Monday, February 8, 2016

The Federal Reserve economic stimulus plan is edging toward the Twilight Zone now that the Fed sees its recovery about to be eaten by an economic apocalypse greater than its imagination could conceive.

by David Haggith
By Federalreserve (00491) [Public domain], via Wikimedia Commons
The Federal Reserve economic stimulus plan is edging toward the Twilight Zone now that the Fed sees its recovery about to be eaten by an economic apocalypse greater than its imagination could conceive. Though many think of central bankers as stogy and uncreative, the Fed has been quite creative when it comes to massive economic ideas that don’t work or are extremely repressive to normal market functioning.
Take for example this one:

Federal Reserve Economic Stimulus Plan I

I would summarize all of the Federal Reserve’s past economic stimulus plans as follows: The best way to solve a housing market crisis that comes from too many bad loans that were made due to lax credit terms is to keep credit terms fairly loose, make sure housing prices stay inflated to where no one can afford a house without those loose terms, lower interest rates down to zero, and then give banks trillions of free dollars to loan to people who are already up to their ear holes in debt, but allow the banks, if they wish, to invest that money in stocks, instead. (This is the plan I formerly called “Goliath.” Shove the debt accelerator all the way through the floor while steering hard toward the bank vault.)
Somehow, Ben Burn-the-banky and his Fed friends imagined that would work. Nobody knows why, but you can only blame them for trying. All they got was a pile-up of money in the bank vaults.

Federal Reserve Economic Stimulus Plan II

Unfortunately for the Federal Reserve, Economic Stimulus Plan I failed because no citizens wanted the extra debt because they were already drowning in debt. They couldn’t hear the Fed’s enticements to spend because the debt was over their ears. So, the board members of the Federal Reserve looked around and said, “What else can we do?”
“Hmm,” they said, “Europe has tried negative interest rates, and it hasn’t worked well for them. Maybe we should try that. Japan and China have decided to do the same. This is another idea that has been tried and failed. We don’t want to be caught with our skirt up here as the only nation that didn’t try it, so we had better explore this.”
Now, when you know that the Federal Reserve has been down at zero interest as the basis for banks to borrow money that the are supposed to loan out to you, you might think that negative interest would mean that the Fed has decided it is going to pay banks to take the money the Fed wants to loan. If that were the case, maybe the banks could pay you a little to take a loan, too. With that kind of negative interest, you would take out a loan for $100,000, and the bank would only require you pay $98,000 back. We would all, of course, take infinite loans to maximize our profits.
A plan like that might make you happy, but the Federal Reserve has figured out a more ominous form of negative interest. Free money for everyone would certainly juice the economy. (Not that free money stands a popsicle’s chance in the desert of trickling down out of a banker’s hand.) Unfortunately, the Fed banksters don’t mean the kind of negative interest where they pay you to take a loan, rather than charge you. (That would be true negative interest.)
The central bankers are not scheming to give you negative interest on the loan you take out in order to entice you to take one. What they are looking at doing is charging you negative interest on the money you keep in the bank. (Negative interest is newspeak for “positive fees” that apply now to savings, not to loan rates. It’s only negative interest from their perspective in which banks used to pay you interest on your money, but now you will pay them a storage fee for inconveniencing them.)
It starts with the Federal Reserve’s approach to its member banks. The Fed, instead of paying banks interest for the money they keep in reserve accounts, will now charge them interest on that money in hopes that the banks will pass this along by charging you interest on the money you keep in deposit. While profits rarely trickle down, costs almost always do.
That way, you won’t want to keep any more money in the bank than you have to. The Fed’s goal is to wring the very last pennies out of the bank and get them into circulation — but not the bank’s pennies so much as yours. You see, the Fed gives banks money in hope that they will loan it out to get it in circulation; but the banks have said, “No, its easy money; we’d rather just hang on to it. So, the Fed wants to stimulate the banks into circulating this money now, by starting to slowly take it away from them if they don’t. Naturally, the banks will be inclined to pass that expense on to you if they can, and the Fed wants that, too, because really it hates savers. Savers do not participate fully in the debt-based scheme of our monetary system.
Banks, you see, no longer consider it a privilege to hold your money. While that was going out of style even before the Great Recession, it became increasingly a burden to have to take your money when the Federal Reserve was giving away money in far greater amounts. It wasted processing time on trivial sums compared to the huge flow of money the Fed was depositing for free.
Moreover, it was also a burden to loan you money when banks were now allowed to play the stock market where they could make a lot more a lot faster than your pokey little 4% interest housing loan would ever make for them. In fact, they flush those loans out of the system as fast as they can by shoving them off to some other Fascist (government-private) enterprise called Fannie Mae, who pays the banks for these miserable loans, which the Federal government agrees to insure with bailouts in case the paltry loans fail. Banks want nothing to do with them unless they provide easy pass-through revenue because they can quickly wholesale them to Fannie and her husband Freddie Mac. (We won’t even get into his adulterous affairs with government officials.)
Now, if you’re aware of the fact that the Federal Reserve has required banks to build up larger reserves in order to be more solvent in a crisis, this may all seem counter-intuitive. You may naturally ask, “Why would the Federal Reserve want the banks to lower their reserves? What if there is another crisis and a run on the bank and the bank needs those reserves to pay depositors on demand.”
Well, you see, the problem there is that you ask too many reasonable questions, for which the Fed has no reasonable answers. We’re now entering the Epocalypse, and it’s time to wring that money out of the banks; but more importantly out of you. There is not even any point in trying to think of a reasonable explanation for why the Fed would want to flush as much money out of the banks as it can now that we are entering theTwilight Zone of a crashing global economy.
I know I’m not going to bruise my brain trying to figure out why this makes sense just to help others avoid the pain. However, one easy answer comes to the top of my head, which is that, until you spend all the money you have in the bank, you’re not going to take out any more loans, and our monetary system is constructed around the principal that the only way the Federal Reserve gets money into the system is by making loans. It’s a debt-based financial system. It reached the end of its expansion programs when you no longer wanted any more loans, even if they were cheap because you had enough, thanks.
You see, you’ve been a good person — or thought you were — and have been saving for a rainy day. Janet Yellen and her friends at the Federal Reserve believe you should be punished for that. You’re gumming up the mechanism by which they get money flowing into the economy. The Fed’s mojo isn’t flowing because of you!
Even though almost none of the trillions of dollars Yellen & Co. have manufactured have gone into your hands because they all went into stocks and bonds owned largely by banksters, it’s still your fault as far as the Fed’s concerned. It’s important to get you — the “consumer” — to loosen up in order to get a little velocity going as money starts to move through the system.
“Consumer” is a word for “citizen” or “person” that I don’t particularly like because it sounds like your only value is how much you eat and how much real estate you take up. That, of course, is your only value to the Fed, wherein the idea is that the more you eat, the more real estate you will take up. You’ll need a bigger bed and a bigger car and a bigger house, more seats on the plane etc. Your value to your country increases the more rotund you get. But it all only works so long as you are stuffing down Tinkies and Tauruses. They need to get you Fed up.
As it turns out, Federal Reserve Economic Stimulus Plan I failed because you, the “consumer,” didn’t cooperate. Simpleton that you are, you acted in a manner considered prudent by ordinary citizens in times like these. The main thing you need to know is that the Fed’s plan didn’t fail because the Federal Reserve is wrong or because a debt-based monetary system is a totally screwed-up idea in the first place. It failed because you don’t eat enough.

Creature from Jekyll Island: A Second Look at the Federal Reserve. “Reads like a detective story. You’ll never trust a politician again – or a banker.”

US Federal Reserve Economic Stimulus Plan being tested

At this point, Federal Reserve Economic Stimulus Plan II is just an emergency plan. They haven’t taken it off the shelf yet; however, now that they see how the world is going after the first plan failed, they want to get it ready. So, for right now, the Fed is just testing the systems to see if it will fly. It has ordered national banks (those banks that participate in the Federal Reserve System) to run stress tests to see what will happen to the banks if these negative interest rates were applied. (They don’t care at all what will happen to you; but since the banks actually do own the Federal Reserve as shareholders in its twelve member reserve banks, they want to make sure the grid can handle this reverse flow of money before they throw the switch.)

As interest rates turn negative around the world, the Federal Reserve is asking banks to consider the possibility of the same happening in the U.S…. “The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities,” the central bank said in announcing the stress tests last week. (Bloomberg)

The banks are asked to test what will happen if interest rates remain negative through the first quarter of 2019. So, they are assuming a fairly long crash here.
The way this works is that the government, instead of paying interest on the US bonds it issues, will charge the banks interest. Don’t be too stressed out by the idea that this will be passed down to you anytime soon:

Fed officials have made clear that they are a long way from contemplating a reduction in rates below zero in their benchmark overnight policy rate.

How far off is “a long way.” Well, if we look for an example, Japanese officials made clear that they would never switch to negative interest rates … and then a week later they did it and only told people after the decision was made, shocking the world. If you can’t trust your banker, who can you trust? So, if “never” means about a week away, I would think “a long way” could be somewhere short of a week.
The Federal Reserve did not try this kind of economic stimulus plan coming out of the first dip of the Great Recession (which we are re-entering) because it considered it too dangerous and likely to cause major disruptions in money markets; but apparently they sense I may be right and that the second dip of the Great Recession could turn out to be the global Epocalypse. Thinking that there is an off chance that I could be right, they’re testing out the fire hoses and safety harnesses now.
Always best to be prepared in case Knave Dave knows what he’s talking about.

European Central Bank and the central banks of Switzerland, Sweden and Denmark have nudged some official lending rates negative without such repercussions, and Fed officials have publicly taken note.

It hasn’t created a catastrophe in Europe, they note (Of course,it also hasn’t worked. Europe is still in as much trouble as we are … maybe more.) The repercussions haven’t happened because banks have not passed along the fees on their reserves to “consumers,” i.e. “eating machines.” Of course, the only reason banks haven’t passed this cost along is that they are so afraid of the repercussions, which are that the “eating machines” will just take their money out of the bank in the form of cash, go on a hunger strike and sit on it. Thats why banks in Sweden and other parts of Europe are now strongly petitioning their governments to switch to being cashless societies so that there is no cash alternative to keeping your money in the bank Once the alternative is gone, the banks can turn on the fees.
Remember that the Fed has said this stress test of Economic Stimulus Plann II doesn’t mean they actually intend to do it. They will only do it if things get really, really bad. And, though I am saying things will get and are getting really, really bad, the Fed still borders on believing in its recovery. (Or some would say it tries to appear to.) To me, that delusion popped in December, so you can see this test as working out the bugs for an eventual roll-out.
Or as the president of the New York Federal Reserve Bank said,

“I suppose if the economy were to unexpectedly weaken dramatically, and we decided that we needed to use a full array of monetary policy tools to provide stimulus, it’s something that we would contemplate as a potential action.”

Lot of softeners added to that laundry list of caveats. Said another Fed official, more mater-of-factly:

Everybody is looking at how this works.

I’m sure they are. Everybody.

Secrets of the Temple: How the Federal Reserve Runs the Country. “In this penetrating study of the Federal Reserve Board in the Reagan era, Rolling Stone writer Greider views the “Fed” chairman as the “second most powerful” officer of government, the high priest of a temple as mysterious as money itself, its processes unknown to the public and yet to be fully understood by any modern president.”

So, how will the next Federal Reserve Economic Stimulus Plan work?

This work is in the public domain in the United States because it is a work prepared by an officer or employee of the United States Government as part of that person’s official duties under the terms of Title 17, Chapter 1, Section 105 of the US Code. See Copyright.
Federal Open Market Committee Meeting of the US Federal Reserve
You might note that there are two glaring holes in the Federals Reserve’s economic stimulus plan as presented so far:

  1. Why would banks acquire US bonds they have to pay to hold?
  2. Why wouldn’t you just take your money out of the bank if the banks tried to pass that cost on to you?

Not to worry. Problem number one has already been solved, and the Federal Reserve is already working to board up the exit doors in case you wish to use them.
#1) This is where the story really gets dark and deceptive and oh-so-eerily fun. You might think that banks and other investors would only pay to hold US treasuries after we are so deep into the Epocalypse that no other investment looks safe. Then banks and other financial institutions will beg to give their money to the US government to hold and gladly pay for the privilege just to make sure they don’t lose all of it.
The Federal Reserve and its partners in government, however, are not content to leave their novelties up to chance. What if their elaborate plan to entirely collapse the global economic system fails? (Or, if you’re not terribly into conspiracy theories, as I actually am not, what if they once believed that Federal Reserve Economic Stimulus Plan I was truly working and now they are seriously doubting that it is, so they preparing for the worst-case scenario?)
You see, I’m inclined to believe that all of the board and committee members of the Federal Reserve actually think they are brilliant and that they are necessary, but they are really bovine at best. Mostly, you see, I just find it far more fun to ridicule their bloated sense of their own bullish intelligence when their best plans fall to shreds, rather than to say they are a group of Hitler clones, though the latter is not entirely off the table as far as I’m concerned. However you get there, all roads still lead to Rome on this issue just by following the facts.
Economic Stimulus Plan I required that the Federal Reserve buy a huge number of US treasures. Now they don’t know what to do with them; but what if they could get people to pay to take them?
During the collapse, the Federal government also lost most of its major financiers — particularly China and Russia, who really don’t like us very much. That has left the Fed as the buyer of last resort for US government debt; but it’s pretty well tapped out. To attract new investors, the federal government would have to up the interest on its treasuries in order to roll over its monstrous debt. That would be a total disaster.
Thus, the Federal Reserve and the federal government recently formed a tag team to solve both problems by giving the Federal Reseve much broader power over the US financial system under a new plan, apparently already made law.
It has been noted by nearly everyone (especially after the crash of the Chinese stock market) that, when banks or other financial institutions buy a lot of stocks using loans, the whole financial system becomes more perilous. This is called “margin buying.”
(If you’re not familiar with margin buying in stocks, you may need the summary provided in the link above before continuing on, but otherwise, continue your enjoyment:)
Now, here it comes: The Obama administration made deals last fall with the G-20 to give the Federal Reserve power to change the regulated amount of stock margins from 50% to whatever it deems right whenever it deems the change is necessary. Ostensibly, this was to keep the stock market from becoming too top-heavy with debt because those margin calls that the broker can make on leveraged stock purchases can be devastating during a bear market, creating a situation where many margin calls are happening at a time in which investors have to sell off assets at fire-sale prices into a falling market in order to come up with the additional cash they need for collateral. The rapid-fire sales that come when multiple parties reach their margin limits bring the value of everyone’s assets down more, which snowballs into an all-out crash.
Before the stock market gets so heavily bought “on margin” that it becomes perilous, the Fed can start upping the margin requirement — the level at which investors have to cough up more cash to cover their loans. Call it “cough and cover” because it hits like a market flu.
This new power to change the rules of the game on a whim creates risk uncertainty, and markets hate uncertainty, as who knows when the Fed will change what the margin can be? It could happen when you are least prepared to cough and cover.
To offset this uncertainty concern — and here is where it gets really colorful and fun — all investors who use US treasuries as collateral for their bets in the stock market are IMMUNE from the Federal Reserve’s new power. Their margins cannot be changed on the basis that it is assumed US bonds are the least likely collateral on earth to lose value anyway.
Now, pause … and think about the simplicity and beauty of this new architecture. I think you can be certain that the United States and the Federal Reserve in collusion have just created a system in which a) the US government will have many guaranteed buyers for new issues of US debt because it is the only collateral on leveraged buying that keeps the Fed’s hands off; and b)  the Federal Reserve will be able to sell off the trillions of dollars of US treasuries it has purchased. But the best part of all is that the Federal government and the Federal Reserve will be able to make certain that people now pay the government to hold government bonds.
Oh, that’s sweet! Safe investments for retirement are no more. The more you save, the more you lose.
Connect the dots: Investors love, love, love to buy stocks with loans, loans, loans because they hope to use their money as a downpayment to make much more money off of other people’s money. No one loves other people’s money more than Wall Street and the banking cabal. So, if they only have to pay half a percent to give their money to government, they have locked their own money up someplace they feel safe (as their hedge on investments) and can still use the treasuries as collateral to go invest in the stock market with a loan from someone else!
Isn’t that wonderful? Let’s say you have $10,000,000 to invest. You don’t want to put all of it in stocks, so you invest half of it in US bonds. You still want to buy $1o,000,ooo worth of stocks, however, so you put your remaining $5,000,000 into a stock investment and use your $5,000,000 worth of US bonds as collateral on a loan for the other $5,000,000. Your plan is that the bonds go up in value if the stocks drop; but if the stock rise, you still made money off the bonds just by holding them.
If you think the federal government gave the Federal Reserve this new power in the stock market just to have a skilled and impartial referee in the market who can reduce the leverage in the market if they see people are going crazy with loans (as happened in the Chinese stock market), ask yourself why they would grant any provision for immunity from the plan at all … especially knowing that 95% of the market is likely to switch to using treasuries as collateral as the only thing that guarantees immunity from a sudden change in Fed policy.
In other words, granting this immunity, means everyone has a way to circumvent the Fed’s ability to curb margin buying, making the Fed’s new oversight powers almost totally ineffective, while pushing a lot of people into US treasuries. Suddenly paying half a percent to the Federal government to keep half of your money safe for you while you gamble with the other half, doesn’t look so bad.
You might think investors would just flee to other nations to avoid paying small interest in order to hold US bonds. Don’t worry, the new plan to give central banks this kind of regulatory power over national stock markets has already been made global. That’s why Obama and the other G-20 nations agreed to the plan together. (They have to have something to do when they get together, and this is one of the things they’ve been hatching. You might call it “conspiracy,” but now the more accurate thing to call it is simply law.)
#2) In case you think you’ll run for the exit, the Federal Reserve already has its best friends at Bloomberg working the populace and the politicians to end this problem. Bloomberg’s team of editors just published an article advocating that the US now become a cashless society. Yes, that idea, first predicted by radio preachers of apocalyptic prophecy back when I was just a kid sitting at my mother’s table while she made apple pies, is finally going mainstream.
(The really bad ideas digest more slowly, so it’s been nearly fifty years in the making. Even now the Fed knows it needs advocates for the plan who don’t look so long in the tooth; but the idea is rapidly becoming fact in a number of European nations and is being explored by China as well. Now that the Fed has gained the new powers described above, the war on cash is finally being taken public in the US. That’s why you’ve been hearing a lot more about other nations going this route. It’s the thing to do! It’s fashionable.)
Once societies become cashless, then banks can push the negative interest onto depositors without worrying about the ramifications because the other alternatives — gold, silver, jewels and collectibles — are not easily tradable unless you turn them back into cash. Not too many car dealers will give you a car in exchange for three fine diamonds. Not too many grocers will give you a cart full of produce in exchange for a roll of copper wire. With all of those things you pretty much have to trade them back into the bank’s cashless money in order to buy and sell.
So, you cannot just get out of the system. You’ll be stuck with their fees, which will be nominal, of course. For the first year. You see, your cash is no longer a burden to the banksters if you start paying them interest to hold it for you.
You are entering the Twilight Zone … otherwise know as the Epocalypse. If you thought Wonderland was a strange place — that upside-down world where bad news was good news for Wall Street — wait until you see the gravity-free realm of negative interest rates in which the banks go kaching! every time you look at your money. Excuse me, every time you look at your credits.

Morgan Stanley brutally cuts oil forecast as ‘rebalancing may not occur until mid-2017 or later w/ lower demand.

Negative Interest Rates Are the Next Stage in Global Stimulus

Since late 2008, central banks around the world have used unprecedented QE to try and stoke the global economy.
Then in June 2014, the ECB took it a step further. They went negative.
Zero short-term interest rates apparently weren’t enough. The ECB realized that if they couldn’t get banks to loan or consumers to spend, why not really light a fire under their ass and tell them: “if you’re not going to spend, you have to pay to keep your money in the bank!”
The Swiss thought this was a great idea and did the same in December 2014. Later on, the Danish and the Swedes joined the party. And last week, the Bank of Japan decided zero wasn’t enough, either – they went negative, too!
Japan can’t seem to get a grip on the fact that, as a country, they’ve been slowly walking off the plank since 1989 back when everyone (except us) thought they were going to take over the world. They actually started experimenting with QE back in 1997, right after the last of its baby boom peaked in spending as we forecast would happen. And in early 2013, they really stepped on the gas, ultimately tripling their QE!
And what does Japan have to show for all that?
In the 20 years between 1996 and 2015, Japan’s GDP has grown by a lousy 0.17% as the country’s been on-and-off in recession.
Inflation has been comatose as well at near-zero, only bouncing temporarily at first with the surge in QE in 2013 forward.
Japan has the highest debt ratios of any major country. Their 10-year bond yields recently sank to 0.045%, which adjusted for inflation is well into negative. And now they’ve officially adopted negative short-term interest rates of -0.10%.
Look, I get it. Japan’s desperate. Officials aren’t going to stand by and watch as their country continues to sink into oblivion. But how much longer can this delusional policy of bubble denial last?
Japan couldn’t get its GDP off the ground even after tripling its QE. This just proves that it takes more and more of a financial drug to create less and less of a high. These slightly negative interest rates will likely achieve very little.
But clearly negative interest rates are becoming the next evolution in global stimulus. Central banks have tried and tried to save the global economy from the next crash, and clearly they’re willing to do anything until they’re forced to let reality sink in.
Now, I’m sure the Fed will be next.
It’s become quite clear that the Fed got ahead of itself by raising rates in December. The markets have been getting swung up and down like a rag doll as oil crashed even lower than I expected, and as analysts have finally started to catch on that China isn’t all it’s cracked up to be.
And now Japan has thrown them a real curve ball. How can the Fed continue to raise rates when the rest of the world is stuck in reverse? Another rate hike would just mean a stronger dollar and more trouble when the global downturn finally hits us here and the Fed realizes it’s time to go negative.
Stocks in the U.S., Europe and Japan have already gone nowhere since late 2014. And right now the Dow just can’t seem to recover from a horrible January. It’s still possible we could see another bounce. After all, the financial markets love it when they get news of more crack from the central banks. But this looks like the beginning of the end.
I never thought that after the 2008 crash that central banks would go this far, this long. But desperation can only go so far. It’s doubtful they can keep it up for much longer.

Follow me on Twitter @harrydentjr

The only thing left driving US consumption is credit… its debt culture will one day fatally undermine that omnipotence.



I spotted this one yesterday on Twitter:
There’s nothing unusual about a big jump in credit usage during December – it’s called Christmas. You know, the celebration of the Nazarene’s birthday. You must remember it: the bloke who said ‘give all your money away if you want to get into Heaven’ has his birthday marked by the tradition of borrowing money you didn’t give away yet in order to celebrate his arrival on Earth.
What’s surprising is how much more credit was used to out-gift the Jones’s than the expert consensus expected – nearly one third more at just over $21 billion. But overall sales in December were the worst on a like-for-like basis since 2009: the season was saved from even deeper gloom by a last-minute buying spree. Such late surges are almost always credit-card dominated.
America is the most credit-addicted nation on earth, where the average credit card debt level per household is a whopping $15,355. Since 2010, the sum has actually dropped in real terms, but only by a very small amount: and you need to take account of how misleading that average can be.
1 in 5 Americans can’t get approval for a credit card, so when added to those who choose not to have a card at all, the ‘average’ is nearer to $18,500. Then you need to add on car loans at $12,300. The degree of dependence on credit is reflected by the fact that, while household income has grown by 26% since 2003, the cost of living has gone up 29% in that time period. And stuff like medical insurance, food and housing rises have been closer to 40%.
The more one drills down, the more scarey it looks: 1 in 3 American adults have debts that have been passed over to debt collection agencies. Three quarters of all household debt is in mortgages, a reflection of how borrowers have been into ‘extend and pretend’ for some time now.
This is the bottom line: as the credit information Cardhub notes, “Such levels of hugely expensive debt are unsustainable”. Without credit, auto sales would collapse. Without Zirp, the entire domestic economy would collapse. With too many more rate rises from the Fed, 44% of American household finances would collapse. As and when interest rates return to normal – say at 3-4% – two out of every five US tax dollars will go just on servicing the American national debt.
These realities are what makes the day-to-day debates on CNBC, CNN, BBCNews and Boombust TV a surreal thing to tune into. Not just surreal, but also abstract – because the terms used are in the syntax of yesteryear. The equivalent, in fact, of Mark Carney facing a media conference and announcing the devaluation of the Guinea.
Growth is one of these silly nouns. There hasn’t been any earned-income and expenditure growth in the US this century. It is overwhelmingly brought-forward consumption fuelled by debt.
Discretionary income is another. If 30% of your debt-spending goes on plastic-bashing and car loans, and 75% on mortgage repayments, not only does that come to 5% more than your credit line – hence the 1-in-3 stat above – it also amounts to an average figure of $120,000 a year. The median US income today is around $53,700. The vast majority of Americans have negative discretionary income….aka, debt.
Savings ratio is an equally potty measure in that context. 62% of Americans have less than $1000 in savings. 76% of Americans describe themselves as “living from paycheck to paycheck”. Just under 50% of US households have no retirement savings at all.
Recession – as in “we are not in a recession and we are not heading for one” – is probably the most bizarre assertion of the lot. Without QE (which the Fed ‘counts’ as gdp), Zirp (and now Nirp) and credit based brought-forward consumption, the United States economy wouldn’t be in recession: it would be flatlining.
The focus on America in this piece is quite deliberate, but has the best of intentions. The United States with $17.4 trillion has a 22.5% share of global gdp. Troubled China at 14% (and falling) is still way behind. The EU is closer, but not a Sovereign State.
In real (by which I mean ‘get real’) terms, the wealth spread, demographics, debt levels and credit culture in America means the US élite will never allow ‘rates’ to return to anywhere near normal. To do so would be to bring on the following inevitabilities:
  1. Crashed US domestic economy unable to maintain sales…in a country long since over-dependent on such sales given its expensive export dollar
  2. Crashed US banking system unable to call in debt assets
  3. Exploding trade deficits as pauperised US consumers buy Asian
  4. Disastrous retail & manufacturing bankruptcy levels
  5. Trebled unemployment & consequent social instability
  6. Increased taxes to service Sovereign debt
  7. US Sovereign default
  8. Given massive levels of US imports, total collapse of the global economy.
I do realise people think I’m bonkers for sticking to this view, but we have an alternative to US hegemony developing on the planet, and before too long that axis will be empowered in several ways:
  • It can renege on Dollar-denominated debt. This comes under the social resistance heading of “they can’t send all of us to jail”
  • It can massively reduce US petrodollar income
  • It can up rates to attract investors desperate to preserve their wealth
  • It can cut Washington out of future trade deals – just at a time the US is most likely to need such deals.

The US is running the show in 2016. But its debt culture will one day fatally undermine that omnipotence. Without drastically reforming that culture (and learning new foreign policy manners) the US will drag itself over the cliff faster than most people think.

Deutsche Bank is shaking to its foundations – is a new banking crisis around the corner?

by Secular Investor
Deutsche Bank Image
The earnings season has started, and several major banks in the Eurozone have already reported on how they performed in the fourth quarter of 2015, and the entire financial year. Most results were quite boring, but unfortunately Deutsche Bank once again had some bad news.
Just one week before it wanted to release its financial results, it already issued a profit warning to the markets, and the company’s market capitalization has lost in excess of 5B EUR since the profit warning, on top of seeing an additional 18B EUR evaporate since last summer. Deutsche Bank is now trading at less than 50% of the share price it was trading at in July last year.
Deutsche Bank chart
And no, the market isn’t wrong about this one. The shit is now really hitting the fan at Deutsche Bank after having to confess another multi-billion euro loss in 2015 on the back of some hefty litigation charges (which are expected to persist in the future). And to add to all the gloom and doom, even Deutsche Bank’s CEO said he didn’t really want to be there . Talk about being pessimistic!
Right after Germany’s largest bank (and one of the banks that are deemed too big to fail in the Eurozone system) surprised the market with these huge write-downs and high losses, the CDS spread  (‘Credit Default Swap’) started to increase quite sharply. Back in July of last year, when Deutsche Bank’s share price reached quite a high level, the cost to insure yourself reached a level of approximately 100, but as you can see in the next image, the CDS spread started to increase sharply since the beginning of this year. It reached a level of approximately 200  in just the past three weeks, indicating the market is becoming increasingly nervous about Deutsche’s chances to weather the current storm.
CDS Deutsche Bank
Let’s now take a step back and explain why the problems at Deutsche Bank could have a huge negative impact on the world economy. Deutsche has a huge exposure to the derivatives market, and it’s impossible, and then we mean LITERALLY impossible for any government to bail out Deutsche Bank should things go terribly wrong. Keep in mind the exposure of Deutsche Bank to its derivatives portfolio is a stunning 55B EUR, which is almost 20 times (yes, twenty times) the GDP of Germany and roughly 5 times the GDP of the entire Eurozone! And to put things in perspective, the TOTAL government debt of the US government is less than 1/3rd of Deutsche Bank’s exposure.
Indeed, oops. And the worst part of all of this, is the fact the problems at Deutsche Bank are slowly penetrating the other major financial institutions. Have a look at the CDS spread of Banco Santander (from 109 in December to 170 now).
CDS Banco Santander Deutsche Bank
Source: ibidem
And Intesa Sanpaolo? From 82 in November to 147 right now.
CDS Intesa Deutsche Bank
Source: Ibidem
Something is rumbling in Europe’s intestines, and Deutsche Bank is leading the pack towards another huge financial crisis. The CDS spreads of literally ALL major European banks have posted huge changes in the past 3-4 weeks, and if you throw in the most recent messages from Citibank, stating the world economy is trapped in a death spiral, you might want to think about protecting yourself against yet another financial meltdown.

Preppers – Foot Care is a Top Priority

by Ruby Burks
I have a confession to make. I was born with extremely high arches and an obscene love of boots in all their variations. Although my feet don’t quite meet the standards for Pes Cavus (who’s literal translation is “hollow foot”), the footprint I leave behind, were I to stand on a piece of paper with a wet foot, is pretty close. The ball of my foot and my heel can be plainly seen, but there is only a thin line in the print from the outer side of my foot (lateral aspect) connecting the two. The opposite foot structure from mine is a completely flat foot.
foot arch types1
Both of these variations in foot structure tend to run in families (sorry, kids, you got that from me) and can wreak havoc over time on “blue collar feet”. Being on my feet all day caring for animals, jumping out of semi’s and tractors, repeatedly pushing down with my foot on a shovel to turn earth or muck out stalls, hiking up and own the hills here in the Sierras, and carrying heavy sacks of feed on my shoulder while wearing improper footwear (for my foot structure) all added up. I could tell you how to properly trim almost any animal’s hooves, the importance of properly fitting shoes on a horse, how to treat thrush, how to prevent and treat hutch burn in rabbits, and even how to treat bumblefoot in chickens. But until a few years ago, when I was diagnosed with severe, chronic plantar fasciitis, I didn’t know a thing about my own feet, nor did I appreciate the importance of their care. Whether you’re farming or concerned aboutwinter wilderness survival taking care of your feet should be one of your top priorities.

Foot Injuries vs Foot Conditions/Diseases

A foot injury is pretty self-explanatory. Something acute has happened- you’ve stepped on a sharp object, developed a wickedly painful blister, or broken a bone. Foot conditions, on the other hand, are usually things you’re born with that may or may not have any effect for some time. The problem is, it’s a cumulative effect, so addressing the underlying condition and caring for it properly before an issue arises, is much more affective than trying to resolve it after the fact.
As the saying goes, an ounce of prevention is worth a pound of cure, and this is certainly the case in foot problems. There’s a myriad of conditions and diseases than can affect the foot, but for this discussion, I’m going to focus on the ones most often encountered by “blue collar feet”: plantar fasciitis, sesamoid injuries, and their treatments.

Plantar Fasciitis and Heel Pain

pf 1
Anyone can develop plantar fasciitis, the most common cause of heel pain, but you’re at greater risk if the arch of your foot is very high or very flat, are overweight, have very tight calf muscles that make it difficult for you to flex your foot back so that your toes are point up towards your shins, repetitive impact injury (like jumping out of semis and tractors), or a new or sudden increase in activity (like bugging out on foot or the increased farm work that spring season brings). It can start off as pain in the heel, especially upon waking (post-static dyskinesia). Oftentimes, the pain and stiffness in the heel will go away after a few minutes of walking. As it progresses and is left untreated, the heel also becomes very painful after exertion. If you ignore these early warning signs, as I did, the pain can spread across the bottom of your foot from your heel to the ball of your foot, is constant, and is so painful that bearing any weight on your feet becomes impossible. It can affect one or both feet.

What is Plantar Fasciitis?

Plantar fasciitis is literally the inflammation and irritation of the plantar fascia, the strong band of tissue that supports the arch of your foot. To picture where this strong band of tissue is, imagine your bare foot print. The band looks something like a tree with the bottom of the trunk starting at the back of your heel print (called “the insertion point”), the trunk of the tree running up your arch, and the branches spreading out across the ball of your foot to each toe. Unlike other connective tissues in your body, the plantar fascia doesn’t stretch. Instead, it’s designed to absorb the high strains and stresses we place on our feet, but if too much stress is placed on it, it tears the tissue which causes stiffness and inflammation. Dr. Julia Overstreet, a podiatrist, high-risk foot and lower extremity specialist, has a very good video on the subject here.
Mild plantar fasciitis can be treated much like any other sprain or strain: over the counter (OTC) non-steroidal anti-inflammatory drugs (NSAIDS), an ice pack, and rest. Many doctors recommend stretching the affected area by doing a calf stretch and plantar fascia stretch.
  • Calf stretch – Lean forward against a wall with one knee straight and the heel on the ground. Place the other leg in front, with the knee bent. To stretch the calf muscles and the heel cord, push your hips toward the wall in a controlled fashion. Hold the position for 10 seconds and relax. Repeat this exercise 20 times for each foot. A strong pull in the calf should be felt during the stretch.
  • Plantar fascia stretch – This stretch is performed in the seated position. Cross your affected foot over the knee of your other leg. Grasp the toes of your painful foot and slowly pull them toward you in a controlled fashion. If it is difficult to reach your foot, wrap a towel around your big toe to help pull your toes toward you. Place your other hand along the plantar fascia. The fascia should feel like a tight band along the bottom of your foot when stretched. Hold the stretch for 10 seconds. Repeat it 20 times for each foot. This exercise is best done in the morning before standing or walking. (Source)
However, I completely agree with Dr. Overstreet that these exercises have little to no affect. The fascia doesn’t stretch, so you’re really just stretching the tissues surrounding them. This might work for very mild cases of plantar fasciitis, but it doesn’t work once you’ve allowed it to go beyond that.
Plantar fasciitis is a mechanical issue and as such should be treated with devices that help support the mechanics of your foot. That means finding an arch support that will fit your arch and keep it from being stressed. Low dye taping is an economical short-term treatment that can get you back on your feet long enough to get out of an emergency situation or to offer relief until you can see a podiatrist. Dr. David Hughes, podiatrist with The San Antonio Orthopaedic Group, has an excellent video on how to properly tape a foot in the low dye method for plantar fasciitis relief here.
A more permanent solution is to get a pair of OTC orthotics. Many think that the massaging gel foot inserts that you find at the pharmacy will help, but they won’t. Instead, go to a sports shoe store or a podiatrists office (you don’t need an appointment- many of them carry high-quality orthotics that they sell over the counter) and get your feet fitted for orthotics. Why get fitted? Because everyone’s feet are different, each arch is different, and the point is to get an orthotic that closely matches the arch of your foot to give it maximum support. You’re looking for something like this.

Examine Your Footwear

Now is a good time to examine your footwear, too. Shoes, like tires on your car, have a mileage life. Shoes will usually last about 300 miles. It doesn’t matter how pretty they still look on the outside- after 300 miles, the inner structure starts breaking down and will no longer support your feet. For maximum support, choose lace-up shoes. Slip-on shoes won’t hug your feet well enough to keep the arch support snug against your arch. There’s a reason the military provides all their soldiers with lace-up boots! This video gives you a good overview on how to evaluate the quality of the construction of a shoe or boot.
I love the convenience of my slip-on muck boots, but they had to go. My beautiful cowboy boots are now reserved for nights out on the town. Flip-flops and stilettos? Fuggedaboutit! You’ll probably need to remove the insole that came with your shoes. Most of them now have their own support and it will interfere with the custom fit of your new orthotic. Trying to put the orthotic in while the old insole is still in place will also make your shoes too small. If you find that your lace-up boots are too tight even after removing the old insole and replacing it with the new orthotic, you can try lacing them differently for a more comfortable fit. A video on alternative lacing methods can be found here.

Sesamoid Injuries

This is another common injury of “blue collar feet” that take a pounding. Most joint bones connect to each other, but some do not, like your knee cap. The sesamoid bone in your foot is like the knee cap of your big toe. It’s in the underside of your foot where the big toe connects to your foot. Bruising of the sesamoid in your foot is more common (I’m looking at you, stiletto pumps!), but sesamoiditis (inflammation of the tendons surrounding the sesamoids) happens over time with repeated stress. Ironically, it was the quality boots and the custom-fit orthotics that made me more susceptible to sesamoiditis (through no fault of either device).
I took advantage of the increased support and felt indestructible. I was jumping off of things and sitting in bent-knees, toes-flexed-backwards position for long lengths of time. By the end of the day, it felt like a fire had been lit at the base of my big toe and stretching it backwards, even a little, was very painful.
If I had fractured the sesamoid, the pain would have been immediate. Fortunately, the treatment for sesamoiditis and fracture is the same- first, stop doing whatever it is that made it hurt. Next, use NSAIDS, rest, and ice the area to bring the inflammation down. Taping the big toe so that it remains slightly bent down or wearing a soft J-shaped pad to cushion it can sometimes offer relief (but really, you should just stay off of it). If the symptoms persist, you may need to wear a short leg fracture brace for four to six weeks to let the fracture heal.


Whether you’re thinking about preps for your bug-out or your feet are putting in a hard day’s work, having the proper support for them and quality footwear is a must. Shoes wear out after about 300 miles and foot problems can stop you in your tracks. Knowing what to look for in the construction of quality footwear and how to take care of the unique structure of your feet will insure you remain mobile in emergency situations or can keep you earning a living. As Leonardo da Vinci said, “The human foot is a masterpiece of engineering and a work of art”.  Stay tuned!

PayPal 2016 Big Game Commercial - “There’s a New Money in Town”

Global Economy On The Brink Of Collapse! If You Were On Wall Street Today, You Would Smell The Rank Stench Of Pessimism.

If you were on Wall Street today, you would smell the rank stench of pessimism. Citigroup strategist Jonathan Stubbs was quoted in a recent report stating “The world appears to be trapped in a circular reference death spiral.”
Meanwhile, The Chinese company, Chongqing Casin Enterprise Group is attempting to acquire the Chicago Stock Exchange. A definitive deal requiring regulatory approval that is expected to be completed in the second half of the year. Bloomberg reports “The Chicago Stock Exchange — a subsidiary of CHX Holdings Inc. — is minority-owned by a group including E*Trade Financial Corp., Bank of America Corp., Goldman Sachs Group Inc. and JPMorgan Chase & Co., according to the company. The minority shareholders are also selling their stake…”

German arm of Canada’s Maple Bank shut down

The German financial sector watchdog, BaFin, said today it has shut down the German arm of Canadian lender Maple Bank until further notice due to looming over-indebtedness.
Bafin said in a statement that it had imposed a so-called "moratorium" on Maple Bank GmbH, closing it down for customers and barring it from taking payments not related to redemption of debt.
Because the lender is tiny with total net assets of just €5 billion, it poses no threat to the financial stability of the country, BaFin said.
Maple Bank is known in Germany because it helped luxury sports carmaker Porsche in its ultimately failed attempt to take over auto giant Volkswagen in 2008.
It specialises in equities and derivatives trading and had €2.6 billion in liabilities mainly with institutional clients as of February 4th, BaFin said.
Because it is having to set aside tax provisions, there is a threat of over-indebtedness, it added.
In September, German prosecutors searched offices and residences linked to Maple Bank in a probe of serious tax evasion and money laundering connected to dividend stripping

Cameron is sowing the seeds of fascism

Cameron was crowing this week over his ‘victory’ on the issue of migrant benefits. But EU leaders should be extremely wary of what has been agreed.
Cameron emerged seemingly triumphant from this week’s meeting with European Council President Donald Tusk. As expected, three of his four criteria for supporting Britain’s continued membership in the EU – that is, the three largely meaningless ones – were more or less agreed. But Cameron also claimed victory over the one that was expected to be the sticking point: a four-year ban on in-work benefits for new EU migrants. Under existing treaties, EU nationals working in the UK are entitled to be treated the same as British citizens. However, Tusk has now agreed that Britain should be allowed to apply an “emergency brake,” which would block benefits to EU workers in Britain in certain ‘emergency’ circumstances. As yet, exactly what circumstances would qualify as ‘emergencies’ remains undefined, but according to Reuters, what Cameron and Tusk have in mind is the country’s “welfare system [being] under excessive strain”.
If agreed to at the upcoming EU summit on February 18, this would set a dangerous precedent. Such a deal would establish the principle that a country’s supposedly binding treaty obligations can be overridden any time a government can claim its public services are under pressure.
An “emergency brake” procedure, in fact, already applies in relation to certain aspects of EU migrant policy; member states can temporarily stop accepting refugees, for example, on grounds of ‘national security’. However, Cameron’s argument that such a brake can now be triggered simply by pointing to pressure on public services constitutes a significant lowering of the bar. After all, in an age of recession, austerity and systematic corporate tax avoidance, which country does not already face “excessive strain” on its public services?
It is not difficult to see how this precedent is likely to be used by EU member states to justify the shredding of their obligations under other treaties they are signatories to – such as the 1951 Refugee Convention. Cameron’s ‘reform’ would give any EU state a legal basis for arguing that they are free to block refugees entering their countries so long as they can point a strain on public services.
Combined with Cameron’s successful strong-arming of the EU last year to adopt a policy of blowing up refugee boats, this sets the stage for a total inversion of EU refugee policy: from ostensibly giving refuge to those fleeing war and persecution to actually intensifying the persecution and war on such refugees by blocking their access to safe havens, tearing up the 1951 Convention and bombing their boats.
This would be particularly gratuitous given the EU’s heavy responsibility for creating these refugees in the first place. EU member states (chiefly Britain and France) have been the prime supporters and sponsors of the wars on Libya and Syria (even more so than the USA); and it was the EU who agreed in 2013 to allow arms sales to the Syrian terror groups now destabilizing the country. This is in addition to the EU’s disastrous free trade policies, which are set to bankrupt entire swathes of industry in neighboring countries such as Ukraine and Egypt, forcing millions into unemployment and destitution. This is not even to mention Europe’s historic role in the global warming that is likely to create perhaps the biggest refugee exodus the world has ever seen.
Europe should be demonstrating its commitment to the 1951 Refugee Convention by developing and extending the quota system agreed last summer, and pushing recalcitrant nations such as Britain to accept it, rather than setting the stage for reneging on those commitments altogether. And if it wants to reduce refugee numbers, it would do well to re-think those policies, which it still continues to pursue, which have done so much to create them.
The ‘over-riding’ of treaty obligations is not the only precedent that is being set by this deal. By allowing national governments to discriminate against migrants, it is highly unlikely that this discrimination will end with a temporary ban on in-work benefits. Rather, as economic conditions worsen, it will pave the way for ever more draconian measures being taken against non-nationals; indeed, this deal will likely be seen by future historians as having opened the floodgates to a fully two-tier, if not outright apartheid, labor system.
© Marko Djurica
If migrants can be denied in-work benefits, why would we not, further down the line, hear calls to exempt migrants from the minimum wage, for example? By the by, such exemptions, far from being a disincentive to migration, would actually be an incentive for companies to recruit more migrants. Even in their current proposed form they create such an incentive, especially if companies are also to be exempt from paying migrants ‘in work benefits’ such as sick pay, maternity cover and so on.
Finally, on an ideological level, the whole framing of the debate serves to firmly implant the link in people’s minds between collapsing public services and immigration. The reality is that it is not immigrants who are creating the ‘strain’ in British public services; it is the slow breakdown of the global capitalist economy combined with the government’s commitment to financing the debt incurred by the 2008 bankers’ bailout – the biggest transfer of wealth from public to private hands since the enclosures – at the expense of investment in public goods. Yet the constant, daily, association of the disastrous consequences of ‘austerity’ with immigration is carving its way onto the public imagination in an increasingly fascistic manner.
Creating this false association between collapsing living standards and immigration is a key strategic component of the government’s preparation for the next economic crash. Given that none of the contradictions that led to the 2007-8 crash have been resolved, such a crash is inevitable, and it is not only Marxists who recognize it. Last month, Royal Bank of Scotland economists warned of a “cataclysmic year” urging its clients in the bank to “Sell everything except high quality bonds.
This is about return of capital, not return on capital,” they noted, adding, “in a crowded hall, exit doors are small…China has set off a major correction and it is going to snowball. Equities and credit have become very dangerous.” London, in particular, it argued, “is vulnerable to a negative shock. All these people who are long [buyers of] oil and mining companies thinking that the dividends are safe are going to discover that they’re not at all safe… Risks are high.
JP Morgan are also worried, advising their clients to “sell on any bounce” according to the Guardian. So too are Albert Edwards, a Societe Generale expert, who suggests that the US market may be set to sink by 75 percent, and Harry Dent, who correctly predicted the 2001 dotcom crash, the 2008 subprime crisis and China’s recent stock market decline.
Dent believes that “Housing prices will start to fall by as much as 40 percent over several years… unemployment will surge… many state and municipal governments will be forced into default…and the federal deficit will balloon to as high as $1.5 to $2 trillion…The recession is NOT over yet. $100 trillion of the $225 trillion in loans, bonds and stocks across the world…will simply disappear.”
When this happens, it will be much harder than last time to deal with. As the Telegraph noted recently, paraphrasing a report by HSBC’s Stephen King, “we have used up almost all our fiscal and monetary ammunition, and may face the next global economic downturn with no lifeboats whenever it comes.
The consequences are almost unthinkable. And the British government, at least, wants to ensure that we are ready to blame, not the most culpable, but the most vulnerable.
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.

The IMF Changes its Rules to Isolate China and Russia

Dr. Hudson discusses his paper, The IMF Changes Its Rules To Isolate China and Russia; implications of the four policy changes at the International Monetary Fund in its role as enforcer of inter-government debts; the Shanghai Cooperation Organization (SCO) as an alternative military alliance to NATO; the Asian Infrastructure Investment Bank (AIIB) threatens to replace the IMF and World Bank; the Trans Pacific Partnership Treaty; the China International Payments System (CIPS); WTO investment treaties; Ukraine and Greece; different philosophies of development between east and west; break up of the post WWII dollarized global financial system; the world dividing into two camps.
A nightmare scenario of U.S. geopolitical strategists is coming true: foreign independence from U.S.-centered financial and diplomatic control. China and Russia are investing in neighboring economies on terms that cement Eurasian integration on the basis of financing in their own currencies and favoring their own exports. They also have created the Shanghai Cooperation Organization (SCO) as an alternative military alliance to NATO.[1]And the Asian Infrastructure Investment Bank (AIIB) threatens to replace the IMF and World Bank tandem in which the United States holds unique veto power.
More than just a disparity of voting rights in the IMF and World Bank is at stake. At issue is a philosophy of development. U.S. and other foreign investment in infrastructure (or buyouts and takeovers on credit) adds interest rates and other financial charges to the cost structure, while charging prices as high as the market can bear (think of Carlos Slim’s telephone monopoly in Mexico, or the high costs of America’s health care system), and making their profits and monopoly rents tax-exempt by paying them out as interest.
By contrast, government-owned infrastructure provides basic services at low cost, on a subsidized basis, or freely. That is what has made the United States, Germany and other industrial lead nations so competitive over the past few centuries. But this positive role of government is no longer possible under World Bank/IMF policy. The U.S. promotion of neoliberalism and austerity is a major reason propelling China, Russia and other nations out of the U.S. diplomatic and banking orbit.
On December 3, 2015, Prime Minister Putin proposed that Russia “and other Eurasian Economic Union countries should kick-off consultations with members of the SCO and the Association of Southeast Asian Nations (ASEAN) on a possible economic partnership.”[2]Russia also is seeking to build pipelines to Europe through friendly secular countries instead of Sunni jihadist U.S.-backed countries locked into America’s increasingly confrontational orbit.
Russian finance minister Anton Siluanov points out that when Russia’s 2013 loan to Ukraine was made, at the request of Ukraine’s elected government, Ukraine’s “international reserves were barely enough to cover three months’ imports, and no other creditor was prepared to lend on terms acceptable to Kiev. Yet Russia provided $3 billion of much-needed funding at a 5 per cent interest rate, when Ukraine’s bonds were yielding nearly 12 per cent.”[3]
What especially annoys U.S. financial strategists is that this loan by Russia’s National Wealth Fund was protected by IMF lending practice, which at that time ensured collectability by withholding credit from countries in default of foreign official debts, or at least not bargaining in good faith to pay. To cap matters, the bonds are registered under London’s creditor-oriented rules and courts.
Most worrisome to U.S. strategists is that China and Russia are denominating their trade and investment in their own currencies instead of dollars. After U.S. officials threatened to derange Russia’s banking linkages by cutting it off from the SWIFT interbank clearing system, China accelerated its creation of the alternative China International Payments System (CIPS), and its own credit card system to protect Eurasian economies from the threats made by U.S. unilateralists.
Russia and China are simply doing what the United States has long done: using trade and credit linkages to cement their diplomacy. This tectonic geopolitical shift is a Copernican threat to New Cold War ideology: Instead of the world economy revolving around the United States (the Ptolemaic idea of America as “the indispensible nation”), it may revolve around Eurasia. As long as global financial control remains grounded in Washington at the offices of the IMF and World Bank, such a shift in the center of gravity will be fought with all the power of an American Century (and would-be American Millennium) inquisition.
Any inquisition needs a court system and enforcement vehicles. So does resistance to such a system. That is what today’s global financial, legal and trade maneuvering is all about. And that is why today’s world system is in the process of breaking apart. Differences in economic philosophy call for different institutions.
To U.S. neocons the specter of AIIB government-to-government investment creates fear of nations minting their own money and holding each other’s debt in their international reserves instead of borrowing dollars, paying interest in dollars and subordinating their financial planning to the U.S. Treasury and IMF. Foreign governments would have less need to finance their budget deficits by selling off key infrastructure. And instead of dismantling public spending, a broad Eurasian economic union would do what the United States itself practices, and seek self-sufficiency in banking and monetary policy.
Imagine the following scenario five years from now. China will have spent half a decade building high-speed railroads, ports, power systems and other construction for Asian and African countries, enabling them to grow and export more. These exports will be coming online to repay the infrastructure loans. Also, suppose that Russia has been supplying the oil and gas energy for these projects on credit.
To avert this prospect, suppose an American diplomat makes the following proposal to the leaders of countries in debt to China, Russia and the AIIB: “Now that you’ve got your increased production in place, why repay? We’ll make you rich if you stiff our adversaries and turn back to the West. We and our European allies will support your assigning your nations’ public infrastructure to yourselves and your supporters at insider prices, and then give these assets market value by selling shares in New York and London. Then, you can keep the money and spend it in the West.”
How can China or Russia collect in such a situation? They can sue. But what court in the West will accept their jurisdiction?
That is the kind of scenario U.S. State Department and Treasury officials have been discussing for more than a year. Implementing it became more pressing in light of Ukraine’s $3 billion debt to Russia falling due by December 20, 2015. Ukraine’s U.S.-backed regime has announced its intention to default. To support their position, the IMF has just changed its rules to remove a critical lever on which Russia and other governments have long relied to ensure payment of their loans.
The IMF’s role as enforcer of inter-government debts
When it comes to enforcing nations to pay inter-government debts, the IMF is able to withhold not only its own credit but also that of governments and global bank consortia participating when debtor countries need “stabilization” loans (the neoliberal euphemism for imposing austerity and destabilizing debtor economies, as in Greece this year). Countries that do not privatize their infrastructure and sell it to Western buyers are threatened with sanctions, backed by U.S.-sponsored “regime change” and “democracy promotion” Maidan-style. The Fund’s creditor leverage has been that if a nation is in financial arrears to any government, it cannot qualify for an IMF loan – and hence, for packages involving other governments. That is how the dollarized global financial system has worked for half a century. But until now, the beneficiaries have been U.S. and NATO lenders, not been China or Russia.
The focus on a mixed public/private economy sets the AIIB at odds with the Trans-Pacific Partnership’s aim of relinquishing government planning power to the financial and corporate sector, and the neoliberal aim of blocking governments from creating their own money and implementing their own financial, economic and environmental regulation. Chief Nomura economist Richard Koo, explained the logic of viewing the AIIB as a threat to the U.S.-controlled IMF: “If the IMF’s rival is heavily under China’s influence, countries receiving its support will rebuild their economies under what is effectively Chinese guidance, increasing the likelihood they will fall directly or indirectly under that country’s influence.”[4]
This was the setting on December 8, when Chief IMF Spokesman Gerry Rice announced: “The IMF’s Executive Board met today and agreed to change the current policy on non-toleration of arrears to official creditors.” Russian Finance Minister Anton Siluanov accused the IMF decision of being “hasty and biased.”[5] But it had been discussed all year long, calculating a range of scenarios for a sea change in international law. Anders Aslund, senior fellow at the NATO-oriented Atlantic Council, points out:
The IMF staff started contemplating a rule change in the spring of 2013 because nontraditional creditors, such as China, had started providing developing countries with large loans. One issue was that these loans were issued on conditions out of line with IMF practice. China wasn’t a member of the Paris Club, where loan restructuring is usually discussed, so it was time to update the rules.
The IMF intended to adopt a new policy in the spring of 2016, but the dispute over Russia’s $3 billion loan to Ukraine has accelerated an otherwise slow decision-making process.[6]
The target was not only Russia and its ability to collect on its sovereign loan to Ukraine, but China even more, in its prospective role as creditor to African countries and prospective AIIB borrowers, planning for a New Silk Road to integrate a Eurasian economy independent of U.S. financial and trade control. The Wall Street Journal concurred that the main motive for changing the rules was the threat that China would provide an alternative to IMF lending and its demands for crushing austerity. “IMF-watchers said the fund was originally thinking of ensuring China wouldn’t be able to foil IMF lending to member countries seeking bailouts as Beijing ramped up loans to developing economies around the world.”[7] So U.S. officials walked into the IMF headquarters in Washington with the legal equivalent of suicide vests. Their aim was a last-ditch attempt to block trade and financial agreements organized outside of U.S. control and that of the IMF and World Bank.
The plan is simple enough. Trade follows finance, and the creditor usually calls the tune. That is how the United States has used the Dollar Standard to steer Third World trade and investment since World War II along lines benefiting the U.S. economy. The cement of trade credit and bank lending is the ability of creditors to collect on the international debts being negotiated. That is why the United States and other creditor nations have used the IMF as an intermediary to act as “honest broker” for loan consortia. (“Honest broker” means being subject to U.S. veto power.) To enforce its financial leverage, the IMF has long followed the rule that it will not sponsor any loan agreement or refinancing for governments that are in default of debts owed to other governments. However, as the afore-mentioned Aslund explains, the IMF could easily
change its practice of not lending into [countries in official] arrears … because it is not incorporated into the IMF Articles of Agreement, that is, the IMF statutes. The IMF Executive Board can decide to change this policy with a simple board majority. The IMF has lent to Afghanistan, Georgia, and Iraq in the midst of war, and Russia has no veto right, holding only 2.39 percent of the votes in the IMF. When the IMF has lent to Georgia and Ukraine, the other members of its Executive Board have overruled Russia.[8]
After the rules change, Aslund later noted, “the IMF can continue to give Ukraine loans regardless of what Ukraine does about its credit from Russia, which falls due on December 20.[9]
The IMF rule that no country can borrow if it is in default to a foreign government was created in the post-1945 world. Since then, the U.S. Government, Treasury and/or U.S. bank consortia have been party to nearly every major loan agreement. But inasmuch as Ukraine’s official debt to Russia’s National Wealth Fund was not to the U.S. Government, the IMF announced its rules change simply as a “clarification.” What its rule really meant was that it would not provide credit to countries in arrears to the U.S. government, not that of Russia or China.
It remains up to the IMF board – and in the end, its managing director – whether or not to deem a country creditworthy. The U.S. representative can block any foreign leaders not beholden to the United States. Mikhail Delyagin, Director of the Institute of Globalization Problems, explained the double standard at work: “The Fund will give Kiev a new loan tranche on one condition: that Ukraine should not pay Russia a dollar under its $3 billion debt. … they will oblige Ukraine to pay only to western creditors for political reasons.”[10]
The post-2010 loan packages to Greece are a case in point. The IMF staff saw that Greece could not possibly pay the sums needed to bail out French, German and other foreign banks and bondholders. Many Board members agreed, and have gone public with their whistle blowing. Their protests didn’t matter. President Barack Obama and Treasury Secretary Tim Geithner pointed out that U.S. banks had written credit default swaps betting that Greece could pay, and would lose money if there were a debt writedown). Dominique Strauss-Kahn backed the hard line US- European Central Bank position. So did Christine Lagarde in 2015, overriding staff protests.[11]
Regarding Ukraine, IMF executive board member Otaviano Canuto, representing Brazil, noted that the logic that “conditions on IMF lending to a country that fell behind on payments [was to] make sure it kept negotiating in good faith to reach agreement with creditors.”[12] Dropping this condition, he said, would open the door for other countries to insist on a similar waiver and avoid making serious and sincere efforts to reach payment agreement with creditor governments.
A more binding IMF rule is Article I of its 1944-45 founding charter, prohibiting the Fund from lending to a member state engaged in civil war or at war with another member state, or for military purposes in general. But when IMF head Lagarde made the last loan to Ukraine, in spring 2015, she merely expressed a vapid token hope there might be peace. Withholding IMF credit could have been a lever to force peace and adherence to the Minsk agreements, but U.S. diplomatic pressure led that opportunity to be rejected. President Porochenko immediately announced that he would step up the civil war with the Russian-speaking population in the eastern Donbass region.
The most important IMF condition being violated is that continued warfare with the East prevents a realistic prospect of Ukraine paying back new loans. The Donbas is where most Ukrainian exports were made, mainly to Russia. That market is being lost by the junta’s belligerence toward Russia. This should have blocked Ukraine from receiving IMF aid. Aslund himself points to the internal contradiction at work: Ukraine has achieved budget balance because the inflation and steep currency depreciation has drastically eroded its pension costs. But the resulting decline in the purchasing power of pension benefits has led to growing opposition to Ukraine’s post-Maidan junta. So how can the IMF’s austerity budget be followed without a political backlash? “Leading representatives from President Petro Poroshenko’s Bloc are insisting on massive tax cuts, but no more expenditure cuts; that would cause a vast budget deficit that the IMF assesses at 9-10 percent of GDP, that could not possibly be financed.”[13]
By welcoming and financing Ukraine instead of treating as an outcast, the IMF thus is breaking four of its rules:
  1. Not to lend to a country that has no visible means to pay back the loan. This breaks the “No More Argentinas” rule, adopted after the IMF’s disastrous 2001 loan.
  2. Not to lend to a country that repudiates its debt to official creditors. This goes against the IMF’s role as enforcer for the global creditor cartel.
  3. Not to lend to a borrower at war – and indeed, to one that is destroying its export capacity and hence its balance-of-payments ability to pay back the loan.
  4. Finally, not to lend to a country that is not likely to carry out the IMF’s austerity “conditionalities,” at least without crushing democratic opposition in a totalitarian manner.
The upshot – and new basic guideline for IMF lending – is to split the world into pro-U.S. economies going neoliberal, and economies maintaining public investment in infrastructure n and what used to be viewed as progressive capitalism. Russia and China may lend as much as they want to other governments, but there is no global vehicle to help secure their ability to be paid back under international law. Having refused to roll back its own (and ECB) claims on Greece, the IMF is willing to see countries not on the list approved by U.S. neocons repudiate their official debts to Russia or China. Changing its rules to clear the path for making loans to Ukraine is rightly seen as an escalation of America’s New Cold War against Russia and China.
Timing is everything in such ploys. Georgetown University Law professor and Treasury consultant Anna Gelpern warned that before the “IMF staff and executive board [had] enough time to change the policy on arrears to official creditors,” Russia might use “its notorious debt/GDP clause to accelerate the bonds at any time before December, or simply gum up the process of reforming the IMF’s arrears policy.”[14] According to this clause, if Ukraine’s foreign debt rose above 60 percent of GDP, Russia’s government would have the right to demand immediate payment. But President Putin, no doubt anticipating the bitter fight to come over its attempts to collect on its loan, refrained from exercising this option. He is playing the long game, bending over backward to behave in a way that cannot be criticized as “odious.”
A more immediate reason deterring the United States from pressing earlier to change IMF rules was the need to use the old set of rules against Greece before changing them for Ukraine. A waiver for Ukraine would have provided a precedent for Greece to ask for a similar waiver on paying the “troika” – the European Central Bank (ECB), EU commission and the IMF itself – for the post-2010 loans that have pushed it into a worse depression than the 1930s. Only after Greece capitulated to eurozone austerity was the path clear for U.S. officials to change the IMF rules to isolate Russia. But their victory has come at the cost of changing the IMF’s rules and those of the global financial system irreversibly. Other countries henceforth may reject conditionalities, as Ukraine has done, as well as asking for write-downs on foreign official debts.
That was the great fear of neoliberal U.S. and Eurozone strategists last summer, after all. The reason for smashing Greece’s economy was to deter Podemos in Spain and similar movements in Italy and Portugal from pursuing national prosperity instead of eurozone austerity. “Imagine the Greek government had insisted that EU institutions accept the same haircut as the country’s private creditors,” Russian finance minister Anton Siluanov asked. “The reaction in European capitals would have been frosty. Yet this is the position now taken by Kiev with respect to Ukraine’s $3 billion eurobond held by Russia.”[15]
The consequences of America’s tactics to make a financial hit on Russia while its balance of payments is down (as a result of collapsing oil and gas prices) go far beyond just the IMF. These tactics are driving other countries to defend their own economies in the legal and political spheres, in ways that are breaking apart the post-1945 global order.
Countering Russia’s ability to collect in Britain’s law courts
Over the past year the U.S. Treasury and State Departments have discussed ploys to block Russia from collecting by suing in the London Court of International Arbitration, under whose rules Russia’s bonds issued to Ukraine are registered. Reviewing the excuses Ukraine might use to avoid paying Russia, Prof. Gelpern noted that it might declare the debt “odious,” made under duress or corruptly. In a paper for the Peterson Institute of International Economics (the banking lobby in Washington) she suggested that Britain should deny Russia the use of its courts as a means of reinforcing the financial, energy and trade sanctions passed after Crimea voted to join Russia as protection against the ethnic cleansing from the Right Sector, Azov Battalion and other paramilitary groups descending on the region.[16]
A kindred ploy might be for Ukraine to countersue Russia for reparations for “invading” it and taking Crimea. Such a claim would seem to have little chance of success (without showing the court to be an arm of NATO politics), but it might delay Russia’ ability to collect by tying the loan up in a long nuisance lawsuit. But the British court would lose credibility if it permits frivolous legal claims (called barratry in English) such as President Poroshenko and Prime Minister Yatsenyuk have threatened.
To claim that Ukraine’s debt to Russia was “odious” or otherwise illegitimate, “President Petro Poroshenko said the money was intended to ensure Yanukovych’s loyalty to Moscow, and called the payment a ‘bribe,’ according to an interview with Bloomberg in June this year.”[17] The legal and moral problem with such arguments is that they would apply equally to IMF and U.S. loans. They would open the floodgates for other countries to repudiate debts taken on by dictatorships supported by IMF and U.S. lenders.
As Foreign Minister Sergei Lavrov noted, the IMF’s change of rules, “designed to suit Ukraine only, could plant a time bomb under all other IMF programs.” The new rules showed the extent to which the IMF is subordinate to U.S. aggressive New Cold Warriors: “since Ukraine is politically important – and it is only important because it is opposed to Russia – the IMF is ready to do for Ukraine everything it has not done for anyone else.”[18]
In a similar vein, Andrei Klimov, deputy chairman of the Committee for International Affairs at the Federation Council (the upper house of Russia’s parliament) accused the United States of playing “the role of the main violin in the IMF while the role of the second violin is played by the European Union, [the] two basic sponsors of the Maidan – the … coup d’état in Ukraine in 2014.”[19]
Putin’s counter-strategy and the blowback on U.S.-European relations
Having anticipated that Ukraine would seek excuses to not pay Russia, President Putin refrained from exercising Russia’s right to demand immediate payment when Ukraine’s foreign debt rose above 60 percent of GDP. In November he even offered to defer any payment at all this year, stretching payments out to “$1 billion next year, $1 billion in 2017, and $1 billion in 2018,” if “the United States government, the European Union, or one of the big international financial institutions” guaranteed payment.[20] Based on their assurances “that Ukraine’s solvency will grow,” he added, they should be willing to put their money where their mouth was. If they did not provide guarantees, Putin pointed out, “this means that they do not believe in the Ukrainian economy’s future.”
Implicit was that if the West continued encouraging Ukraine to fight against the East, its government would not be in a position to pay. The Minsk agreement was expiring and Ukraine was receiving new arms support from the United States, Canada and other NATO members to intensify hostilities against Donbas and Crimea.
But the IMF, European Union and United States refused to back up the Fund’s optimistic forecast of Ukraine’s ability to pay in the face of its continued civil war against the East. Foreign Minister Lavrov concluded that, “By having refused to guarantee Ukraine’s debt as part of Russia’s proposal to restructure it, the United States effectively admitted the absence of prospects of restoring its solvency.”[21]
In an exasperated tone, Prime Minister Dmitry Medvedev said on Russian television: “I have a feeling that they won’t give us the money back because they are crooks … and our Western partners not only refuse to help, but they also make it difficult for us.” Accusing that “the international financial system is unjustly structured,” he nonetheless promised to “go to court. We’ll push for default on the loan and we’ll push for default on all Ukrainian debts,” based on the fact that the loan was a request from the Ukrainian Government to the Russian Government. If two governments reach an agreement this is obviously a sovereign loan…. Surprisingly, however, international financial organisations started saying that this is not exactly a sovereign loan. This is utter bull. Evidently, it’s just an absolutely brazen, cynical lie. … This seriously erodes trust in IMF decisions. I believe that now there will be a lot of pleas from different borrower states to the IMF to grant them the same terms as Ukraine. How will the IMF possibly refuse them?[22]
And there the matter stands. On December 16, 2015, the IMF’s Executive Board ruled that “the bond should be treated as official debt, rather than a commercial bond.”[23] Forbes quipped: “Russia apparently is not always blowing smoke. Sometimes they’re actually telling it like it is.”[24]
Reflecting the degree of hatred fanned by U.S. diplomacy, U.S.-backed Ukrainian Finance Minister Natalie A. Jaresko expressed an arrogant confidence that the IMF would back the Ukrainian cabinet’s announcement on Friday, December 18, of its intention to default on the debt to Russia falling due two days later. “If we were to repay this bond in full, it would mean we failed to meet the terms of the I.M.F. and the obligations we made under our restructuring.”[25]
Adding his own bluster, Prime Minister Arseny Yatsenyuk announced his intention to tie up Russia’s claim for payment by filing a multibillion-dollar counter claim “over Russia’s occupation of Crimea and intervention in east Ukraine.” To cap matters, he added that “several hundred million dollars of debt owed by two state enterprises to Russian banks would also not be paid.”[26] This makes trade between Ukraine and Russia impossible to continue. Evidently Ukraine’s authorities had received assurance from IMF and U.S. officials that no real “good faith” bargaining would be required to gain ongoing support. Ukraine’s Parliament did not even find it necessary to enact the new tax code and Michael Hudson: U.S. admits lack of prospects of restoring Ukrainian solvency,” November 7, 2015, translated on Johnson’s Russia List, December 7, 2015, #38.
[21] “In Conversation with Dmitry Medvedev: Interview with five television channels,”, December 9, 2015, from Johnson’s Russia List, December 10, 2015,  #2[22]
[23] Andrew Mayeda, “IMF Says Ukraine Bond Owned by Russia Is Official Sovereign Debt,” Bloomberg, December 17, 2015.
[24] Kenneth Rapoza, “IMF Says Russia Right About Ukraine $3 Billion Loan,”, December 16, 2015. The article added: “the Russian government confirmed to Euroclear, at the request of the Ukrainian authorities at the time, that the Eurobond was fully owned by the Russian government.”
[25] Andrew E. Kramer, “Ukraine Halts Repayments on $3.5 Billion It Owes Russia,” The New York Times, December 19, 2015.
[26] Roman Olearchyk, “Ukraine tensions with Russia mount after debt moratorium,” Financial Times, December 19, 2015.
[27] “Violence instead of democracy: Putin slams ‘policies of exceptionalism and impunity’ in UN speech,”, September 29, 2015. From Johnson’s Russia List, September 29, 2015, #2.