The West is eating itself

The Economic Collapse blog comments today on widening inequality in the USA (http://theeconomiccollapseblog.com/archives/the-one-percent-gigantic-government-gigantic-corporations-massive-wealth-inequality-in-america/comment-page-1#comment-78618).

I think it's time to review who's really benefiting from globalisation. As I have said on that site:

Of course there's going to be widening inequality if the working class is undercut by foreign labour. This would happen even if the 1% didn't get richer.

But the dirty secret, I suspect, is not the economic destruction of the US (and UK, and just watch Europe) by outsiders, but the way that most of the international wealth transfer from globalisation has ended up where the money started.

James Kynge's book "China Shakes The World" says that only 15% of the end price goes to the Chinese manufacturers, the rest is captured by the middlemen - the importers, dealerships and supermarket owners.

America is cannibalising itself and throwing the bones abroad.

INVESTMENT DISCLOSURE: None. Still in cash (and index-linked National Savings Certificates), and missing all those day-trading opportunities.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content.

Will the truth about the "anti-capitalists" be heard? - Part 3

http://abstrusegoose.com/348

Will the truth about the "anti-capitalists" be heard? - Part 2

Yesterday's article by Matt Taibbi of Rolling Stone magazine says it all and more for the Occupy Wall Street protestors.

When you take into consideration all the theft and fraud and market manipulation and other evil shit Wall Street bankers have been guilty of in the last ten-fifteen years, you have to have balls like church bells to trot out a propaganda line that says the protesters are just jealous of their hard-earned money.

And then he goes on to detail what the protestors have reason to protest about. Truly a tour de force.

Please use the link above, or copy and paste this into your browser: http://www.rollingstone.com/politics/blogs/taibblog/owss-beef-wall-street-isnt-winning-its-cheating-20111025

Will the truth about the "anti-capitalists" be heard? - Part 1

The mainstream news media often seem to me like boastful, lying Rumour at the start of Shakespeare's Henry IV Part II:

Open your ears; for which of you will stop
The vent of hearing when loud Rumour speaks?
I, from the orient to the drooping west,
Making the wind my post-horse, still unfold
The acts commenced on this ball of earth.
Upon my tongues continual slanders ride,
The which in every language I pronounce,
Stuffing the ears of men with false reports.
I speak of peace while covert enmity,
Under the smile of safety, wounds the world...

But last night's BBC TV news coverage of the protest camp outside St Paul's Cathedral was, for a moment, a bit more like what I'd call proper news: it allowed an inconvenient truth to slip through the propaganda sieve. A man told the camera that he'd been looking into the board of trustees that controls the Cathedral, and it turns out to include a number of important figures from the City of London's financial establishment. His assertion is supported by this from Ekklesia:

"St Paul's Cathedral, seat of the Bishop of London and the site of state funerals and other national celebrations, is a powerful top-down organisation. A tourist attraction charging an adult entry fee of £14.50, it takes around £16,000 a day from visitors. It has a hierarchy of clerical and non clerical staff and its trustees are a roll call of what are so often called 'the great and the good'. That many of them are bankers and financiers might be seen as more than a little unfortunate in the present stand-off."

This site gives details of the Chairman and Board of Trustees. It also gives a link to the 2010 accounts, where we find two further individuals who resigned last December: Barry Bateman, vice-chairman of Fidelity International Limited and a benefactor of Exeter University; and a Nigel Kirkup, who has moved on to the St George's Chapel at the royal castle of Windsor and about whom it is proving intriguingly difficult to find out much more.

The land on which the protestors have erected their tents belongs to St Paul's and in an interesting display of Christian anti-authoritarianism, Canon Giles Fraser told the police to move on. The Dean (who is on the Board of Trustees) felt forced "with a heavy heart" to close the Cathedral on Friday, and Canon Fraser seems to concur, while still maintaining that "financial justice is a gospel imperative."

This business of closing a world landmark because of "health and safety" considerations may be, on the face of it, not necessarily entirely apolitical - from either side.

I should like to see the protestors call that bluff - putting up red velvet ropes so that visitors could pass safely in and out of the Cathedral, which survived the Blitz and surely cannot be seriously threatened by the proximity of a few polythene tents.

In addition, perhaps the members of the Board of Trustees could be approached individually, to give their views on modern capitalism and how it has, or has not, benefited the community?

There's a smell about this, and it's not coming from the unwashed in their tepees.

Why am I reminded of Brian Haw, who spent the last 10 years of his life shaming Parliament with his anti-war protest. Even more shamefully, the authorities tried various dodges in retaliation: Westminster Council claimed he was an obstruction, and the Speaker of the House tried to invoke mediaeval laws guaranteeing the "safe" passage of MPs. The then Home Secretary David Blunkett announced he would outlaw "permanent encampments" outside Parliament as well as the use of megaphones.

So the - may I call them swine? - attempted to get him under the fresh draconian legislation of the Serious Organised Crime and Police Act 2005, only to find that it didn't apply to Haw since his protest had started before that Act. But it does apply to any of us who might try the same kind of protest. Anything, anything is fair to spare those in power the slightest embarrassment.

This thing is the tip of an iceberg. There is a great battle joined for democracy against corrupt, wealthy tyrants, and these protestors are, perhaps, among the first of our "contemptible little army".

Libya and the failure of British news

Am I alone in thinking that the West has just done things illegal and immoral in Libya, on the basis of lies and and half-truths told to us? Last night's BBC News had Jeremy Bowen and I-forget-who chatting away comfortably on location and the only question seemed to be whether getting Gadaffi killed had been (a) a good thing or (b) a very good thing.

These two gossiped agreeably like a latter-day Huntley and Brinkley. It would have been good to see the BBC fulfil its brief on balance and impartiality, for example by having one question the other's assertion that Lockerbie had been a Libya plot, rather than (say) an Iranian one, and asking why victim-father Jim Swire and Professor Emeritus of Scots Law Robert Black QC FRSE both feel that Abdelbaset Ali Mohmed Al-Megrahi is innocent and his trial a travesty of justice. Also, how a UN resolution to protect rebels in Misrata developed into NATO bombing raids on Sirte.

And why we got involved. EU empire-building? Securing Western oil supplies? Scaring the Saudis into withdrawing their support of Wahabi terrorism?

And what's going to happen next. Democracy? That's what Iranian students thought they'd get when they helped overthrow the Shah; instead they got a far harsher, fundamentalist government and Teheran's blood-fountain.

And why are we pretending to foster democracy abroad, in a week when all three major UK political parties are planning to instruct our Parliamentary representatives to vote against holding a referendum on the EU?

Money velocity, not quantity, caused the boom'n'bust

Reading "Extreme Money", the acclaimed new book by Satyajit Das, has highlighted for me the importance of money velocity.

As Das so clearly demonstrates (pp. 78-80), the banks altered their mortgage lending model in recent years. Instead of lending money and then holding that mortgage to maturity, they would sell it on for a sum that included the discounted value of future interest payments. This returned bank capital and depositors' money more quickly, which made it available for a new loan. Turning the money over faster massively increased the ratio of net profit to bank capital, so that the yield on banking activities outstripped other, one might say more productive, forms of enterprise. It became almost the only game in town, so that the economy has been skewed towards sterile financial hocus-pocus, instead of providing and exchanging useful goods and services.

The system created a boom, which could only be sustained as long as borrowers could absorb the increased quantity of loaned money. Asset prices boomed as fools sold on to bigger fools, and poorer-quality borrowers were suckered into joining. But we seem to have reached the limit of this pyramid scheme, and having run out of expansion room, the velocity of money is dropping and attention then turns to quantity instead.

The question now being asked - again, since we are in the throes of QE3 - is whether pumping extra cash into banks will balance the equation. If Wikipedia (see "money velocity" link above) quotes him accurately, I think the answer was given more than sixty years ago, by Paul Anthony Samuelson:

In terms of the quantity theory of money, we may say that the velocity of circulation of money does not remain constant. “You can lead a horse to water, but you can’t make him drink.” You can force money on the system in exchange for government bonds, its close money substitute; but you can’t make the money circulate against new goods and new jobs.

Banks have been given contradictory instructions: lend more, and build up your reserves. No wonder they take government support cash and buy safe, interest-earning government bonds with it. Effectively, the government is funding the gradual repair of bank balance sheets; it would be quicker and more honest if Uncle Sam and John Bull simply gave them enough cash to do the job.

But even that might not get the banks lending again. Would you, in their position?

Let's assume for a moment, sophisticated investor, that you have decided to stop day-trading because there's an increasing probability in this shark market that the bigger fool may turn out to be you. What longer-term investment might act as a safe haven for your gains?

• Western manufacturing industry, with its high costs of labor and regulation?
• Eastern manufacturing industry, so dependent on the once-profligate but now financially distressed Western consumer?
• Industrial commodities, which have soared in the busy economic boom but also because of leveraged speculation?
• Western real estate? Yes, the price-to-income ratio is dropping - but we haven't yet seen the drop in incomes that will continue the downward trend in nominal terms - especially as the borrower finds more of his limited income going on food and energy bills.
• Emerging markets real estate? One for the specialists, such as Marc Faber.
• Bank shares and sovereign debt? Junk bonds? Isn't that what got us into this mess?
• Agriculture? Maybe.
• Gold? Maybe - but what a rise it's seen in the last few years.
• Cash? Inflation isn't hitting everything - big-ticket items have gotten cheaper in real terms for decades. Here in the UK my first new compact car cost me £6,000 in 1989 and I could get another for that price now, with higher specifications. If you can pay your living expenses from income, maybe cash isn't such a crazy option.

For the way our governments (US/UK) are seeking to shore up the system doesn't look destined to work. The increased quantity of money, now used so cautiously and unproductively by the banks, is not going to offset the drop in velocity.

Later, if that money stays around and is not withdrawn quickly enough, then when we revive economic activity there will be a rush of general price inflation; but not, I think, for some years yet. Such inflation as we're seeing now has different causes and effects from the type we saw before, and has more to do with physical supply and demand rather than monetary expansion.

So some experts are predicting "troubles ahead", "unprecedented velocity collapse", a "double dip recession", or even a breakdown that will make us envy simpler, more sustainable societies.

I don't go with that last, but then again, I don't expect my house to burst into flame and yet I still have smoke detectors and fire insurance; so I do think it's good to build up easily-accessible emergency reserves against the possibility of temporary disruption.

There is no royal road to predicting economic developments. All the charts in the world are no use when the powers that be decide something different really has to be done. The system is not a machine but a poker game, and a crooked one at that. So I expect the course of events to be determined by a negotiation between the interests of the powerful, which in our democracies also (to some small extent) includes us, the ordinary people.

For now, I'm still holding cash and government inflation-linked bonds, but if the consequences of deflation are too painful for the populace, then the rules may well alter. Maybe, in time, we will indeed get hyperinflation, even though these days the currency is managed in a very different way from that of Germany in 1923. Dr Faber noted recently that gold and bonds rose together, a counterintuitive phenomenon he analysed as arising from fear of systemic collapse. This fear may also explain why India and China (among others) are boosting their holdings of physical gold, which is supporting the price even as other commodities deflate.

But that time of game-changing crisis is not, I think, with us yet.

INVESTMENT DISCLOSURE: None. Still in cash (and index-linked National Savings Certificates), and missing all those day-trading opportunities.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Why "black swans" and "fat tails" happen more often than expected

The more system dynamics are repressed, the more likely it becomes that "improbable" events occur and "highly probable" trends dissolve or reverse.

Charles Hugh Smith

What are the chances of frozen peas being embedded in your kitchen ceiling? Vanishingly small - unless one of them gets stuck in the escape valve of your pressure cooker, as happened to a neighbour of ours, years ago.