, that any assets they try to save long-term, may be easily stolen either by corrupt US lawyers and judges (the true American mafia) or by ‘crises’ put upon them by a mis-arranged health care system.In other words, anyone in the US, who merely had several hundred thousand dollars, and no political connections, was liable to having those assets evaporated and seized in some bogus lawsuit or divorce case, or when arrested on some bogus charge. (Remember that in the US, 1 out of every 45 working-age males is already imprisoned, they have 2.3 million prisoners, 25 % of all imprisoned in the world.)Or, in another scenario, those assets would be lost by needing to pay for health care, after a middle-age job loss, which led to loss of health insurance, which then led to inability to buy new insurance, which then led to needing to drain assets in a health crisis before they could access government benefits.These scenarios are very real, and felt subconsciously by the populace, although the media hides these criminal rackets. The US consumer ‘spend-now’ mentality, is because they do not have the security of life that exists here, at least in some parts of Western Europe.So, US people buy flat-screens and vehicles, because US people have long felt there is no tomorrow. The US citizenry feels it likely that they will be raped and robbed tomorrow, so better to enjoy today, at least have the memory of some fun.With assets evaporating in the US in the current crisis, the army of about 1 million US lawyers and the bribed US judges – in truth, the world’s largest organised crime gang – will be increasing the seizures from asset holders who don’t have political connections. This is already happening on a significant scale, but is largely unremarked, because victims of legal corruption cannot get major media coverage. Media companies in the US are flooded with judicial corruption stories they don’t print, afraid of the US judges themselves if they don’t submit.A significant question is now in play, as to the decreasing security of foreign assets invested in the United States, including investments by sovereign wealth funds. There has always been some looting of foreign companies and asset holders by the US legal system, but it has been generally ‘managed’ by the US judges to a limited level, so as not to excessively discourage new investment and lending to the United States.As US economic failure increases, and political frictions heighten, the US lawyers and judges will not only engage in increased looting of domestic victims. The next stage will be that the mafia of US lawyers and judges will go for the throat and directly begin looting the foreign asset-holders on a large scale, once it is decided that the foreign cows would not be sought to provide any more milk after the current supply has been drained.A background trump card will be the US military might, ready to back US asset looting and financial extortions.The looting of European banks and governments and investors, via the Wall Street frauds of ‘AAA-rated investments’, was a major first stage of this looting of foreign assets. Later stages may be even uglier.In a couple of dozen months, after crises expand to great severity, the US might be quite at the stage to simply renounce its foreign debt, thus completing a USD 10 trillion ‘mother of all frauds’, the US will additionally seize foreign assets on which it can lay hands, and hunker down in an expanded North American empire.Related to that, it is well-documented that the rather quisling leaders of the gentle Canadians, have signed away sovereignty rights, giving US troops the right to operate on Canadian territory and impose martial law upon a new ’11 Sept’ type incident of ‘terra-rism’, that will perhaps be arranged at a convenient moment.A US not paying debts and having seized foreign assets, may try to operate for a while using Mexican labour, and Canadian resources such as tar sands oil, with the decade after 2010 perhaps seeing an internal resistance struggle against fascism within the North American continent.Anyone with assets inside North America should consider getting them out.

  32. Anonymous   May 24, 2008 at 8:41 am

    London banker – i think it’s obvious that this amount of debt will not be paid any time soon in real terms. It all looks very grim. The only hope is that nuclear weapons will ward of a threat of major war, but with US trying to install new weaponry in eastern europe and japan even this is no guarantie.As US mooves close to default you can expect anything. Inflation scenario is imho impossible – it’s easier to rob foreigners because US is major military force and foreigners do not vote.

  33. Anonymous   May 24, 2008 at 8:47 am

    Euro-Guest, good point on confiscations. All off-shore dollar finance has become a big trap. Accounts are beeing frozen and confiscated on bogus charges. The recent anti-terrorism measures make that very easy.

  34. London Banker   May 24, 2008 at 1:24 pm

    @ Average JaneAfter reading today’s crop of comments, I’m frightened too! Can I join you down there in the root [email protected] MichaelToo right. Excess credit creation, masked by statistical gimmickry, has been going on way too [email protected] PsyOps (great name, but can I trust you?), Euro-Guest and AnonymousLighten up! The USA came within a whisker of Fascism back in the 1930s too, even seeing a near coup against Roosevelt backed by the National Association of Manufacturers and Wall Street, but turned instead to FDR and rational, practical policies that helped real people make it through the worst of times. After WWII, instead of triumphalism, Americans created multinational institutions that shared power and promoted wider wealth. People today may be shallower, fatter and more easily frightened, but they also are catching on and smartening up as more of the picture gets revealed. When their personal standard of living today and tomorrow comes under threat, they will start paying attention and looking for answers.It won’t be easy to wrest power from the corrupt corporate oligarchs, but I believe it can and will be done. The pendulum will swing back.Military strikes are no good without willing troops to hold territory. The Soviets learned that lesson in Afghanistan and the Americans are learning it again in Iraq and Afghanistan. The stop-loss is a back-door draft, but cannot be permanent or effective. In 1933 it was General Smedley Butler who betrayed the coup being plotted to oust FDR, and I expect at least some generals today are as patriotic and loyal to their oath to the Constitution (not the president!). Using any weapons of mass destruction in the Middle East will backfire, as the nations left unscathed will band together to extort even more for the oil they hold, and probably prefer selling to non-agressors in Asia who produce things they might want to buy.Even facing hard times, we are lucky to live in this generation that has enough food, enough housing, enough information to preserve a quality of life that all but a handful of the people that have ever lived would marvel at enviously.

  35. quintum   May 24, 2008 at 2:05 pm

    that reminds me of the Russian Spring of Norman Spinrad. The US ends up broke, defaulted and dollar worthless but also owner of the most powerful military machinery in the world…I think the culprit is human nature to the worst of it, greed and abuse of the less knowledgeable. That’s why IMO any mortgage relief will mostly benefit the perpetrators of the current crisis who will find ways to engage in other such dilapidating schemes.Too bad decency and common sense became obsolete in the current world. more has long overtaken better.

  36. Psyops   May 24, 2008 at 4:12 pm

    So glad you liked the name dear LB! Worry not, actually it was inspired from the cheesy sci fi show Babylon 5. Speaking of cheesy and as a sign of reassurement, I’m off to vote for Armenia on the Eurovivsion song contest.No neferious psyops agent would ever possibly watch that piece of eurotrash. Besides I just couldn’t resist seeing the words Eurovision and LB printed side by side on an RGE blog!Promise to make a less meansngless contribution next time…psyops

  37. kilgores   May 24, 2008 at 6:34 pm

    Brilliant piece, London Banker. Thank you. As the great-grandson of a Georgia sharecropper, I found that analogy resonated with me.SWK

  38. London Banker   May 25, 2008 at 3:23 am

    @ PsyOpsSo you aren’t an agent for TPTB? You would say that, wouldn’t you!I caught a few minutes of the Eurovision contest myself last night. The voting was interminable now that all those little countries in Eastern Europe have sovereignty and their own tele-votes.Results: (1) Russia, (2)Ukraine, (3) GreeceThe UK tied for last place with Germany and Poland.For those of you Americans who have no idea what we are talking about, go to the BBC website and enjoy! This is what a united Europe brings to the world – 43 nations competing to sing the most vacuous song in the most outlandish costume and hairstyle. This is why there cannot be war in Europe.http://news.bbc.co.uk/1/hi/entertainment/[email protected] KilgoresMany thanks for your kind words. It is always encouraging to touch a chord with words.

  39. London Banker   May 25, 2008 at 3:29 am

    I have just been nudged and had it pointed out to me that the winner is singing in English (Yes, I’m listening as I type) in the style of one of our boy bands. We won after all.

  40. Andyh   May 25, 2008 at 4:48 am

    Where do you stand on peakoil LB?

  41. Guest   May 25, 2008 at 4:29 pm

    You can tell its a Euro-vision by the violinist in a suit.KS

  42. Ulasheeoon   May 25, 2008 at 7:39 pm

    @LBRich hinted at the $29 Bil Bear Stearns/JPM takedown needing to come on the books and for creative accounting to do the trick at least temporarily. Would you like to comment?

  43. Kilroy was here   May 25, 2008 at 10:25 pm

    Asian markets are being allowed to tank over this holiday, are we in for a FED surprise come early Tuesday morning? Remember Martin Luther King day? We all got skinned by consummate insider trading.

  44. flipper   May 26, 2008 at 1:08 pm

    In case u did not read this – one of the most intellengent and real comentators recently:http://www.eurointelligence.com/article.581+M570f9a31530.0.html

  45. London Banker   May 26, 2008 at 2:16 pm

    @ flipperMany thanks. I always enjoy Satyajit Das, but I disagree with him this time. He recommends three steps: (1) designation of all assets as binary performing or not-performing; (2)bright line capital reserve targets set on a bank by bank basis, with time to meet the target; (3)an explicit central bank guarantee charged for on the basis of underlying risk. (1) isn’t possible because too many banks refuse to disclose what is on their books, much less whether they deem it to be performing. They’d rather play the game of moving it from mark to market (level 1), to mark to model (level 2), to mark to make believe (level 3), and hold it at the same value throughout so they can continue to pay themselves bonuses and their shareholders dividends.(2) isn’t possible because a whole generation of regulators globally has just spent twenty years negotiating and implementing Basle II, and they will refuse to consider that all their 500 pages of delusional BS about models, ratings and mark to market is inferior to a bright line percentage.(3) isn’t possible because a blanket guarantee of all obligations entails huge moral hazard, and central bankers would be corrupt puppets in a nano-second (giving them the benefit of the doubt for now) if they were subject to competitive gaming on the differential pricing of comparative risk among competing banks.Nice try, Satyajit, but no [email protected] Kilroy: Could be. Wouldn’t surprise [email protected] Ulasheeoon: Rich is cryptic. I’m never quite confident interpreting his [email protected] KS: [email protected] AndyH: I have 100L of diesel stockpiled in the garage.

  46. Average Jane   May 26, 2008 at 5:34 pm

    @ LB: You are most welcome to join me in the root cellar. Truly you are an officer and a gentleman. I am so pleased that you have your own blog and you are right on the [email protected] Euro-Guest: You too are absolutely correct; we of the Middle Class do not feel secure in any way, shape or form which thusly drives our incomprehensible borrowing-and-spending behavior, which mirrors, of course, the decades of the same behavior from our administrations. I have never understood, in my adult life, why it is "good" for my "credit rating" to have all kinds of credit card debt on which I pay usurious interest [email protected] All Posters here and on NR’s board–bless you all a thousand times for your insights.

  47. Taxpayer   May 26, 2008 at 9:11 pm

    @ Andyh "Where do you stand on peakoil LB?"Forgive me for butting in…Oil might run out some time, but peak oil is not, apart from shaping perceptions, an actual problem today.I consider the peak oil idea to be a convenient justification for the current phase of "the great looting".The oil crisis is based on a combination of things.It is speculation underpinned by the concept of parity and corrupted market price indicators.We often hear the word parity bandied about in relation to the oil price.In this context it means, "Equality of prices of goods or securities in … different markets."The argument goes something like this.Just because we can produce oil for, say, 60 cents a litre (production costs, capital servicing, profit, tax etc), that does not mean we should sell it at that price.The sale price should not be related to the cost of production, it should be a price set by "the market".So far so good, charge what the unencumbered market will bear, entirely reasonable economic behaviour.The next bit is where we head to go to jail territory.The "market" that we use to set the price trades less than 1% of global hydrocarbon production, it is not only tiny but also mysterious and does not appear to react to market forces.That is, prices in this market can go up in the face of falling consumption.The prices are set in very thin trade and cannot be given any credibility, they are not achievable by your average producer.Spot market prices are often subject to such limited application.(I speak from personal experience here.)Then these fake market prices are then used to "set" the consumer price.Notice that this consumer price is also not related to demand.Places with cheap energy lose their competative advantage if they get on the parity bandwagon.But tax collectors slaver at the extra revenue and neglect their responsibilities to ensure efficient allocation of resources.Not only do they turn a blind eye to market corruption they also rake it in big time, increasing their already greedy share of GNP.The irony is that the extra cash the state collects is likely to be quarantined from the domestic economy.(They do this as well as increase interest rates in a misguided attempt to control domestic inflation.)Once again the media does it’s bit, either through ignorance or treacherous complicity.This is monumental economic disruption, deliberately engineered it seems.Parity when combined with fake price setting mechanisms is a recipe for disaster.It is interesting that much of the inaccurate comment about oil shortages originates from a company called MF Global, a broker with its head office in Bermuda.Here are a couple of quotes from MF Global people,MF Global analyst John Kilduff said it was "a compelling fundamental factor" that the world was using 87 million barrels of oil a day and producing only 82.6 million barrels. http://www.busrep.co.za/index.php?fSectionId=&fArticleId=4416241Rob Laughlin is a senior energy broker at MF Global (google this phrase to see much more)"…it’s been a roller coaster of events, in actual fact. But primaryreason is supply and demand. There’s too much demand at the momentfrom emerging countries like China and India, as well as the rest ofthe globe. And to be fair, there’s been too much desire for oil andoil products, and the oil producers have been unable to keep up withsupply." http://www.abc.net.au/lateline/business/items/200805/s2253128.htmThey do mention other factors in their assessments but imply that they are not relevant.MF Global itself is losing money and getting capital from vulture fund, JC Flowers."…the company is maneuvering to refinance a $1.4bn bridge loan…"http://www.efinancialnews.com/usedition/index/content/2350714449It had a "rogue trader" problem a few months ago and lost around $140m in a wheat trade.Contrast these comments with those of other industry commentators,"We see many of the essential ingredients for a classic asset bubble," said Edward Morse at Lehman Brothers.Myles Zyblock of RBC Capital Markets was concerned that "a euphoric investment mentality" could be overtaking the market, but even so, he said, the spike could do considerable damage."An oil price mania … has the potential to generate severe economic or political dislocation."Analysts say oil prices will eventually retreat as the US and other big consumers curb demand – either voluntarily or because of an economic slump. "US oil imports are on a downward slope," said Phil Flynn of Alaron Trading, noting that more fuel efficient cars and alternative fuels were at last denting demand.Zyblock said the strain on global energy supply "appears to be moderating, albeit slightly".Other commodities like gold had come off their peaks, he said, but "a speculative psychology is beginning to overtake fundamentals" in the oil market."While all manias are incredibly profitable, their inevitable demise – characterised by a price crash – is always a surprise."http://www.busrep.co.za/index.php?fSectionId=&fArticleId=4416241"There is now irrefutable evidence to support the conclusion that a large amount of speculation in the current oil price markets has significantly added to prices. When conservative global pension funds join the fray, it just makes one think twice about another subprime market fiasco in the making….as far as the oil markets are concerned, the basic fundamentals no longer seem to matter…."http://www.arabnews.com/?page=6&section=0&article=110257&d=26&m=5&y=2008Record oil not due to shortage – Shell CEOReuters | Friday, 23 May 2008"What we say and what we see is there are no physical shortages,….There are no tankers waiting in the Middle East, there are no cars waiting at gasoline stations because they are out of stock."http://www.stuff.co.nz/4557937a6026.htmlThe falling US dollar must also be considered, but a 10% fall in the dollar in not in the same league as the 70% rise in the oil price.

  48. Guest   May 27, 2008 at 12:21 am

    Remember Friday March 14, 2008,” wrote Martin Wolf in The Financial Times; “it was the day the dream of global free-market capitalism died.” http://www.webofdebt.com/articles/banking-bailout.phpA manufactured crisis to empower backroom dealing? Surely, not so! How to shackle an entire nation and populace? Control of currency, issuance of credit, and ingenuity in making the semblance of true crisis! Then rush in as saviors, whereupon take advantage, institute dominion, crush resistance, control government with extortionary monetary influence! But wholeheartedly proclaim freedom throughout the land while quietly looting every nook and cranny, every institution and granary. An dark and deep iniquity a thousand years in making, refined in every epoch. Recognize the wisdom of ages and ages past.

  49. GSM   May 27, 2008 at 12:28 am

    Hi LB.Been away for a few and came back to find your blog up. Congratulations. I’m sure the topics you rant about will be pertinent, informative and deficient of BS. Pull back the curtain and let’s have a look at that Wizard!Cheers.

  50. mjc   May 30, 2008 at 5:06 pm

    I am just a worker bee (mostly in aerospace but never monged a war) who has, through luck and some skill, gotten close to retirement with a paid-for house and moderate savings and I am scared.First fear is the Bush administration’s decent into Fascism. I came up with this a few years ago: "This is the Constitution. This is the Constitution under the Bush administration. Any questions?" When I tell people that I think there is at least a 15% chance that the elections will be cancelled or abrogated and martial law declared (especially if a Democrat wins) they laugh, but just because you are paranoid …Then there is the vanishing food supply, collapsing environment, oil-be-gone in 50 years, and general feh.The fact that lack of universal health insurance has crippled the US seems almost minor.When Nelson Rockerfeller ran for president, the joke was "It’s only fair that those who owned the country should run it." We have now seen the resulting disaster, and the US may never recover.HELP!

  51. roger   August 31, 2008 at 11:03 am

    Having absolutely no education in economics I tend to see things in simple terms so this is the way I see it: Industrial,manufacturing & agricultural sectors produce the real wealth,retail sector buys sale buys for profit only, all these profits are entrusted to the financial sector but the financial sector is not satisfied with just managing the medium of exchange being greedy they also sale money (interest)andcreate more I O U’s (credit) this becomes the source of BUBBLES witch in turn metaphor into DEPRESSIONS.