Friday, April 8, 2011

The Link Between War And Big Finance

Americans are recognizing the link between the military-industrial complex and the Wall Street oligarchs—a connection that goes back to the beginning of the modern U.S. empire

Kevin Zeese

Americans are recognizing the link between the military-industrial complex and the Wall Street oligarchs—a connection that goes back to the beginning of the modern U.S. empire. Banks have always profited from war because the debt created by banks results in ongoing war profit for big finance; and because wars have been used to open countries to U.S. corporate and banking interests. Secretary of State, William Jennings Bryan wrote: “the large banking interests were deeply interested in the world war because of the wide opportunities for large profits.”

Many historians now recognize that a hidden history for U.S. entry into World War I was to protect U.S. investors. U.S. commercial interests had invested heavily in European allies before the war: “ By 1915, American neutrality was being criticized as bankers and merchants began to loan money and offer credits to the warring parties, although the Central Powers received far less. Between 1915 and April 1917, the Allies received 85 times the amount loaned to Germany.” The total dollars loaned to all Allied borrowers during this period was $2,581,300,000. The bankers saw that if Germany won, their loans to European allies would not be repaid. The leading U.S. banker of the era, J.P. Morgan and his associates did everything they could to push the United States into the war on the side of England and France. Morgan said: “We agreed that we should do all that was lawfully in our power to help the Allies win the war as soon as possible.” President Woodrow Wilson, who campaigned saying he would keep the United States out of war, seems to have entered the war to protect U.S. banks’ investments in Europe.

The most decorated Marine in history, Smedley Butler , described fighting for U.S. banks in many of the wars he fought in. He said: “I spent 33 years and four months in active military service and during that period I spent most of my time as a high-class muscle man for Big Business, for Wall Street and the bankers. In short, I was a racketeer, a gangster for capitalism. I helped make Mexico and especially Tampico safe for American oil interests in 1914. I helped make Haiti and Cuba a decent place for the National City Bank boys to collect revenues in. I helped in the raping of half a dozen Central American republics for the benefit of Wall Street. I helped purify Nicaragua for the International Banking House of Brown Brothers in 1902-1912. I brought light to the Dominican Republic for the American sugar interests in 1916. I helped make Honduras right for the American fruit companies in 1903. In China in 1927 I helped see to it that Standard Oil went on its way unmolested. Looking back on it, I might have given Al Capone a few hints. The best he could do was to operate his racket in three districts. I operated on three continents.”

In Confessions of an Economic Hit Man , John Perkins describes how World Bank and IMF loans are used to generate profits for U.S. business and saddle countries with huge debts that allow the United States to control them. It is not surprising that former civilian military leaders like Robert McNamara and Paul Wolfowitz went on to head the World Bank. These nations’ debt to international banks ensures they are controlled by the United States, which pressures them into joining the “coalition of the willing” that helped invade Iraq or allowing U.S. military bases on their land. If countries refuse to “honor” their debts, the CIA or Department of Defense enforces U.S. political will through coups or military action.

Tarak Kauff, Veteran For Peace activist and organizer, stated, “There are trillions for wars and occupations in Iraq, Afghanistan, Pakistan and now Libya, billions yearly to support Israel’s occupation and oppression of Palestine, again trillions in bailouts to make those at the top of the economic food chain even more powerful, but relative pennies for our children’s education, adequate health care, infrastructure, housing and other necessities of Americans. Yet big corporate banks are thriving and, like Bank of America, pay no taxes. But you do, and I do, and working people all across this country pay taxes. I ask, what are we paying for and into whose pockets is it going? The wealth of this country is disappearing down the tubes into the stuffed pockets of the financial/military/industrial oligarchs. Americans are being bled dry while people of the world are literally bleeding and dying from U.S.-made weapons and warfare. Do we not see the connection?”

More and more people are indeed seeing the connection between corporate banksterism and militarism; they are seeing how uncontrolled spending on war is resulting in austerity at home. In a recent interview, Cornel West brought the issues of the wealth divide, Wall Street and militarism together. Prof. West also spoke about Obama, calling him “a cagey neoliberal at home and a liberal neoconservative abroad” who expanded the wars and military while re-enforcing the existing Wall Street-dominated power structure at home, a president who has abandoned the poor and working class and is becoming” a pawn of big finance and a puppet of big business.” See the interview with Professor West here:

Veterans For Peace has joined in endorsing “Sounds of Resistance,” a concert and protest against Wall Street banks that draws the connections between militarism, Wall Street, the wealth divide and the downward spiral of the wealth of most Americans. The event, on April 15 at 11:00 a.m. in New York City’s Union Square Park, is part of a democratic awakening that more and more Americans are joining.

Are ETFs Really Safe?

A Casey Report interview with Dr. Andrew Bogan

Life 123
David Galland -- Casey Research

Dr. Andrew Bogan is a managing member of Bogan Associates, LLC in Boston, Massachusetts. He has spoken at many international investor conferences – his specialty being global equity investing – and has been interviewed on live television for CNBC's Strategy Session.

In an attempt to understand the relatively new but wildly popular Exchange Traded Funds (ETFs), Dr. Bogan did extensive research into the structures used by ETF operators, with a special focus on the potential risks that might arise should they be faced with large and sudden liquidations. Given that there are about 2,000 ETFs in existence, with assets totaling over $1 trillion, we thought it appropriate to find out what Dr. Bogan has learned in his research.

David Galland: Our primary goal today is to give readers a better understanding of exchange-traded funds (ETFs) and the risks that come with them. Speaking personally, I've been in this business for a long time, and I find anything that grows as quickly as ETFs have a bit worrisome.

To begin, maybe you could just talk a little about the difference between an ETF and a traditional stock or bond mutual fund.

Andrew Bogan: Yes. Shares in a traditional mutual fund, whether it's an index fund or has a managed portfolio, don't trade in the open market. If you want to own shares, you buy them from the fund. If you want to get rid of your shares, you sell them to the fund.

A traditional mutual fund takes its shareholders' capital and invests it directly on a one-to-one basis in stocks or bonds and holds those securities in custody. Thus it's always 100% reserved, meaning that the securities it owns correspond exactly to the shares its investors own. If you want your capital back, the fund can deliver it to you either in kind or in cash, depending on market conditions.

That's not the case with an ETF. Shares in an ETF trade in the open market, which is where retail investors buy and sell them. An ETF also issues and redeems shares every day, like a mutual fund. But, unlike a mutual fund, it does so only through "authorized participants," which are brokers, market-makers and other institutions.

DG: Jumping right to the point, has there ever been a problem with an ETF?

AB: ETFs have operated pretty well historically, but the mechanics of share issuance and redemption also creates some unique differences that we believe may lead to unintended consequences.

There already have been a few problems with ETFs, some more significant than others. The Flash Crash on May 6 of last year showed some structural issues with ETFs and perhaps with our whole market system for equities as well. It's hard to decide where to draw the line, but a lot of securities departed from their perceived value during the Flash Crash by very large amounts. The reasons are still not completely understood, although the SEC has made a reasonable effort to understand what happened.

Another incident occurred in September 2008, when the Lehman and AIG mess was upon us. The commodity ETFs run by ETF Securities, Ltd., in London halted trading when AIG's solvency came into question. The funds were investing in derivative contracts, including swap agreements, some of which were with AIG. It was only the Federal Reserve pumping in tens of billions of dollars that prevented those products from going. Bailing out AIG averted a disaster for the funds, and they continued to trade the next day.

DG: So, the issue with the ETF securities fund was more around the derivatives the fund held, not the structure of the fund itself?

AB: In that particular case, it was around the derivative contracts that underlay the fund, although that kind of arrangement is very common with European ETFs. Even equity index ETFs in Europe tend to be structured that way, and that's also not uncommon with a lot of the foreign stock ETFs as well – including some of those traded here in the United States.

I think it's a clear example where you have a counterparty risk wrapped inside the fund that could be very significant in bad circumstances.

DG: In the case of the Flash Crash, your research paper pointed out that even though ETFs represent only 11% of the listedsecurities in the U.S., 70% of the canceled trades during the Flash Crash involved ETFs. Is there an explanation for that?

AB: Some clarity is starting to emerge from work done by the SEC and others. But from our perspective, those statistics are quite alarming. There's no good reason 70% of canceled trades would be in ETFs while only 11% of listed securities are ETFs. And even though ETFs trade more actively, they don't represent 70% of all trading volume. So any way you look at it, they were badly overrepresented among the canceled trades, i.e., overrepresented among the most extremely off-priced trades.

From the perspective of financial theory, that makes absolutely no sense. ETFs are meant to be index-fund trackers. They’re meant to represent a whole basket of shares, and yet these very securities that are meant to be diversified actually fell more than their underlying stocks during the Flash Crash, more often and more deeply.

That's quite worrisome; it tells you that in a crisis environment ETFs don't behave the way financial logic suggests they ought to, which suggests to me that the theory is incomplete. People haven’t really looked closely enough at what the unintended consequences of ETF issuance and redemption mechanics are, and what the realities are in stressful market conditions.

DG: At this point, more than half the American Stock Exchange's daily volume is ETFs, which is quite a number. These things have only been around for, what, less than 20 years. Yet from everything I've read, it seems they’re not very well understood, even by you guys. Which is saying something because you’ve spent a lot of time looking at them, and there are still blank spots in your knowledge about how they actually operate.

AB: Absolutely, and I think that's an important point. We understand the mechanics of how an equity trades and from where it derives its value and how it's priced in the market. The mechanics for mutual funds are well understood also. The challenge with ETFs is that the process of issuing and redeeming shares that also are trading is much more complicated than a lot of people want to talk about. It allows for some unintended consequences, particularly in connection with short-selling, which became an important factor only in the last decade.

DG: Let’s talk about the process of creating new shares. If I'm running an ETF that is designed to mimic the S&P 500 index and I have a lot of people who want to own my fund, I can simply issue new shares based upon the flow of stocks into my fund, right?

AB: Shares can be created at the end of any day if someone delivers a basket of underlying stocks to the ETF through an authorized participant. And shares that are not wanted in the marketplace can be redeemed in kind for the underlying stocks – or in some cases cash. That's all been carefully structured and works smoothly. The issue is what happens when short-selling dominates the trading.

People have been short-selling ETFs up to shocking levels, like 100% short, 500% short, sometimes over 1,000% short. That's in a world where stocks like Apple are 1% short, or IBM is 1.4% short, or General Electric is 0.5% short. You really don’t see traditional stocks with short positions anything like this, so clearly something is fundamentally different. The difference is that ETF short-sellers – including hedge funds, dealers and arbitragers – are confident they can always create the shares needed to cover, so they see less risk of being squeezed.

DG: But in a traditional short-selling situation, you typically have to borrow the shares before you can short them.

AB: Yes, and that's true here too. But if you look at the Securities Settlement Failure data, ETFs are very oddly overrepresented, so it does look like there is some short-selling that happens before the shares are borrowed. But that's a small matter. The problem is that there is no limit to the amount of short-selling you can theoretically do while still having borrowed the shares. It simply requires the same share to have been borrowed, short-sold, borrowed from the new owner and short-sold again down a daisy chain. That's how you get these arbitrarily large short interest figures.

The short-selling involves new buyers coming in without the shares being created at all, and that's the fundamental asymmetry in the short-selling that we're most concerned about.

DG: Let's get to that, because you have retail investors, for lack of a better word, and you’ve got the hedge funds. I suppose they could both own the same fund, but for completely different reasons; a hedger to hedge another bet, and a retail investor to pursue a certain goal, but the net result is that the short interest is still way out of whack from what you'd expect to see in a traditional stock. I suspect this is something that most of the retail investors are unaware of. So, where is the potential for the ETFs to get into trouble?

AB: The trouble could come from a number of different angles.

One concern is that the huge short interest building up essentially leaves the ETF as a fractionally reserved stock ownership system. If you have a fund, for example, that is 500% net short, then for every one holder of an actual share there are five other investors who own IOUs for the shares. Their real shares have been lent out and short-sold to someone else – usually without the original owner's knowledge, unless they read and still remember the margin agreement they signed when they opened the account 10 years ago.

For the ETF itself, it means that the fund holds only 15% of the underlying securities implied by the gross number of fund shares that investors think they own. The other 85% isn't totally missing, it just isn't held by the fund.

Morningstar commented that the money is all there, it's just in hidden plumbing in the financial system, and we agree with that exactly. The question is, how many investors understood they were storing their money in the hidden plumbing?

DG: So walk us through what might happen if there were large-scale redemptions. Let's just say that for whatever reason, people decided this was the time to get out of a particular fund. How do things get unwound?

AB: Redemptions have to flow through an authorized participant, which is usually a broker or market-maker, and it's only that institutional layer that can actually redeem. If for some reason a significant portion, say, half or 80% or so, of the total fund ownership wanted to redeem and get the underlying stocks from the ETF through the authorized participant layer, you would fundamentally have a crisis in a fractional-reserve system.

The ETF could not deliver the underlying stocks to all the would-be redeemers. The investors who really owned just an IOU on shares that had been lent to short-sellers wouldn't have a direct claim on the fund, so their demand to redeem would force an unwinding of the short-sales.

DG: So it seems that it's not so much the fund that might have a problem. The fund is only liable for the shares it has issued. The risk seems to lie in the counterparties – the brokers or the investors that brokers lent shares to.

AB: Right. Essentially you have just that. You have quite a bit of counterparty risk here, because if you think your shares can be redeemed and then the fund halts redemptions because they’re running out of the underlying stocks, you're stuck. Normally ETF shares are redeemable through the authorized-participant channel, but an ETF or any other institution that issues something that is redeemable but fractionally reserved could be hit with a run, like a bank run.

Now the big question is, in practice, would this happen? It's up to everyone to form their own conclusion, but interestingly the first argument we heard when we began looking into ETFs was that this was just a theoretical topic and that there would never be a really big redemption in a large ETF. But we have since learned that's actually not the case, because a giant redemption in IWM, one of the largest ETFs, occurred in 2007.

Now we think that 2007, being one of the best markets for equities since maybe the late ‘90s, was a pretty forgiving time to test the crashworthiness of an ETF that runs into a massive, unexpected redemption. But IWM was redeemed from millions of shares outstanding down to something on the order of 150,000 shares, and in one day, and that's because somebody tried to crash the fund.

DG: Was that a really lousy fund, and somebody just said, "Enough, I'm going to punish you guys and get out of it,” or –

AB: Oh, no, no, IWM is one of the largest and most liquid ETFs in the entire market. It's the Russell 2000 iShares ETF. It is the poster child of why ETFs are great. But even so, what's interesting is that the first argument we got from industry insiders was that our misgivings are nonsense, growing out of some theoretical conversation about what might happen but is never going to happen, and now we're being told it already has happened and nothing broke too badly, so what are we worried about.

DG: Let’s stick with this potential problem of a huge bunch of redemptions. People say, "Oh my god, I've got to get out of my ETFs," and there is a wholesale run on the funds. Because of the way ETFs are structured, it would seem that if they post net redemptions for a day, that the broker that had lent fund shares to short-sellers would just force the borrowers to buy back and cover their obligations.

AB: That's exactly right, but remember, for an ETF to create units requires someone to deliver the underlying stocks, so there's somebody who's on the hook to buy those stocks en masse all at the same time.

DG: No matter what has happened to the price in the interim.

AB: Yes, which gives rise to the question of who's on the hook and what's their creditworthiness when they get put on the hook. Have their prime brokers really been keeping appropriate track, as they’re required to do and on most days have done, of the creditworthiness of those, say, hedge funds or other kinds of short-sellers?

DG: Because you're not talking about small amounts of money.

AB: No. In fact, in one ETF, IWM again, short positions recently amounted to 14 billion dollars. That's not an enormous amount for the capital markets, but it's a pretty significant amount with respect to 2,000 small stocks. If there were a run, actually doing that unwind and getting those 14 billion dollars' worth of extra ETF shares would require buying 14 billion dollars’ worth of Russell 2000 stocks. If you didn’t want to be more than, say, 10% of volume, it would take 40 trading days to buy all you needed.

So we think that if you actually had a very sudden redemption run on IWM, there is a real likelihood of a short squeeze occurring in the Russell 2000. We don’t expect that at any particular time, it's just something that could happen if enough things went wrong.

The short position in an ETF like IWM being over 100% means that a large amount of the money investors think they have placed in Russell 2000 stocks has in fact been lent to hedge funds and other short-sellers. You take that across the entire ETF industry and you're looking at about 100 billion dollars in short interest – money that did not go into the underlying shares or gold or whatever the ETF represents. It was instead lent to hedge funds. It has been deposited in a shadow banking system where ETFs allow short-sellers to borrow money from institutional and retail investors.

DG: And what are they doing with that money?

AB: Well, no one knows. Presumably they invest it in what they think is going to make a better return than what they shorted, because you can't score the 10% or 20% those guys are all trying to make every year by buying the index. So it's anybody's guess.

DG: One question that Terry Coxon asked as I prepared for this interview was whether there is any way for the marketplace to let the fund's share price deviate for long from NAV?

AB: The tracking of an ETF's price with the fund's NAV, which historically has been extremely close, is totally dependent on an arbitrage mechanism. The arbitrager can make money by continuously pushing the price of the ETF toward its NAV. The question is... what NAV? What they mean by NAV is a value per share outstanding of the fund's underlying stocks. But of course you have this huge implied ownership through short-selling, and the short-sellers' shares are not being counted in the shares outstanding number.

DG: A lot of our readers have money in GLD, which is the ETF that invests in physical gold. You've looked at GLD, and it's based upon the premise that as investors pour money in, the operators of GLD turn around and buy physical gold and store it. And likewise with redemptions, they just sell the gold. My understanding is that there isn't anywhere near the same level of short interest on GLD.

AB: The short position in GLD isn't nearly as large as it is for some equity funds – but we have looked at GLD, and it has the same structural issues, just to a lesser extent, at least for now. The short interest in GLD has fluctuated around 20 million shares. Now, GLD is a pretty big fund. With 20 million shares short, it is roughly 95% fractionally reserved. So for all the investors who think they own the underlying physical gold, the fund actually has 95% of it in the vaults.

But GLD does not have to stay at 95% fractionally reserved. If there were a massive wave of short-selling in GLD, you could end up with a very significant fractional-reserve situation. If that were followed by heavy redemptions, you'd have the same kind of problem I described earlier – not enough gold to redeem all the shares.

DG: Could they just say, "From here on, we're not issuing any more shares"? Would that stop the short-selling?

AB: Not necessarily, because, you know, the short-sellers are selling – in fact, it would probably exacerbate the short-selling. So as long as a fund is issuing shares, aggregate buying demand can be satisfied by expanding the fund. If they stop issuing shares, aggregate demand would get satisfied by short-sales of existing shares. So, if anything, closing the issue window should make the problem worse, not better.

DG: Working through the mechanics of this, let's say gold drops by a few hundred bucks. Say, for instance, that there is some major change in the market along the lines of when Volcker raised interest rates back in '79-'80. And at that point a lot of short-sellers say, "Okay, this is it for gold," they pile on, they start shorting the hell out of GLD, and now all of a sudden you’ve got a real problem because the fractional aspect of it balloons, if you will.

AB: Well, you don’t necessarily have an immediate problem. It depends on the market conditions and the level of panic. You certainly would have a ballooning fractional-reserve situation, meaning that the reserves held in actual gold versus the implied ownership by people who think they own GLD (even though the shares have been hypothecated by the broker) will shrink. Those investors may believe they are still entitled to the metal, but the reserve of gold held on their behalf starts to shrink very quickly under those conditions.

The bigger challenge might be if there were an actual redemption wave. If that happened when GLD was already substantially fractionally reserved, then you're back to an 1800s gold bank problem. Fractionally reserved banks can be hit with a run.

DG: Right. Is there anything else that would make this whole "house of cards" collapse? Suppose a highly visible ETF stumbles and is unable to meet redemptions, or they just have to postpone redemptions. That might be the sort of trigger that could really send people off.

AB: You know, one of the big risks, by the way, that no one has really discussed much, is if an ETF were to have a big redemption run in panicky market conditions and halted redemptions. Halting redemptions is a complicated decision, because it breaks the symmetry that allows the arbitragers to go long or short both the basket of stocks and the ETF shares to move price toward NAV.

So it's quite possible that if redemptions were halted for any length of time, the arbitragers wouldn't be keeping the share price in line with NAV. We already know from the Flash Crash that significant price departures from NAV are quite possible for ETFs.

DG: Knowing what you do, I mean, obviously you deal on an institutional level with your money-management firm, do you own ETFs personally?

AB: We do not. We do not own any ETFs either personally or on behalf of the funds we manage.

DG: Is it because of the research you’ve done or just because it's not what you guys do?

AB: I would say it's primarily because it's not part of our strategy, but obviously we did the research because we were interested in understanding the product better.

DG: So, any advice for readers? Is there a short interest over which a person should be concerned about his holdings?

AB: Well, I don’t know if I could set a threshold, but I would certainly encourage people to make sure they know what the short interest is in any fund they are considering. That's a metric that is starting to become more accessible. Since we published in September, some of the ETF sponsors, like BlackRock, have begun reporting on ETF short interest, which I think is terrific – kudos to those guys.

We would like to see better transparency and disclosure, so that institutional and retail investors alike are aware of the counterparty risks that are "hidden in the plumbing," to use Morningstar's term, and are aware of the actual and somewhat complicated mechanics of the products that they’re buying.

DG: Do the ETFs with a mandate to magnify an index 2 or 3 times (e.g., RSW) have an elevated level of risk, due to the additional leverage?

AB: The underlying "assets" from which these funds get their NAV are derivatives to begin with, which introduces another layer of counterparty risk – one that has already experienced serious problems. We find it surprising that packaging complex derivatives in an exchange-listed security (the ETF) seems to remove all of the sophisticated investor standards usually applied to derivatives trading by SEC, CFTC, etc.

One ETF recently launched in the U.S. is PEK, the Market Vectors China A Shares ETF. This is another great example of where the industry is headed.

It is illegal for most foreign investors – except a few licensed global institutions – to buy A shares on Shanghai or Shenzhen, China's two mainland stock markets, and Market Vectors is not one of the exceptions. So instead of owning A shares, the ETF owns swaps with brokers that are licensed in China to own A shares. The fund holds the swaps as its underlying "assets." So PEK is an NYSE-listed China A shares ETF that does not own a single Chinese A share.

If PEK were to become significantly short in the secondary market, it would mean a fractional-reserve ownership of a derivative representing a basket of stocks that would be illegal for nearly all of the ETF's investors to own directly. More confusing still is what it means to be short PEK in the first place, since it has historically been illegal to be short A shares in China at all.

In essence, ETFs are being used to package and securitize products that are at best poorly understood and in some cases are used to circumvent securities regulations. An example closer to home is when the SEC briefly banned short-selling of essentially all financial stocks in 2008. The financial-sector ETFs were not on the list, so many hedge funds kept right on shorting financials using those ETFs.

DG: Certainly a lot to think about here. Any other questions I forgot to ask about, but that I should have?

AB: No, I think that was a pretty good coverage of a little bit of work we've done.

DG: Is there a good publication that would help people better understand the mechanics of the ETFs, because it is obviously very complicated, something that people might want to be able to study?

AB: Always the best place to look is in the fund's prospectus. The prospectuses are long and impenetrable, because they’re written by the legal team, but they really do have a tremendous amount of information. If you can float through one of them, I think it's definitely to your advantage.

DG: Thank you for your time.

[Successful crisis investing requires that you see the big picture… and know where it’s leading in the near future. That is the forte of The Casey Report, with its editorial team of two economists and two investment pros, among them Doug Casey himself. While it’s hard to make enough money in today’s markets to beat inflation, it is possible… learn how in our free report Your Bank Account Is Slowly Bleeding to Death.]

Mike Reagan: "Is Obama Doing to the U.S. What My Dad Ronald Reagan Did to the Soviet Union? "

Luminescence phenomenon Miyagi Japan of earthquake.mp4

Russia Bans Seafood Imports From Areas Near Japan Nuclear Plant

MOSCOW -(Dow Jones)- Russia's federal food safety watchdog Rosselkhoznadzor has banned the import of seafood from some 242 Japanese processing plants situated near the stricken Fukushima nuclear plant.

In a statement Rosselkhoznadzor said the ban came as a result of the analysis of radiation risks in the area surrounding the nuclear plant.

"Other countries ban seafood imports from the whole of Japan," a spokesman for Rosselkhoznadzor told Dow Jones Newswires. "We aren't going to do that. We are only concerned with those suppliers which are situated in contaminated areas."

Russia's imports of Japanese seafood in 2010 totaled 57,000 metric tons.

-By Grigori Gerenstein, contributing to Dow Jones Newswires; gerenstein@

Portugal defaults, America on the waiting list?

A Crack in the Great Wall-mart: Watch Out for Rising Prices from China

Jason Kaspar, Contributing Writer
Activist Post

In a widely covered interview last Wednesday, the CEO of Wal-Mart, Bill Simon, warned that “U.S. consumers face ‘serious’ inflation in the months ahead for clothing, food and other products.” He noted: "We're seeing cost increases starting to come through at a pretty rapid rate." Given his purview, I accept Simon’s opinion as positively disconcerting, and if inflation is to hit home in the heartland of America, it will certainly begin at Wal-Mart.

While America’s labor force struggles to regain employment and reclaim real wages, the prices of necessary products are preparing to surge, creating the uncomfortable prospect of stagflation, that dour economic phenomenon of rising prices and falling wages last seriously confronted three decades ago. It would be a toxic drink to swallow. Packaged in China for Sam’s Club, and mixed with a little Mexican Wage Gouging Tequila, this “stagarita” would leave a bitter taste in an election year. And what a hangover.

Yet, although there is asset inflation in many areas, the fact that wages are not increasing in tandem implies that this inflation must be short-lived. I speculate that we are entering a period similar to the 2008 deflationary crisis, when many asset prices spiked before plummeting rapidly without the economic strength to support the new price levels.

Besides the Federal Reserve’s QE policies, which have created this artificial asset inflation, it is my contention that China will be intimately tied to this period of stagflation now accelerating on the American consumer. (In a world of never ending game theory, even China’s action could be linked back to the Fed).

Beginning in the mid-1990s until about 2005, China exported price deflation into the United States as the country’s 1.3 billion people were gradually integrated into the world workforce. In 2000, the United States imported $100 billion of goods from China, increasing to $365 billion in 2010. During this time, multinational companies in search of the lower costs transferred hundreds of thousands of manufacturing jobs from the United States into China. Many accused Wal-mart of instigating the exportation of 200,000 US jobs. This phenomenon began reversing in late 2007 as all the juice had been squeezed out of lower prices.

I speculated in July of 2008 that much of the inflation hitting the United States at the time (remember oil at $150?) was the result of massive Chinese stimulus, construction, and stockpiling leading up to the 2008 Olympics in Beijing. If China had been stockpiling oil, diesel, and unleaded gasoline in preparation for the Olympics, then the sudden post-Olympics drop in demand (though small in relative terms) would have a large impact on marginal demand.

Whether or not I correctly identified correlation and causation, China’s massive slowdown commenced immediately after the Olympics. The Chinese government intervened, fostering a massive stimulus plan and construction boom (bubble) in 2009 and 2010. Now, China seems to be in a similar economic position as it was leading into the 2008 Olympics.


The end has come for China’s exporting of deflation, at least until its property bubble collapses and the country enters into its own deflationary crunch. Unlike the United States, wages for workers in China are climbing higher. From 2005 to 2010, monthly minimum wages have increased over 300%. Much of that increase has occurred in the last two years. Surging wage growth in China, combined with surging asset inflation instigated by the Federal Reserve QE, has created a large increase in prices for many American consumables.

Why asset inflation will only be temporary

Just as in 2008, an even minor inflationary shock will send the United States consumer over the financial edge. This will cause price deflation to reignite as deleveraging once again becomes front page news.

Alternatively, two conditions would need to preexist for stagflation to turn into inflation (or hyperinflation) instead of deflation; namely, wage growth and/or an underleveraged economy. The United States has neither. In fact, real wages have recently begun to plummet at rates not seen since late 2008, a reality unlikely to reverse itself soon with very high unemployment rates and capacity utilization approaching the troughs of the 1990 and 2001 recessions. Simply put, the average American does not have a bargaining position to push for higher wages.


Without higher wages to offset any increase in asset prices, American consumers will be forced to restrain consumption and lower debt. This will cause an economic slowdown.

There exists one potential outlier. A public backlash and deteriorating trust in the Federal Reserve and the U.S. government could cause trust in the dollar to collapse. This is an entirely different type of inflation than price inflation and deserving of its own multi thousand word editorial. While I believe the odds are high for a dollar collapse to be the ultimate final chapter, it would appear to me that we have several more chapters to slog through before we get there.

In the meantime, Americans should prepare to take a nasty swig from the stagarita. No age limit on this one.

Nobel Economist Joseph Stiglitz: Assault on Social Spending, Pro-Rich Tax Cuts Turning U.S. into Nation "Of the 1 Percent, by the 1 Percent, for the 1

This week Republicans unveiled a budget proposal for 2012 that cuts more than $5.8 trillion in government spending over the next decade. The plan calls for sweeping changes to Medicaid and Medicare, while reducing the top corporate and individual tax rates to 25 percent. We speak to Nobel Prize-winning economist Joseph Stiglitz, who addresses the growing class divide taking place in the United States and inequality in a new Vanity Fair article titled "Of the 1, by the 1, for the 1%." Stiglitz is a professor at Columbia University and author of numerous books, most recently Freefall: America, Free Markets, and the Sinking of the World Economy. "It’s not just that the people at the top are getting richer," Stiglitz says. "Actually, they’re gaining, and everybody else is decreasing... And right now, we are worse than old Europe." [includes rush transcript]

Joe Nocera on "All the Devils Are Here: The Hidden History of the Financial Crisis"

As federal agents raid the offices of three major hedge funds amidst news of a sweeping probe of insider trading at Wall Street firms, we speak with New York Times business columnist Joe Nocera about his new book All the Devils Are Here: The Hidden History of the Financial Crisis. The book describes how most of the underlying structures and key players behind the financial crisis have emerged relatively unscathed. [includes rush transcript]

FDR: Executive Order 6102 Banning Gold Ownership

Yesterday marked the 78th anniversary of FDR's decree.

It remained the law of the land for more than four decades. Only on Dec. 31, 1974, was it finally repealed by President Nixon.


Executive Order 6102

Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates

By virtue of the authority vested in me by Section 5 (b) of the Act of October 6, 1917, as amended by Section 2 of the Act of March 9, 1933, entitled ‘‘An Act to provide relief in the existing national emergency in banking, and for other purposes,’’ in which amendatory Act Congress declared that a serious emergency exists, I, Franklin D. Roosevelt, President of the United States of America, do declare that said national emergency still continues to exist and pursuant to said section do hereby prohibit the hoarding of gold coin, gold bullion, and gold certificates within the continental United States by individuals, partnerships, associations and corporations and hereby prescribe the following regulations for carrying out the purposes of this order:

Section 1.

For the purposes of this regulation, the term ‘‘hoarding’’ means the withdrawal and withholding of gold coin, gold bullion or gold certificates from the recognized and customary channels of trade. The term ‘‘person’’ means any individual, partnership, association or corporation.

Section 2.

All persons are hereby required to deliver on or before May 1, 1933, to a Federal Reserve Bank or a branch or agency thereof or to any member bank of the Federal Reserve System all gold coin, gold bullion and gold certificates now owned by them or coming into their ownership on or before April 28, 1933, except the following:
(a) Such amount of gold as may be required for legitimate and customary use in industry, profession or art within a reasonable time, including gold prior to refining and stocks of gold in reasonable amounts for the usual trade requirements of owners mining and refining such gold.
(b) Gold coin and gold certificates in an amount not exceeding in the aggregate $100 belonging to any one person; and gold coins having a recognized special value to collectors. of rare and unusual coins.
(c) Gold coin and bullion earmarked or held in trust for a recognized foreign Government or foreign central bank or the Bank for International Settlements.
(d) Gold coin and bullion licensed for other proper transactions (not involving hoarding) including gold coin and bullion imported for reexport or held pending action on applications for export licenses.

Section 3.

Until otherwise ordered any person becoming the owner of any gold coin, gold bullion, or gold certificates after April 28, 1933, shall, within three days after receipt thereof, deliver the same in the manner prescribed in Section 2; unless such gold coin, gold bullion or gold certificates are held for any of the purposes specified in paragraphs (a), (b), or (c) of Section 2; or unless such gold coin or gold bullion is held for purposes specified in paragraph (d) of Section 2 and the person holding it is, with respect to such gold coin or bullion, a licensee or applicant for license pending action thereon.

Section 4.

Upon receipt of gold coin, gold bullion or gold certificates delivered to it in accordance with Sections 2 or 3, the Federal Reserve Bank or member bank will pay therefor an equivalent amount of any other form of coin or currency coined or issued under the laws of the United States.

Section 5.

Member banks shall deliver all gold coin, gold bullion and gold certificates owned or received by them (other than as exempted under the provisions of Section 2) to the Federal Reserve Banks of their respective districts and receive credit or payment therefor.

Section 6.

The Secretary of the Treasury, out of the sum made available to the President by Section 501 of the Act of March 9, 1933, will in all proper cases pay the reasonable costs of transportation of gold coin, gold bullion or gold certificates delivered to a member bank or Federal Reserve Bank in accordance with Section 2, 3, or 5 hereof, including the cost of insurance, protection, and such other incidental costs as may be necessary, upon production of satisfactory evidence of such costs. Voucher forms for this purpose may be procured from Federal Reserve Banks.

Section 7.

In cases where the delivery of gold coin, gold bullion or gold certificates by the owners thereof within the time set forth above will involve extraordinary hardship or difficulty, the Secretary of the Treasury may, in his discretion, extend the time within which such delivery must be made. Applications for such extensions must be made in writing under oath, addressed to the Secretary of the Treasury and filed with a Federal Reserve Bank. Each application must state the date to which the extension is desired, the amount and location of the gold coin, gold bullion and gold certificates in respect of which such application is made and the facts showing extension to be necessary to avoid extraordinary hardship or difficulty.

Section 8.

The Secretary of the Treasury is hereby authorized and empowered to issue such further regulations as he may deem necessary to carry out the purposes of this order and to issue licenses thereunder, through such officers or agencies as he may designate, including licenses permitting the Federal Reserve Banks and member banks of the Federal Reserve System, in return for an equivalent amount of other coin, currency or credit, to deliver, earmark or hold in trust gold coin and bullion to or for persons showing the need for the same for any of the purposes specified in paragraphs (a), (c) and (d) of Section 2 of these regulations.

Section 9.

Whoever willfully violates any provision of this Executive Order or of these regulations or of any rule, regulation or license issued thereunder may be fined not more than $10,000, or, if a natural person, may be imprisoned for not more than ten years, or both; and any officer, director, or agent of any corporation who knowingly participates in any such violation may be punished by a like fine, imprisonment, or both.

This order and these regulations may be modified or revoked at any time.

Signature of Franklin Delano Roosevelt
Franklin D. Roosevelt

The White House,

April 5, 1933.


Bill Moyers Essay: The Health Care Lobby

Truth and transparency of the highest order.

Video - Oct. 15, 2009

Out Of Service: Milwaukee Budget Cuts Hit Bus Lines -- And Keep Residents From Jobs

MILWAUKEE, Wis. -- Peggy Schulz was fed up. In March, after being unemployed for nearly two years, she performed an experiment: She went to a job-search website, limited the search to the Milwaukee area and typed in a simple term: "bus line."

The results displayed what had long been plaguing her. Job posting after job posting featured similar caveats: "this is not on a bus line," "need reliable transportation not on bus line," "positions are NOT on a bus line," "our client that is not located on a bus line is interested in having you work ..."

"Here it was in black and white," she later recalled with a bitter laugh. "It's been very frustrating to look through the want ads, look online, think about places I could work and realize, 'Nope, can't get there on the bus.'"

Schulz is 53. She has years of experience as a legal secretary. But she does not own a car.

Over the last decade, as Milwaukee County has inflicted relentless cuts to public transit, she has watched her primary means of transportation decay. After she was laid off in June 2009, a pattern emerged: She'd find what seemed like the perfect job opportunity, only to discover that bus service cuts had rendered it inaccessible.

Working people like Schulz bear the strain of a crisis that has struck municipalities nationwide. As revenues fall and expenses balloon in the wake of the economic downturn, local officials have cut essential services in a frenzied attempt to balance budgets. Communities have closed libraries and schools. Governments have laid off workers and imposed deep pay cuts to those who remain. Some of the nation's statistically most dangerous cities have axed significant portions of their police forces.

Many local officials are pushing an inevitable reckoning further into the future as they delay certain payments. Here in Milwaukee, though, policymakers have been unusually diligent. They have funded pension benefits -- which eventually have to be funded -- almost fully. But with limited dollars, putting money behind those promises has forced the local government not to fund other things, prompting the type of cuts that may loom on other municipalities' horizons. Milwaukee County's day of reckoning, to a large extent, has already arrived.

The pain has spread over a range of departments. Since 2001, the public workforce has shrunk by nearly a third, as security officers have been laid off and nurses, frustrated by anemic compensation, have quit. After years of limited funding, the parks system now needs repairs that would exceed $200 million. Bus service has been reduced by a fifth in the last decade, preventing Milwaukeeans from accessing tens of thousands of potential jobs.

The financial crisis and economic downturn put millions of Americans out of work. Now, those same forces are making the job search even more difficult by weakening a vital link between workers and workplaces -- public transportation. Milwaukee has reached a point at which cuts, necessitated by a weak economy, make the local economy even weaker.

"We're going to start bleeding red ink," county executive Marvin Pratt said while sitting at a heavy wooden table in his stately office on the third floor of the county courthouse. "If you're talking about getting people to jobs and creating jobs, we have to maintain that transit system. We have to make it better."


Not long ago, the future seemed brighter. Buoyed by the surging stock market and the tight labor dynamics of the late 1990s, Milwaukee County entered the millennium flush. It seemed prosperous days would last -- or, at least, that's what local policymakers were banking on.

Milwaukee County, a metropolitan community of 950,000 on the coast of Lake Michigan, was busy adorning itself with symbols of its success. Miller Park, home of the Brewers baseball team, opened in the spring of 2001. A new addition to the Milwaukee Art Museum, featuring a pair of sail-like wings on top, opened that same year, immediately becoming an international icon of contemporary architecture.

And transit worked. The American Public Transportation Association, a national advocacy group, bestowed its Outstanding Achievement Award on Milwaukee County transit in 1999. Buses carried residents not only throughout the downtown area but also between the city and the suburbs, traversing the entire county and beyond.

"Milwaukee was really coming alive," said Mike Kostiuk, 58. After living in a suburb for two decades, he moved back to the city in 2000, looking forward to taking advantage of the bus system.

And the county government decided to share the wealth. During two sessions, in late 2000 and early 2001, the county Board of Supervisors approved a hike to pension benefits for public workers. The package included an increase in the pension multiplier, which is used to determine the percentage of final average salary that an employee, upon retirement, gets as an annual pension payment. The deal applied to all categories of county employees, including the elected officials who had approved it.

"They rolled out the retirement package to us, which far exceeded anything we had proposed," said Richard Abelson, executive director of District Council 48 of the American Federation of State, County and Municipal Employees, a public sector union that represents more than two-thirds of county workers here. "It was a bad deal. It was a bad deal for taxpayers. It was a bad deal for union members. The impact it would have on the budget in the future was dramatic."

But excluding special lump-sum payments, retirees' pensions are not particularly rich. In 2009, the average annual pension payout was less than $19,000, according to county records.

Rather, the pension fund has been victim to the same economic forces that are eroding municipal finances nationwide. When the financial crisis struck, these relatively modest benefits suddenly required an outsized contribution from taxpayers -- money that the government otherwise would spend on things like public transportation.

Al Gore Ambushed On Climategate By New World Order Activists (WATCH)

Video: Al Gore ambushed on Climategate by activists at Chicago Bookstore

The day was November 29, a few weeks after Climategate broke. Gore was doing a signing at a Chicago bookstore. We Are Change Chicago was prepared. It's some of the best pure live footage I've ever seen. Do not miss the final 45 seconds. Someone screams out "You're a piece of shit Al Gore" and then it begins.


Video: We Are Change goes after Al Gore in April of 2009 -- this is definitely worth watching as well...some confrontations in the second minute.

Madeleine Albright Confronted On Bilderberg, Iraq War Crimes: "Is 1 Million Dead Enough?"

Video - April 5, 2011

These are my favorite type of clips - live, public embarrassment.

And she thought it would be a simple book signing...