The Next Financial Crisis Won’t be Like the Last One

Posted on September 15, 2015 by Charles Hugh Smith    

http://www.washingtonsblog.com/2015/09/the-next-financial-crisis-wont-be-like-the-last-one.html

Central banks are like generals: they tend to fight the last war. The Great Financial meltdown of 2008 was centered in too big to fail, too big to jail transnational banks and other financial entities with enormous exposure to collateral risk (such as subprime mortgages), highly leveraged bets and counterparty risk (the guys who were supposed to pay off your portfolio insurance vanish in a puff of digital smoke, leaving you to absorb the loss).
In response, the central banks and treasuries of the major economies “did whatever it took” to save the private banking sector from insolvency and collapse. In effect, central banks launched a multi-pronged bailout of banks and other financial heavyweights (such as AIG) and hastily constructed a clumsy and costly Maginot Line to protect the now-indispensable private banks from a similar meltdown.
The problem with preparing to fight the last war is that crises arise not from what is visible to all but from what is largely invisible to the mainstream.
The other factor is what’s within the power of central banks to fix and what’s beyond their power to fix. Correspondent Mark G. and I refer to this as the set of problems that can be solved by printing a trillion dollars. It’s widely assumed that virtually any problem can be fixed by printing a trillion dollars (or multiple trillions) and throwing it at the problem.
Yes, the looming student-loan debacle can be fixed by printing a trillion dollars and paying down a majority of the existing student debt.
But lots of other problems are not fixed by printing a trillion dollars. Printing $1 trillion can pay for a lot of make-work jobs, but that’s not the same as boosting employment in a sustainable, organic fashion.
The ocean’s fisheries will not magically come back from being stripmined if a central bank prints $1 trillion. If the $1 trillion is spent wisely, perhaps in a decade or two fisheries can recover. But neither employment or ecosystems can be “saved” by printing money and throwing it at the usual vested interests.
So what else is beyond the easy fix of a quick $1 trillion printing/bailout? How about the foreign exchange (FX) market? Many a government and central bank has attempted to fix the foreign exchange market, but they fail for the simple reason that the FX market is too large to control for long.
$1 trillion just isn’t that much in a market that trades $3 or $4 trillion per day.
It’s not that difficult to predict that the next global financial crisis will arise not in the banking sector but in a market that’s beyond the reach of central banks.That is, printing $1 trillion and promising to “do whatever it takes” won’t fix what’s broken.
One reason I have been focusing on the potential of the U.S. dollar (USD) to strengthen for the past four years is the potential for this dynamic to fatally disrupt the central bank-managed global “recovery.”
Could the U.S. Dollar Rise 50%? (January 12, 2011)
We can already see the consequences of a strengthening USD: since the USD started strengthening against other currencies late last summer, capital flows have reversed globally, fleeing China and the emerging markets. Commodities and global trade have crashed as a result of this drain of capital out of emerging markets into USD-denominated assets.
The other reason crises arise is policies designed to solve one problem end up triggering another even more uncontrollable problem. Trying to control FX markets is intrinsically loaded with paradoxes and unresolvable conflicts, as whatever a central bank or treasury does to effect global FX markets has another set of consequences within the domestic economy that issues the currency.
Conversely, if the central bank/treasury set policies to control a crisis in their domestic economy, those policies have uncontrollable consequences in global FX markets.
For example: if a central bank raises interest rates to defend its currency, those higher rates strangle the domestic economy. In effect, the central bank has only bad options: either accept a domestic recession to defend the currency, or let the currency devalue and watch the domestic economy implode as import costs soar and capital flees the devaluing currency.
Add all this up and it seems increasingly likely the next Global Financial Meltdown will arise in the FX/currency markets. The core paradox–that central banks can’t control both domestic and global FX markets with the same set of policies–cannot be resolved by printing $1 trillion, or even $5 trillion.
Printing money to fix one problem leads to another set of problems that are only made worse by additional money-printing.

Did The Fed Intentionally Spark A Commodity Sell-off?

Submitted by Tyler Durden on 08/30/2015 17:00 -0400
http://www.zerohedge.com/news/2015-08-30/did-fed-intentionally-spark-commodity-sell
Submitted by Leonard Brecken via OilPrice.com,
The intention here is the bring facts to light so the public can decide.
I’m not quite sure what to believe on how and why oil prices remain more than 50 percent below free cash flow break even for most independent E&P companies. I know for sure it’s not just one reason and is more likely a confluence of events.
Part of the reason oil prices broke new six-year lows is tied to hedge funds shorting equities and pressuring equity pricing through shorting oil. Another reason is the desire of private equity firms to buy assets on cheap and some banks seeking M&A fees. Obviously OPEC policy has a part to play. There is also no doubt that EIA statistics mistakenly leave the impression that production has remained resilient throughout the summer. But the spark that set the ball in motion was the dollar strength as every major money center bank in the U.S. recommended going long EU equities and long the dollar because of further monetary easing in Europe.
The inverse correlation between the U.S. dollar and oil prices in June was virtually 100 percent, but that has changed more recently, as I have noted previously. At that time, investors here in the U.S. plowed into biotechnology and technology and went short oil as if they knew what assets central banks were going to buy and not buy based on all the free money from Europe and Japan.
Since the financial crisis began the cozy relationship between money center banks and the Federal Reserve, since the bail outs, is well known. For example, Goldman Sachs’ deep ties to the U.S. government are notorious and, not surprisingly, they led the charge in calls for a downturn in oil. So has the media, as I have extensively documented all year here.
On the other hand, oil inventories on paper in the U.S. were rising into the fall of last year for sure while the economy was weakening in the U.S. and in China, the largest importer of commodities. So the merits of weaker commodity prices stand on their own to an extent. The correction to $70 from $100 was justified, but the crash to levels not seen since the crisis of 2008-2009 are overblown. Now the cries comparing the 2015 crisis to the 1986 oil demise rise as well. Are economic conditions that bad?
For oil, demand has greatly accelerated, in fact. Then why go long the riskier, higher beta technology that, at their highs and still to this day, are still being pumped? To make matters worse, record short positions in oil futures and equities still exist, eclipsing even the 2008-2009 meltdown. So where did this long tech, short commodity trade derive from and why? One possibility is the Federal Reserve itself; either indirectly, through monetary policy, or directly.
When the markets corrected last fall, Fed officials did not shy away from additional use of monetary policy or Quantitative Easing (QE). The cries from Wall Street were as loud as ever for it.
By early 2015, the economy had weakened, and GDP dropped below 2 percent growth on an annual basis. But Wall Street’s cries were largely silent, other than to say the Fed shouldn’t raise rates. The Fed, on the other hand, instead of threatening to ease, is instead threatening to tighten; the opposite of what we heard when markets fell similarly in 2014. The question is, why the change, despite fundamentals weakening?
One theory is that some within the Fed realized that QE wasn’t working, and never worked, thus another path was needed. But what alternative did they have, since rates were already ZERO?
So maybe they changed course and took a strong dollar policy vs. a weak one to intentionally weaken the commodity sector and thus boost consumer spending. Throughout this down turn, that message has been repeated by Yellen herself many times, as a source of economic stimulus and for sure has been repeated over and over in the media and the talking heads of Wall Street.
Wall Street is notorious for not fighting Fed policy, so they turned to other asset classes such as technology to blow that bubble up even further. But then why was there such a desire to close the Iran deal so suddenly, which would further add to global oil supply?
This theory isn’t as farfetched as it initially seems, especially considering that Wall Street has been investing based on central bank policies for 6 years now, moving money where easing occurs around the globe and putting very little into real fundamentals. It’s something to consider in explaining prices.

The Last Days Of 'Normal Life' In America

Submitted by Tyler Durden on 07/13/2015 23:00 -0400
http://www.zerohedge.com/news/2015-07-13/last-days-normal-life-america
Submitted by Michael Snyder via The End of The American Dream blog,
If you have got family and friends that you would like to visit before things start getting really crazy, you should do so within the next couple of months, because these are the last days of “normal life” in America.  The website where I have posted this article is called “End of the American Dream“, but perhaps I should have entitled it “The End of America” because that is essentially what we are heading for.  The debt-fueled prosperity that so many of us take for granted is about to come to a screeching halt, and we are about to enter the hardest times that any of us have ever known.  And I am not just talking about economics either.  Based on all of the intel and information that I have gathered, we are about to enter a “perfect storm” that is going to shake this country in just about every possible way that it can be shaken.  So I hope that you will truly savor this summer – days like this will not come around again any time soon.
Have you ever known someone that lived a seemingly charmed life even though that individual made foolish decision after foolish decision?
In the end, reality almost always catches up with people like that.
And in so many ways, we have been living a charmed life as a nation even though we have been making incredibly foolish decisions for decades.  We have cursed ourselves over and over again, and just about every form of evil that you can possibly imagine is exploding all around us.  As a nation, we now stand for just about everything that is foul, disgusting and wicked, and the rest of the world is absolutely horrified by what has happened to us.
Once upon a time, we were one of the most loved nations on the entire planet.
Now we are one of the most hated.
The things that we have been doing to ourselves and to other countries are about to catch up with us in a major way.  We thought that we were getting away with everything that we were doing, but that was never the case.  When you do evil, there is always a price to pay.
Over the past few weeks, some very strange things have begun to happen.  And in the months ahead, we are going to see some more unusual events.  But to be honest, this is just the tip of the iceberg.  For now, you are just going to have to trust me on this one.
If my tone sounds ominous, that is good, because that is precisely the mood that I am trying to convey.  Right now, there are major things going on behind the scenes, and all of our comfortable little lives are about to get shaken up big time.
I have often written about the global elite and about how they like to go about doing things.  Throughout history, they have always liked to create order out of chaos.  In other words, they will often purposely create a crisis in order to push through things that they would not be able to accomplish during “normal” times.
I believe that we are about to enter one of those periods of time.  The problems that we are about to experience are going to be used to justify radical “solutions” that will further the overall agenda of the elite.  But because we will be in the middle of an “emergency”, a lot of people will choose to go along with those solutions.
Sadly, most people don’t understand how the world works because they are so consumed with other things.  We live in a society that is absolutely addicted to entertainment.  Just recently, I wrote about how the average American spends more than 10 hours a day plugged in to some form of media.  If we are not watching television, we are listening to the radio, going to movies, playing video games, messing with our smartphones or spending endless hours on the Internet.  And more than 90 percent of the “programming” that we are fed through these devices is produced by just 6 absolutely gigantic media corporations.
And who controls those gigantic media corporations?
The elite do.
And have you noticed how “the mainstream media” loves to divide us?
Today, Americans are more divided than ever it seems.  Our news broadcasts endlessly fixate on “black vs. white”, “male vs. female”, “liberal vs. conservative”, “rich vs. poor”, etc, etc.
Americans are extremely angry and frustrated at this point, but most of our anger and frustration is directed at one another.
How can we ever hope to come up with any solutions for our nation if we spend so much time hating our fellow citizens?
But this is just how the elite like it.
They love to play divide and conquer.  If we were united, we would be far more difficult to manipulate.
And even if we did find a way to come together, what values and principles would we use to rebuild this nation?
The truth is that most Americans deeply reject the values and principles that the founders of this country once held so dear.
Personally, I am very optimistic about the future.  My wife and I believe that the greatest chapters of our lives are still ahead of us.
But am I optimistic about the future of the United States?
No, I am not.
Perhaps you are reading this and you have come to the conclusion that I am being irrationally negative.  If so, you are probably spending way too much time plugged in to the “propaganda matrix” that I described above.  The establishment wants you to believe that everything is going to be just fine and that the best days for this world are ahead.
If you think that I am wrong, I challenge you to bookmark this page.  Then, after some time has passed, come back and revisit what I had to say today.
I believe that you will be quite shocked by how your perspective has changed.
The last half of this year (2015) is going to represent a major turning point, and we are moving into hard times unlike anything that America has ever seen before.
Unfortunately, most of the “sheeple” are going to be completely blindsided by what is coming.  They just continue to follow their utterly clueless leaders down a path toward oblivion.
But the good news is that once the “shaking” starts, many of these “sheeple” will begin to wake up.
When that happens, who will those “sheeple” turn to for answers?

Losing Control

Submitted by Tyler Durden on 07/10/2015 08:16 -0400
http://www.zerohedge.com/news/2015-07-10/losing-control
By Guy Haselmann of Scotiabank
Losing Control
Markets are beginning to signal that policy makers are losing control.  Many second-order-effects of the unprecedented and experimental global actions taken since the 2008 crisis are beginning to manifest.  There are always causes and effects that develop; but they do so at different speeds. Many actions in recent years have prioritized 'benefits today' over 'consequences tomorrow'.  'Tomorrow' is approaching ever more quickly. There is no 'free lunch'. 
Market damage and volatility due to policy interference, or due to the deliberate influence of security prices, are a shame.  Markets should ideally operate with unencumbered fluidity. Markets should operate in a manner where adjustments to new information allow buyers and sellers to rapidly, and seamlessly, find a natural clearing price.  Authorities and regulations should be like good referees in a soccer match; they provide the conditions for a fair match, and you rarely notice their presence.

• The beginning-of-the-end of official control happened earlier this year when the Swiss National Bank (SNB) retracted its currency-peg-promise, triggering a 40% move in the G-7 currency in 10 minutes. 
• In early May, shortly after the SNB event and the launch of ECB QE and EU negative interest rate experiments, the EU bond market became dysfunctional.  The absurdity of sustaining $4 trillion of negative rates came into focus. The German 10-year Bund moved from 0.05% to 0.75% in under a month.
• A series of Greek policy and troika bailout mistakes - actions that never resulted in a realistic and sustainable solution - are now culminating toward a tipping point. 
• Chinese authorities that have allowed and encouraged an equity bubble to manifest (and other central banks for that matter) are starting to see how ‘bubble blowing’ typically ends.  Other central banks are hopefully watching.  Chinese equities have lost $3.2 trillion in value in 30 days.  To put this into perspective, this is equivalent to the entire stock market capitalization of Germany and France combined.

After implementing numerous procedures that encouraged equity risk taking, Chinese officials this week seemed fraught to stop the free fall in prices before it began to affect the broader economy, or led to social unrest. Officials have cut bank reserve requirements and interest rates.  They have advertised and published stories about the soaring stocks and upside potential. They have channeled pension assets into shares. They have targeted short sellers, suspended IPOs (to allay dilution), decreased trading fees, and loosened margin requirements. The Chinese central bank has also provided liquidity to state entities that make margin financing available to stock brokers. None of these actions are good for (free) markets.

• It appears China might not be learning from history.  In 1999, margin debt ran amok in NASDAQ doubled the index - which was followed by a 78% crash.  The subsequent FOMC easings and prolonged over-accommodation then fueled the housing and credit bubbles.

Too many central banks have entered into a dangerous trade-off:  providing excessive monetary accommodation (despite questionable economic benefits -particularly at the Zero Lower Bound) in order to lift equity markets, versus allowing financial instability to cultivate and amass.  This tradeoff embodies the fears of both FOMC camps: the fear of hiking too soon versus the risks of waiting too long.  There are enormous consequences on both sides - all of which are poorly understood.
Even those who do not believe that US equities are in a bubble (or that moral hazard troubles are rampant) must admit that debt issuance from low interest rates are at colossal levels.  The amount of debt issuance has broken a new record four years in a row.  The last two quarters are the largest quarters ever. 
This moonshot of global levels of indebtedness will be an economic headwind for decades to come particularly if and when interest rates rise.  Maintaining a policy tool that encourages such massive indebtedness (public and private issuance) is imprudent long run policy.  As mentioned above, it mortgages the future while attempting to immediately boast equity prices and economic activity. This trade-off has failed to play out as officials suspected; otherwise debt-to-GDP levels would have fallen. 
It is the Fed’s zero interest rate policy foremost that has provided the opportunity for the debt issuance to occur in the first place. As the Volcker Rule launches on July 20th, market making and liquidity will soon deteriorate further; a troubling result of over-zealous regulators.   In addition, a large portion of the debt issuance proceeds have gone into share buyback, further fueling the illusion of healthy EPS improvement.
Despite various attempts at redistribution, policies have also widened wealth inequality. As this gap widens and the underlying problems in the economy merely get patched-over with temporary remedies, social unease builds, giving rise to fringe political parties.  
Today, China’s extraordinary market meddling resulted in a one day reprieve from the recent implosion in various commodity, currency, and equity markets.  However, it is likely to prove temporary.  Where there is smoke there is fire, especially in China.   Typically, official information and data is often disregarded because it is taken with a healthy dose of skepticism.  In contrast, the magnitude of the drop in commodity and Chinese equity index prices is real and should be taken as a warning sign.
Chinese build-up of imbalances probably has much further to run after years of gargantuan stimulus.  Recent policy actions are likely to prove insufficient to arrest those adjustments.  Chinese troubles are likely to prove more important to markets in the near term than Greece.  Chinese troubles are unfolding now, they are immediate, and they are vast. The Greek tragedy will continue to unravel but do so more slowly with fits and starts, via false hopes, humanitarian aid, misinformation, and political posturing (more on Greece tomorrow). 
It has yet to be seen how the aggressive policies of the Fed, BoJ, and ECB eventually play out, but there are plenty of  signs that markets will not be as composed and containable as they had hoped.
“The government solution to a problem is usually as bad as the problem”.
    – Milton Friedman

Upside down economics of debt, poverty, unemployment: Ready to seize solutions, or need more pain?

Posted on July 7, 2015 by Carl Herman

http://www.washingtonsblog.com/2015/07/upside-down-economics-of-debt-poverty-unemployment-ready-to-seize-solutions-or-need-more-pain.html 

“If people were really self-interested, they would stop trying to be individualistic.” – John B. Cobb, founder of Seizing an Alternative conference (and here, videos here)

Economic Hitman John Perkins’ 2-minutes on today’s neo-colonialism capitalism:

Demonocracy’s 2-minutes on what the US national debt looks like if shown in actual amounts of $100 bills:

Clarke and Dawe’s 2-minute comedy on European debt crisis:

Earth economics is upside down.
Accelerating technology can and should provide:

• more personal freedom from labor,
• more beauty in infrastructure and nature,
• greater joy in our freedom to create and explore our beautiful, powerful, and diverse virtues (something like “resource-based economics” as researched by The Venus Project).

We know what we have is in contrived Orwellian opposition of what leadership should create. We know that what we receive is literal criminal fraud:

• increasing national and total debts from having what we use for money created as debt owed to private banks,
• decaying infrastructure getting uglier from “deferred maintenance,”
• real unemployment near 25% with most families demanding both parents work longer and longer hours,
• real inflation well above official reports,
• US poverty of 20% among children,
• 72% of California students in schools with over half the children classified as “socio-economically disadvantaged,”
• a .01% oligarch class that “legally” hide $20 to $30 trillion in offshore tax havens,
• a rigged-casino economy designed for “peak inequality,”
• “too big to fail” banks demand public subsidies (so-called “bailouts”) while gambling with over $200 TRILLION in derivatives,
• these “too big to fail/jail” banks deriving most of their income from subsidies and apparent market manipulations,
• ongoing intentional poverty that kills ~20,000 children world-wide in gruesome slow-motion daily ($1 to $3 trillion over ten years would end poverty while reducing population growth rates),
• connected to money are unlawful and lie-began wars; crimes that have to be “covered” with Orwellian lies of corporate media.

I could go on to literally ~100 areas of crucial concern.
The first challenge for the 99.99% is to trust their own Emperor’s New Clothes observations that Earth is truly in this tragic-comedy rather than listen to the .01%’s lies attempting to cover naked facts anyone can see.
Please understand that I represent likely hundreds of thousands of professionals making factual claims with objective evidence anyone with a high school-level of education can verify. For example, the June 2015 Seizing an Alternative conference (and here, videos here) at the Claremont Colleges had hundreds of professionals presenting data and solutions in over 80 areas of speciality. My paper and videos for this conference is here.
The purpose of education since the “Age of Enlightenment” is to present facts for public verification, and to seize the victory of refuting lies by would-be dictators, especially when such lies are obvious and of crucial public importance.
The path forward as we build a critical mass of humans recognizing the Emperor’s New Clothes truth is to demand arrests and solutions, obviously:

1. ARRESTS: the first responsible action upon recognizing massive crimes that annually kill millions, harm billions, and loot trillions is to demand that law enforcement and military enact arrests of criminal leaders to stop the crimes and begin unwinding the truth of what happened in Earth’s tragic-comedy (four-part article series with videos on arrests as the obvious citizen response).
2. SOLUTIONS: the .01% with corporate media have suppressed solutions documented beginning with Benjamin Franklin how government can abundantly operate without taxes: monetary and credit reform allow the public to have near-instant prosperity: full-employment, zero public deficits and debt, the best infrastructure we can imagine, falling prices, and release of public TRILLIONS held in “rainy day” accounts. Full documentation here.

Humanity’s choices:

1. Ongoing .01% Orwellian, upside-down, tragic-comic, Emperor’s New Clothes crimes with all the pain, fear, harm, death, debt, poverty, enslavement, crime, destruction, and despair.
2. Arrests to stop the crimes of the present, and ready-to-start solutions to build a brighter future.

Be your brightest light as the person you’ve always wanted to be.
Former World Bank economist Herman Daly and co-author John B. Cobb of For the Common Good discuss our condition and pathways forward in this 40-minute interview:

**
Note: I make all factual assertions as a National Board Certified Teacher of US Government, Economics, and History, with all economics factual claims receiving zero refutation since I began writing in 2008 among Advanced Placement Macroeconomics teachers on our discussion board, public audiences of these articles, and international conferences. I invite readers to empower their civic voices with the strongest comprehensive facts most important to building a brighter future. I challenge professionals, academics, and citizens to add their voices for the benefit of all Earth’s inhabitants.
**
Carl Herman is a National Board Certified Teacher of US Government, Economics, and History; also credentialed in Mathematics. He worked with both US political parties over 18 years and two UN Summits with the citizen’s lobby, RESULTS, for US domestic and foreign policy to end poverty. He can be reached at Carl_Herman@post.harvard.edu

China's stock market is crashing, and the Chinese are trying to do the exact same thing America did in 1929

By Oscar Williams-Grut July 6, 2015 5:59 AM

https://finance.yahoo.com/news/chinas-stock-market-crashing-chinese-095900183.html

(AP Images) Four members of the House of Morgan stand on a balcony outside the Senate Banking Committee room just before the committee resumed its investigation into the banking institution's practices, May 31, 1933, in Washington.
While attention is focused on Greece, China is having a serious market meltdown.
After exploding earlier in the year because of deregulation, China's benchmark Shanghai Composite has collapsed a crazy 29% since the highs of early June. China's other stock markets have had similarly steep falls.
Bloomberg notes that the crisis is closely mirroring the 1929 Wall Street crash, which led to the Great Depression in the US in the 1930s.

China's government is now also using the same tactics as Wall Street did back then to try to prop up the markets.

Over the weekend China's top stock brokerages pledged that they would collectively buy at least 120 billion yuan (£12.3 billion, $19.3 billion) of shares to help steady the market, with backing from the People's Bank of China.
The central bank is effectively becoming the buyer of last resort, printing money to buy up shares and prop up prices.
In 1929, Wall Street's banks did something similar. JPMorgan and several other top financial firms agreed to pool resources and buy up shares to put a floor under prices. It happened after a drop of about 30% for the Dow Jones Industrial Average.

The effort by the US banking systems had only the briefest of effects on the index, and America was eventually plunged into the Great Depression.

It's too early to tell whether China's latest move will work, despite the insistence of state media. So far it has failed to curb the huge volatility that has been plaguing China's stock markets recently. The Shanghai Composite opened up over 7% and eventually slipped back into the red before ending the day up 2.4%.

How China Lost an Entire Spain in 17 Days

Submitted by EconMatters on 06/30/2015 18:58 -0400

By EconMatters

http://www.zerohedge.com/news/2015-06-30/how-china-lost-entire-spain-17-days

Concerned about a tumbling equity market, PBOC moved to cut both interest rates and the reserve requirement ratio for banks over the weekend.  However, increasingly wary of a market bubble in China, investors still sent Shanghai Composite spiraling down another 3.3% on Monday after the dramatic 7.4% plunge last Friday despite the support from the central bank.

Chaos on Three Continents

Investors are also unnerve by the latest development of Greece just days before a total default and Grexit out of EU, and the news that Puerto Rico could become another Greece of the U.S. facing a financial crisis and cannot pay back its $70 billion in municipal debt.

Read: China's $370 Billion Margin Call

VIX Spike

MarketWatch reported that VIX spiked 33% to above 18, the highest since February, implying that investors are very nervous about the chaos going around.

Beijing Targets Soft Landing?

If you think U.S. stocks are lofty trading at an average of 16 times last year's earnings, the average Chinese stock is now trading at 30 times earnings.

Analysts at HSBC think the China's central bank was trying to engineer a "soft landing" for stocks. But this could be a difficult balancing act trying to shore up investors' confidence while keeping a lid on the speculative fever among Chinese retailer investors (Remember those Chinese housewives who bought up 300 tons of gold and made Goldman Sachs swallow their gold selling recommendation?)

Read: Is China Under The Skyscraper Curse?

 

$1.3 trillion, an Entire Spain, in 17 Days

The Shanghai Composite has fallen 21.5% since its June 12 peak wiping out ~ $1.3 trillion in market cap. To put this in perspective, Quartz pointed out that the ~ $1.3 trillion loss in market cap, in 17 days, is close to the combined market capitalization of Spain’s four stock exchanges, and it’s not even counting losses in Shenzhen, China’s other major bourse.

 

Read: China Resets The Currency Markets

Size Does Matter 

Greece has been the center of financial market attention for the past few months.  With a record $370 billion in margin trades, the Chinese stock market is looking even more ominous.

Only time will tell if Beijing's able to turn the situation (i.e. slowing economy with a bubbling equity market) around.  But if the world's biggest trading nation suddenly has a crisis of some sort, it would be a catastrophe of a different scale.  Size does matter when it comes to financial collapse, and China could do far worse damage than any Grexit or PIIGS debt default.

Chart Source: Quartz

Collapse, Part 5: Things Fall Apart

Submitted by Tyler Durden on 06/26/2015 13:37 -0400
http://www.zerohedge.com/news/2015-06-26/collapse-part-5-things-fall-apart
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
It is impossible to wean an economy that relies on debt and leverage for its "growth" of excessive debt and leverage. 

As noted earlier in this series, collapse is not an event, it's a process, a process we experience as things fall apart. The phrase famously appears in William Butler Yeats' 1919 poem, The Second Coming:
 

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
 

 

Why do things fall apart? I have addressed a number of dynamics in the first four essays of this series, but there are many more expressed in Yeats' few brief lines.
 

1. Magical thinking dominates all discussions. The truth, being too fearful to contemplate, is sidelined in favor of magical thinking:
 

-- we can grow our way out of debt by expanding debt
 

-- if we simply print enough money, we can pay for everything we want
 

-- a miraculous new technology (insert current example) will provide limitless energy/food at near-zero cost
 

-- if we tweak the system with some minor reforms, all the big problems will go away
 

-- new technology always creates more jobs than it destroys
 

and so on.
 

2. Same as it always was: politics was always corrupt, humans have always been greedy, etc.--in other words,today's problems are no different from those of the past, which we handled without major difficulty. The possibility that today's extremes of financialization and political decay might actually be quantitatively and qualitatively different from the past 50 years is dismissed.
 

3. The political and financial Elites have lost touch with the citizenry. The falcon cannot hear the falconer, for the Elites have withdrawn into protected circles of privilege with little contact with the rest of us. Since all is well within these circles of wealth and power, all must be well in the system as a whole.
 

And if it isn't, the solution is to withdraw even deeper into circles of privilege and cast off in a luxury lifeboat, leaving the citizenry to muddle through on the doomed Titanic.
 

4. Things stop working well or stop working, period. The causes are many: inefficiency born of self-interest and historical habit, loss of accountability, The Ratchet Effect, Bureaucratic Complexity, diminishing returns, unproductive friction--the list is long.
 

The net result is things don't work well even when stupendous sums are thrown at them. Flush with the tax revenue bounty of a gargantuan bubble in housing and tech start-ups, the city and county of San Francisco now has an annual budget of $9 billion--a sum greater than the budgets of many states, all to serve a population of about 850,000.
 

One would be forgiven for assuming all the essential systems of a metropolis would be working smoothly, greased with an astonishing $9 billion. (It wasn't that long ago--the late 1990s--that San Francisco's budget was a mere $3 billion.)
 

But citizens aren't experiencing the system as working well. Lapses in public services tax San Franciscans’ patience:
 

Two weeks ago, we asked City Insider readers what they think of the fact that San Francisco’s budget hit a whopping $9 billion a year — more than the budgets of at least 10 states.
 

Now that more taxes are pouring into city coffers than ever before, do residents think they’re getting their money’s worth?
 

We were surprised by the deluge of e-mails, which continue to roll in, and the very vehement responses. Every single person who wrote had valid complaints, and not one thought city services were up to snuff for one of the richest cities in the world.
 

“One thing is for sure,” wrote Philip Snyder, a retired inspector for the Department of Public Health who lives North of the Panhandle. “If money was blood, San Francisco would make Dracula look like a mosquito.”
 

What happens when the budget declines by $1 billion in a run-of-the-mill recession? Right now, magical thinking reigns supreme, and the idea that bubbles need only stop expanding to trigger a business-cycle recession isn't in many minds. But recessions do happen, and those following explosive bubbles tend to be deeper than the average, so a $1 billion drop in tax revenues is to be expected.
 

In the same vein, the state of California, also flush with revenues from these same bubbles, has a "rainy day fund" of $3.46 billion and an annual budget of $117 billion. In previous recessions, state revenues drop by $10 to $20 billion--meaning the rainy day fund is woefully inadequate.
 

Here is the budget reality in Greece:
 

These budget numbers are dated--the current figures are much worse.
 

The European Status Quo is expending the last dregs of its legitimacy and cash defending its financial Elites. It is impossible to "reform" a Status Quo whose foundation is kleptocracy, just as it is impossible to wean an economy that relies on debt and leverage for its "growth" of excessive debt and leverage: financialization isn't a feature of the economy, it is the economy.
 

Things fall apart for systemic reasons that are deeply intertwined; minor policy tweaks and printing more money are simply expressions of magical thinking.

Collapse, Part 4: Loss Of Faith In Public Institutions

Submitted by Tyler Durden on 06/25/2015

inShare2

http://www.zerohedge.com/news/2015-06-25/collapse-part-4-loss-faith-public-institutions 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Public institutions are now devoted to serving their own vested interests or the interests of private financial Elites. 

Though we may think of collapse in terms of ATMs not working and rampaging mobs, collapse actually starts with the intangible loss of faith in public institutions: elected officials, law enforcement, the justice system and the agencies of financial regulation (anti-trust, etc.).
 

Unsurprisingly to those who discern the structural rot of the status quo, Americans No Longer Believe In Their Institutions:

“Americans’ confidence in most major U.S. institutions remains below the historical average for each one,” a Gallup spokesman said in a news release. All in all, it’s a picture of a nation discouraged about its present and worried about its future, and highly doubtful that its institutions can pull America out of its trough.

Only 8 percent have confidence in Congress, the lowest of all institutions rated. No wonder, given the Congressional credo that we have to pass this bill to find out what's in it.The latest monstrosity that is cloaked in secrecy and mumbo-jumbo is the Trans-Pacific Partnership (TPP), which Ellen Brown rightly describes as Straight out of Alice in Wonderland:

The terms of the TPP and the TiSA are so secret that drafts of the negotiations are to remain classified for four years or five years, respectively, after the deals have been passed into law. How can laws be enforced against people and governments who are not allowed to know what was negotiated?

If the Trans-Pacific Partnership is so good for the average American, then why not let us read it and be persuaded by the document itself? Instead, the vast machinery of the American central state is devoted to maintaining the secrecy of the bill and crushing all opposition with threats that are no longer even veiled.
 

One of the 39 senators who voted against the TPP, Jeff Sessions, concluded "They Won The Vote, But Lost The Trust Of The American People"

Americans increasingly believe that their country isn’t serving its own citizens. They need look no further than a bipartisan vote of Congress that will transfer congressional power to the Executive Branch and, in turn, to a transnational Pacific Union and the global interests who will help write its rules.

 

The same routine plays out over and again. We are told a massive bill must be passed, all the business lobbyists and leaders tell how grand it will be, but that it must be rushed through before the voters spoil the plan. As with Obamacare, the politicians meet with the consultants to craft the talking points—not based on what the bill actually does, but what they hope people will believe it does.

 

And when ordinary Americans who never asked for the plan, who don’t want the plan, who want no part of the plan, resist, they are scorned, mocked, and heaped with condescension.

 

Washington broke arms and heads to get that 60th vote--not one to spare--to impose on the American people a plan which imperils their jobs, wages, and control over their own affairs. It is remarkable that so much energy has been expended on advancing the things Americans oppose, and preventing the things Americans want.

No wonder Americans have lost faith in their institutions: those institutions are now devoted to serving their own vested interests or the interests of private financial Elites.
 

This same loss of trust is underway in Europe. The entire Greek debt issue could have been resolved with fewer losses and much less suffering if Greece had defaulted on the private bank debt in 2010.
 

But with the complicity of the public institutions that were supposed to serve the citizens' interests, private banks quickly shifted the vast majority of the Greek debt to the taxpayers: If Greece Defaults, Europe's Taxpayers Lose.
 

Here is the debt in 2009--mostly private:

a

Here is the debt in 2015--almost all public debt on the backs of taxpayers:

a

When institutions serve the interests of the few at the expense of the many, democracy is just a label slapped on financial totalitarianism. In case you missed it, here is Smith's Neofeudalism Principle #1:: "If the citizenry cannot replace a dysfunctional government and/or limit the power of the financial Aristocracy at the ballot box, the nation is a democracy in name only."
 

Of related interest:
 

Orwell and Kafka Do America: How the Government Steals Your Money--"Legally," Of Course (March 24, 2015) 

 

Collapse Part 3: No Institutional Path to Contraction

Posted on June 25, 2015 by Charles Hugh Smith

http://www.washingtonsblog.com/2015/06/collapse-part-3-no-institutional-path-to-contraction.html 

One poorly understood source of collapse is the lack of pathways to contraction and a reduction of complexity/cost. The only pathway that is clearly marked is the one to expansion–of production, debt, credit, government, income, benefits, costs and complexity: more agencies, more regulations, more committees, more staff, more of everything.
The path to less complexity, less debt, less production and a contraction of the entire system doesn’t exist in most institutions.
Many dismiss any talk of collapse as mere fear-mongering. This is a legitimate issue to discuss, for if we focus exclusively on the lurid horrors of being killed by a shark in open water (for example) while ignoring the much higher risks of being killed by falling off a ladder at home, we have distorted the risks of accidental death and done a disservice to our understanding of various risks.
But collapse is not an event, it is a process. As a result, systemic collapse doesn’t lend itself to statistical calculations of probability. Processes are driven by dynamics, not odds.
So those dismissing any discussion of collapse as mere fear-mongering are doing a disservice to our understanding of processes–or lack thereof. One interesting feature of collapse is that it can result from either a choking over-abundance of complex, costly processes or a complete lack of essential processes, conceptually and practically.
Which brings us to the process that is lacking virtually everywhere–the process of contraction: shrinking the system, income, headcount, complexity and being productive with less of everything.
The corporate world offers many examples of what happens when the process of contraction and reducing complexity does not exist: companies buckle, fold and go bust. The world’s corporate darling Apple experienced this precise death-spiral in 1996-1997 before the company’s board brought Steve Jobs back as CEO. (So tentative was the board that Jobs was appointed “interim CEO.”)
Apple had only one path: expansion. More fiefdoms, more staff, more product lines, more models, more sales, more profits. The reversal from profits to losses marooned the company, for there was no institutional history of a vast reduction in products, fixed costs and organizational complexity.
Not only was there no institutional history of downsizing, there was no conceptual or practical pathway from unprofitable bloat and institutional failure to a leaner, flatter more productive system. Without an emergency infusion of cash from Microsoft and the appointment of a manager empowered to slash and burn fixed costs and re-set priorities and product lines, Apple would have collapsed.
The same can be said of the European Union. The bylaws of the EU (as I understand them) define the pathway of expanding the EU but not the pathway of forcibly shedding members. Member nations may elect to leave the EU of their own volition, but there is no mechanism in place for the EU to eject member nations such as Greece.
In other cases, systems are structured so any contraction leads to collapse. This is the nature of our debt/leverage-based financial system: any contraction in debt, credit or inflation will bring the system down because the system is predicated on the permanent expansion of collateral to support more debt and the expansion of income to service debt.
If either collateral or income declines, the system implodes:
a
This is not an event, it is a process. If debt and leverage expand while collateral and income decrease, the system becomes systemically more fragile and prone to destabilization. The financial system is dynamic and has multiple inputs; on its current setting, the system will become increasingly fragile. If alternative policies were put in place, it could become increasingly resilient.
Systems with no conceptual or practical pathway to contraction and reduced complexity/fixed costs are more at risk of collapse than systems with institutional pathways for successful reductions in debt, credit, income, fixed costs and complexity.
How many institutions have proven pathways for becoming smaller, leaner, and flatter in organizational structure? Very few, as the default setting for the past 60 years has been expansion and more of everything. Less of everything does not compute.

Collapse, Part 2: The Nine Dynamics of Decay

Posted on June 24, 2015 by Charles Hugh Smith

http://www.washingtonsblog.com/2015/06/collapse-part-2-the-nine-dynamics-of-decay.html 

While collapse may be sudden, the decay that generated the collapse had been rotting away the foundation for years or decades. In distilling the vast literature on collapse into nine dynamics, I am drawing upon many other authors’ work, including:
The Collapse of Complex Societies
The Great Wave: Price Revolutions and the Rhythm of History
The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century
The Shock Doctrine: The Rise of Disaster Capitalism
Overshoot: The Ecological Basis of Revolutionary Change
The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization
Collapse: How Societies Choose to Fail or Succeed
The Long Descent: A User’s Guide to the End of the Industrial Age
Reinventing Collapse: The Soviet Example and American Prospects
Here are the nine dynamics of decay that lead to collapse:
1. complacency and intellectual laziness
2. profound political disunity
3. rise of unproductive complexity
4. those bearing the sacrifices opt out/quit
5. decay of effective leadership
6. rise of bread and circuses social welfare and entertainment to distract/placate restive citizenry
7. decline of wealth-producing capacity–status quo living off financial trickery
8. sclerosis–status quo controlled by vested interests
9. resource depletion/environmental damage
All of these dynamics are currently in play around the globe.
Michael Grant touched on many of these dynamics in his excellent account The Fall of the Roman Empire, a short book I have been recommending since 2009:
There was no room at all, in these ways of thinking, for the novel, apocalyptic situation which had now arisen, a situation which needed solutions as radical as itself. (The Status Quo) attitude is a complacent acceptance of things as they are, without a single new idea.
This acceptance was accompanied by greatly excessive optimism about the present and future. Even when the end was only sixty years away, and the Empire was already crumbling fast, Rutilius continued to address the spirit of Rome with the same supreme assurance.
This blind adherence to the ideas of the past ranks high among the principal causes of the downfall of Rome. If you were sufficiently lulled by these traditional fictions, there was no call to take any practical first-aid measures at all.
If our idea of intellectual rigor is Paul Krugman dancing around the Neo-Keynesian Cargo Cult campfire waving dead chickens and spewing nonsensical claims of grand success, we’re doomed. Placing our faith in failed monetary-legerdemain and policies of the past is the height of hubris and complacency. There is a cost to complacency and it’s called collapse.
A lengthier book on the same subject by Adrian Goldsworthy, How Rome Fell: Death of a Superpower, found that a key driver of decline was the constant political struggle for power drained resources and led to ineffective leadership.
This profound political disunity is not the usual staged battles of the Demopublicans vs. the Republicrats. The real disunity is between a doomed Status Quo and those willing to deal with reality. Right now those willing to deal with reality are few, but they have the distinct advantage of reality on their side, while the Status Quo has only propaganda, artifice, phony political theater and empty promises.
Another dynamic of decay is expansive, sclerotic bureaucracies that lose sight of their purpose while piling on unproductive complexity. The top leadership abandons the pursuit of the common good for personal gain, wealth and power, and this rot at the top soon spreads down the chain of command to infect and corrupt the entire institutional culture.

Grant describes how key classes of productive citizens opt out as their sacrifices are squandered on propping up rapacious elites. Those making the sacrifices look around at what they’ve sacrificed to maintain and decide it’s no longer worth it. So they opt out or quit, draining the status quo of talent, drive and wealth-producing assets.
As the masses become debt-serfs or dependents on the state, the costs of providing bread and circuses becomes unsustainable. The state and central banks are currently papering over this mismatch by printing or borrowing money in the trillions of dollars. But financial trickery is no substitute for actual wealth creation: printing money is not the same as printing real-world wealth.
As for resource depletion and environmental damage–look no further than aquifer depletion, soil erosion, the stripmining of the seas and the poisoning of our air/water/soil on a grand scale.
Rome didn’t fall so much as erode away, its many strengths squandered on in-fighting, mismanagement of resources, complacency and personal aggrandizement/corruption. That’s the template for collapse, and you see it in every status quo globally.

Collapse, Part 1: Greece

Posted on June 22, 2015 by Charles Hugh Smith

http://www.washingtonsblog.com/2015/06/collapse-part-1-greece.html 

The theme this week is collapse. It’s a big, complex topic because there are as many types of collapse as there are systems. Some systems appear stable on the surface but collapse suddenly; others visibly decay for decades before finally slipping beneath the waves of history, and some go through stages of collapse.
The taxonomy of collapse is broad, and each unsustainable system (i.e. a system that will fail despite claims to the contrary) has its unique characteristics.
Which brings us to Greece.
I have written extensively about Greece and the doomed financial arrangement known as the euro for many years–for example: Greece, Please Do The Right Thing: Default Now (June 1, 2011).
When Debt is More Important Than People, The System Is Evil (February 18, 2012)
Greece at the Crossroads: the Oligarchs Blew It (January 27, 2015)
Greece and the Endgame of the Neocolonial Model of Exploitation(February 19, 2015)
When Europe Gets Greece’s Jingle Mail: Dealing with Default (May 15, 2015)
With the bankruptcy of Greece now undeniable, we’ve finally reached the endgame of the Neocolonial-Financialization Model. There are no more markets in Greece to exploit with financialization, and the fact that the mountains of debt are unpayable can no longer be masked.
Europe’s financial Aristocracy has an unsolvable dilemma: writing off defaulted debt also writes off assets and income streams, for every debt is somebody else’s asset and income stream. When all those phantom assets are recognized as worthless, collateral vanishes and the system implodes.
The peripheral nations of the EU are effectively neocolonial debtors of the core, and the taxpayers of the core nations are now feudal serfs whose labor is devoted to making good on any loans to the periphery that go bad. (see chart of Greece’s debtors below)
Greece’s financial/political Elites milked the entry into the EU for all it was worth, effectively destroying the Greek economy in their limitless looting: Misrule of the Few: How the Oligarchs Ruined Greece.
What has already collapsed is the faith that institutions within Greece and the European Union can effectively manage the inevitable Greek default. As noted in the essay linked above, Greece’s power structure is designed to do one thing: protect vested interests and dissipate accountability.
The same can be said of the European central Bank (ECB) and the European Union (EU). Both were sold as abstract financial magic: the Elitist power structures of every nation in the union–the ultimate source of the rot that is now emitting the foul stench of collapse–would be left intact while the economies of all member nations would magically produce more goods and services based on ever-expanding debt and leverage.
This leads to the critical question of the hour: who’s saving whom? Are last-ditch bailouts saving the Greek people and the integrity of their nation, or are they simply saving the political/financial Elites who benefited from EU membership and the systemic expansion of debt?

Here’s another key question: who’s being punished by the Troika’s “nobody defaults and gets away with it” policy? Clearly, the Greek people are being punished–but to what end? What about punishing the political/financial Elites who benefited from Greece’s entry into the EU and the banking Elites who profited from the irresponsible expansion of loans to Greece?
If Greece had defaulted four years ago when default was already visibly inevitable, the Greek citizenry would already have worked through the painful crisis of adjusting to a dearth of external credit and perhaps a new currency, and maybe they would have jettisoned their corrupt and self-serving Elites, clearing the way for sustainable growth and governance.
Instead, the Greek people have suffered for nothing. Default is still inevitable, as is the resulting EU-wide currency-political crises.
When systems are broke and broken, collapse is the only way forward. Only collapse breaks the grip of vested interests and opens the political process to non-Elite participation. By pushing default/collapse forward for four long years, the Greek Elites have punished their citizens for absolutely no yield on their immense suffering. Greece can no more escape the black hole of default than it could four years ago.
Central and private banking magic has failed. The idea that corrupt, self-serving Elites would magically create widespread prosperity by borrowing money that could never be paid back has collapsed, though the Power Elites of the Troika cling to this foolish fantasy because they have no other choice if they want to retain power.
The only faith remaining in the EU Elite is belief in the goddess TINA–there is no alternative. But there is always another alternative: collapse of the status quo and the assembly of an alternative arrangement that doesn’t concentrate power in the hands of a few at the expense of the many.

The Fed's Policies Have Paved the Way For an Even Bigger Crisis Than 2008

Submitted by Phoenix Capital Research on 06/23/2015 13:42 -0400
http://www.zerohedge.com/news/2015-06-23/feds-policies-have-paved-way-even-bigger-crisis-2008
The 2008 crash was a warm up.
Many investors think that we could never have a crash again. The 2008 melt-down was a one in 100 years episode, they think.
They are wrong.
The 2008 Crisis was a stock and investment bank crisis. But it was not THE Crisis.
THE Crisis concerns the biggest bubble in financial history: the epic Bond bubble… which as it stands is north of $100 trillion… although if you include the derivatives that trade based on bonds it’s more like $500 TRILLION.
The Fed likes to act as though it’s concerned about stocks… but the real story is in bonds. Indeed, when you look at the Fed’s actions from the perspective of the bond market, everything suddenly becomes clear.
Bonds are debt.  A bond is created when a borrower borrows money from a lender. And at the top of the financial food chain are sovereign bonds like US Treasuries.
These bonds are created when someone lends the US money. Why would they do this? Because the US SPENDS more money than it TAKES IN via taxes. So it issues debt to cover its extra expenses.
This cycle continued for over 30 years until today, when the US has over $11 TRILLION in size. Because we never actually pay our debt off (or rarely do), what we do is ROLL OVER debt when it comes due, so that investors continue to receive interest payments but never actually get the money back… because the US Government doesn’t have it… because it’s still spending more money than it takes in via taxes.
This is why the Fed cut interest rates to zero and will likely do everything in its power to keep them low: even a small raise in interest rates makes all of this debt MORE expensive to pay off.
This is also why the Fed had the regulators drop accounting standards for derivatives… because if banks and financial firms had to accurately value their hundreds of trillions of derivatives trades based on bonds, investors would be terrified at the amount of leverage and the margin calls would begin.
The bond bubble is also why the Fed started its QE programs. Because by buying bonds, the Fed put a floor under Treasuries… which made investors less likely to dump bonds despite bonds offering such low rates of return.
This is also why the Fed is terrified of deflation. Deflation makes future debt payments more expensive. So the Fed prefers inflation because it means the dollars used to pay off debt down the road will be cheaper than Dollars today.
Again, when look at the Fed’s actions through the perspective of the bond market… everything becomes clear.
The only problem is that by doing all of this, the Fed has only made the bond market even BIGGER. In 2008, the bond market was $82 trillion. Today it’s over $100 trillion. And the derivatives market, of which 80%+ of all trades are based on interest rates (Treasury yields), is at $700 TRILLION.
The REAL Crisis will be when the bond bubble bursts. When this happens, it will be clear that real standards of living have been falling since the ‘70s and that sovereign nations have been papering over this through social spending and entitlements (a whopping 47% of US households receive Government benefits in some form).
Imagine what will happen to the markets when the Western welfare states finally go broke? It will make 2008 look like a picnic.