Wednesday, June 4, 2014

7-minute video: ‘The Choice is Ours’ experts explain how 1% hoodwink 99%

The 7-minute video points to data of breakthrough economic solutions only awaiting a critical mass of public recognition. You literally have nothing more valuable for your attention because three OBVIOUS reforms are conservatively worth $60+ trillion:

1 in 5 Children Live in Poverty in USA

One in five children under age 18, or 21.3%, are living in poverty in the United States, according to the latest data from the U.S. Census Bureau.

In 2012, there were 15,437,000 children under 18 years old, or 21.3%, who were classified in the “below poverty” threshold, according to the Census.

“The incidence of poverty rates varies widely across the population according to age, education, labor force attachment, family living arrangements, and area of residence, among other factors. Under the official poverty definition, an average family of four was considered poor in 2012 if its pre-tax cash income for the year was below $23,492,” according to a Congressional Research Service (CRS) report entitled, Poverty in the United States: 2012.

1 in 5 Children Live in Poverty in U.S.
“The Census Bureau’s poverty thresholds form the basis for statistical estimates of poverty in the United States,” reads the report.  “The thresholds reflect crude estimates of the amount of money individuals or families, of various size and composition, need per year to purchase a basket of goods and services deemed as ‘minimally adequate,’ according to the living standards of the early 1960s.”

“Persons are considered poor, for statistical purposes, if their family’s countable money income is below its corresponding poverty threshold,” the CRS states.

The Census has been tracking these data since 1959, when the percentage of children under 18 living in poverty was 26.9%. In 1964, when then-President Lyndon B. Johnson announced the War on Poverty, the percentage of children living in poverty was 22.7%. Since then until now, the percentage has decreased by only 6.2%.

“In 2012, over one in five children (21.3%) in the United States, some 15.4 million, were poor – both their poverty rate and estimated number poor were statistically unchanged from 2011,” said the CRS report.  “The lowest recorded rate of child poverty was in 1969, when 13.8% of children were counted as poor.”

“Children living in single female-headed families are especially prone to poverty,” says the report.  “In 2012, a child living in a single female-headed family was well over four times more likely to be poor than a child living in a married-couple family. In 2012, among all children living in single female-headed families, 47.2 % were poor.”

“In contrast, among children living in married-couple families, 11.1% were poor,” said the CRS report. “The increased share of children who live in single female-headed families has contributed to the high overall child poverty rate.”


Just like many financial conservatives have advised in the past, notably former Reps. Jack Kemp and Ron Paul, Forbes said that economic prosperity can come only if the dollar is linked to gold and not printed willy-nilly at inflated rates.
“The best way to achieve monetary stability: linking the dollar to gold,” he wrote in the book out today. “The Fed should have only two tasks: keeping the dollar fixed to gold and dealing quickly and decisively with panics,” he wrote, according to excerpts provided in advance to Secrets.
Among the economic problems Forbes blames on the Fed’s monetary policies:
— The U.S.’s weak economic recovery.
– Slower long-term growth and higher unemployment.
— High food and fuel prices.
— Declining mobility, greater inequality and the destruction of personal wealth.
— Increased volatility and currency crises.
— Larger government with higher debt.
— Lower levels of business innovation and entrepreneurship.

Gold price fixing is a FACT – Ed Steer

Ed Steer, the esteemed editor of Casey Research’s Gold & Silver Daily and director of GATA (Gold Anti-Trust Action Committee), chats with Cambridge House Live anchor Vanessa Collette about the fine levied on Barclays for gold price fixing. Must-see TV for any gold investor.

Comex Options Expiration: Orchestrated Price Take-Down

In this episode, we review the options expiration week that was for gold on the Comex. Predictably, the hits just kept coming. The take down of gold arrived right on time, which we explain in our unique blow-by-blow format.
To avoid beating what is by now a thoroughly dead horse, we thought we’d dress up one of the criminal cabal’s most hackneyed cliches with some animation and laughs.
Because laughing is what the thieves are doing–all the way to the vault.

Average American CEO Now Making $10 MILLION Per Year – 257 Times More Than The Average Worker

Renminbi (RMB) Yuan Clearing Bank To Open In London

Source: Live Trading
Renminbi (RMB) Yuan Clearing Bank To Open In London
A RMB Yuan (CNY) clearing bank will be officially appointed in the United Kingdom (UK) in June, said Mark Boleat, policy chairman for the City of London Corp, in an interview at the weekend.
“There will be a clearing bank in London. In due course, there will be an announcement,” Mr. Boleat said. The news will be an endorsement for London’s efforts to become an offshore yuan center. Other European financial centers in the race to become a Yuan center include Frankfurt, Paris, Switzerland and Luxembourg.
An official clearing bank facilitates efficient clearing of offshore Renminbi transactions, achieved through the appointed bank’s direct cooperation with the People’s Bank of China (PBOC) , the country’s central bank.
Mr. Boleat said having a clearing bank in London will act as a signal for London’s growing Yuan activities, although activities are already cleared through many commercial banks’ own channels.
For example, in December Standard Chartered (LO:STAN) teamed up with Agricultural Bank of China to provide their own Yuan clearing platform, making use of the 2 banks’ expertise and client base in the UK and China.
Mr. Boleat’s news follows a memorandum of understanding China and the UK signed in April to work together on a clearing bank for London.
A week before that agreement was reached, China also signed a memorandum with Germany to work on appointing a clearing bank in Frankfurt, highlighting the fierce competition between European financial centers for more yuan activities.
Mr. Boleat said his team has been working on the idea for some time with the People’s Bank of China, Bank of England (BOE), and many banks in London, and the PBOC has now decided to appoint the clearing bank.
“We assume it’s going to be a Chinese bank, because that’s the way the PBOC does things,” Mr. Boleat said.
He said another key announcement is expected on Chinese banks opening new branches, after a long lobbying process to achieve this.
Read More @ Source

Russian Roulette – Derivative Style

Russian Roulette: Put one bullet in the cylinder of a revolver, spin the cylinder, point the gun at YOUR head, and pull the trigger. Most revolvers have 6 chambers, so your odds of surviving are 5 in 6, IF you quit after pulling the trigger once.
Press your luck, spin the cylinder, point the gun, and pull the trigger again. It might be okay. Try for a third time?

Now play Russian Roulette – Derivative Style

Note: I have no insider knowledge regarding derivatives, so I am merely speculating. But I think we can assume the following:
  • Total face value of unregulated derivative contracts is something around 1,000 Trillion dollars – depending on who is counting and who is lying.
  • Banks (Goldman, JP Morgan, Deutsche Bank, etc.) sell these contracts because they generate huge commissions and probably other long-term profits.
  • Wall Street banks poured mega-bucks into DC lobbyists to keep the derivative game running with minimal regulation and oversight. Obscene profits, not the public good, are the reason.
  • Except for commissions upfront, derivatives are supposedly a zero sum game. I win, you lose, and the bank gets a fee. It sounds like a bookie in Las Vegas. You put up $1.1 Billion to win $1.0 Billion. Somebody wins, somebody loses, and the casinos (derivative banks) take the $100 Million as a fee – roughly 5% of every dollar bet on either side.
  • Let’s be trusting and assume the derivative banks only take 1%, not 5%. If the notional value of derivative contracts is $1,000 Trillion and the fee is only 1%, the cumulative take for the banks writing contracts was $10 Trillion. That is a lot of CEO bonuses.
  • Even if the commission was one-tenth of a percent, the take was $1 Trillion in fees.
  • Eventually the system must fail, as commissions and fees suck capital out of the system each time a contract is written. More leverage and more indebtedness will not improve an unsustainable system.
  • But fees are collected as contracts are written, bonuses are paid, and taxpayers (via bail-outs) or depositors (via bail-ins) might have to cover the losses. Remember TARP and the Cyprus bail-ins!

Another Trigger Pull!

  • Nothing goes wrong – no crash, no bank failures, no government default. This is unlikely and more so each day.
  • Banks continue writing derivative contracts because… they can and why would they stop? Let’s guess another $1,000 Trillion each decade in new contracts.
  • Banks collect a commission that generates perhaps $1 Trillion or more in fees; this is $1 Trillion (or maybe much more) sucked out of the financial system each decade – and it produced nothing. It reminds me of the phrase, “the rich get richer, and the poor get poorer.”


  • In ideal circumstances, there is no crash, no bank failures, and all debts get paid.
  • But derivatives suck a huge amount of capital out of the global economies each year, and that makes ideal circumstances increasingly difficult to maintain. Instead of paying banker bonuses, that capital could be used for constructive projects.
  • The financial system is unlikely to continue operating under ideal circumstances. When another 2008 crisis arrives, the supposed zero sum game, less commissions of course, becomes a black hole of daisy-chained obligations that might collapse the American, European, and Asian financial systems. It has happened before.
  • The resulting financial and social chaos will not be pretty!
Got gold? Own silver? They are financial insurance, unless you trust that Wall Street will take care of your needs.
Read: Bill Holter: Precious Metals 101 with One Obvious Assumption
Read: Michael Snyder: The Size Of The Derivatives Bubble Hanging Over The Global Economy Hits A Record High
Read: SRSrocco Report: Precious Metals Manipulation Isn’t Hidden, It’s Right In Front Of Your Eyes

GE Christenson
aka Deviant Investor

I-495 bridge closed because of tilting columns

Delaware officials on Monday ordered the emergency closure of the Interstate 495 bridge over the Christina River in Wilmington after discovering that four support columns are tilting.

The 4,800-foot bridge normally carries about 90,000 vehicles a day on I-495, which diverts traffic around the city of Wilmington and toward the Port of Wilmington. The route parallels Interstate 95, which runs through downtown Wilmington.

"We understand that there will be a significant impact to the traveling public," said state Transportation Secretary Shailen Bhatt.

He added that he doesn't know how long the bridge will be closed. "It could be a day; it could be significant amount of time," he said.

Officials said the four columns on the south bank of the river are tilted by as much as 2.4 degrees, or 4 percent, from vertical. The bridge will be closed in both directions until officials can determine what caused the shifting of the columns and what needs to be done to address it.

"The whole bridge will be re-inspected," said Rob McCleary, chief engineer for the Delaware Department of Transportation.

Delaware transportation officials said the agency received a report late Friday from an engineering firm working on an unrelated project about a possible problem with the bridge. The department sent out an inspection team Monday morning.

"It didn't come to us as like an emergency call," Bhatt said, explaining why a team wasn't sent earlier.

Officials said I-495 will be closed northbound at Terminal Avenue, which leads to the port, and that local northbound traffic can stay on I-495 to Terminal Avenue. Southbound traffic on I-495 will be closed at the Pennsylvania state line, with traffic diverted onto I-95 southbound. Southbound port traffic is being directed to Interstate 295 east and then to Delaware 9 north to the port.

Officials said the main span of the bridge over the water is considered "fracture critical," meaning that failure of one element could result in failure of the entire bridge, which consists of a concrete deck on steel beams supported by 37 reinforced concrete columns. However, the tilting columns in question support a different area of the 38-span bridge.

"The main span is not what's in question here," McCleary said.

The bridge was built in 1974 and is scheduled to be inspected every two years. It was last inspected in October 2012.

But officials noted that the tilting of the columns has resulted in the shifting of concrete pier caps resting on top of them. That shifting, in turn, has led to a height difference of about a foot between a northbound barrier wall on the bridge deck and the adjacent wall on the southbound side, according to McCleary.

Steen Jakobsen: Expect A 30% Stock Market Correction in 2014

Submitted by Adam Taggart of Peak Prosperity,
This week, Chris talks with Steen Jakobsen, Chief Investment Officer of Saxo Bank. We wanted to see through the eyes of a professional economist, which Steen kindly allowed us to do.
Steen agrees that central banks have largely failed in their misguided attempts to boost growth via trickle-down programs. Pretty much all the benefits of the recent years of money printing have gone to the upper echelons, with the true engines of growth and jobs -- small to medium sized enterprises (SMEs) -- getting very little.
As a result, financial asset prices have been driven up too high, which Steen anticipates will correct at some point in 2014; likely by 30% or so:
Here is my practical view. Since Q3 of last year I’ve been 70% in fixed income because I do believe, and I continue to believe, that we’ll see new low interest rates. In a world that cannot restart itself, it a world that believes in 'extend and pretend', you will not have any activity. You don’t have any move towards a mandate for change. So that means that history tells us the only way we get change is through the system failing. I’m not talking about a systemic failing; I'm talking about people owning up to the fact that we need to activate the SME. So I think we’ll see a progression towards helping the SMEs.

But in terms of the market, I have been very on fixed income, an increase in the exposure right now from 70 to 90% taking whatever equity I have down. Not because I’m afraid of 'doom and gloom' but simply because I think you can have a huge amount of leverage into the fixed income market here when everybody seems to believe that interest rates cannot go lower -- now confirmed today by the Q1 data from the US. The world is simply starving because the world is rebalancing. The US current account deficit moved from -800 to -400. The world needs $400 billion worth of new export markets before it gets back to break even.

At the same time, Asia and China certainly are rebalancing their way from nominal growth towards quality growth. Again, the first derivative of that is lower growth, deflation, exported to the rest of the world.

So I think the low comes in economically in Q1 and Q2 in 2015. Every single macro indicator you can find will bottom at Q1/Q2. For the equity market, I think the top is 1900/1950. But you can't both predicted the level and the timing. And I’m more confident about the timing, not the level. So my timing I’m confident, and the timing I am confident on is the fact that the second half of this year is going to see a 30% correction from the top.
He also agrees that rising energy costs and overall resource scarcity are real threats to future economic growth; threats that he believes most economists and investors are blind to.
On all the above, we're in agreement with Steen.
In other areas, our predictions differ. But that's why we have guests like him on the program: to hear the rational behind contrasting views, and to learn what those moving large sums of capital in today's markets are thinking.
Despite the near term likelihood of a major correction, Steen remains quite optimistic. He believes that the correction will be a clearing event not just for overly-elevated prices, but also will serve as a wake-up call about the net energy situation that will lead to better policy decisions. We sure hope he's right, but we sadly think it will take a major price shock or supply shortage of key commodities to get the attention of our leaders.
Click the play button below to listen to Chris' interview with Steen (42m:43s):

The Fed’s Dilemma: No Wiggle Room

The Volatility Index (VIX) is a contrarian indicator that gauges whether overall sentiment in the market is optimistic or fearful.  Basically, the VIX is a measure of market anxiety.  When the index is low, as it is now, the sentiment is optimistic.  When it is high, the sentiment is pessimistic.  Note the following chart from the Financial Times:

For over a year now, the VIX, across a variety of asset classes, has been range-bound at levels last seen in 2006 and 2007, just prior to the Great Recession.  As seen in the chart above, volatility increased dramatically beginning in the second half of 2007, as an overheated housing market crashed bringing the stock market down with it.  History seems to be repeating itself, as investors appear to be put off by the extensive amount of Federal Reserve interference and the unbridled cupidity of high frequency traders in our financial markets.  These factors, among other concerns, have led investors to throttle back on market activity and this is reflected in the low volatility levels we are witnessing.  Lillian Gett of the Financial Times warns that “market tranquility tends to sow the seeds of its own demise and the longer the period of calm, the worse the eventual whiplash.”
The Federal Reserve was created by bankers for bankers one century ago.  Consequently, the first thing the Fed did when the markets nosedived in 2008 was rescue the big banks and they pulled out all the stops to do so.  All else was secondary.  The Fed and U.S. Treasury successfully used the counterfactual argument that we were at the brink of a financial abyss to spook Congress into granting them extraordinary powers at the peak of the crisis in 2008.  At the Fed’s urging, the government bailed out the big Wall Street banks with taxpayer money.  The Fed rushed to the rescue of recalcitrant bankers instead of opting for an orderly bankruptcy consistent with the principles of a capitalist system.  To reverse the slide in the economy, the Fed also drove the federal funds rate to near zero in 2008, where it has remained ever since.  This Zero Interest Rate Policy (ZIRP) was later turbo-charged with a series of quantitative easing programs, where the Fed, on a monthly basis, purchases tens of billions of dollars of U.S. Treasury securities and toxic assets held by the big banks.  That influx of freshly minted money naturally found its way into equities in a big way and pushed up asset prices even as the general economy continued to languish.
The main beneficiaries of the Fed’s monetary policies have clearly been wealthy investors, whose considerable financial assets have risen in value as the stock market has risen relentlessly, without a significant correction for five years and counting.  On the other hand, the middle class has suffered the brunt of the damage as wages have remained stagnant through either unemployment, increased part-time instead of full-time work, or minimal salary increases.
One would think that Wall Street bankers would be delighted with the outcome as it relates to them and would act with more magnanimity in the future.  Instead, it appears that being rewarded for failing miserably made them believe in their invincibility.  As any spoiled child will attest, it is unacceptable to suffer any setback for a prolonged period of time.  Hence, we have arrived at the point where bankers are complaining that Fed policy is now harming their profitability or, at least, the levels of profitability to which they have become accustomed over the years.  They contend that normal market fluctuations have been unduly attenuated by Fed policy and this diminution in the amplitude of the wiggles; i.e. ups and downs, in asset prices has had a deleterious impact on their trading revenues.
To its dismay, the Fed never counted on the economy being mired in anemic growth for this long a time period.  By now, according the prior Fed forecasts concerning anticipated GDP growth, the economy should have recovered its health and the Fed should have been well on the way to reducing its balance sheet.  Instead, the balance sheet has ballooned to a record four trillion dollars.  Any serious talk about increasing interest rates by the Fed is met with swift market pullbacks, but these are short-lived as Fed officials immediately walk back any notion that could be misinterpreted that they intend to raise rates anytime soon.  Investors have grown accustomed to a stock charts that continue to ascend up and to the right.  It is taken for granted that, as long as the Fed continues its easy money policy, the market will continue its inexorable climb.  Anyone who thought they knew better over the past several years and shorted the market got their heads handed to them.  All the bears did was provide fuel to the bull market as they got squeezed and had to cover their short positions at market prices.  Numerous technical analysts repeatedly called for a market reversal, if not a major market crash, only to see it not come to fruition.  They failed to recognize that technical analysis does not work very well with a rigged market, where the data being analyzed is corrupted.  Garbage in; garbage out.  See previous article at: .
Having been burned numerous times, most bears retreated to the sidelines some time ago, leaving mostly those with a bullish outlook in the market.  Hence, it is no surprise that market sentiment, as reflected in the VIX, is near record lows.  Complacency rules.  Fear is missing in action.  When sentiment, whether it is fear or optimism, settles at extreme levels for a prolonged period of time, the market fails to exhibit the up and down fluctuations it normally would.   The swings in stock prices become muted and tame compared to what they would typically be.  Becalmed markets are anathema to short-term traders, who need stock prices to swing up and down in a reasonably fluid manner, if they are to trade profitability.  This is particularly true for high-frequency traders, who trade at millisecond intervals in huge volume.  The trading edge provided by clever algorithms is dulled as stock volatility declines.
Reinforcing stock market placidity is the flight of retail investors who have retreated to the sidelines in large numbers as the market marches into record high territory.  Even the village idiot knows, at some point, that it is probably not a good long-term strategy to buy high and then sell higher as the market keeps making new highs on a regular basis.  Market volume is dominated by high frequency traders who use manipulative computer programs to front-run honest investors 24/7 with impunity. Laughingly, the SEC claims it has been studying the self-evident scam for years but can’t quite decide whether stepping in front of stock transactions at the speed of light to scalp pennies and nickels in huge volume is a problem or could possibly result in an uneven playing field.  But investors see right through the charade.  They are tired of being duped and juked by high-speed computer algorithms, leading them to curtail or abandon their trading activity in what they perceive to be a rigged market.
Therefore, it is more difficult for market manipulators to earn as much as they usually do since there a fewer marks to separate from their money.  It’s like a sailboat without strong winds to propel it along.  It simply can’t go as fast and travel as far as it otherwise would under normal trade winds.  The same analogy applies to high frequency traders who cannot haul in as much in profits as they otherwise would under normal market conditions.  In other words, traders need the market to fluctuate or wiggle in a more traditional manner and they need a sizeable supply of active market participants, if they are to make the same level of trading profits to which they have become accustomed.  And the profits to which they have become accustomed are considerable.  Reduced market participation and reduced market volatility translate into reduced trading revenues.
As a result, several spokesmen at Goldman, Citigroup, and JPMorgan have voiced concerns that lingering low volatility is negatively impacting trading revenues. They are blaming Federal Reserve policies for distorting normal market behavior.  They want the Fed to remove its heavy thumb from the scale so there is more bounce in the market.  It’s time, in their view, for the Fed to leave market manipulation in the capable hands of the proprietary trading desks in order to restore profits to their proper levels.
So, what is the Fed to do?  Not only are bank depositors, particularly seniors, sick and tired getting next to nothing on their savings, but now bankers are starting to complain that they are not getting the returns they believe they deserve.
When big bankers squawk, the Fed listens.  If past is prologue, the Fed would normally be inclined to do whatever favors the big banks.  And, if that means increasing volatility to increase trading gains at proprietary trading desks, the Fed would normally be disposed to grant the banks their wish.  But there is a problem with making such an accommodation: increasing volatility is usually accompanied by declining equity prices.
Wall Street firms will position themselves to stay out of harm’s way, as they usually do, when the general market declines, but they will also be in a position to profit by the increase in stock price fluctuations caused by increased volatility.  In other words, market fluctuations, which are conducive to surefire high frequency trading gains, are more important to them than which direction the market is heading.  The bears will return to the market making for a choppy trading environment.  As far as high frequency algorithmic traders are concerned, the ripple on the ocean’s surface is more important than the level of the tide.  But the reverse is true for investors who are primarily concerned with the level of the tide and don’t want to suffer losses in a sinking market, especially after the Fed encouraged them to take on more risk.
Hence, the Fed finds itself caught on the horns of a dilemma.  Satisfy the banks and leave market forces alone, thereby risking a potential market collapse.  Or satisfy investors by keeping the market artificially afloat by continuing the easy money policy indefinitely.
As a matter of self-preservation, the Fed does not want to be blamed for setting off a major market panic.  The Fed realizes that any serious market setback will again hurt those least capable of sustaining the losses and will provide ammunition to those who want to rein in or end the Fed.  As much as the Fed may want to please Wall Street, they aren’t going to walk the plank that easily.  They are still smarting from their failure to recognize the housing bubble that crashed around their ears not that long ago.  Instead of doing something they might regret, the Fed is seeking a middle ground where they gradually return interest rates closer to a normal range, hoping nothing untoward happens in the interim.  A glacial return to normalcy, however, is likely to distort market behavior even more in the future and may have other unintended consequences.
This was the ineluctable outcome once the Fed embarked on a course of monetary easing over a protracted period of time because it threw a monkey wrench into the natural rhythms of our financial markets.  The result is an aberrant market which is showing telltale signs of manipulation.  It is behaving more like a fixed horse race, where the horses leave the starting gates and line up along the rail in a pre-determined order, like a merry-go-round, until they cross the finish line.
Sooner or later, the piper must be paid.  Instead of letting our capitalist system work to expunge excesses and accepting the pain that it engenders over the short or intermediate term, the Fed decided that it was more important to protect the worst offenders and distribute the pain over a very long time frame to those least culpable of causing the problem; i.e., the American middle class.
This is what happens when a tiny group of unelected insiders at the Federal Reserve make monetary policy decisions with little oversight.  Perhaps, the Fed initially thought they could control market forces through monetary machinations.  But, with so many market variables at play, not the least of which is the fact that we live in a globally interconnected financial system, it turned out to be a dubious experiment.  The forces of supply and demand tend to seek their own level of equilibrium.  Any attempt to manipulate and alter the natural balance is doomed to failure.  It is foolhardy to think monetary policy can be cleverly managed to avoid the pain associated with poor financial decisions over the long run.  It doesn’t work that way for an individual with his or her private finances nor does it work for central bankers on a national or global scale.
The Fed appears to have painted itself in a corner where they are damned if they do and damned if they don’t.  Sitting on the fence is getting more and more uncomfortable for the Federal Reserve but jumping off is likely to be much worse.
This leaves the Fed very little wiggle room in their quixotic quest to suppress and contain normal market forces, which are stronger than any group of individuals who may think they are more powerful.  In all likelihood, this will not end well, nor should it.

BREAKING: You now have two weeks to prepare for a massive cyber attack! Also 4 days fearful stocks!

The US Housing Market’s Darkening Data

When looking at residential real estate, we often tend to focus almost solely on recent price movements in assessing the health of the housing market at any point in time. But as both homeowners and income-earners in the larger economy, of which the housing market is an important component, to really understand what’s going on, we need clarity into the larger cycle driving those price movements.
The more we look at today’s data, the more it looks like that we are in a new type of pricing cycle — one that homeowners and housing investors have no prior experience with.
And the more we learn about the fundamentals underlying the current cycle, the harder it becomes to justify today’s home prices on any sustained level. Meaning a downward reversion in home values is very probable in the coming years.

Housing & The Economy

Housing construction has been meaningfully additive to overall US GDP in virtually every economic expansion cycle on record. Moreover, sales of home furnishings, appliances, landscaping and gardening equipment, etc. have contributed to expansion in consumer spending, the largest singular component of US GDP. And maybe most importantly, residential real estate investment has been a key wealth-generation asset for the middle and lower classes for decades.
Residential housing has typically been purchased with leverage that has been paid down over time accompanied by a commensurate increase in household equity as homeowner’s age and mortgages are paid off.  Particularly for the middle and lower classes, residential real estate investment has been the single largest contributor to net worth expansion of any household investment asset class.
With the clarity of hindsight, we know that the prior 2006-2009 period witnessed the most serious downturn in residential real estate prices in a generation. Few saw it coming as it was an event never experienced in their lifetimes. One would have to travel back to the 1930’s Depression period to find a similar occurrence. There is an old saying in the markets — People don’t repeat the mistakes of their parents, they repeat the mistakes of their grandparents —  and this was certainly true in residential real estate markets in the middle of the prior decade, as the buildup of excess and often reckless leverage was ultimately the key provocateur leading to price declines, as was the case in the 1930’s.

Recovery At Last (?)

Accompanying the current economic expansion that began in June of 2009, residential real estate prices have recovered. In fact, in high-ticket geographic areas such as many parts of the San Francisco Bay Area, New York, etc, current prices have well exceeded the prior cycle peaks of 2006.
Indeed, the following chart (using data from the US Census Bureau) shows us that the median price of a single family home in the US has now recovered to a level just above the prior cycle peak:
Remember, this incorporates meaningful and often anomalistic sales activity in very high priced areas such as New York and San Francisco, clearly skewing the median numbers higher.
In one sense, the recovery in price is at least graphically pleasing and simplistically suggests a return to longer term normalcy, or trend, in the overall residential real estate market. But as we look a bit deeper beyond just price into the important components of housing activity as they relate to the real economy (GDP) and household balance sheets, we see something very different: as the prior cycle downturn was a once-in-a-generation event, so, too, is the character of the current housing recovery. The anomaly of the current recovery has implications for both the real economy and investment activity ahead.
In headline fashion, the contribution of housing to US economic growth is found in new home sales and housing starts.  Demand for new homes drives demand for building materials and construction work, both important in prior cycles in driving job growth, the bedrock foundation for consumer spending. Again, if one only looked at residential real estate price trends, one would assume a very normal recovery.

The Data Tell A Much Darker Story

But the data below show us that actual new home sales and housing starts currently rest very near half-century lows.  How can this be?  What we see at present with new home sales and construction starts is what we saw at the depths of every US recession of the last 50 years. These data points suggest that the current is anything but a normal housing recovery.
Here are the numbers are current through April of this year:
(Source: US Census Bureau)
Accompanying the dearth of new home sales and starts is the fact that the number of new mortgage purchase applications currently rests near the lows seen since 2009.  Just how can prices be ascending so spectacularly when new home sales are in prior recession territory, new housing starts have not recovered, and the number of new mortgage purchase applications has not climbed from the depths seen in 2009-2010?
Accompanying these trends is the fact that the US homeownership rate post the peak seen in 2004 has fallen to a near 19-year low. The message is that although total household formation has marched forward, households are increasingly choosing to rent their primary residence as opposed to own residential real estate.  Of course, this is the reason that median rents in the US, seen in the bottom clip of the next chart, have incrementally marched to new all-time highs:
(Source: US Census Bureau)

How Will This Contradiction Resolve?

The key macro conclusion of the current cycle is that we are not witnessing a “normal” residential real estate recovery at all, but rather an investment cycle driven by actions of central bankers (think the Fed), global flows of capital, and a new entrant to the residential real estate market from the institutional investor side.
In Part 2: Get Ready For Falling Home Prices we identify the new primary drivers of home values in this unfamiliar pricing cycle and examine their implications for the broader economy, and household consumers specifically, as we look ahead.
Long story short: price reversion is coming. If you own housing as either a residence or an investment, don’t let yourself be caught as vulnerable as you were in 2008.
Click here to access Part 2 of this report (free executive summary, enrollment required for full access)

“Buying Time” Doesn’t Fix Financial Crises, It Makes the Next One Worse

The strategy of “buying time so the financial system can heal itself” by protecting a systemically destabilizing financial sector has failed because it could only fail.
The core strategy of central states and banks to fix the Global Financial Meltdown of 2008 was to buy time: take extraordinary emergency monetary and regulatory measures to save the parasitic too big to fail banking sector and the rest of the crony-capitalist Wall Street parasites, and initiate an unprecedented transfer of wealth from savers and Main Street to the banks and Wall Street via zero-interest rates and credit funneled to the very players who caused the crisis.
The idea was that the system would “heal itself” if authorities simply “bought time” by saving the financial sector from its own predation. The second phase of “buying time so the financial system can heal itself” was to institute policies (ZIRP, etc.) that restored the financial sector’s obscene profits and socialized its losses by transferring them to the taxpayers.
The terrible irony in the official strategy of “buying time so the financial system can heal itself” is the policies prohibit healing and guarantee the next financial crisis will be greater in magnitude than the last one.
There is only one way for any financial system to heal itself: enable the open market to discover the price of capital, credit, assets, collateral and risk. When participants finally discover the market price of their assets and collateral are much lower than the valuations claimed in credit bubbles, the market clears itself of bad credit and overvalued collateral in a market-clearing event in which overpriced assets are marked down, firms that overleveraged weak collateral are declared insolvent and liquidated, and creditors who can no longer afford their loans are declared bankrupt and their remaining assets liquidated to pay their creditors.
There is no other healing process but this one: enable transparent, open markets to discover the price of capital, credit, assets, collateral and risk and let those firms and individuals who overleveraged and made bets that blew up go bankrupt.
What “buying time” has done is destroy the market’s ability to price capital, credit, assets, collateral and risk, stripping the system of the essential information participants need to make rational, informed decisions. By crushing the market’s ability to generate accurate pricing information, central state and banking authorities have insured the system cannot possibly heal itself while maintaining perverse incentives that guarantee the next financial crisis will dwarf the previous one.
The official policy of “buying time” has another fatal flaw: it maintains a parasitic financial sector that expanded to a structurally unhealthy dominance over both the political and economic sectors. Once financial profits ballooned from a modest share of corporate profits to dominance, this enabled financiers and bankers to buy political protection of their skimming and scamming:
The strategy of “buying time so the financial system can heal itself” by protecting a systemically destabilizing financial sector has failed because it could only fail. The policies that “saved the financial system” only saved it from the healing process of the market discovering the price of capital, credit, assets, collateral and risk.

OUR BIGGEST PROBLEM: being eternally in denial about there being no such thing as eternity.

“What goes up must come down” is a fundamental and general law with very few exceptions. But the human race, in almost all of its directions, metiers, callings and endeavours, seems to think that the “down” part is an exception so rare as to be homoaeophathic in nature.
Every empire in history has at some point gone stratospheric, and then fallen to earth faster than Icarus.
Every over-heated stock market has been presented as an infinite rise, but every ‘new paradigm’ ends up as “Buddy can you spare a dime” when it obeys the old rule….and collapses.
The mad Caledonian Gordon Brown boasted that he’d abolished boom and bust….eighteen months before  the greatest Bank bust in history began.
At one point some four hundred years ago, Christianity looked set to become the very first globalist business. Now it is in retreat, and the new kid chopping hands on the block is Islam.
In 1902, the British Empire was something upon which “the sun will never set”. In 1937, Hitler said the Nazi empire would last a thousand years. In 1958, Nikita Kruschev said Communism would rule the world forever. Even ten years ago, Blair’s theorist Lord Gould called ours “the Socialist century”. Now the neoliberals claim theirs is the only way, that only they are “correct”. Perhaps they should look back at political correctness itself, and observe how it has become increasingly ridiculed and rejected over time.
The biggest problem we face today as a species is our ability to deny the inevitable. This odd piece of wiring in our cerebral areas means that, ultimately everything comes as a shock to us.
Thus every inability of ClubMed countries to recover from austerity produces data that “surprised experts”. Nobody expects the United States of America to collapse under the weight of its obscene debts. China will forever be a capitalist tiger – a mere thirty years after we all expected Mao’s creation to be eternally Communist. Britain’s dominance of financial markets was last week described by one junior ministerial twerp as “a given”. And our favourite Brussels alien Herman van Rompuy once described the EU as “Europe’s obvious and perpetual economic future”.
What a terrible shock the next ten years is going to be. For some people.

ANOTHER WORLD – Occupy Wall St. Documentary with Lauren Saffa

ANOTHER WORLD, the Occupy Wall St. documentary is shared with the trailer and additional footage and explanation offered by filmmaker Lauren Saffa. The story of the 99%, the political dissidents involved, and the continuing production of the film that addresses the critics and players of the movement against income inequality is discussed in this BYOD.

Just A Seasonal Low For Gold: Frank Holmes | Kitco News

Frank Holmes kicks off the week on Kitco News with this latest edition of “Gold Game Film.” Holmes talks about weaker gold prices and whether he sees this as an opportunity for investors. “Economic GDP rising in Asia is so important for gold prices to rise,” he says. “I think the touchdown pass is to get resolution in South East Asia [...] having their political stability come back in place, we’ll see an increase in gold consumption.” Looking specifically at China, Holmes comments on the recent news regarding the Shanghai Gold Exchange, which he thinks is just a way for the Chinese to show that they want to become ‘price-makers’ rather than ‘price-takers.’ Holmes looks at the US dollar as well as gold import restrictions in India as potential opportunities and threats in the marketplace. Tune in now to get his latest comments on the gold market and where he expects the metal is headed. Kitco News, June 2, 2014.

Here’s What 60 Minutes Didn’t Tell You About the F-35

The millions of viewers who tuned into 60 Minutes Sunday may have gotten the impression that, despite being billions over budget and almost a decade behind schedule, the F-35 Joint Strike Fighter is ultimately necessary to maintain U.S. air superiority. That’s an unsurprising conclusion, given that all of the individuals interviewed in the story work either for the federal government or for Lockheed Martin, the primary contractor for the F-35. 60 Minutes’ producers broke a basic lesson of Journalism 101 when they failed to interview anyone who would tell the other side of the F-35 story.
Fortunately, a new video from Brave New Films does just that. The Jet that Ate the Pentagon, released along with a new website, explains how the F-35 became a $1.5 trillion burden on American taxpayers. Winslow Wheeler, the director of the Straus Military Reform Project at the Project On Government Oversight, is featured in the video. He answered a few of our questions about how and why the F-35 program got so out of control.
POGO: Why are you focused on informing the public about the F35?
Winslow Wheeler, Director, Straus Military Reform Project, Center for Defense Information at the Project On Government Oversight
Winslow Wheeler
Wheeler: It is essential that the public be aware of the many serious and fundamental problems in the F-35 program because the Pentagon, the White House and Congress have all failed to do their jobs.
In the 1990s the Pentagon’s aviation bureaucracy in the Clinton administration put together a plan for the Joint Strike Fighter that was bound to fail at great cost. The building’s senior leadership—Secretary of Defense Les Aspin, acquisition Czar William Perry and others--failed to recognize the fundamental problems in both the physical design of the F-35 and its buy-first, test-later acquisition plan.  In fact, they willfully advocated those horrendous ideas.  Then, both the White House and Congress did nothing but cheer the whole thing on.  They were warned by some experts, and they ignored the warnings.
Because the people who claim to be our national security leadership failed so miserably in the Clinton and George W. Bush administrations to recognize the problems, let alone take any appropriate action, it became necessary in the mid-2000s to raise the volume of the complaints and make the public aware.
In a functioning democratic system, public pressure on the politicians in the Pentagon, the White House and Congress should force them to find a solution.  It remains to be seen, however, just how functional our system is: the public now is far more fully aware of the many and serious problems in the F-35, but there is no sign yet that any real action will be taken by the national security decision-makers.  I fear that Congress is too fixated on the pork the F-35 brings to states and congressional districts; the White House is scared of the tough-minded politics needed to reverse course on the F-35, and most, but not all, Pentagon managers are too happy to keep on drinking—and passing out—the F-35 Kool Aid.
Nonetheless, making the public aware of the issues and its complaining to decision makers in Washington is our only viable way to bring this disaster to an end.
POGO: What are some of the F35s most shocking failures?
Wheeler: The most stunning failure in the F-35 is the level of complexity and contradiction in the basic design.  Starting out as a plan to make a short take off and vertical landing (STOVL) aircraft supersonic (two inherently contradictory design characteristics), it only went further downhill after that.  They then made it a multi-role aircraft, piling on the additional contradictory characteristics of an air to air fighter and an air to ground bomber; then they made it “stealth” making even fatter the aerodynamic design and making it all more complex by an order of magnitude.  And finally, they made it multi-service adding further contradictory complexities demanded separately by the Air Force, Marine Corps and Navy.  All this insanity made high cost inherent to the design, just as it also made low performance (performing many roles, all of them poorly) intrinsic.
Thus, the most shocking thing is that some think the solution is to cancel the Marine Corps and or the Navy’s version of this aircraft, but not the Air Force’s: ignoring all the basic characteristics of all three versions, these faux critics opt for a politically convenient non-solution which will mean that our Air Force and any remaining foreign purchasers will be strapped with an incompetent design of an astoundingly expensive aircraft.
That to me is the most shocking thing of all: after all the lessons, some of those pretending to be critics, simply don’t, or refuse to, get it.
POGO: Do you think the story of the F35 is a paradigm of larger issues in the American government?
Wheeler: Absolutely yes! The obsessive complexity of the physical design and the buy-it-then-fly-it acquisition plan are absolutely typical of American weapons acquisition.  Those characteristics don’t occur by accident.   Technologists who consider combat lessons an afterthought control the beginning design, and advocates in industry, Congress and the Pentagon seek to commit the entire government to the program by spending $billions and $billions before any empirical data becomes available from testing to show what the actual cost and performance are.  They call it “concurrency,” but it is really bait and switch political engineering.  Chuck Spinney has written about this many times, especially in “Defense Power Games.”
POGO: How has Lockheed Martin been able to continue with the program, despite the cost overruns and delays?
Wheeler: Lockheed-Martin cannot design effectively performing, affordable combat aircraft, but they are without peer in designing a greasy plan to foist the aircraft on the US and multiple foreign buyers.  I am in awe of their skill in doing that; they successfully convince otherwise rational people to ignore empirical data, to believe that press releases spout biblical truth and to embrace new promises in the face of scores of broken ones.  Those are awesome powers.
POGO: What do you hope the video will add to the F35 conversation?
Wheeler: The video covers a lot of territory in just a few minutes, but people who want to check the data behind the many statements in the video will find there are piles of evidence to back them up.  I hope people do exactly that: check on the facts.  Then, armed with the data, they may want to make noise—however they so choose—to give the politicians in Congress, the White House and the Pentagon a choice: Do the right thing on the F-35 or be replaced.
See the video from Brave New Films below.

Ever Wonder Why You Don’t Find Ship Wreck Companies Digging Up Sunken Fiat Currency? – James Anderson

Beijing Tightens Security for Tiananmen Anniversary

‘Two Weeks’ To Prepare For Cyber Attack On Bank Accounts – UK Government

Yesterday’s AM fix was USD 1,244.75, EUR 915.26 and GBP 743.49 per ounce.
Gold fell $7.70 or 0.62% yesterday to $1,243.10/oz. Silver slipped $0.06 or 0.32% to $18.75/oz.
Gold fell to the lowest since February 3 and prices completed a sixth day of declines for the longest losing run since August. Gold bullion in Singapore traded sideways around the $1,244/oz level prior to ticking slightly higher to over $1,246/oz at the open in London (0800 BST).
Silver for immediate delivery rose 0.5% to $18.849 an ounce after sliding to $18.635 on May 30, the lowest since June 2013. Platinum traded at $1,437.75 an ounce from $1,435.56 yesterday, when prices fell to a three-week low of $1,433.
Palladium added another 0.2% to $833.74/oz. The metal climbed to a 34 month high of $845.24 an ounce on May 28 amid a strike in South Africa and prospects of further sanctions against Russia, the world’s biggest producers.
Gold held near a four-month low as risk appetite saw advances in the dollar and global equities. The Standard & Poor’s 500 Index reached a new record high and the dollar climbed to a two-month high against 10 major counterparts.
Gold declined 3.3% in May, the biggest monthly drop this year, despite quite strong fundamentals.  The euro also weakened 1.7% versus the dollar in May and there is speculation that the European Central Bank will become even more dovish when policy makers meet this Thursday, June 5. Goldman alumni Draghi adopting an even loose monetary policy should support gold prices.

Gold in U.S. Dollars – 5 Years – (Thomson Reuters)
On Friday, the U.S. nonfarm payrolls data will be watched for signs regarding the fragile U.S recovery. As usual, a good jobs number should see gold sold by traders and a poor jobs number should see gold buying.
Gold remains 3.6% higher this year partly due to robust global demand and due to heightened geopolitical risk.
Since May 29, the 14 day relative-strength index has been below the level of 30 that suggests a potential impending rebound to technical analysts.
‘Two Weeks’ To Prepare For Cyber Attack On Bank Accounts -  UK Government
Computer users are being urged to protect their machines from malware which could allow hackers to steal financial data, access banks accounts and withdraw savers funds.
British investigators have been working with the FBI to trace the hackers behind an attack, which they expect to take place in the next fortnight.
Between 500,000 and one million machines have so far been infected worldwide, according to court documents.
U.S. officials have accused a Russian hacker of masterminding the scam – and prosecutors say those involved have already raked in more than $100 million (£60 million).
The National Crime Agency (NCA) is now warning of a “powerful computer attack”. It is urging people to back up important files and make sure their security software and operating system are up to date.
Two pieces of malware software known as GOZeuS and CryptoLocker are responsible for the alert.
They typically infect a computer via attachments or links in emails. If a user clicks on GOZeuS, it silently monitors activity and tries to capture information such as bank details.
“(The links or attachments) may look like they have been sent by genuine contacts and may purport to carry invoices, voicemail messages, or any file made to look innocuous,” the NCA warned.
“These emails are generated by other victims’ computers, who do not realise they are infected, and are used to send mass emails creating more victims.”
The Cryptolocker malware is activated if the first attack is not profitable enough. It locks a user from their files and threatens to delete them unless a “ransom” of several hundred pounds is paid.
Some 234,000 machines were hit by Cryptolocker – bringing in $27m (£16m) in payments – in its first two months, the US Justice Department said. More than 15,500 computers in the UK are infected and “many more” are at risk, according to the NCA.
Stewart Garrick, a senior investigator with the NCA, told Sky News the threat was mainly against individuals or businesses running Windows-based computers.
We have long warned of the vulnerability of having all your investments and savings in electronic format. The nature of our modern financial and banking system exposes investors and savers to new risks that were not there a generation ago.
Prudent diversification today, involves owning some actual physical gold and silver coins and bars in your possession or in allocated, segregated accounts that can be taken delivery of with a phone call.

War Makes Us Poor … And Drags the Economy Down Through the Floor

Top Economists Say War Is Bad for the Economy

Preface: Many Americans – including influential economists and talking heads - stillwrongly assume that war is good for the economy. For example, extremely influential economists like Paul Krugmanand Martin Feldstein promote the myth that war is good for the economy.
Many congressmen assume that cutting pork-barrel military spending would hurt their constituents’ jobs. And talking heads like senior Washington Post political columnist David Broder parrot this idea.
As demonstrated below, it isn’t true.
Nobel-prize winning economist Joseph Stiglitz says that war is bad for the economy:
Stiglitz wrote in 2003:
War is widely thought to be linked to economic good times. The second world war is often said to have brought the world out of depression, and war has since enhanced its reputation as a spur to economic growth. Some even suggest that capitalism needs wars, that without them, recession would always lurk on the horizon. Today, we know that this is nonsense. The 1990s boom showed that peace is economically far better than war. The Gulf war of 1991 demonstrated that wars can actually be bad for an economy.
Stiglitz has also said that this decade’s Iraq war has been very bad for the economy. Seethisthis and this.
Former Federal Reserve chairman Alan Greenspan also said in that war is bad for the economy. In 1991, Greenspan said that a prolonged conflict in the Middle East would hurt the economy. And he made this point again in 1999:
Societies need to buy as much military insurance as they need, but to spend more than that is to squander money that could go toward improving the productivity of the economy as a whole: with more efficient transportation systems, a better educated citizenry, and so on. This is the point that retiring Rep. Barney Frank (D-Mass.) learned back in 1999 in a House Banking Committee hearing with then-Federal Reserve Chairman Alan Greenspan. Frank asked what factors were producing our then-strong economic performance. On Greenspan’s list: “The freeing up of resources previously employed to produce military products that was brought about by the end of the Cold War.” Are you saying, Frank asked, “that dollar for dollar, military products are there as insurance … and to the extent you could put those dollars into other areas, maybe education and job trainings, maybe into transportation … that is going to have a good economic effect?”Greenspan agreed.
Economist Dean Baker notes:
It is often believed that wars and military spending increases are good for the economy. In fact, most economic models show that military spending diverts resources from productive uses, such as consumption and investment, and ultimately slows economic growth and reduces employment.
Professor Emeritus of International Relations at the American University Joshua Goldstein notes:
Recurring war has drained wealth, disrupted markets, and depressed economic growth.
War generally impedes economic development and undermines prosperity.
And David R. Henderson – associate professor of economics at the Naval Postgraduate School in Monterey, California and previously a senior economist with President Reagan’s Council of Economic Advisers -  writes:
Is military conflict really good for the economy of the country that engages in it? Basic economics answers a resounding “no.”

The Proof Is In the Pudding

Mike Lofgren notes:
Military spending may at one time have been a genuine job creator when weapons were compatible with converted civilian production lines, but the days of Rosie the Riveter are long gone. [Indeed, WWII was different from current wars in many ways, and so its economic effects are not comparable to those of today's wars.] Most weapons projects now require relatively little touch labor. Instead, a disproportionate share is siphoned into high-cost R&D (from which the civilian economy benefits little), exorbitant management expenditures, high overhead, and out-and-out padding, including money that flows back into political campaigns. A dollar appropriated for highway construction, health care, or education will likely create more jobs than a dollar for Pentagon weapons procurement.
During the decade of the 2000s, DOD budgets, including funds spent on the war, doubled in our nation’s longest sustained post-World War II defense increase. Yet during the same decade, jobs were created at the slowest rate since the Hoover administrationIf defense helped the economy, it is not evident. And just the wars in Iraq and Afghanistan added over $1.4 trillion to deficits, according to the Congressional Research Service. Whether the wars were “worth it” or merely stirred up a hornet’s nest abroad is a policy discussion for another time; what is clear is that whether you are a Keynesian or a deficit hawk, war and associated military spending are no economic panacea.
The Washington Post noted in 2008:
A recent paper from the National Bureau of Economic Research concludes that countries with high military expenditures during World War II showed strong economic growth following the war, but says this growth can be credited more to population growththan war spending. The paper finds that war spending had only minimal effects on per-capita economic activity.
A historical survey of the U.S. economy from the U.S. State Department reports the Vietnam War had a mixed economic impact. The first Gulf War typically meets criticism for having pushed the United States toward a 1991 recession.
The Institute for Economics & Peace (IEP) shows that any boost from war is temporary at best. For example, while WWII provided a temporary bump in GDP, GDP then fell back to the baseline trend. After the Korean War, GDP fell below the baseline trend:
IEP notes:
By examining the state of the economy at each of the major conflict periods since World War II, it can be seen that the positive effects of increased military spending were outweighed by longer term unintended negative macroeconomic consequences. While the stimulatory effect of military outlays is evidently associated with boosts in economic growth, adverse effects show up either immediately or soon after, through higher inflation, budget deficits, high taxes and reductions in consumption or investment. Rectifying these effects has required subsequent painful adjustments which are neither efficient nor desirable. When an economy has excess capacity and unemployment, it is possible that increasing military spending can provide an important stimulus. However, if there are budget constraints, as there are in the U.S. currently, then excessive military spending can displace more productive non-military outlays in other areas such as investments in high-tech industries, education, or infrastructure. The crowding-out effects of disproportionate government spending on military functions can affect service delivery or infrastructure development, ultimately affecting long-term growth rates.
Analysis of the macroeconomic components of GDP during World War II and in subsequent conflicts show heightened military spending had several adverse macroeconomic effects. These occurred as a direct consequence of the funding requirements of increased military spending. The U.S. has paid for its wars either through debt (World War II, Cold War, Afghanistan/Iraq), taxation (Korean War) or inflation (Vietnam). In each case, taxpayers have been burdened, and private sector consumption and investment have been constrained as a result. Other negative effects include larger budget deficits, higher taxes, and growth above trend leading to inflation pressure. These effects can run concurrent with major conflict or via lagging effects into the future. Regardless of the way a war is financed, the overall macroeconomic effect on the economy tends to be negative. For each of the periods after World War II, we need to ask, what would have happened in economic terms if these wars did not happen? On the specific evidence provided, it can be reasonably said, it is likely taxes would have been lower, inflation would have been lower, there would have been higher consumption and investment and certainly lower budget deficits. Some wars are necessary to fight and the negative effects of not fighting these wars can far outweigh the costs of fighting. However if there are other options, then it is prudent to exhaust them first as once wars do start, the outcome, duration and economic consequences are difficult to predict.
We noted in 2011:
This is a no-brainer, if you think about it. We’ve been in Afghanistan for almost twice as long as World War II. We’ve been in Iraq for years longer than WWII. We’ve been involved in 7 or 8 wars in the last decade. And yet [the economy is still unstable]. If wars really helped the economy, don’t you think things would have improved by now? Indeed,the Iraq war alone could end up costing more than World War II. And given the other wars we’ve been involved in this decade, I believe that the total price tag for the so-called “War on Terror” will definitely support that of the “Greatest War”.
Let’s look at the adverse effects of war in more detail …

War Spending Diverts Stimulus Away from the Real Civilian Economy

IEP notes that – even though the government spending soared – consumption and investment were flatduring the Vietnam war:
The New Republic noted in 2009:
Conservative Harvard economist Robert Barro has argued that increased military spending during WWII actually depressed other parts of the economy.
(New Republic also points out that conservative economist Robert Higgs and liberal economists Larry Summers and Brad Delong have all shown that any stimulation to the economy from World War II has been greatly exaggerated.)
How could war actually hurt the economy, when so many say that it stimulates the economy?
Because of what economists call the “broken window fallacy”.
Specifically, if a window in a store is broken, it means that the window-maker gets paid to make a new window, and he, in turn, has money to pay others. However, economists long ago showed that – if the window hadn’t been broken – the shop-owner would have spent that money on other things, such as food, clothing, health care, consumer electronics or recreation, which would have helped the economy as much or more.
If the shop-owner hadn’t had to replace his window, he might have taken his family out to dinner, which would have circulated more money to the restaurant, and from there to other sectors of the economy. Similarly, the money spent on the war effort is money that cannot be spent on other sectors of the economy. Indeed, all of the military spending has just created military jobs, at the expense of the civilian economy.
Professor Henderson writes:
Money not spent on the military could be spent elsewhere.This also applies to human resources. The more than 200,000 U.S. military personnel in Iraq and Afghanistan could be doing something valuable at home.
Why is this hard to understand? The first reason is a point 19th-century French economic journalist Frederic Bastiat made in his essay, “What Is Seen and What Is Not Seen.” Everyone can see that soldiers are employed. But we cannot see the jobs and the other creative pursuits they could be engaged in were they not in the military.
The second reason is that when economic times are tough and unemployment is high, it’s easy to assume that other jobs could not exist. But they can. This gets to an argument Bastiat made in discussing demobilization of French soldiers after Napoleon’s downfall. He pointed out that when government cuts the size of the military, it frees up not only manpower but also money. The money that would have gone to pay soldiers can instead be used to hire them as civilian workersThat can happen in three ways, either individually or in combination: (1) a tax cut; (2) a reduction in the deficit; or (3) an increase in other government spending.
Most people still believe that World War II ended the Great Depression …. But look deeper.
The government-spending component of GNP went for guns, trucks, airplanes, tanks, gasoline, ships, uniforms, parachutes, and labor. What do these things have in common? Almost all of them were destroyed. Not just these goods but also the military’s billions of labor hours were used up without creating value to consumers. Much of the capital and labor used to make the hundreds of thousands of trucks and jeeps and the tens of thousands of tanks and airplanes would otherwise have been producing cars and trucks for the domestic economy. The assembly lines in Detroit, which had churned out 3.6 million cars in 1941, were retooled to produce the vehicles of war. From late 1942 to 1945, production of civilian cars was essentially shut down.
And that’s just one example. Women went without nylon stockings so that factories could produce parachutes. Civilians faced tight rationing of gasoline so that U.S. bombers could fly over Germany. People went without meat so that U.S. soldiers could be fed. And so on.
These resources helped win the war—no small issue. But the war was not a stimulus program, either in its intentions or in its effects, and it was not necessary for pulling the U.S. out of the Great Depression. Had World War II never taken place, millions of cars would have been produced; people would have been able to travel much more widely; and there would have been no rationing. In short, by the standard measures, Americans would have been much more prosperous.
Today, the vast majority of us are richer than even the most affluent people back then. But despite this prosperity, one thing has not changed: war is bad for our economy. The $150 billion that the government spends annually on wars in Iraq and Afghanistan (and, increasingly, Pakistan) could instead be used to cut taxes or cut the deficit. By ending its ongoing wars … the U.S. government … would be developing a more prosperous economy.
Austrian economist Ludwig Von Mises points:
That is the essence of so-called war prosperity; it enriches some by what it takes from others. It is not rising wealth but a shifting of wealth and income.
We noted in 2010:
You know about America’s unemployment problem. You may have even heard that the U.S. may very well have suffered a permanent destruction of jobs.
But did you know that the defense employment sector is booming?
[P]ublic sector spending – and mainly defense spending – has accounted for virtually all of the new job creation in the past 10 years:
The U.S. has largely been financing job creation for ten years. Specifically, as the chief economist for BusinessWeek, Michael Mandel, points out, public spending has accounted for virtually all new job creation in the past 1o years:
Private sector job growth was almost non-existent over the past ten years. Take a look at this horrifying chart:
longjobs1 The Military Industrial Complex is Ruining the Economy
Between May 1999 and May 2009, employment in the private sector sector only rose by 1.1%, by far the lowest 10-year increase in the post-depression period.
It’s impossible to overstate how bad this is. Basically speaking, the private sector job machine has almost completely stalled over the past ten years. Take a look at this chart:
longjobs2 The Military Industrial Complex is Ruining the Economy
Over the past 10 years, the private sector has generated roughly 1.1 million additional jobs, or about 100K per year. The public sector created about 2.4 million jobs.
But even that gives the private sector too much credit. Remember that the private sector includes health care, social assistance, and education, all areas which receive a lot of government support.
Most of the industries which had positive job growth over the past ten years were in the HealthEdGov sector. In fact, financial job growth was nearly nonexistent once we take out the health insurers.
Let me finish with a final chart.
longjobs4 The Military Industrial Complex is Ruining the Economy
Without a decade of growing government support from rising health and education spending and soaring budget deficits, the labor market would have been flat on its back. [120]
So most of the job creation has been by the public sector. But because the job creation has been financed with loans from China and private banks, trillions in unnecessary interest charges have been incurred by the U.S.
And this shows military versus non-military durable goods shipments: us collapse 18 11 The Military Industrial Complex is Ruining the Economy[Click here to view full image.]
So we’re running up our debt (which will eventually decrease economic growth), but the only jobs we’re creating are military and other public sector jobs.
PhD economist Dean Baker points out that America’s massive military spending on unnecessary and unpopular wars lowers economic growth and increasesunemployment:
Defense spending means that the government is pulling away resources from the uses determined by the market and instead using them to buy weapons and supplies and to pay for soldiers and other military personnel. In standard economic models, defense spending is a direct drain on the economy, reducing efficiency, slowing growth and costing jobs.
A few years ago, the Center for Economic and Policy Research commissioned Global Insight, one of the leading economic modeling firms, to project the impact of a sustained increase in defense spending equal to 1.0 percentage point of GDP. This was roughly equal to the cost of the Iraq War.
Global Insight’s model projected that after 20 years the economy would be about 0.6 percentage points smaller as a result of the additional defense spending. Slower growth would imply a loss of almost 700,000 jobs compared to a situation in which defense spending had not been increased. Construction and manufacturing were especially big job losers in the projections, losing 210,000 and 90,000 jobs, respectively.
The scenario we asked Global Insight [recognized as the most consistentlyaccurate forecasting company in the world] to model turned out to have vastly underestimated the increase in defense spending associated with current policy. In the most recent quarter, defense spending was equal to 5.6 percent of GDP. By comparison, before the September 11th attacks, the Congressional Budget Office projected that defense spending in 2009 would be equal to just 2.4 percent of GDP. Our post-September 11th build-up was equal to 3.2 percentage points of GDP compared to the pre-attack baseline. This means that the Global Insight projections of job loss are far too low…
The projected job loss from this increase in defense spending would be close to 2 million. In other words, the standard economic models that project job loss from efforts to stem global warming also project that the increase in defense spending since 2000 will cost the economy close to 2 million jobs in the long run.
The Political Economy Research Institute at the University of Massachusetts, Amherst has also shown that non-military spending creates more jobs than military spending.
So we’re running up our debt – which will eventually decrease economic growth – and creating many fewer jobs than if we spent the money on non-military purposes.

High Military Spending Drains Innovation, Investment and Manufacturing Strength from the Civilian Economy

Chalmers Johnson notes that high military spending diverts innovation and manufacturing capacity from the economy:
By the 1960s it was becoming apparent that turning over the nation’s largest manufacturing enterprises to the Department of Defense and producing goods without any investment or consumption value was starting to crowd out civilian economic activities. The historian Thomas E Woods Jr observes that, during the 1950s and 1960s, between one-third and two-thirds of all US research talent was siphoned off into the military sector. It is, of course, impossible to know what innovations never appeared as a result of this diversion of resources and brainpower into the service of the military, but it was during the 1960s that we first began to notice Japan was outpacing us in the design and quality of a range of consumer goods, including household electronics and automobiles.
Woods writes: “According to the US Department of Defense, during the four decades from 1947 through 1987 it used (in 1982 dollars) $7.62 trillion in capital resources. In 1985, the Department of Commerce estimated the value of the nation’s plant and equipment, and infrastructure, at just over $7.29 trillion… The amount spent over that period could have doubled the American capital stock or modernized and replaced its existing stock”.
The fact that we did not modernise or replace our capital assets is one of the main reasons why, by the turn of the 21st century, our manufacturing base had all but evaporated. Machine tools, an industry on which Melman was an authority, are a particularly important symptom. In November 1968, a five-year inventory disclosed “that 64% of the metalworking machine tools used in US industry were 10 years old or older. The age of this industrial equipment (drills, lathes, etc.) marks the United States’ machine tool stock as the oldest among all major industrial nations, and it marks the continuation of a deterioration process that began with the end of the second world war. This deterioration at the base of the industrial system certifies to the continuousdebilitating and depleting effect that the military use of capital and research and development talent has had on American industry.”
Economist Robert Higgs makes the same pointabout World War II:
Yes, officially measured GDP soared during the war. Examination of that increased output shows, however, that it consisted entirely of military goods and services. Real civilian consumption and private investment both fell after 1941, and they did not recover fully until 1946. The privately owned capital stock actually shrank during the war. Some prosperity. (My article in the peer-reviewed Journal of Economic History, March 1992, presents many of the relevant details.)
It is high time that we come to appreciate the distinction between the government spending, especially the war spending, that bulks up official GDP figures and the kinds of production that create genuine economic prosperity. As Ludwig von Mises wrote in the aftermath of World War I, “war prosperity is like the prosperity that an earthquake or a plague brings.”

War Causes Inflation … Which Keynes and Bernanke Admit Taxes Consumers

As we noted in 2010, war causes inflation … which hurts consumers:
Liberal economist James Galbraith wrote in 2004:
Inflation applies the law of the jungle to war finance. Prices and profits rise, wages and their purchasing power fall. Thugs, profiteers and the well connected get rich. Working people and the poor make out as they can. Savings erode, through the unseen mechanism of the “inflation tax” — meaning that the government runs a big deficit in nominal terms, but a smaller one when inflation is factored in.
There is profiteering. Firms with monopoly power usually keep some in reserve. In wartime, if the climate is permissive, they bring it out and use it. Gas prices can go up when refining capacity becomes short — due partly to too many mergers. More generally, when sales to consumers are slow, businesses ought to cut prices — but many of them don’t. Instead, they raise prices to meet their income targets and hope that the market won’t collapse.
Ron Paul agreed in 2007:
Congress and the Federal Reserve Bank have a cozy, unspoken arrangement that makes war easier to finance. Congress has an insatiable appetite for new spending, but raising taxes is politically unpopular. The Federal Reserve, however, is happy to accommodate deficit spending by creating new money through the Treasury Department. In exchange, Congress leaves the Fed alone to operate free of pesky oversight and free of political scrutiny. Monetary policy is utterly ignored in Washington, even though the Federal Reserve system is a creation of Congress.
The result of this arrangement is inflation. And inflation finances war.
Blanchard Economic Research pointed out in 2001:
War has a profound effect on the economy, our government and its fiscal and monetary policies. These effects have consistently led to high inflation.
David Hackett Fischer is a Professor of History and Economic History at Brandeis. [H]is book, The Great Wave, Price Revolutions and the Rhythm of History … finds that … periods of high inflation are caused by, and cause, a breakdown in order and a loss of faith in political institutions. He also finds that war is a triggering influence on inflation, political disorder, social conflict and economic disruption.
Other economists agree with Professor Fischer’s link between inflation and war.
James Grant, the respected editor of Grant’s Interest Rate Observer, supplies us with the most timely perspective on the effect of war on inflation in the September 14 issue of his newsletter:
“War is inflationary. It is always wasteful no matter how just the cause. It is cost without income, destruction financed (more often than not) by credit creation. It is the essence of inflation.”
Libertarian economics writer Lew Rockwell noted in 2008:
You can line up 100 professional war historians and political scientists to talk about the 20th century, and not one is likely to mention the role of the Fed in funding US militarism. And yet it is true: the Fed is the institution that has created the money to fund the wars. In this role, it has solved a major problem that the state has confronted for all of human history. A state without money or a state that must tax its citizens to raise money for its wars is necessarily limited in its imperial ambitions. Keep in mind that this is only a problem for the state. It is not a problem for the people. The inability of the state to fund its unlimited ambitions is worth more for the people than every kind of legal check and balance. It is more valuable than all the constitutions every devised.
Reflecting on the calamity of this war, Ludwig von Mises wrote in 1919
One can say without exaggeration that inflation is an indispensable means of militarism. Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly; war weariness would set in much earlier.***

In the entire run-up to war, George Bush just assumed as a matter of policy that it was his decision alone whether to invade Iraq. The objections by Ron Paul and some other members of Congress and vast numbers of the American population were reduced to little more than white noise in the background. Imagine if he had to raise the money for the war through taxes. It never would have happened. But he didn’t have to. He knew the money would be there. So despite a $200 billion deficit, a $9 trillion debt, $5 trillion in outstanding debt instruments held by the public, a federal budget of $3 trillion, and falling tax receipts in 2001, Bush contemplated a war that has cost $525 billion dollars — or $4,681 per household. Imagine if he had gone to the American people to request that. What would have happened? I think we know the answer to that question. And those are government figures; the actual cost of this war will be far higher — perhaps $20,000 per household.
If the state has the power and is asked to choose between doing good and waging war, what will it choose? Certainly in the American context, the choice has always been for war.
And progressive economics writer Chris Martenson explains as part of his “Crash Course” on economics:
If we look at the entire sweep of history, we can make an utterly obvious claim: All wars are inflationary. Period. No exceptions.
So if anybody tries to tell you that you haven’t sacrificed for the war, let them know you sacrificed a large portion of your savings and your paycheck to the effort, thank you very much.
The bottom line is that war always causes inflation, at least when it is funded through money-printing instead of a pay-as-you-go system of taxes and/or bonds. It might be great for a handful of defense contractors, but war is bad for Main Street, stealing wealth from people by making their dollars worth less.
Given that John Maynard Keynes and former Federal Reserve chair Ben Bernanke both say thatinflation is a tax on the American people, war-induced inflation is a theft of our wealth.
IEP gives a graphic example – the Vietnam war helping to push inflation through the roof:

War Causes Runaway Debt

We noted in 2010:
All of the spending on unnecessary wars adds up.
The U.S. is adding trillions to its debt burden to finance its multiple wars in Iraq, Afghanistan, Yemen, etc.
Indeed, IEP – commenting on the war in Afghanistan and Iraq – notes:
This was also the first time in U.S. history where taxes were cut during a war which then resulted in both wars completely financed by deficit spending. A loose monetary policy was also implemented while interest rates were kept low and banking regulations were relaxed to stimulate the economy. All of these factors have contributed to the U.S. having severe unsustainable structural imbalances in its government finances.
We also pointed out in 2010:
It is ironic that America’s huge military spending is what made us an empire … but our huge military is what is bankrupting us … thus destroying our status as an empire.
Economist Michel Chossudovsky told Washington’s Blog:
War always causes recession. Well, if it is a very short war, then it may stimulate the economy in the short-run. But if there is not a quick victory and it drags on, then wars always put the nation waging war into a recession and hurt its economy.
Indeed, we’ve known for 2,500 years that prolonged war bankrupts an economy (and remember Greenspan’s comment.)
It’s not just civilians saying this …
The former head of the Joint Chiefs of Staff – Admiral Mullen – agrees:
The Pentagon needs to cut back on spending.
“We’re going to have to do that if it’s going to survive at all,” Mullen said, “and do it in a way that is predictable.”
Indeed, Mullen said:
For industry and adequate defense funding to survive … the two must work together. Otherwise, he added, “this wave of debt” will carry over from year to year, and eventually, the defense budget will be cut just to facilitate the debt.
Former Secretary of Defense Robert Gates agrees as well. As David Ignatius wrote in the Washington Post in 2010:
After a decade of war and financial crisis, America has run up debts that pose a national security problem, not just an economic one.
One of the strongest voices arguing for fiscal responsibility as a national security issue has been Defense Secretary Bob Gates. He gave a landmark speech in Kansas on May 8, invoking President Dwight Eisenhower’s warnings about the dangers of an imbalanced military-industrial state.
“Eisenhower was wary of seeing his beloved republic turn into a muscle-bound, garrison state — militarily strong, but economically stagnant and strategically insolvent,” Gates said. He warned that America was in a “parlous fiscal condition” and that the “gusher” of military spending that followed Sept. 11, 2001, must be capped. “We can’t have a strong military if we have a weak economy,” Gates told reporters who covered the Kansas speech.
On Thursday the defense secretary reiterated his pitch that Congress must stop shoveling money at the military, telling Pentagon reporters: “The defense budget process should no longer be characterized by ‘business as usual’ within this building — or outside of it.”
While war might make a handful in the military-industrial complex and big banks rich, America’s top military leaders and economists say that would be a very bad idea for the American people.
Indeed, military strategists have known for 2,500 years that prolonged wars are disastrous for the nation.

War Increases Terrorism … And Terrorism Hurts the Economy

Security experts – conservative hawks and liberal doves alike – agree that waging war in the Middle Eastweakens national security and increases terrorism. See thisthisthisthisthisthis and this.
Terrorism – in turn – terrorism is bad for the economy. Specifically, a study by Harvard and the National Bureau of Economic Research (NBER) points out:
From an economic standpoint, terrorism has been described to have four main effects (see, e.g., US Congress, Joint Economic Committee, 2002). First, the capital stock (human and physical) of a country is reduced as a result of terrorist attacks. Second, the terrorist threat induces higher levels of uncertainty. Third, terrorism promotes increases in counter-terrorism expenditures, drawing resources from productive sectors for use in security. Fourth, terrorism is known to affect negatively specific industries such as tourism.
The Harvard/NBER concludes:
In accordance with the predictions of the model, higher levels of terrorist risks are associated with lower levels of net foreign direct investment positions, even after controlling for other types of country risks. On average, a standard deviation increase in the terrorist risk is associated with a fall in the net foreign direct investment position of about 5 percent of GDP.
So the more unnecessary wars American launches and the more innocent civilians we kill, the less foreign investment in America, the more destruction to our capital stock, the higher the level of uncertainty, the more counter-terrorism expenditures and the less expenditures in more productive sectors, and the greater the hit to tourism and some other industries. Moreover:
Terrorism has contributed to a decline in the global economy (for example, European Commission, 2001).
So military adventurism increases terrorism which hurts the world economy. And see this.
Postscript: Attacking a country which controls the flow of oil has special impacts on the economy. For example, well-known economist Nouriel Roubini says that attacking Iran would lead to global recession. The IMF says that Iran cutting off oil supplies could raise crude prices 30%.