Blessed Blankfein

In case you missed it, this past Sunday the head of Goldman Sachs was quoted saying that he does "God's work." In the same interview he also said "We're very important," "We have a social purpose," and "Everybody should be, frankly, happy."

Just call him Lloyd Marie Antoinette Blankfein.

Tom Gregory over at HuffPo put up a hilarious response as follows:

THE LLOYD's Prayer

Our Chairman,
Who Art At Goldman,
Blankfein Be Thy Name.
The Rally's Come. God's Work Be Done
On Earth As There's No Fear Of Correction.

Give Us This Day Our Daily Gains,
And Bankrupt Our Competitors
As You Taught Lehman and Bear Their Lessons.
And Bring Us Not Under Indictment.
For Thine Is The Treasury,
The House And The Senate
Forever and Ever.

Goldman.

Goldman's performance in the markets was so spectacular last quarter that they only lost money on 1 out of 65 trading days. You cannot do that without massive corruption. It's simply impossible. With this "God" reference, perhaps Mr. Blankfein is arguing that it wasn't criminal behavior-- it was Divine Intervention.

Losing faith

Over the past few millenia, humans have used a great many things as money. Units of labor, peppercorns, giant slabs of rock too heavy to lift, seashells, clay tablets, sticks, and of course, gold and silver. (The sticks were surprisingly effective. Worked for centuries in England.)

From an elitist's perspective, the most fantastic form of money yet devised is paper. It has less utility than seashells (which after all are made of minerals), or peppercorns, or sticks. Even the lowly stick can be burned for warmth. (The British had loads of these very old sticks lying around in the Houses of Parliament, and in 1834 they got the brilliant idea of destroying them in a stove, whereupon the entire Parliament burned down. That was some seriously dry wood.)

But fiat paper money doesn't represent any tangible goods whatsoever. (Over 90% of our "paper" money is actually just a computer entry somewhere.) Paper money is an object of collective faith. That could be said about any of the other forms of money, too; but the thing with paper is that it can be created by governments, in enormous quantities, at will. Money printing makes the currency less rare and therefore less valuable, robbing the people of their savings.

Whatever governmental mistakes bring about the failure of a currency, in the actual moment when it tilts over the precipice and plummets in value, it's mass psychology that does it. It's a sudden, widespread loss of confidence in the value of the currency.

I note that people are already losing confidence in Wall Street, in the Treasury, in the Presidency (that is, in the position itself), in Congress, in the two-party system, in the People themselves. This is to say nothing of the sense of decline one gets from the new crappy houses with deteriorating siding and toxic drywall, the clothing made of increasingly thin material, the ruined historical buildings and town centers, the shrinking food packages, the disintegrating barns and silos, the uglier and emptier strip malls, the rusting factories, the increasing drop-out and illiteracy rates. As an Empire, we are through. Stick a fork in us, we're done.

As for the financial world, I wouldn't know where to begin or how to express how criminal, insane, and plainly dangerous the markets have become. On blogs where people are knowledgeable about these things, the cynicism and bitterness are rampant (although there's a lot of humor, too-- what can you do but laugh?). Nothing in the financial world is considered to have any meaning anymore, because it's all disconnected from the real world and the real economy.

In short, there's not a lot of confidence in the institutions surrounding the dollar, nor in the society that exports all these dollars, nor in the international banking system in which the dollar operates. Psychologically speaking, the supports are being knocked out one by one.

You can start to prepare yourself for this coming distrust of paper money by taking out a bill-- not a one-dollar bill, but say a twenty-- and recognizing that it is just a bit of cotton and ink. Seriously. The only reason you can hand it over and get gas or jeans or eggs in return is because the guy taking your money is an idiot. Okay, not an idiot, but willfully blind, in the manner of the villagers praising the non-existent clothing of their emperor.

Another tactic is to imagine yourself on a desert island with a big wad of tens and twenties. You're screwed, right? Now imagine you get one hour to shop at a Super Wal-Mart before we drop you and your stuff off for two weeks on that same barren island. Makes it pretty clear what's really important, doesn't it?

This is NOT all survivalist thinking. Actually there is a very long-term cycle in which for a couple of decades or more, financial assets (paper) do very well. And then they get way over-valued and there is a return to real assets (also known as hard or tangible assets) such as gold, silver, real estate, agricultural commodities, crude oil, natural gas, base metals, etc. We are now exiting the overblown paper party, and hard assets will be far superior investments for the foreseeable future.

But it's true, it's pretty easy to understand at a survivalist level. If you have loads of cash, you assume that can be turned into wheat or clothing or firewood or batteries at your convenience. Essentially those dollars are someone else's future promise to give you stuff. As long as nothing goes wrong, these future cashiers can keep that promise, and you won't have to do without.

As long as nothing goes wrong. I mean, as long as people don't change their minds and start worrying about the bits of cotton in their wallets. If people start worrying, en masse, then in the blink of an eye the stores may no longer have that stuff you meant to buy. Whatever can be reasonably converted today from "colored cotton paper" into "stuff" should be converted. A great many things last almost forever: toilet paper, soap, salt, sugar, popcorn, properly stored firewood, wool blankets, oil lamps & oil, Coleman stoves & fuel canisters. Think of it as making an investment change from paper assets to hard assets, and try to get it done before all faith in paper is lost.

Still losing jobs, no end in sight

[So much for my goal of blogging daily in November... my family was waylaid by a virus.]

Last week the official unemployment rate hit 10.2%, meaning that -- and here comes the tricky bit -- among those still considered part of the American work force, 1 in 10 are out of a job. However, if you've given up looking for a job because there are none (think of a construction worker in Florida or Arizona), then you don't count. If you've been out of work over 6 months, you also don't count.

And it doesn't matter whether your job is enough to survive on, either. If you used to work full time, and now the only job you can find is for 8 hours per week, it doesn't matter. That's considered "employed". If you are a self-employed real estate agent who hasn't sold a home in 6 months-- you guessed it! Employed.

If you put the "discouraged workers," the long-term unemployed, and the under-employed into the unemployment category, our unemployment rate is 17.5%. But even that's an underestimate, since various administrations have finagled this number in order to soften the bad news. Economist John Williams calculates this unemployment figure the way it was calculated prior to the Clinton administration, and his figure is 22.1% unemployment.

In truth, then, at least 1 in 5 American workers cannot find a job.

Meanwhile, those still employed are being squeezed mercilessly. Wall Street was just frickin' ecstatic over this bit of news from last Thursday:

The Labor Department said the output per hour of nonfarm workers rose at an annual rate of 9.5% in the quarter, more than four times the average productivity growth rate of the past quarter-century. When taken together with the second quarter's 6.9% rise, it was the strongest productivity growth rate over a six-month period since 1961.

Woo-hoo! CEO's are going to get almost 10% more work out of people this year, and all without paying them a red cent more! Bust out the champagne on the floor of the NYSE!

Disgusting. In the past 6 months, the output per hour of work has increased dramatically while worker's incomes have been flat or falling. This increased productivity has meant that more workers can be let go, or not hired back. In effect, Wall Street was cheering the fact that companies won't have to employ as many people.

Meanwhile the government claims it saved or created 640,329 jobs via its stimulus plan. As Mish points out, if that's true then it means they spent $323,739.83 per job. I don't know about you, but that doesn't look too impressive.

Furthermore, more than half those jobs were in government, meaning that government must continue to pay over 320,000 salaries indefinitely. The Obama administration had promised that 90% of the jobs would come from the private sector, in effect assuring us that government wouldn't have to keep paying for these jobs by paying the salaries year after year. But in fact, the minority of new jobs were in the private sector; most must be funded by government in perpetuity.

But this jobs number turns out to be entirely bogus, because (get this) pay raises were counted as new jobs.

Uh-huh. You read that right. Check it out over at The Automatic Earth:

AP found, just to name an example, that of 14,506 jobs allegedly saved or created by just one federal agency, two-thirds (!) were not saved or created at all. They were counted because existing government employees got pay raises.

An unfortunate and isolated accident? No, it's not. The administration has even issued directives to count pay raises as saved jobs. AP: "The inflated job count is at least partly the product of the administration instructing local community agencies that received money to count the raises as jobs saved."

You can't make this stuff up!

Who knows what we spent on the few measly jobs we did manage to create. Half a million each? A million apiece? And even if the Obama administration had been correct, and we had saved or created 640,000 jobs, that still would be terribly disappointing considering that unemployment rolls show 559,000 people lost jobs just last month.

Of course, the Bureau of Labor Statistics or BLS -- also known as the Bureau of Lies and Statistics -- says we only lost 190,000 jobs last month. But this is a much-manipulated estimate based on the bogus "birth and death model" which we now know has vastly underestimated job losses throughout 2009. The BLS will correct this understatement of lost jobs after the end of the year. Still, even according to these rosy-colored BLS numbers we have lost 2.8 million jobs since the stimulus plan was passed roughly 10 months ago.

The blue lines in the graph below show the estimated unemployment rate, without any stimulus plan (the higher light blue line) or with the stimulus (the lower dark blue line). Reality is a bitch... the real numbers are in red.



Meanwhile the Goldman crowd continues to suck down their hundreds of thousands in bonuses and the Too Big to Fail banks (more like So Big We Can Screw You) throw multiple trillions of our dollars into their black hole, bankrupt coffers. Who needs production? We gotta save the bankers!

Massive income disparity is not financially healthy and usually leads to a ruined economy and major social unrest. You would think the banking elites must know this, yet they appear to think Things Are Different This Time, and that they have nothing to fear from the masses. Meaningless pop culture, electronic toys, public schooling, and controlled media make Americans so passive -- or so the popular thinking goes -- that they couldn't lift a torch if their children were starving. Well, I don't think so. In fact, Americans have such a sense of entitlement that they're liable to be far more pissed off about their falling standard of living than the citizens of many other nations.

Unrest doesn't have to be sparked by anything directly related to joblessness, foreclosures, or other economic problems. Last December, during rioting in Greece, 16 bank branches were burned down. The riots weren't about the banks or the economy, but had been ignited when police murdered an unarmed teenaged boy. Nonetheless, the underlying economic discontent was enough that banks were targeted.

Jobs are not simply the key to economic health, they are also the best way to prevent civil unrest. And yet with all the money being spent, virtually nothing is being done to bring work back to the United States. According to Mish in a recent interview, we still give tax benefits to corporations' overseas operations which they cannot get for US operations. In other words, the US Congress is continuing to give incentives to US companies to offshore their labor, even as we speak.

As Jim Kunstler has said, once the first window gets broken, all bets are off.



Policemen stand by the burned Emboriki Bank in central Athens on December 9, 2008. AFP PHOTO /Louisa Gouliamaki

Disaster is inevitable

Well, I mean, if you're going to put up a seriously doom and gloom post you might as well announce it right there in the title.

I'm going to translate from a newsletter written by a well-respected money guy named Eric Sprott. I can't offer any expertise in economics, but what I can hopefully offer is a translation service into plain English. The excerpts below are from the October 2009 issue, Dead Government Walking.

[T]he United States Government is on a trajectory to default on their obligations. In its current financial condition, it will not be able to fund its forecasted budget deficits and unfunded Social Security and Medicare promises on top of its current debt obligations.

That is, there will be no Social Security or Medicare for most of us. Imagine a company that was setting aside money for its employee pension plan, only every single year they "borrowed" the entire amount that was supposed to go into pension funds, and instead used it to make payroll. That's what the US government did. There is no Social Security money. We just figured we could borrow or raise taxes when the time came. Ha! Not so much.

[T]he financial condition of the US government is completely untenable. The projected US deficit from 2009 to 2019 is now slated to be almost $9 trillion dollars. How on earth does anyone expect them to raise this capital?

In other words, the rest of the world cannot afford to loan us $9,000,000,000,000 over the course of the next decade when everyone is broke.

As we stated in a previous article, in order to satisfy US capital requirements, all existing investors would have had to increase their US bond purchases by 200% in fiscal 2009. Foreigners, however, only increased their purchases by a mere 28% from September 2008 to July 2009 - far short of what the US government required.

So here's a similar example. Suppose that last year you had to put $1,000 on your credit card to make ends meet. This year your income is lower and your expenses are greater, and you know you're going to need to borrow $3,000. But then your credit card company sends you a letter announcing that your credit limit is being lowered to $2,280. You can only borrow another $1,280 this year, far short of what you need to get by. But here is where the difference comes in: you don't have a printing press with which to counterfeit money to make up the difference. The government does. And boy howdy, they use it.

[T]he Federal Reserve isn’t merely supporting the market for US treasuries… it is the market for US treasuries. Printing new dollars to support an almost $9 trillion dollar budget deficit that stretches out over the next ten years puts the US on the road to ruin....

In other words we print money and buy our own Treasuries. It's like transferring counterfeit money from your left pocket to your right, and pretending that all money in the right-hand pocket is now magically legitimate. Here in the real world, as it says above, that puts you on a very bad path. One that often leads to hunger, and occasionally leads to guillotines or fascism.

Taxing the citizens is another possibility, one that doesn't involve borrowing or printing, and thus seems a tad more responsible. But here we run into the principle that "you can't get blood out of a stone":

The US taxpayer can’t cover the difference either. According to recent estimates, tax revenue from all sources would have to increase by 61% in order to balance the 2010 fiscal budget. Given that State government income tax revenues were down 27.5% in the second quarter, the US government will be lucky just to maintain its current level
of tax revenue, let alone increase it....

Can't borrow it, can't get it from taxes. That leaves only breaking promises and printing money, both of which will undoubtedly take place.

Hemingway wrote that a man goes broke “slowly, then all at once”. We believe the same sentiment can be applied to governments....

Like dead men walking, the US government is merely biding its time until the moment of truth. Unlike Fannie Mae, General Motors or Citigroup, however, there is no one left to grant a reprieve.

The Japan risk

[I'm attempting to blog every day for the month of November.]

A totally new danger -- new to me, anyway -- was brought to my attention today by Ambrose Evans-Pritchard in his article It is Japan we should be worrying about, not America. I'll attempt to translate some of it into plain English.

The basic problem is that Japan has borrowed wayyyyy too much money. They've been even worse than the US, and now owe more than twice their total GDP. They may, in the not too distant future, be forced either to default (stop making debt payments) or to print massive quantitites of new money, thus collapsing the value of the yen.

When you loan a government money by buying its bonds, there is always a risk that it will never give you your money back. You can buy insurance to protect yourself against the risk of not being paid back. It currently costs $63 per year for every $10,000 you've loaned to Japan (the loan in this case is for 5 years). That's a much higher insurance premium than for other major governments; the same sort of insurance only costs $22 if your loan was to the United States. These insurance costs for Japanese government debt have spiked higher just recently, a sign that people are becoming more doubtful about Japan being able to handle its debts.

Part of the problem is that the new left-leaning Japanese administration wants to... well, "borrow and spend," in an attempt to extricate the country from a horrible deflation. However good the intentions, Japan is already in debt up to its eyeballs and this is only making the fiscal situation more dire.

On top of the new round of borrowing and spending, Japan has a heck of a lot of elderly people, and various retirement funds are having to sell off Japanese government bonds in order to give people their retirement money. When all these old folks were still working, their pension funds were buying government bonds, i.e., they were loaning oodles of cash to the government. Now it's time for the government to start giving that money back.

And here we come to the Spooky Quotes section of the piece:

If Japan's bond rates rise to global levels of 3pc to 4pc, interest costs will shatter state finances.

No one knows exactly when a country tips into a debt compound trap. But Japan must be close....

"The debt situation is irrecoverable," said Carl Weinberg from High Frequency Economics. "I don't see any orderly way out of this. They will not be able to fund their deficit. There will be a fiscal shutdown, a pension haircut, and bank failures that will rock the world. It is criminally negligent that rating agencies are not blowing the whistle on this."

"Irrecoverable" is not a word one likes to see in an econ piece. It means, as I said earlier, that Japan is stuck with two really awful choices. It can default on its debt outright-- thus saying "Screw you!" to its lenders. Or it can print brand new money to pay its bills, eventually collapsing the value of the yen. When the yen gets decimated, that's essentially another way of defaulting, because although they will be paying people back, they'll be paying them back with toilet paper.

Now, I really doubt that they would simply stop making payments (default). If they did, the amount of interest that other major governments would have to pay to their lenders would shoot up rapidly, because everyone would be spooked. Government debt would no longer look like the "safe haven" investment it's assumed to be. People would be a lot more skittish about loaning money to governments, and would demand a lot more interest. Skyrocketing interest rates would completely crush stock markets, bond markets, and real economies worldwide. Frankly, I'm not sure Japan could even get away with it; other governments would presumably intervene somehow to avoid a catastrophic global deflation.

Option #2, then: Japan starts printing money to pay its bills. That dilutes the value of existing yen, so the value of yen starts to go down. This often ends in a sudden loss of confidence and Japan could then experience hyperinflation. When Thailand experienced a currency collapse in 1997 it spread to a number of other Asian currencies like an epidemic disease. If one of the world's major fiat currencies implodes, what happens to the others? Aren't all purely paper currencies impugned when one of them utterly falls apart? But if so, then this scenario might end in global hyperinflation; a collapse of all currencies (to varying degrees, but in all cases disastrous). Sure, there might be some little ones that would survive (maybe the Swiss would return to strict gold backing), but such currencies would not be plentiful enough to facilitate global trade as we've come to depend on it.

I certainly hope I'm missing something here. If Japan's situation is "irrecoverable" and if they could drag the rest of the developed world down with them, then it might not matter what Western central banks do from here on out.

My UPS guy on the economy

[I'm attempting to blog every day for the month of November.]

About a week ago I was signing for a new printer, and my UPS guy asked me out of the blue whether we're stockpiling food. I'd seen this guy several times before, and I figured he'd delivered boxes from Emergency Essentials, Pleasant Hill Grain, BulkFoods.com... that sort of place. So he had a pretty good idea that we have a survivalist bent (although in our case, TEOTWAWKI arises not from nuclear war, Chinese invasion, or fire and brimstone, but currency failure). Mind you, we hadn't gotten any suspiciously survivalist boxes in a long time, and I wondered how long he'd been wanting to ask me this.

So I said yes, and admitted it. He nodded and recommended FoodInsurance.com for freeze-dried food. I recommended EmergencyEssentials.com and explained that our food isn't freeze-dried, it's mostly wheat and rice and dried beans and canned stuff. He said he's also been buying food at the regular old grocery store, stuff like mac and cheese and canned tuna. He explained that his dad lived through the Great Depression and we're headed that way again.

I started to say something about the dollar and he interrupted with "Yeah, they're gonna destroy it unless we can do something about these communists." I told him he could also buy silver, and it turned out he was already doing that. He'd been buying junk silver (old 90% silver dimes, quarters, half-dollars and dollars) because "that's currency, so they can't confiscate that." He was also saving old pennies (before 1982), which are 95% copper.

I mentioned the bankers, and he got on a tear talking about the Matt Taibbi article in Rolling Stone. He and I were mutually amazed that the other one had read it. And shortly thereafter he ran off to his truck, while I stood there realizing that my UPS guy knows more about the current economic situation than most people I know (even if you include the "communists" bit, where in my opinion the better term is "corporatists").

I think it's an excellent idea (if you can manage it) to lay aside food, silver, batteries, blankets, larger sized shoes / boots / coats for growing children, and so on. We don't know exactly what we're facing here, except that it's the end of an empire, and that's never pretty. I hope the idea of taking precautions is spreading.

For my family, this past week's precautionary purchases include two one-liter bottles of lamp oil (we have a very old-fashioned -- in fact, antique -- oil lamp) and two half-gallon jars of raw honey. Honey keeps forever. Oh, and 4 new LED flashlights, which don't eat batteries anywhere near as fast as our old incandescents.

And you?