save those pennies!

This "wheat ear" was passed to me by a supermarket checker. As one who appreciates old coins I put it in my nice-penny jar to save. Naturally some folks ask me what such treasures are worth. It is worth, as of Jan 14, 2011, 2.89 cents! An instant 189% return not something to scorn. The 2.89 cents is simply the melt value of the coin: the metal it is made of is worth more than its monetary value (all US pennies minted in 1982 or earlier are pure copper and have at least this value). This is because pure copper pennies have lost their seignorage value. In a well run economy that has circulating coinage, the coins should be worth more than the bullion they contain.

There is plenty of discussion these days about the possible role of gold in healthy economies, and but I want to make two points:

1. It is important to have a circulating coinage. An economy devoid of coins (i.e. an all digital economy, or one based entirely on credit) is simply not healthy. All creditors, of sums from the smallest to the very largest, must have the possibility of demanding settlement in coin or other form of bullion.
2. Copper, while it has never been called a precious metal, has historically been a very useful monetary metal, albeit for the smallest of denominations.

As a monetary metal, copper is to silver as silver is to gold. All three have their place. Those who cannot afford gold, will transact in silver, those who cannot afford silver will transact in copper.

Obama and Goldman Sachs

Like most Americans, I was pleased that Goldman Sachs was charged with fraud. One of the very few things that Dems and Republicans can agree on is the perfidy of Wall Street.

But what's really going on? Is the government serious about rooting out corruption in finance? If so, lots more charges (and indictments) need to follow. This humorous post on The Exiled illustrates why that can't, and won't ever happen. Quote:

..the POTUS dropped this bombshell: “The only people who ought to fear the kind of oversight and transparency that we’re proposing are those whose conduct will fail this scrutiny.”

The Big Secret, of course, is that every living creature within a 100-mile radius of Cooper Union would fail “this scrutiny”—or that scrutiny, or any scrutiny, period. Not just in a 100-mile radius, but wherever there are still signs of economic life beating in these 50 United States, the mere whiff of scrutiny would work like nerve gas on what’s left of the economy. Because in the 21st century, fraud is as American as baseball, apple pie and Chevrolet Volts—fraud’s all we got left, Doc. Scare off the fraud with Obama’s “scrutiny,” and the entire pyramid scheme collapses in a heap of smoldering savings accounts.

It is the same-old Too Big To Fail argument that we've heard for two years, and unfortunately accurate. Our economy, multiple economies actually, if you count the the financial economy, the consumer economy, the (horribly compromised) health care economy, whatever, are all ponzi schemes, stacked and nested. It is all both Too Big To Fail and a House Of Cards at the same time. That's a very poor combination, obviously.

To get back to my hypothetical question, no, I don't think the government is serious about cleaning up the Street. They need Wall Street as much or more than anyone. America is is deep shit financially and is making desperate deals with the Federal Reserve (i.e. quantitative easing) to stay afloat. The Federal Reserve is just the biggest of the big fish on wall street. What Obama really fears is the another bank, such as Goldman, will become more powerful than the Fed. Then the government loses all control, loses the ability to say which bank must marry which bank (like a Mob godfather?), or which bank lives and which bank gets eaten, etc. They need Wall Street for all sorts of covert ops:

• manipulating commodity prices
• keeping the stock market propped up (the Plunge Protection Team)
• paying for foreign adventures
• playing the benevolent/malevolent god to obstreperous congressional districts
• most of all, keeping interest rates low

All these things are very expensive. Some of these tasks are performed by the Fed, some are performed by other banks on the Fed's instruction. For example JP Morgan is thought to be the primary force for control of precious metal prices, and an expensive struggle it is, which they are slowly losing. But it is better to have a corporate bank take the risk of all those naked short silver contracts than the Fed directly. And the Fed needs to control JP Morgan.

Goldman is getting hauled out and whipped because they are too big, too arrogant, too profitable and too powerful. It has nothing to do with fraud.

Obama's just trying to establish dominance.

United States Of Big Banks

I was depositing a check at my bank, Wells Fargo, and the teller wanted to up-sell me to a de-luxe account of some sort, some kind of special, VIP, for our very favorite customers sort of thing. No doubt. The delux came with no BillPay fees, which is very nice and free money orders, etc. Our conversation went like this:

Peter: the delux carries an automatic monthly transfer to a savings account, right?

Teller: that's right, we set that up right here in the branch.

Peter: $100 a month, or something?

Teller: just $75

Peter: so what's the interest rate for the savings account?

Teller: you get an introductory rate of 3.25% on the first $500 and [blah blah, more figures]

Peter: fascinating. A reverse teaser rate.

Teller: Yes, [what a great deal this, etc]

Peter: and what's the regular interest rate after the one year?

Teller: well it varies you know.

Peter: what is the rate today?

Teller: zero point one-five percent

Peter: [pause.. astonishment..] ZERO POINT ONE-FIVE PERCENT??
[voice goes up a few decibels] that's.. fifteen cents a year.. on a HUNDRED DOLLARS??

Teller: [almost inaudible] that's right

Peter: wow. WOW.
[can't believe it.. does the math again in his head] zero point one-five percent.
[looks at the teller to see if she thinks this is strange. Teller is looking at her feet.. maybe wondering if she's going to have to hit the security button]

Peter: you have Ben Bernanke to thank for that.. [realizes that this is not the place for a debate on macro economics, and quits]

Teller: can I help you with anything else?

Peter: [cheerful again] no not today, thanks!

I just wish I'd thought to point out to her that when Wells Fargo lends me money, they charge around twenty percent interest (i.e. cash advance rate) and did she think that was fair? But why bother?

Quantitative what?

Quantitative easing is simply the central bank printing money out of nothing. Really just adding it to the accounts of the Federal Reserve. The chart below is hotlinked directly from the St. Louis Fed website. Note that it is still spiking straight up.

And what does it mean? It means inflation. Lots of it. Very likely out-of-control inflation.

Rude FUs from the FDIC and Office of Thrift Supervision

This pisses me off so much: The Fight For WaMu Documents. It is an email from Sheila Bair, chair of the FDIC, to Jason Cave, also at the FDIC, with the subject line WAMU. It is so sensitive that it cannot be seen by the press. Just what is the FDIC hiding? And the OTS, they were far more direct: they simply told the Puget Sound Business Journal that their FOIA request was "denied in full".

All during the boom years of the 90s and 2000s, did the OTS or FDIC ever stand up to anyone, for either law or principal? I doubt it. But now they are smug and arrogant enough to send shit like this to the Puget Sound Business Journal. Beyond the insolence of our government agencies there is a very serious charge being made here: that government regulators gave WaMu to J.P. Morgan Chase ("Just the assets please, we don't want the liabilities."). They did this to keep JPM solvent. "Kyle Krol", in comments, alleges that JPM committed felonies in the process (click the link and go down). Who knows if there is any truth here, or if this is just a vindictive lawsuit? If our government is permitted to do this sort of concealment we will never know.

When us mere citizens write a check or swipe a debit card the transaction is a matter of record. And if we are indicted for some crime, or if the government just chooses to audit us (even at random), all our financial transactions may be seen. But the financial dealings of major too big to fail banks – they are far too sensitive for public scrutiny. Suppose the bank is charged with wrongdoing? No one will be permitted to see anything. If the government sides with the bank, and even conspired in the crime, what hope would the plaintiff ever have?

Pretty Boy Floyd and Jesse James were thought to be good at robbing banks in their day. They had no idea what could be done if you got the federal government to back you up.

so you own some gold stocks?

maybe gold stocks will become the next boom. who knows? is gold mining the path to wealth via speculation? I don't know. I just want to make a point about political risk here.

the world is moving, inexorably, to a gold standard. but not exactly willingly, happily, or easily. the disruption this process will entail is hard to predict, or even imagine. the world will more likely be thrown violently onto a gold standard, complete with mercantilist trade principals – enforced with arms. the reason we are moving inexorably to a gold standard is that we are losing our dollar: the key currency that stitches globalized trade together. we are losing it, it is disintegrating, rotting and crumbling. and when it is gone, then fiat currency itself will be gone.

it is not like we will gain a wonderful stable monetary base – mostly we'll just gain poverty. think of what we will be losing: we'll lose our freedom to travel internationally, freedom to buy imported goods, freedom to buy on credit (these things will be virtually banned). if we american are lucky we'll retain our constitution, but not much else. we will slowly re-build our manufacturing base, and try to make the things we need, instead of buying them on credit and fake money.

but think of Mexico (as just one of numerous examples). how will Mexico deal with the loss of their oil revenue? (in case you have not heard: due to depletion Mexico will soon no longer be exporting oil, and they will also have to end domestic subsidies on fuel.) Either the Mexican government will retain control by authoritarian decrees, or the government will all but collapse under assault from drug cartels and their warlords. These are the two possible outcomes from the unrest that will result in Mexico City when the government is broke, and no international aid is available to save them.

to get back to the gold mines.. Mexico has significant mineral wealth and a developed mining industry. a mining industry that goes back many centuries. they are going to keep mining. but who will control that wealth? maybe the Mexican government, through nationalization. maybe a regional warlord will take control of certain mines. it won't be through any fair process, not democratic, not environmentally sound, and not without violence, and not traded freely on a stock exchange. and if anyone thinks the profits from gold mining will leave Mexico and find their way to the brokerage accounts of americans, they're nuts.

what about Australian gold stocks (to use one more typical example)? Australia won't slide into authoritarianism, not fractional violence. but I still don't think the profits, nor the specie, will find its way to America. it will go to China. the Chinese will be putting up the capital, once the United States Federal Reserve Notes disintegrate like so many leaves on the ground in November. the Chinese will own most of what portion of the global mining industry is not nationalized and guarded. gold bars will be shipped to Shanghai vaults, not London, New York or Toronto.

Is silver a precious metal or an industrial commodity?

This is a chart of the price of silver divided by the CRB commodities index. It shows that Silver is rising strongly compared to the CRB index. All moving averages are in bullish alignment. The 200 week average is steadily climbing. Silver is outperforming the CRB. I think this indicates that silver is regaining its status as precious metal. The MACD has recently crossed over.
This might simply mean that commodities are going to crash, but silver holds its own. That would be the deflationary view. It's a question. In last fall's deflationary collapse, silver fell harder and faster than just about everything. That might change. There is less silver than gold in the world today. The bullish case for silver is stronger than ever.

View of the New Depression

President-elect Barack Obama is wasting no time addressing America's, and the world's, economic crisis. His administration is naturally being compared to the Roosevelt presidency.

So, can Obama fix things? Unfortunately, he can do almost nothing to fix the economy. He can bring "change". Change is coming no matter what, but a competent and inspiring leader, which Obama seems to be, can at least steer the nation in sensible directions, instead of making it all worse. But one thing he can't do is fix it. BTW, Roosevelt wasn't able to fix much either. I am inclined to believe there is no way to fix it: the world's economies simply need to slowly build up from the ground level.

Many writers are wondering if the nation is facing a recession or a depression. Joe Nocera, in the New York Times, says America is not as bad off as it was when Roosevelt took office, "not even close", he says.

Nocera is deluded. It is far worse this time. Nocera points out that numbers for unemployment are not as bad as they were in 1933. But when Roosevelt took office it had been three terrible years since the famous stock market crash of 1928. We have only had about three months. Nocera says in the Great Depression there were far more bank failures. Joe, two more banks just failed yesterday (Franklin Bank of Texas and Security Pacific of California). But really, the number of banks failing is not the problem. The failure of thousands of local banks in the Great Depression was catastrophic for millions of Americans, but it is simply nowhere near as bad as the linked chain of derivative defaults that characterizes the current global crisis. The losses are in the trillions. This process has only begun. The real problem with Nocera's shallow analysis is that it ignores the fundamental source of America's problem: in 1933 we were self-sufficient in the three key areas:

• Energy
• Manufacturing
• Capital

Sadly, we have none of these left today. We are broke, busted, and up shit creek. Maybe we can scrape together enough cash to fix our railroad infrastructure, as James Kunstler proposes. That would help.

For those who think the American economy is on the mend, I would refer to the weekly chart of the Philadelphia Housing Index. This is not showing any signs of turnaround. It would help to at least get a bounce here. If we break down through the lower trend line, there will be yet another shit-storm of huge defaults, and end-of-the-world panic newscasts. It will probably be big enough to bring about the State of Emergency I predicted in my last post. If we get a bounce, say up to the upper trend line, we'll have one of those delusionary interludes where we'll be sing "Happy Times Are Here Again" and Jim Cramer will start jumping up and down saying we should BUY FINANCIAL STOCKS. Don't fall for it. Not unless the housing index punches up from the upper trend line (not likely), the banking system will continue to suffer catastrophic losses every quarter.


Meanwhile, the international finance system is on the verge of systemic breakdown. I'm not talking about some secret cabal of Swiss bankers. The international finance system is what trades clear in every day for doing ordinary business. The currency of international business happens to the US Treasury Bill. T-bills are very precarious right now - they have been in a year-and-a-half rally, but have broken that rally. If treasuries collapse, we will have a US dollar crisis. This is looking increasingly likely, and is the direct result of the Fed and the Treasury selling all these bills to raise the money to bail out everyone on the whole planet who looks like they might be about to default. This will be the crisis that stops virtually all trade.

State of Emergency Coming

The recent catastrophic drops in equity markets, worldwide, are the coup de grace of the whole financial debacle. Now we know: no bailout, no stimulus, nor rescue plan will save the American, nor the global economy. We have to take stock and look at what's coming to us. What does it mean for the United States of America? It means that we are a hair's width from a State of Emergency being declared. When this occurs, all banks will close for a time. When they re-open they will be practically unified under a government umbrella, with all deposits in all accounts collateralizing the whole system. There may be a new currency.

The rest of the world is through trying to save themselves by saving our butts. Now foreigners need to save themselves by isolating America. There will be no more foreign capital coming to the USA. Global market contagion has made it imperative that foreign nations protect themselves from the now toxic, sub-prime currency.

Paradoxically, one of the few things that has not plummeted in value in the past two weeks is, oddly enough, the US dollar. Unfortunately, this is not a sign of strength. The dollar has risen because all over the world people have been selling anything denominated in US dollars.

From stocks, to bonds, to real estate, everything is being sold. Selling a treasury bill (denominated in dollars) means buying dollars. And next, whoever used to have a t-bill, and now has dollars, wants to exchange the dollars for something else.. they just don't yet know what to exchange it for. But they will figure it out. Leaders of european nations and asian nations are meeting every day, trying to figure out what sort of common medium of exchange, or mediums, will replace the US dollar. It probably won't be another fiat currency. It will be some sort of gold backed currency. Russia, Germany and some Persian Gulf states have been accumulating state gold reserves in the past years. They may float their own currencies. Hopefully there is still some American gold hoarded in the vaults of Fort Knox. We will need it.

It is not just foreigners who are selling. Americans are also selling their own assets, and hoping to acquire dollars. Its called liquidation. For myself, I'm trying to sell my Mazda 3 (I'm getting no interest whatsoever). I'd rather have the dollars than the Mazda. If I do sell it, I'll try to buy some silver or gold coins with the cash.

Some commentators note that at least oil has come down in price. Actually, this is not a good sign. Do they really think that exporting nations will sell us oil for $85 a barrel? No way. They will sell it to other nations, such as asian nations, or Germany. They will sell it to the nations that have good credit. For America, cheap oil simply foretells shortages.

We will have shortages in almost every commodity soon. Gold is being priced at $850. Can you buy gold at that price? No. Can you buy gold at any price? Probably not - maybe a few ounces, and you will pay a fat premium. This is called a shortage. We will soon have shortages in the commodities we produce, not just the ones we import. I just heard from my stepmother that the fishing boats in Maine have almost all been hauled out of the water and put in storage. The fishermen can't make any money because the price of lobster is so low. A shortage of lobster is the probable result. In hard times, low prices create shortages.

A shortage in gold coins is not going to cripple the US economy - but shortages of food and fuel will. These will occur for much the same reason that shortages in precious metal have developed: the government will try to maintain current prices instead of allowing hyperinflation to occur. This will be the main reason for a state of emergency being declared. Army and national guard units will take over distribution.

Capital will be strictly controlled, and it will be almost impossible to take anything of value out of the country, and certainly not things like precious metals. Naturally there will be a black market. Speculation of all kinds will be outlawed and vilified, but will be essential. Great depression II, here we come.

Robert Reich's solution: honesty

The crisis on Wall Street right now is less about solvency and about capital than it is about trust. And the real question is, How do you restore trust to a system in which, basically, nobody trusts the numbers that are supplied by big banks on securities?
—Robert Reich, interviewed on Marketplace

That's a great idea, Robert (although America probably is insolvent). We could bring a culture of honesty and fairness to Wall Street. Brilliant. However, since Wall Street has never been honest, nor fair, ever, it might be a difficult idea to implement. But I have an idea for a good way to start: the US government could set an example. The government could instruct the Bureau of Labor Statistics to produce accurate statistics instead of horseshit for a change.

First, how about an honest CPI series, instead of ridiculous fantasy numbers? Even the mainstream media is starting to report the CPI with skepticism and sometimes sarcasm. Then, we could have an honest data series for the gross domestic product! Imagine - numbers that businesses and the American people trust.

Note that none of this would cost billions of dollars. The government could just stop lying.

After that, some pretty simple, common sense finance regulation would avoid all this insane mortgage bond trouble. Twenty percent down payment for a house. No off-balance sheet liabilities for corporations (or the government). Its not that hard.

I realize that admitting we have out of control inflation, negative economic growth, and un-payable debts would send this country into the worst depression ever, but that will happen in any case. We should admit our insolvency, and start building an honest nation.

Walking around Manhattan and seeing.. Lehman Brothers

My girlfriend and I were spending Monday in New York City after attending a wedding, and the only art museum open was the Modern, so that's where we went. I had heard the news about Lehman Brothers in the morning and was following the latest carnage on Wall Street, but I was mainly trying to enjoy a vacation day. After our art-touring, and looking for the mid-town subway stop we pause to gape at the most garishly lit building I've seen yet in Manhattan. It was a massive block of video display. This thing was zipping and flashing. Then I noticed that there were media crews up and down the block, with all cameras pointing to the flashing video building. I realized I was looking at Lehman Brothers!


I was of course thrilled to be looking at the eye of the financial storm. It turns out that Lehman had been in the World Trade Center, but had moved to mid-town after nine-eleven.

News reports were rather odd. NPR interviewed Gordon Steele, author of Empire Of Wealth, an very good economic history of America. Steele compared the Fed allowing Lehman to fail to the the New York banks letting Bank of the United States fail in the 1929. I don't get it. Bank of the United States was the immigrants bank. Lehman is an investment bank that caters to the ultra-rich. The failure of Bank of the United States did set off a chain reaction; a wave of bank failures across America that launched the real Great Depression, because it had far more impact of peoples lives than the more famous stock market crash. Steele wondered is Lehman's failure would set off a similar chain of events.

Other reports described how upset Lehman's employees were at being made into such a spectacle. Most of those interviewed were angry that the Fed had not bailed out Lehman. Wow. They think we should be sympathetic?

I think what is going on today is that the Fed, and the press, and the public, are realizing that bailing out this bank (i.e. Bear Stearns) or that bank is not going to solve anything. We are facing a systemic crisis. The Fed is dealing with this by exchanging credit for just about anything at its many discount windows and TAF facilities. That sure sounds like monetization to me. But it is doing this for the few bank it chooses to save. Bank of America and J.P. Morgan seem to be on the A list. Merrill Lynch and WaMu are on the shit list.

So, what next for the financial crisis? The failure of Washington Mutual is only a few days away, if things keep going at this pace. And, after the elections, we'll have accelerating inflation, probably hyper inflation.

By the way, this financial crisis affects our ability to innovate our way out of the energy crisis. We no longer have an investment banking industry to supply capital to American industry on favorable terms. There is going to be a wave of innovation for alternative energy? Which of the almost-dead banks will finance this project? European banks will prefer to finance Euro companies like Airbus and Siemens over General Electric.

Those bonds we just guaranteed, issued by Fannie and Freddy? We will have to keep making those coupon payments even when the homes they represent are no longer generating income, because the occupants have left. More monetization. Our hapless government will monetize everything they can until our dollars are well and truly worthless.

Fannie and Freddie, ad nauseum

So, the goverment has taken over operation of the America's two giant, government sponsored mortgage brokers, Fannie Mae and Freddie Mac. News reports say ominously that the bailout "could cost taxpayers tens of billions of dollars".

Tens of billions? Who are they kidding? Fannie and Freddie's liabilities were in the trillions (btw, a trillion is a thousand billions). At the rate that American mortgages are defaulting, tens of billions are not going to fix anything. It's hundreds of billions if we're lucky, probably well over a trillion dollars that the government will have to pay. Remember that Fannie Mae was notoriously resistant to audits, and the SEC kept letting them postpone their statements? No one knows the true mass of the black hole at the center of the mortgage galaxy.

Supposedly the holders of GSE debt (collateralized debt obligations, mortgage backed securities, etc) are relieved that the US Treasury will guarantee the monthly interest payments on this debt. Not to worry, the freshly printed notes will keep arriving in the mailbox on schedule.. but something is different here. Think of what those bonds used to represent. All those people going to their jobs, bringing in paychecks, making mortgage payments to banks.. that was a lot of economic activity. That was the process of wealth creation. Now that those homes have foreclosed (not all of them of course, but a lot of them) and mortgages defaulted, the treasury will simple write out a check to cover the mortgage - even though the people who originally borrowed the money no longer even own the home! What economic activity does that represent? Not a lot. No equity is being accumulated, no wealth is created, or value added. The government simply prints the money. The government could try to cover the cost with increased taxes, but that would only suppress economic activity even more (not to mention cause riots). These bailouts are simply the next stepping stone to hyper-inflation.

In the end, who owns all those homes? Bond fund PIMCO does, and the government of China, which are both huge holders of Fannie and Freddie debt. These are the owners of American homes, along with many others. And if those homes go into foreclosure, the mortgages will still be paid by the USA. In soon-to-be-worthless American dollars.

The Terrible Silver Plunge

For all the people like me, who believe silver and gold are real shit, as opposed to fiat currency, the recent plunge in the futures price of silver and gold, was a crime against humanity.. well not really. But this is a prevailing view of many good and smart precious metals analysts. Heck, I don't see it. I think the major banks and nations that are aligned with the U.S. dollar have a very strong interest in not seeing the precious metals soar in price. So, they try to manage the price down. No conspiracy needed other than the usual corrupt shenanigans on Wall Street. Is anything new here?


Silver is still within it's recent uptrend, and may in fact be a spectacular bargain right now.

Silver was driven down very hard and fast by two New York investment banks. Almost certainly JP Morgan was one of them. Shorting silver is one of their lines of business. They probably had help from a variety of self interested parties: central banks, hedge funds. This is how hot commodities go: up and down. However there are repercussions to such savage price manipulation. Silver miners will find it impossible to continue operating. If not forced to shut down, because they'd be running at a loss, they might chooses to inventory their production. Artificially suppressed prices are a guaranteed way to create shortages, and shortages can then persist for some time. Even the arrogant JP Morgan, flush with their vanquishment and consumption of Bear Strearns, knows that they cannot control silver for long. Instead they will reverse their position and ride the precious metals upward, as the dollar renews its own fall into oblivion. If Bernanke is thinking the New York investment bankers are his friend this month for helping drive down commodities and prop up the dollar, he is crazy. Those guys are both ruthless and desperate.

War with Iran? I don't believe it.

The press seems to assume war with Iran is more and more certain. At least the western press. My father, who travels widely, tells me that virtually all Israelis now believe war with Iran is now inevitable. The prevailing assumptions are outlined in this gloomy op-ed for the New York Times:

Israel will almost surely attack Iran’s nuclear sites in the next four to seven months — and the leaders in Washington and even Tehran should hope that the attack will be successful enough to cause at least a significant delay in the Iranian production schedule, if not complete destruction, of that country’s nuclear program. Because if the attack fails, the Middle East will almost certainly face a nuclear war — either through a subsequent pre-emptive Israeli nuclear strike or a nuclear exchange shortly after Iran gets the bomb.
—Benny Morris

I guess this puts me in the optimist camp for a change. I think Morris is missing something (maybe everything would be more accurate). Israel can not hope to achieve anything by launching a unilateral war against Iran. This is because Iran is now backed by both China and Russia (and, discretely, by Japan). China and Japan depend on Iran for energy supplies. Russia is building much of Iran's new infrastructure, including military, and has many billions of rubles worth of business deals there. Iran is to Russia as Iraq is to America: Russia is fortifying Iran to secure their oil and gas supplies, much as America installed massive military bases in Iraq to secure their oil and gas. Russia has supplied Iran with Sunburn cruise missiles, which are a generation more advanced than US and Israeli cruise missiles, giving them tactical superiority. They are capable of evasive maneuvers, making them hard to defend against. These missile installations look down on the straits of Hormuz, bottleneck to the Persian Gulf oil shipments.

Of course, Iran can't win on the basis of better missiles. Over all, the Israeli and American military is far superior to Iran's. The real issue is not tactical, but strategic. Israel is backed by the USA and England, and Iran is backed by Russia and China. If a conflict starts, unless it turns into a short and quick victory for one side (unlikely), the side that will prevail will be the side with access to the most energy and capital. I'm not saying that Russia or China would attack the USA or England. Rather that those powers would employ geopolitical leverage to prevent Israel from destroying Iran, and vital Russian interests there, i.e. the oil and gas fields.

The USA and England are both on the brink of outright insolvency, and the USA is also dependent on imported energy. They are in no position to back Israel in a war. Wars are insanely expensive. England is now a net importer of energy, and their domestic supplies are in rapid depletion. Israel purchases its oil imports on the London and Russian markets. They depend on American and UK lines of credit.

Russia is not only self sufficient in energy, but can, and has demonstrated its willingness, to cut off energy from its export markets. China can do the same with capital, by simply selling part of its war chest of US Treasury bonds. China and Russia's superiority is so overwhelming that they can prevent a war from happening.

And that, I believe, is optimistic. If Iran had the bomb, I don't think Iran would nuke Israel and assume a retaliatory strike. In fact I think it is astonishing that Israel is threatening exactly that. Don't tell me that Iran is more crazy than Israel. They are both crazy. I think saner heads, i.e. Russian and Chinese, will prevail.

When push come to shove among bankers

Since it is increasingly clear, reading between the lines of the business press, that there are going to be bank runs in America and other western nations, it seems prudent to wonder just how and they will occur. Bernanke himself said in February that

"There probably will be some bank failures," he said, though they are likely to be among smaller regional banks that are particularly exposed to falling property markets.

So, Bernanke expects smaller banks to fail? Aren't some of the largest investment banks heavily exposed to mortgage bond losses? I think he is suggesting some consolidation will be happening. What might occur is larger banks preying on smaller banks in cannibalistic fashion. If all banks are finding it hard to make any money and can't borrow, the larger ones, especially those with access to the Fed's "discount window" and "term auction facility", could take over pretty much any bank they want. They will of course choose the most solvent ones, which have capital on deposit. They will use that money to pay off their bad loans! Any bad loans on the consumed bank's books will not be absorbed, rather it will be disposed of by being passed off to "garbage can" banks. Jim Willie has written extensively about how JP Morgan functions as the Fed's depository of debt that must never see the light of day

Continuing in this extrapolating manner, of positing free ranging thought experiments, I'll point out another thing. This process might continue up the food chain. The big New York banks and investment houses have always assumed that the Fed has their back and wouldn't let anything truly bad happen to them. Such assumptions are true to a point. The Fed is just one more bank, albeit the biggest. The Fed is having problems of it's own. It has blown almost its whole stash of capital trying to stabilize the credit crisis, and it has failed. It can neither raise nor lower interest rates. It can only create more "dollars", of uncertain worth, but they hemorrhage out of the financial system faster than the Fed can create them. I don't think Wall Street can be too confident that the Fed has their back for ever. At some point, after much bank-failing and insolvencies have come to light, and when the Citibanks and Goldman Sachs are still struggling to survive, they might realize that the Fed is now looking at them with a hungry eye, and inventorying their balance sheets for morsels.

OK, one more thing, on banks. Suppose you are a bank with a lot of unsalvageable mortgage debt. You have no morsels of good loans, and little capital to attract predators (i.e. investors). There is no market for your shit, and you know, deep in your heart, that there never will be, and you can't raise capital from any friendly Saudi Princes. Bankruptcy is inevitable. About the only thing you can do is control the timing. Maybe you can choose a favorable moment to go out? A good time might be when a lot of other banks go down. Or when there is an international crisis. Perhaps a currency crisis! Then you will be less exposed to liability. You might even get to claim a force majeure. Corporations always think of their liability first. Will they consider their depositors in this calculus? No way. Only liability.

Schumer tells the Saudis.. something he'll apologize for

Senator Charles Schumer is trying to threaten OPEC, and Saudi Arabia in particular, to get them to sell America cheaper oil.

“The Saudis have to understand this is a two-way street. We provide them weapons, our troops provide them protection, and then they rake us over the coals when it comes to oil.”— Schumer

Wow. Schumer is threatening the Arabian oil producers. The whole thing about protecting them with our weapons and troops sounds just like a mafia shakedown, with the thing about our troops being already there. Amazing. Doesn't he know that most Saudis hate the fact that US military “protects” them? Does it occur to him that Saudi Arabia could trade American protection for Chinese and Russian protection?

Doesn't he know who recently bailed out America's investment banking system? Among the participants of Citicorp's private offering of convertible preferred securities are the Kuwait Investment Authority, and His Royal Highness Prince Al-Waleed bin Talal bin Abdul Aziz Al Saud (see Citi's own press release). Mr. Al-Waleed bin Talal is a member of the Saudi royal family, and one of the world's most successful investors.

The senator from New York, of all people, should know what's going on on wall street. He should know who now controls the huge money center banks. The large investment banks' recent preferred stock offerings were no ordinary stock offerings. These were last ditch efforts to re-capitalize America's banking infrastructure. If these offerings failed there would have been a global financial collapse. So, know that the rescue money from the Arabs did not come without conditions, far on top of the 7% coupon the preferred shares pay. The first condition would be “we control the oil now”.

An article that expands on Schumer's assumption that America can still prevail as a superpower, and gives a somewhat more logical and reasoned framework, was published last week by Chile based market analyst Clive Maund: Powerful Bullmarket In Us Stocks Looms As The Us Prepares For Global Hegemony.... Maund basically says that America now has control of Iraqi oil (because of it's permanent military installations), and, in addition, will soon secure Iran:

“The oil reserves contained within Iraq are gigantic, and thus its acquisition was a major economic and security leap forward for the United States. In addition its central position within the region and the earlier acquisition of Afghanistan make the eventual appropriation of oil-rich Iran an almost foregone conclusion... At present the US is only militarily the greatest power on earth, but in a few years it looks set to assume comprehensive hegemony of the planet, as the massive oil revenues from the spoils of the Mid-East campaigns flow in and correct the careening deficits. China will then comply with US demands or the oil tap will be swiveled in the off direction. Russia, currently blessed by an abundant supply of oil and other natural resources, should do well, but will be surrounded and eventually forced into compliance as its resources dwindle and it becomes increasingly isolated. Britain, as the 1st officer of the US in its wars of acquisition, will enjoy a privileged place at the table in an increasingly resource starved world. Israel will look on with quiet satisfaction at all of this.”

This is a fascinating thesis, and one that I disagree with. America had global hegemony. That ended last year when it became apparent that the USA is essentially insolvent. We simply don't have the time to get out of this: a domestic shitstorm of housing collapse, energy shortage and capital crises are slamming us concurrently. Far from expanding our influence in the Persian Gulf, I think we'll be forced to withdraw. Jim Willie has made a prediction on how the showdown would occur: a demonstration of Iranian firepower via a Russian Sunburn cruise missile.

“The Iran wild card cannot be dismissed. A casual observer might believe the United States Military eagerly desires an incident, even with loss of US soldier lives, provided a cause for war is achieved with Iran, for some greater good not easily understood. So far Tehran has not bitten the bait. In the wings is Russia, quietly in control of European energy supply and eyeing its odd bedfellows among the ruling mullahs. Hidden in the hills and along the shore of the Persian Gulf are oodles of Sunburn missiles, supplied by Russia, installed by Iran, aimed at US warships. The Sunburn is one generation ahead of the Tomahawk Cruise missile in the US arsenal, capable of evasive maneuvers. ”

A sunk aircraft carrier would be a convincing demonstration of power. Naturally such a blow would not go unanswered. Iran would suffer some terrible attack with probably far more loss of life. But the American generals know, as do the Iranian, Russian, and Chinese generals, that America can not prevail. With a depleted military, and without the capital to re-fit and re-build, America can no longer use its military to seize the remaining great oil prizes. Weapons and ideology can start wars, but only fuel and capital can win them.

Fortunately it need not come to warfare. The Chinese could use discreet diplomatic and financial threats to steer us away from the path of global hegemony, even though that is America's natural default stance. We'll just have to spend the money on something boring, like building public transportation. We should mention it to Schumer one of these days. And next time New York needs a little cash he might be saying “sorry!” to His Royal Highness Prince Al-Waleed bin Talal bin Abdul Aziz Al Saud.

Lessons of the Russian Ponzi scheme

This is how Wikipedia describes the Russian financial crisis of 1998:

“Prior to the culmination of the economic crisis, the GKO bonds (Russian treasury bonds) issuance policy was similar to a pyramid, or Ponzi scheme”.

A Ponzi scheme! How America gloated in 1998 at the victorious end of the cold war. We were flush with pride over the beautiful new internet, and the stock market was soaring. But America, having gone a little overboard on internet frenzy, and hoping to pull off something bigger and better, soon built the most spectacular Ponzi scheme the world had ever seen: the housing and mortgage bond Ponzi. A Ponzi to end all Ponzis.

The thing that finally drove Russia into insolvency was a peculiar problem: oil was selling too cheap. It was essential to government revenues. Now people want Russia to increase oil production for the convenience of American drivers. If Russia (or the Arabian nations) increased production, the price of oil will go down. Why would they do that? Earth to America: nobody owes you any favors. It is America that owes.

A few weeks ago I wrote that when the treasury bill market finally softens, it will be “game over” for the Fed. A strong treasury market is the only thing that is maintaining the illusion of American solvency right now. I was thinking the treasury might start to turn over in November or December (08). But almost as soon as I wrote it, the treasury chart started to look a little softer:


Well a little softness in the very strong treasury is not going to crash the dollar — yet. But what would happen if it decisively broke down out of its up-trending channel? Suppose it went into a secular bear trend, chasing the dollar to the bottom? There would be a stampede out of treasuries, that's what. We'd blame the Chinese, naturally. “Economic Warfare”, we'd shout (although American hedge funds would be selling too). The Persian Gulf states would finally give up on us. They would try to separate their economies from ours. The only question is what sellers of treasuries would buy? Euros? Rubles? Gold? All three, probably.

Don't forget that the yield on a bond moves inversely to the price. A falling price makes the yield on a bond rise. And how would an insolvent USA pay the increasing interest on its debt? Simple: not for very long. The point will come, maybe within a year, when America defaults on its debt. Just as Russia did in 1998, as a result of its own top heavy financial system, America will default. That will be the final, ignominious end of a spectacularly successful era of American history, and it's sudden collapse. Maybe it will also be a beginning? I hope so.