The Rot Within, Part I: Our Ponzi Economy

Depending on blowing the next bubble to temporarily prop up the economy is the height of foolhardy shortsightedness.

All the conventional policy fixes proposed by Demopublican politicos, technocrats and the vast army of academic/think-tank apparatchiks are the equivalent of slapping a coat of paint on a fragile facade riddled with dryrot. All these fake-fixes share a few key characteristics:

1. They focus on effects and symptoms rather than address the underlying causes, i.e. the dryrot at the heart of our government, society and economy.

2. They maintain and protect the Status Quo Powers That Be–no vested interests, protected fiefdoms or Financial Elites ever lose power as a result of these policy tweaks.

3. They are politically expedient, meaning they assuage the demands of vested interests rather than tackle the rot undermining the nation.

4. They ignore the perverse incentives built into current systems and the incentives of complicity, i.e. to cheer another coat of paint on the dryrot rather than face the costs of real reform.

The financial underpinnings of the economy and society are rotting from within:finance, higher education, defense, healthcare, law, governance, you name it.

This week I want to highlight a few key causes of this pervasive and eventually fatal systemic rot.

Let’s start with Our Ponzi Economy. There are three primary examples of our Ponzi Economy: pay-as-you-go social programs (Social Security, Medicare, Medicaid, etc.); housing and the stock market. All are examples of financial Ponzi schemes.

All Ponzi schemes rely on an ever-expanding pool of greater fools who buy into the scheme and pay the interest/gains due the previous pool of greater fools. Ponzi schemes fail because the pool of greater fools is finite, but the scheme demands an ever-expanding pool of participants to function.

All Ponzi schemes eventually fail, though each is declared financially sound because this time it’s different. The number of greater fools required to keep the scheme going eventually exceeds the working population of the nation.

Here’s why Pay-As-You-Go Social Programs are all Ponzi schemes:

1 retiree consumes the taxes paid by 5 workers. 
Those 5 workers when they retire consume the taxes paid by 25 workers. 
Those 25 workers when they retire consume the taxes paid by 125 workers. 
Those 125 workers when they retire consume the taxes paid by 625 workers. 
Those 625 workers when they retire consume the taxes paid by 3,125 workers.

You see where this goes: very quickly, the number of workers required to keep the Ponzi scheme afloat exceeds the entire workforce.

The only way to keep the Ponzi scheme going is to keep raising payroll taxes on the remaining workers, which is precisely what welfare states (i.e. every developed economy on the planet) has done.

But raising taxes merely extends the Ponzi scheme one cycle. Eventually, taxes are so high that the remaining workers are impoverished. Right now, the U.S. has reached a ratio of 2 full-time workers for every retiree. As the number of retirees rises by thousands every day and the number of full-time jobs stagnates, the ratio will slide toward 1-to-1:

The Problem with Pay-As-You-Go Social Programs: They’re Ponzi Schemes (November 5, 2013)

Estimates are even worse in other developed nations. In Europe, the ratio of retirees over 65 to those between 20 and 64 will soon reach 50%–and that’s of the population, not of people with full-time jobs paying taxes to fund social welfare programs. (source: Foreign Affairs, July/August 2014, page 130)

As the percentage of the working-age populace with full-time jobs declines, the worker-retiree ratio will become increasingly unsustainable. The taxes paid by each worker are nowhere enough to fund the generous pension and healthcare benefits promised to every retiree.

In the U.S., the number of people of working age who are jobless is 92 million; the number of full-time jobs is 118 million. This chart of labor participation includes almost 30 million part-time employees who don’t earn enough to pay substantial taxes and millions of self-employed people making poverty-level net incomes.

Courtesy of STA Wealth Management, here is a chart that shows full-time workers are less than half the labor force:

Housing is also a classic Ponzi scheme: prices can only go up if there is an ever-expanding pool of greater fools willing and able to pay even more for a house than the previous pool of greater fools.

As I have explained many times, the only way the Status Quo has been able to expand the pool of greater fools is to lower interest rates to near-zero, drop down payments to 3% and loosen previously-prudent lending standards.

The Housing “Recovery” in Four Charts (May 27, 2014)

These tricks extend the Ponzi for a cycle by artifically expanding the pool of greater fools, but that pool is not infinite. (Foreign buyers are currently enlarging the pool, but their participation is dependent on the Ponzi schemes in their home economies not blowing up.)

The stock market has been made the official metric of the nation’s economic health; too bad it’s a Ponzi scheme. Financial bubbles are what economist Robert Shiller calls “naturally occurring Ponzis” because the psychology of ever-rising prices and profits fuels an inflow of greater fools that sustains the bubble until all available greater fools have sunk their cash and credit into the bubble.

Here is what a market that is increasingly dominated by Ponzi bubbles looks like: this is the S&P 500 (SPX):

 
(source: Gordon T. Long, Macro Analytics)

Depending on blowing the next bubble to temporarily prop up the economy is the height of foolhardy shortsightedness. Yet that’s our Status Quo, increasingly dependent on inflating bubbles to evince “economic strength” when the Ponzi paint will soon peel off the rotten wood of the real economy. 


The ideal summer reading for recent graduates:
Get a Job, Build a Real Career and Defy a Bewildering Economy
,
a mere $9.95 for the Kindle ebook edition and $15.47 for the print edition.

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DRONES: Free Online Screening

There’s a chance to watch DRONES, the movie, online on July 30th and then to join a discussion with filmmakers and experts.  There’s a preview video below. The movie’s website is at http://dronesthefilm.com and the free screening is at http://demandprogress.tv/drones

I saw a screening of this film back in November at the drone summit in DC. It’s wonderful. I was a bit put-off and staggered, to be frank, at the time, because someone involved with the film bragged about how inexpensively it had been made, and yet the budget was so unfathomably huge that I knew that if an anti-war organization had that kind of money we could hire organizers all over the world and quite possibly make the abolition of war a major mainstream force. 

And, of course, you can’t simply ask if the money was well spent, because no one will say that it was spent to end the practice of drone murder.  The director and the cast, of course, say they wanted to make a socially important film about a serious issue, but not what they wanted to accomplish, beyond raising questions and being entertaining.  Everyone’s always happy to say that a film opposes racism or cruelty to animals or bullying, but not war. 

But, you hundreds of millions of odd-balls who, like me, happen to give a damn whether your government is murdering people in your name with your money will, in fact, want to make this film a huge viral success.  I’m telling you, right now, it’s a good one.  It is indeed entertaining.  It’s not simple, predictable, pedantic, or preaching.  But neither is the film itself reluctant to face head-on the banal, evil, arrogant mass-murder engaged in by these young people who dress up in pilots suits to sit at desks in trailers taking orders from military bureaucrats and private contractors, and ultimately from a president who reviews a list of potential men, women, and children to murder on Tuesdays. 

Drones look like a golden opportunity to war makers who don’t want to ask Congress or the U.N. or the public, don’t want to send in armies, just want to target people and groups for death anywhere in the world and obliterate them with the push of a button from an air-conditioned — or, sometimes not so air-conditioned — office.

But drones also look like a golden opportunity to those of us who have been trying to point out that murder and war are distinguished only by scale.  I suspect that many who cannot see the bombing of a city as murder will see the drone-targeting of an individual as nothing else — particularly if they watch this film.

If you can watch the film and not want to Ban Weaponized Drones, watch it again.

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Sign Amnesty Int’l Petition to “Urge U.S. Government to stop arming Israel”

Sign this Amnesty International petition to urge the US government to stop providing lethal weapons and other support to Israel as it carries out yet another massacre in Palestine.  Providing such support to Israel, as Amnesty has noted, is illegal under US and international law because Israel is a consistent violator of human rights.

Amnesty International:

Urge the US government to stop arming Israel. 

Amnesty International is calling for a UN-imposed comprehensive arms embargo on Israel, Hamas and Palestinian armed groups.

The U.S. is by far the largest exporter of military, security and policing equipment to Israel. The U.S. gives over $3 billion in annual “Foreign Military Financing” to Israel alone. As long as there is a substantial risk these arms will be used to commit the violations we’re seeing now, all arms supplies to Israel must stop. The same is true for those supplying Hamas and other Palestinian armed groups.

The U.S. government needs to do its part and stop giving munitions, weapons, crowd control devices, and military training to Israel.

Leading scholar on the conflict Dr. Norman Finkelstein has also called for comprehensive, UN-imposed arms embargoes on Israel and Palestine.

Help stop Israel’s terrorism and other crimes by pressuring the US government to stop making them possible by illegally arming Israel.

Sign the petition. 

In addition, here are 9 brands you can boycott to pressure Israel to stop the massacre and accept international law on its illegal colonization, occupation and blockade of Palestine.

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Key Piece of Video “Evidence” for Russian Responsibility for Malaysian Plane Shootdown Debunked

Video of Rebel Buk Launchers Headed Back to Russia? No – Images From Ukraine-Held Territory Since May

Mish is a highly-respected financial blogger. His Global Economic Analysis site routinely wins awards such as:

One of Mish’s trademarks is to speak with knowledgeable people in various subject areas, and report on what they said.

Today, Mish debunked one of the main pieces of video “evidence” claimed by the mainstream media to prove that Russia was behind the shootdown of the Malaysian plane over Ukraine:

Jacob Dreizin, a US citizen who speaks Russian and reads Ukrainian provided this update three hours ago.

Hello Mish,

On Friday, the Daily Mail, one of the major UK tabloids carried photos and video of what was alleged to be a rebel “Buk” launcher heading back to Russia. The article carried a claim from some Ukrainian source that the launcher was missing several missiles after having shot them at the Malaysian 777. The article was prominently linked to the Drudge Report, and so was probably viewed by several million people.

Today, this meme made it into Uncle Sam’s official narrative, as per the following New York Times excerpt:

On the CBS program “Face the Nation,” Mr. Kerry referred to a video that the Ukrainians have made public showing an SA-11 unit heading back to Russia after the downing of the plane with “a missing missile or so.”

The video referenced by the New York Times was, in fact, posted on the Facebook account of the Ukrainian Interior Minister. The allegation was that the launcher was crossing the border with Russia.

However, going by the billboard and other features of the scenery, Russian bloggers and news sources claim to have identified the road in the video as having been taken in or near the town of Krasnoarmeisk (“Krasnoarmiysk” in Ukrainian), which has been under Kiev’s control since May.

In fact, the billboard is supposedly advertising a Krasnoarmeisk car dealership. Also, one of the structures in the background is said to be a construction materials store on Gorkii Street, Krasnoarmeisk.

Please note that this town is (very roughly) 120 kilometers from the Russian border and 80 kilometers from where the Malaysian 777 went down. And again, it has been under Kiev’s control since May.

At least one other clip of the “Russian Buk” that has been made available also suggests that the Ukrainians are showing their own equipment. I’m still working on researching that one for you.

Jacob

Video in Question

It is beyond incredibly sloppy for Ukraine to release such a video with a clear billboard of something in Ukraine-held territory, purportedly showing a Buk missile launcher headed back to Russia.

And we are supposed to believe Kiev? Kerry?

Please be serious. If you are really interested in the truth, you do not resort to such easily disproved and sloppy bullsheet.

This is – of course – not the first piece of video “evidence” trumpeted by the MSM which has been debunked.

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The Insiders’ Case for a Stock Market Mini-Crash

The trade only works if everyone is lulled into staying on the long side until it’s too late.

Let’s try a thought experiment: suppose we’re players in the stock market, Wall Street insiders with real leverage and connections to the Fed. You know, the kind of player who can reverse a decline in the S&P 500 with an order (executed through a proxy) for thousands of call options on the SPX.

Retail participants tend to forget we make money on both the long and short side.The small-fry who provide liquidity always assume a sharp decline in equities is a terrible thing because “everybody is losing their gains,” and this general belief is pushed by the mainstream financial media: unfailingly chirpy news anchors’ expressions and voices darken when reporting the rare drop in stocks: horrible, horrible, horrible, a drop means we all lose, I’m sad reporting this.

The players are laughing at this play-acting and the gullibility of the audience: insiders make huge gains when they engineer a sharp decline. It’s not that difficult to manipulate the market when volume and volatility are low, especially in an age where quant-bot trading machines are programmed to follow trends.

It’s also easy to hype stocks publicly while selling (distributing) your shares at the top to unwary punters who believe the PR (the Fed has your back, thanks to the Fed’s quantitative easing (QE), the market will never go down, etc.).

But pushing the melt-up higher gets more difficult when the market gets heavy.Markets get heavy when participation thins (i.e. fewer stocks are leading the advance), speculative sectors are rolling over as the crowd of greater fools shrinks and volume on up days keeps declining.

When the markets get heavy, the easy-profits trade is get short and engineer a sharp decline. Nudging a heavy market into a free-fall has a number of advantages to players, other than the gratifying profits from being short equities and long volatility.


1. The Fed needs a decline to “prove” it isn’t pushing markets higher, further enriching the already obscenely rich. A thoroughly corrupted Congress is finally awakening to the public rage over the Federal Reserve’s blatant enrichment of the few at the expense of the many, and as a result, the Fed has a serious PR problem: Janet Yellen may be a lot of things, but a believable actress isn’t one of them. Her performance claiming the Fed acts only on behalf of widows, orphans, Mom, apple pie and the merchants lining Main Street was laughably inauthentic.

A sharp decline would demonstrate that the Fed isn’t controlling the market to enrich the insiders–even though a sharp decline would only benefit the insiders who engineered the drop. Heh. No need to be churlish about it. Where’s your sense of humor?

2. A mini-crash would panic the herd into selling, enabling insiders to scoop up shares on sale. This is of course the classic insider play: unload enough shares to blow off all the sell stops (i.e. orders to sell if price drops to specified level), which extends the decline and reinforces the panic-selling.

3. Never give a sucker an even break. After two years without a meaningful correction and complacency at multi-year highs, how much profit is there left in pushing an increasingly heavy market up another few percentage points? The big money is in engineering a decline that catches the crowd by surprise and doesn’t allow the traders a chance to board the short-bus before it roars out of the station.

Many traders are confident the market will broadcast a technical signal that will give them a chance to get on the short bus with the insiders. How likely is this? If we’re engineering a decline, why would we spoil the trade by letting a bunch of peasants get on board? With every quant-bot programmed to recognize all the usual technical signals and systems, why telegraph the trade?

As legendary stock trader/manipulator Jesse Livermore observed, the market will take the fewest possible number of participants along for the ride, and expecting the market to issue a “go short now for easy profits” signal would violate this rule: if everybody shifts from the long side to the short side, the trade is no longer profitable.

The trade only works if everyone is lulled into staying on the long side until it’s too late.Traders seem to be waiting for another standard-issue decline in September/October that would set up yet another standard-issue Santa Claus rally. Will it really be this easy to book profits in the second half? When everybody expects the same thing to unfold, it’s just another form of complacency.

Complacency–and the confidence that you can beat a confidence game by following what everybody else is following–is dangerous.


The ideal summer reading for recent graduates:
Get a Job, Build a Real Career and Defy a Bewildering Economy
,
a mere $9.95 for the Kindle ebook edition and $15.47 for the print edition.

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