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  1. #1
    Senior Member AirborneSapper7's Avatar
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    The "Solution" Is Collapse - There are no "solutions" that can fix those defaults

    Guest Post: The "Solution" Is Collapse




    Submitted by Tyler Durden on 06/08/2012 11:38 -0400

    Submitted by Charles Hugh Smith from Of Two Minds


    The "Solution" Is Collapse


    So the root problem is the system, human nature, blah blah blah. There are no "solutions" that can fix those defaults. Thus the "solution" is collapse.


    Policies create incentives and disincentives. Some are intended, some fall into the category of unintended consequences. Regardless of their intention, policies that create windfalls ("easy money") or open spigots of "free money" (or what is perceived as free money by the recipient) quickly gather the allegiance of everyone reaping the windfall or collecting the free money.


    This allegiance is soon tempered into political steel by self-justification: humans excel at rationalizing their self-interest. Thus my share of the swag is soon "absolutely essential."


    Humans don't need much incentive to pursue windfalls or free money--seeking windfalls in the here and now is our default setting. Taking the pulpit to denounce humanity's innate greed, avarice and selfishness doesn't change this, as seeking short-term windfalls has offered enormous selective advantages for hundreds of thousands of years.


    That which is painful to those collecting free money will be avoided, and that which is easy will be pursued until it's painful. Borrowing $1.5 trillion a year from toddlers and the unborn taxpayers of the future is easy and painless, as toddlers have no political power. So we will borrow from the powerless to fund our free money spigots until it becomes painful.


    It won't become painful to borrow from our grandkids for quite some time, and it will probably not become progressively painful, either, because we will suppress the pain with superlow interest rates and other trickery. The pain will more likely be of the sudden, unexpected, "this can't be happening to me" heart-attack sort: the free-money machine will unexpectedly grind to a halt in some sort of easily predictable but always-in-the-future crisis.


    "Solutions" that turn off the free money spigots are non-starters, not just from self-interest but from ideology. Any attempt to tighten the spigots steps on ideological toes, as each spigot is ideologically sacred to one political camp or another.


    Liberals don't want to hear about scamming of their sacred "we must help everyone in need" welfare programs, and conservatives don't want to hear about cartel looting of their sacred "free enterprise" system.


    And so we have gridlock, what I call profound political disunity. Everybody at each trough of free money fights tooth and nail to keep their spigot wide open, and so the "solution" is to borrow 10% of the nation's output in "free money" every year until the free-money machine breaks down.
    Each ideology worships their own version of cargo-cult economics: if we wave the dead chicken over the enchanted rocks while dancing the humba-humba, prosperity and abundance will magically return and we can "grow our way out of debt."


    We're like a sprawling family bickering over the inheritance: we'll keep arguing over who deserves what until the inheritance is gone. That will trigger one final outburst of finger-pointing, resentment and betrayal, and then we'll go do something else to get by.


    The "solution" is thus collapse. This model has been very effectively explored in The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization by Thomas Homer-Dixon. The basic idea is that when the carrying costs of the society exceed its output, the whole contraption collapses.


    The political adjunct to this systemic implosion is that the productive people just stop supporting the Status Quo because it's become too burdensome. The calculus of self-interest shifts from supporting the bloated, marginal-return Status Quo to abandoning it.


    So the root problem is the system, human nature, blah blah blah. There are no "solutions" that can fix those defaults. The "solution" is collapse, as only collapse will force everyone to go do something more sustainable to get by.


    Until then, arguing about "solutions" is a sport to be enjoyed sparingly.

    Guest Post: The "Solution" Is Collapse | ZeroHedge
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  2. #2
    Senior Member AirborneSapper7's Avatar
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    ‘The End Is Not Near, It Is Here and Now’ – Gold Legend Jim Sinclair

    Submitted by GoldCore on 06/08/2012 12:00 -0400

    Gold fell $28 or 1.73% yesterday in New York and closed at $1,591.60/oz. Gold traded sideways prior to another 1% fall in Asia but has recovered somewhat in early European trading and has made gains in euros and Swiss francs particularly.


    Cross Currency Table – (Bloomberg)

    Gold’s sell off was attributed to Fed Chairman Ben Bernanke not hinting at further quantitative easing. Leveraged speculators sold gold & silver aggressively after Bernanke failed to communicate aggressive use of helicopters to dump money on the citizenry of the US and further debase the dollar.

    When prices hit around $1,600/oz, Comex gold stop losses kicked in and exacerbated the selloff.

    Bernanke’s testimony also led to US equities falling at the close and weakness has continued in Asian and European indices.

    Although Bernanke didn’t offer hints in the near term, he said that “the central bank was ready to shield the economy if financial troubles mounted,” which suggests that the kneejerk speculative sellers will be buying back sooner rather than later.

    QE3 is assured as are further versions of QE - although they will no doubt be given a new dissembling name and acronym and remarketed as something other than mass currency debasement.

    The People’s Bank of China cut their interest rate due to concerns of a property crash and because of their slowing economy. Gold rose on the news prior to prices being capped.

    German exports and imports have dropped sharply in April - the latest sign that Europe's largest economy is beginning to feel the chill from the euro zone debt crisis.

    Europe’s debt crisis is creating economic contagion and may be spreading to the already fragile Chinese and American shores.

    ‘The End Is Not Near, It Is Here and Now’ – Gold Legend Sinclair

    Veteran and respected gold and silver trader and a former adviser to the Hunt Brothers in the silver market in 1980, Jim Sinclair is now warning on his website,Jim Sinclair's Mineset that ‘The end is not near, it is here and now’ in reference to the global financial system.


    He is also reiterating his long held view that there will be “QE to infinity” despite the denials of Bernanke and other central bankers.


    Currency Ranked Returns – (Bloomberg)


    Sinclair believes that gold and silver will surge in value very soon and much sooner than most are currently forecasting.


    Mr Sinclair disagrees with George Soros , who accumulated gold aggressively in Q1 2012, who recently said that the euro has three months to sort itself out. He thinks the euro, in its current form, will be lucky to survive three weeks.

    He believes that after a couple of years of crises in the euro zone, market commentators and investors may have become desensitised to bad news and are in danger of missing the real denouement when it is actually about to happen.

    The Greek election on June 17 is only 11 days away and is an obvious flash point ahead. Meeting after meeting of European leaders does not seem to be getting anywhere.

    Nobody really seems to have a handle on the situation and a realisation that this is a global debt crisis and not a regional “euro debt crisis”.

    Only massive debt write downs and debt forgiveness and a form of global debt jubilee can prevent a collapse of the financial system and a deep global depression.


    XAU/EUR, XAU/USD, XAU/GBP & XAU/CHF Daily – (Bloomberg)

    Mr. Sinclair has a good track record. He predicted back in the early 2000’s with gold below $300 an ounce that gold would reach $1,650 within a decade. Now he is talking about “quantitative easing to the moon” and a similar trajectory for gold and silver prices.

    OTHER NEWS

    (Bloomberg) -- iShares Silver Trust Holdings Dropped 30.17 Tons Yesterday

    Silver holdings in the iShares Silver Trust, the biggest exchange-traded fund backed by silver, dropped 30.17 metric tons yesterday to 9,669.08 tons, according to the company’s website. Assets increased by the same amount the day before.


    For breaking news and commentary on financial markets and gold, follow us on Twitter.

    NEWS

    Gold extends sell-off after Fed disappoints - Reuters

    Gold futures extend slide in Asian trading - MarketWatch
    FTSE falls as euro mood darkens again - Citywire
    Asia stocks fall sharply after recent gains - MarketWatch

    COMMENTARY

    The 'Big Reset' Is Coming: Here Is What To Do – Zero Hedge

    Euro Breakup Precedent Seen When 15 State-Ruble Zone Fell Apart - Bloomberg
    End Is Here for Financial Markets, Warns Jim Sinclair – Resource Investor
    Keiser Report: Planet Ponzi – Max Keiser
    Gold Standard, Gold Futures, and Perception Management – Midas Letter
    Rickards: The US Is the Biggest Currency Manipulator – Casey Research


    ‘The End Is Not Near, It Is Here and Now’ – Gold Legend Jim Sinclair | ZeroHedge
    Last edited by AirborneSapper7; 06-08-2012 at 05:55 PM.
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  3. #3
    Senior Member AirborneSapper7's Avatar
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    Brodsky On "Gold Monetization And The Big Reset"



    Submitted by Tyler Durden on 06/08/2012 13:51 -0400

    Macroeconomic Problems

    1) The global banking system is functionally insolvent and will fail without exogenous policy action*

    • There is one, interconnected global banking system linked by global financial markets and coordination among currency boards and central banks
    • In the current banking system model, debts due tomorrow are serviced by newly-incurred debts today (which create deposits)
    • Stagnant or declining nominal global asset prices since 2008 have stressed bank balance sheets
      • Loan book marks remain at substantial premiums to:
        • The present value of their cash flows in real terms
        • Liquidation prices at current or higher interest rates


    • Central bank easing and asset purchases to date have only tempered the rate of asset price declines
    • Current adversity among European banks directly impacts global commerce and finance

    *Bank balance sheets can deleverage either via nominal write-downs of assets, (leading to outright failure/insolvency as tangible equity is extinguished), or through nominal increases in system reserves via base money inflation (provided by central banks as they expand their own balance sheets)

    2) Governments and private parties are heavily-indebted and this indebtedness is growing exponentially

    • In the aggregate, the public and private sectors have “borrowed money into existence” for decades, as fractionally-reserved banks have created unreserved deposits and extended unreserved credit
    • In the net, private sector borrowing has stagnated and is prone to contraction
    • In response, public sector borrowings have been increased measurably to fill this gap
      • Public sector debts and deficits are increasing
      • The global economy is rapidly approaching the point where neither the public sector nor the private sector can service debts to the degree required to maintain asset prices, which, in turn, removes incentives to borrow further
      • The temporary benefit of growing debt obligations supporting ever-increasing nominal assets prices is now prone to reversal
      • Should global bank balance sheets thus contract, so would the global pool of bank deposits
      • Contracting bank deposits implies contracting money supplies and attendant deflationary pressures



    3) The global economy is threatened because, in real terms, it continues to misallocate capital

    • The global relative price spectrum does not reflect true value and therefore is contributing to the general economic and financial malaise
      • Wealth and income concentration stemming from the asymmetric rise of asset prices tends to be self-reinforcing, and thus suffocates purchasing power for most economic participants (“the 99%”)
      • The more one pays for productive assets, the less one can pay for labor or other productive inputs

    • The extension of unreserved bank credit has fed the feedback loop of nominal asset price inflation (i.e. bubbles and subsequent busts)
      • Wages and basic input pricing has thus lagged, in relative terms, the robust upward trend of asset pricing

    • Over-priced assets have led to capital over-investment in many industries/projects
      • Unsupportable by labor inputs or unaffordable at current wage levels

    • Most developed economies have morphed into financial economies, which over time have become fragilely dependent on net imports to sustain living standards
    • The current propensity of both public and private sectors to channel ever more income towards debt service is threatening the debt-for-debt feedback loop that has maintained the appearance of stability since 2008
      • European sovereign issues
      • global real estate setbacks
      • declining public participation in equity and other leveraged asset markets



    The Expedient Solution: Policy-Administered Asset Monetization
    1) Re-monetize gold as the asset against which newly-created central bank liabilities (base money) are created

    • Gold purchases would serve to promote deleveraging in two manners:
      • 1) via base money (bank reserve) creation and,
      • 2) by providing the currency proceeds to fiscal agents to retire existing debts

    • The threat of waning confidence in the currency unit in response to expanding central bank balance sheets would be arrested by a gold price peg in the aftermath of the base money expansion
    • Any future operations to expand the base money stock would require additional purchases of gold at, most likely, higher and higher nominal prices or exchange rates
    • A gold peg would thus act both as a deleveraging agent today and a fiscal/monetary policy discipline looking forward


    The Consequences (Pros & Cons)
    1) The global banking system would be deleveraged via base money (bank reserve) inflation

    • Asset monetization is the least painful and most politically expedient option to reverse current conditions in which global bank deposit liabilities are many multiples of reserves (a classic precondition for bank runs)
    • Continued central bank purchases of sovereign debts would merely continue to roll and perpetuate the debts, albeit at attractively low interest rates (starkly negative in real terms)

    2) Nominal asset (and bank asset collateral) pricing would be supported and perhaps even inflated

    • As nominal bank reserves grow, the illusion of returning strength to bank balance sheets would be perpetuated
    • The propensity for privileged speculators to place their “risk-on” bets would likely increase

    3) Public and private sector debts from the prior extension of unreserved bank credit would, at the margin, be paid down with the base money creation stemming from central bank asset purchases

    • Public debts in particular could be paid down in the event fiscal agents were to sell official gold holdings to their respective central bank (central bank purchases of gold then would be, in the net, debt-extinguishing and thus, deleveraging)

    4) Wages and consumables pricing would rise in asset-price terms, which would arrest and begin to reverse the political consequences of several decades of wealth and income redistribution to the top “1%”

    • An easy political posture to take for those who choose to promote it

    5) Asset prices would decline relative to current and future expectations of consumption expenses which, in turn, would lead to lower living standards than currently anticipated by those asset holders

    • A necessary evil; however, the loss of future purchasing power as assets are sold to fund future consumption is already “baked in the cake”
    • This loss of perceived value can either be crystallized and recognized today so the real economy can begin to rebalance and establish a foundation for growth, or, in the alternative, be suspended -- a slow and time-consuming “death by a thousand cuts” malaise (e.g. Japan’s lost decade[s])

    6) Rising relative and nominal wages would support debt-servicing capacity going forward

    • Would promote debt pay-downs at par, which better ensures banking system solvency
    • Would raise wages relative to debt, a powerful political palliative

    7) Banks, being agnostic to measures of consumer-type price inflation, would most likely see the nominal pricing of their current pool of assets rise, which would eventually restore their solvency because the nominal valuations of their liabilities are generally fixed

    • The value of the currency unit is a common denominator to both sides of bank’s balance sheet
      • Real losses/gains on one side of the balance sheet are simultaneously and proportionately offset with real losses/gains on the other side

    • However, this would not hold for nominal losses (insolvency would result if a bank were to go into a negative equity position should the variable nominal valuation of its assets decline as the nominal valuation of its liabilities remains constant)

    Deleveraged government balance sheets would have less impact on private asset values and marketplace pricing

    • The political dimension could review and renew optimal levels of participation and capital market intervention

    9) No overall meaningful impact on the general price level (but, as implied above, there would likely be a migration of value, in real terms, from leveraged assets to unleveraged goods, services and assets)

    • Stable to higher nominal asset prices would require even higher nominal wage and consumable pricing looking forward

    Conclusion
    Asset monetization (and in, particular, gold monetization) would solve many more problems than it would create. The negatives would merely recognize the balance sheet damage already done and beginning to be manifest (first, in the private sector and now, increasingly in the public sector).
    Mechanically, policy-administered asset monetization would be quite simple. Using the US as an example, the Fed would purchase Treasury’s gold at a large and specified premium to its current spot valuation. The higher the price, the more base money would be created and the more public debt would be extinguished. An eight-to-tenfold increase in the gold price via this mechanism would fully-reserve all existing US dollar-denominated bank deposits (a full deleveraging of the banking system). An appropriate multiple of today’s spot price could fully-extinguish the public debt if desired.
    In terms of the relative price spectrum, a speculative 50% increase in the US median home price would be most-welcomed to the US banking system (and certainly to mortgage holders). Clearly, such an operation would be a subsidy to leveraged asset holders and banks. Would this be another form of perpetuating moral hazard? Superficially, it would be easy to conclude so; however, we think this conclusion would be incomplete. Such a “subsidy” is already embedded and institutionalized in the system. The key distinction would be that the system will have been reset to promote fairness and efficiency going forward. Given today’s circumstances, that should be a universal, non-partisan goal.
    Rolling unfunded debts and debating in the political sphere over the merits and risks of unfunded growth or policy-administered national austerity programs is a futile endeavor. The math suggests strongly neither can work. We are convinced policy-administered asset monetization would stop the global financial system from seizing, restore sorely needed economic balance, and reset commercial incentives so that real growth can once again gain traction.


    Lee Quaintance & Paul Brodsky
    QB Asset Management Company, LLC
    pbrodsky@qbamco.com

    Brodsky On "Gold Monetization And The Big Reset" | ZeroHedge


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    Senior Member AirborneSapper7's Avatar
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    Market Is More Fragile Now Than Pre-Lehman



    Submitted by Tyler Durden on 06/08/2012 11:08 -0400

    The significant rise in global systemic risk that occurred in 2008 remained until mid 2010 when it began to subside a little as Jackson Hole and QE2 seemed to allay fears somewhat. However, in the last year or so, BofA's market fragility index has soared higher alarmingly signaling higher systemic risks than in the peak pre-Lehman era. This confirms the massively elevated signal for global systemic risk that credit markets are also sending.
    Systemic Risk inferred from equity market variance decomposition...



    and Global Systemic Risk from the credit market...



    But it appears we have become Pavlovian in our learned response to any systemic risk as the chart below shows. The Fed has acted each time 5Y5Y forward inflation expectations drop below 2%. We were well on our way to this just a week or two ago (red arrow) only to have our own reflexive expectations of a Fed-Save drive inflation expectations back up (green arrow) and thus removing the possibility of QE in the short-term.




    It would appear that while systemic risks are at peak levels, the Fed needs the 'public' to believe it is not always there to save the day in order that when it does save the day, its effect is more than transitory.

    Finally, for those curious just how it is possible that even with trillions in implicit backstops the market is now less stable than with AIG, Lehman, Merrill and all the soon to be failed banks, the answer is simple: back then the market was in the hands of the, well, market. Now it is solely controlled by a few politicians and a even fewer academics. In other words, whatever can go wrong, will.

    Market Is More Fragile Now Than Pre-Lehman | ZeroHedge
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