CLASSIC COMMENTARY: The Con of the Decade Part I

Posted on July 14th, 2010

Scams WordCloudThe con of the decade (Part I) involves the transfer of private debt to the public (the marks), who then pays interest forever to the con artists.
 
By Charles Hugh Smith

I’ve laid out the Con of the Decade (Part I) in outline form:

1. Enable trillions of dollars in mortgages guaranteed to default by packaging unlimited quantities of them into mortgage-backed securities (MBS), creating unlimited demand for fraudulently originated loans.

2. Sell these MBS as “safe” to credulous investors, institutions, town councils in Norway, etc., i.e. “the bezzle” on a global scale.
 
3. Make huge “side bets” against these doomed mortgages so when they default then the short-side bets generate billions in profits.
 
4. Leverage each $1 of actual capital into $100 of high-risk bets.

5. Hide the utterly fraudulent bets offshore and/or off-balance sheet (not that the regulators you had muzzled would have noticed anyway).

6. When the longside bets go bad, transfer hundreds of billions of dollars in Federal guarantees, bailouts and backstops into the private hands which made the risky bets, either via direct payments or via proxies like AIG. Enable these private Power Elites to borrow hundreds of billions more from the Treasury/Fed at zero interest.
 
7. Deposit these funds at the Federal Reserve, where they earn 3-4%. Reap billions in guaranteed income by borrowing Federal money for free and getting paid interest by the Fed.
 
8. As profits pile up, start buying boatloads of short-term U.S. Treasuries. Now the taxpayers who absorbed the trillions in private losses and who transferred trillions in subsidies, backstops, guarantees, bailouts and loans to private banks and corporations, are now paying interest on the Treasuries their own money purchased for the banks/corporations.

9. Slowly acquire trillions of dollars in Treasuries–not difficult to do as the Federal government is borrowing $1.5 trillion a year.

10. Stop buying Treasuries and dump a boatload onto the market, forcing interest rates to rise as supply of new T-Bills exceeds demand (at least temporarily). Repeat as necessary to double and then triple interest rates paid on Treasuries.

11. Buy hundreds of billions in long-term Treasuries at high rates of interest. As interest rates rise, interest payments dwarf all other Federal spending, forcing extreme cuts in all other government spending.
 
12. Enjoy the hundreds of billions of dollars in interest payments being paid by taxpayers on Treasuries that were purchased with their money but which are safely in private hands.
 
Since the Federal government could potentially inflate away these trillions in Treasuries, buy enough elected officials to force austerity so inflation remains tame. In essence, these private banks and corporations now own the revenue stream of the Federal government and its taxpayers. Neat con, and the marks will never understand how “saving our financial system” led to their servitude to the very interests they bailed out.

The circle is now complete: in “saving our financial system,” the public borrowed trillions and transferred the money to private Power Elites, who then buy the public debt with the money swindled out of the taxpayer. Then the taxpayers transfer more wealth every year to the Power Elites/Plutocracy in the form of interest on the Treasury debt. The Power Elites will own the debt that was taken on to bail them out of bad private bets: this is the culmination of privatized gains, socialized risk.
 
In effect, it’s a Third World/colonial scam on a gigantic scale: plunder the public treasury, then buy the debt which was borrowed and transferred to your pockets. You are buying the country with money you borrowed from its taxpayers. No despot could do better. (my emphasis)

I would like to acknowledge Allan Dover and B.C. of Imperial Economics for helping to clarify my thinking on these topics.

By permission Charles Hugh Smith

www.oftwominds.com

CLASSIC COMMENTARY: “Global Financial Crisis for Dummies: Why the Abandonment of the Gold Standard is Responsible for the World’s Sovereign Debt Crisis”

Posted on June 28th, 2010

Gold BarsThis quote is from zerohedge.com’s comments about a very well-written article by Hugo Salinas Price, a Mexican businessman, who has argued over the past few years for Mexico to return to the gold standard, and to re-establish silver as a monetary standard.

The actual article is entitled, “The Gold Standard:  Generator and Protector of Jobs”, and its message applies to the U.S. and other industrialized nations, as well as Mexico:                                                                                                                                                                                                                                                                                                                                                                    

By Hugo Salinas Price

The abandonment of the gold standard in 1971 is closely tied to the massive unemployment the industrialized world has suffered in recent years;  Mexico, even with a lower level of industrialization than the developed countries, has also lost jobs due to the closing of industries; in recent years, the creation of new jobs in productive activities has been anemic at best.

The world’s financial press, in which leading economists and analysts publish their work, never examines the relationship between the abandonment of the gold standard and unemployment, de-industrialization, and the huge chronic export deficits of the Western world powers.  Might it be due to ignorance?  We are reluctant to think so, given that the articles appearing in the world’s leading financial publications are written by quite intelligent analysts.  Rather, in our opinion, it is an act of self-censorship to avoid incurring the displeasure of the important financial and geopolitical interests that are behind the financial press.

In this article we discuss the relationship between loss of the gold standard and the present financial chaos, which is accompanied by severe “structural imbalances” between the historically dominant industrial powers and their new rivals in Asia.

World trade before 1971

From the end of World War II through the 1960s, all well-governed nations in the world sought to maintain a constant balance between their exports and imports.  They all wanted to maintain a situation where they exported more than they imported, so that they could accumulate growing Treasury reserves of gold, or in its defect dollars, which, under the terms of the United States (US) promise in the Bretton Woods Agreements of 1944, could be redeemed by any Central Bank that requested gold in exchange for its dollars.

To be precise, we cannot fail to mention one exception.  The exception to the rule was none other than the US.  All well-governed countries sought to export more than they imported, except the US.

The US was not overly concerned with maintaining a balance between exports and imports, because – according to Bretton Woods – the US could pay its export deficits by the simple expedient of sending more dollars to pay its creditors.  As the sole source of dollars, the US had a clear advantage over the rest of the world; they could pay their debts in (redeemable) dollars that they themselves printed.

Economists of the day warned of the danger of this practice, which resulted in a constant loss of American gold.  From over 20,000 tons at the end of World War II, US gold reserves dropped year by year as certain countries, notably France, insisted on redeeming their dollars for gold at a rate of 35 dollars per ounce of gold.  France incurred intense displeasure in Washington and New York due to its demands for gold in exchange for dollars; some analysts attribute the unrest in France in the spring of 1968 to covert operations by the US intelligence services, in a show of America’s disapproval of the behavior of France, led at the time by General Charles de Gaulle.

The US did nothing to slow the loss of gold.  In the early months of 1971, Henry Hazlitt, a solid classical economist, predicted that the dollar would have to be devalued;  he said it would be necessary to increase the number of dollars that would be needed to obtain an ounce of gold from the United States Treasury.  Only months after his warning, the dam burst, and in August 1971 the US was forced to devalue its currency, because the amount of gold in its reserves had fallen to a dangerous level.  (Today, many doubt that the US has the 8,000 tons of gold it claims to have in its vaults at Fort Knox and the US Military Academy at West Point, N.Y.)

What Henry Hazlitt never imagined was that instead of devaluing the currency – the recommendation of Paul Samuelson, Nobel Prize Winner in Economics, published the week before August 15, 1971 – President Nixon took the advice of Milton Friedman and declared that from that time forward the US would no longer redeem dollars held by the world’s central banks at any price.  The US unilaterally violated the terms of Bretton Woods.  In effect, it was actually financial bankruptcy.

Since then, all world trade – or most of it, as the euro, the pound sterling, and to a lesser extent the yen all compete with the dollar – is conducted using dollars that are nothing more than fiat money, fake money. Because all the world’s other currencies were bound to gold through the dollar, the immediate consequence was that simultaneously they also became fiat money, fake money with no backing.

Consequences of abandoning the gold standard

The consequences of that fateful day have overthrown all order and harmony in economic relations among the nations of the world, while facilitating and expediting the global expansion of credit because part of the dollars exported by the US ended up in the reserves of Central Banks around the world.

Countries began to accumulate dollars as the expansion of credit in the US advanced inexorably, now free of the restraint formerly imposed by Bretton Woods.  The rest of the world was forced to accumulate dollars in reserves, because having insufficient dollar reserves, or having reserves that did not grow, or worse, having falling reserves, was a clear sign for monetary speculators to attack a country’s currency and destroy it with devaluation.
 
As the loss of gold ceased to be a limiting factor, the last restrictions on the expansion of credit were stripped away.  A heavy flow of dollars to all parts of the world spurred the expansion of global credit, which did not stop until 2007.  The international banking elite always strive to obtain greater profits and to that end always seek to expand credit.  Starting in 1971, freed of the restraint of being required to pay international accounts in gold, or with dollars redeemable for gold, the constant unfettered creation of credit and still more credit ensued.  It was boom time in the US.

The US, which paid the rest of the world with its own irredeemable dollars of no intrinsic value, lauded the adoption of “free trade” and “globalization”.  The US could buy whatever it wanted, anywhere in the world, in any quantity, and at any price.  Starting in the 1990s, its export deficits became alarming, but nothing was done to reduce them; on the contrary, they grew year by year.

Mexico, following the US example, joined NAFTA – the North American Free Trade Association.  Down with import tariffs! Free trade with the world!  The new vision offered the enthralling, seductive picture of a globalized world without borders, where everyone could buy and sell where they liked, with no limits.  The 90’s were years of unbridled optimism for globalization!

Free Trade is unquestionably beneficial for humanity at large.  It is good to be able to buy goods where they are cheapest; some countries enjoy conditions that favor them in production of certain things; each country should produce those things in which it has an advantage over other countries.  Thus, the whole world can benefit from the good things each country has to offer.  It is an appealing and sound doctrine, but… there is a crucial catch:  the doctrine of Free Trade was conceived for a world where the sole means of payment was gold.  When the doctrines of “Free Trade” and the “Comparative Advantages of Nations” were developed, the economists of the day could not imagine a world that did not use gold, but instead relied on a fiat money that could be created at will by a single country.

The “globalization” of the 1980s and 1990s and to date is based on the ideas of “Free Trade”.  However, in the absence of the gold standard that existed when the doctrine was conceived, “globalization” had completely destructive results, which have caused the de-industrialization of the West and the rise to power of Asia.

In the decades prior to 2007 a massive fleet of cargo ships was created, which sailed for the US and Europe – the West in general, Mexico included – bearing all kinds of inexpensive, quality products made in Asia.  The flood was so great that local factories in the Western World were forced to move to Asia, to employ cheaper labor and continue to sell their products in the West.  My readers will know how many industries, large and small, have ceased to exist in the US and the West in general, because Chinese competition killed them.  They will know as well how hard it is to find a product that can be produced at a profit in the developed countries.  It is very difficult to find a niche for any product to be manufactured locally.  The flight of factories to Asia to take advantage of lower wages caused unemployment where local factories were closed.  For the same reason job creation is slow or non-existent.

A taxi driver in Barcelona told us:  “Spain is a service economy. Industry is no longer our foundation. If tourists stop coming, we’ll die.”  By the same token, it has been said of Greece:  “It produces olive oil and tourism, and nothing more.”  The US, industrial colossus of the post-war world, has been de-industrialized.  Now, what are developed countries to do to create jobs?

Diagnosis of the evils of de-industrialization and unemployment

These evils appeared because gold was eliminated as a) a constraint on the expansion of credit and the creation of money, and b) the only form of payment of international debt.

Under the gold standard all players in international trade knew that it was only possible to sell to a country that sold something else in turn. It was not possible to buy from a country that did not buy in turn.  Trade was naturally balanced by this restriction.  The “structural imbalances” so commonplace today were unheard of.
 
For example, in 1900, Mexico could export coffee to Germany because Germany, in turn, exported machinery to Mexico.  Germany could buy coffee from Mexico because Mexico, in turn, bought machinery from Germany.  Each transaction was denominated in gold, and as a result there was a balance based on an economic reality.  Because there was balance in world commercial relationships, a relatively small amount of gold sufficed to adjust the international balance.  The world financial center which acted as a “Global Clearing House” was London.  A few hundred tons of gold were sufficient to meet the needs of that Clearing House.  For further reading on the function of London as a clearing centre for world commerce, see “Real Bills” and associated articles by Antal E. Fekete at  professorfekete.com.

Another example:  In 1930, the US could sell very little to China, because the Chinese were poor and lacked purchasing power.  Because the US sold very little to China, at the same time it could buy very little from China.  Although prices of Chinese products were very low, the US could not buy much from China, because China did not buy from the US – China was poor and could not afford American products.  Thus, trade between China and the US was balanced by the need to pay the balance of their transactions in gold. Balance was imperative.  There was no chance of “structural imbalance”.

Under Free Trade with the gold standard, the great majority of transactions did not require movement of gold to complete the exchange.  The goods exchanged paid for each other.  Only small remainders had to be paid in gold.  Consequently, international trade was limited by the volume of mutual purchases between parties; for example, Chinese silk paid for imports of American machinery, and vice-versa.

The gold standard imposed order and harmony.  If President Nixon had not “closed the gold window” in 1971, the world would be radically different today.  China would have taken a century or more to reach its present level.  China could not buy much from the US, because it was poor; therefore, China could not sell much to the US.

All this changed radically with the abolition of the gold standard.

Everything changed because the United States, having removed gold from the world monetary system, could “pay” everything in dollars, and without the gold standard as a limiting institution, it could print dollars ad libitum – without limit.  Thus, in the 1970s the United States started to buy huge amounts of high quality products from Japan, while the Japanese boasted:  “Japan sells; Japan does not buy.”  A situation that was impossible under the gold standard became perfectly possible under the fiat dollar standard.  The Japanese became gigantic producers, their country an island transformed into a factory.  Japan accumulated vast reserves of dollars sent from the US in exchange for Japanese products.  This in turn triggered the de-industrialization of the US.

Take for example the US manufacturers of T.V.  Some of the famous US factories that built TV receivers by the millions were “Philco”, “Admiral”, “Zenith”, and “Motorola”.   The Japanese had better and cheaper products, and since the abandonment of the gold standard allowed Japan to sell without buying in turn, and allowed the US to buy without selling in turn, the result was that all the huge factories producing these TV’s in the US were closed down. That’s how “going off gold” closed down US industry.

Unlimited purchases from Japan flowed to the US and the world, because they were paid in dollars, which could be created in unlimited quantities.  The balance the gold standard had imposed disappeared and imbalance took its place.

After 1971, the US embarked on a protracted, large-scale expansion of credit.  As the nation was de-industrialized and high-paying jobs in industry disappeared, a lack of disposable income for the population was replaced with easy and cheap credit, to conceal the stagnation in per capita income.  Consumer credit drove imports from Asia and furthered de-industrialization even more. The great expansion of American credit was made possible because the gold standard, which restrained the expansion of credit by the banking system, had been abandoned.  It is no coincidence that some analysts have observed that in real terms, American workers have had no real increase in their income since 1970.

All mainstream economists consider the elimination of the gold standard perfectly acceptable.  They still do not see, or do not want to see, that the “Law of Unforeseen Consequences” is at work:  the enormous advantage the US gained by being able to pay unlimited amounts in irredeemable dollars has become the fatal cause of the industrial destruction of the US – and of the West in general.  A Mexican saying applies:  en el pecado llevas la penitencia – “sin brings with it its own punishment”.

The current malaise: financial crisis, industrial crisis, crisis of unemployment

Today the situation is far worse.  China, with a population of 1.3 billion, has become a formidable power.  No one can compete with China in price.  China sells vast quantities of goods to the rest of the world, without the rest of the world having any chance of selling similar quantities to China, and China can do so, because today trade deficits are “paid” not in gold, but in dollars or euros or pounds sterling or yen, which will never be scarce:  they are created at will by the USA, the European Central Bank, the Bank of England, or the Bank of Japan.

A fearful monster has been created as a consequence of the elimination of the gold standard, which imposed a limit:  “You can only sell to those who sell to you; you can only buy from those who buy from you.”   This limit no longer applies; everything is disarray, inequality, imbalance; “structural imbalance” prevails because we no longer have the gold standard.

The credit expansion boom has ended, and in its place we have a global financial crisis. Today the problem of “structural imbalance” and the de-industrialization and unemployment it has produced in formerly industrialized countries acquires greater relevance with every passing day. What is to be done with the masses of jobless men and women? No one knows the answer, because the answer is not acceptable to the thinkers of today: the correction of “structural imbalances” and re-industrialization, in other words the creation of new jobs, lies in restoring the gold standard worldwide.
 
The “globalization” so highly praised by the financial press in recent years, has become the worst imaginable nightmare.  It is no longer possible to support the unemployed with government handouts.  The Sovereign State is close to bankruptcy.  Thus, nature takes its revenge on those who dared violate its laws by seeking to impose false money on the world.
 
Richard Nixon’s elimination of the gold standard has proven to be the US’s best possible strategic gift to China and the rest of Asia.  Today, China has a colossal industrial base that might have taken centuries to build, while the US is to a great extent devoid of factories and incapable of reclaiming its former glory.  How tragic a fate for the US!
 
International and National Commerce

The word “commerce” is defined in the Concise Oxford English Dictionary as “Exchange of merchandise or services, esp. on a large scale [ French or from Latin COM (mercium from merx mercis merchandise)]

Note that the “exchange of merchandise or services” cannot include as a complement to that exchange a fictitious payment with fiat money, which is neither merchandise nor a service, but rather a paper note or digital entry denoting a debt payable in nothing.  In the case of the dollar, the debt is a debt of the Federal Reserve and registered accordingly on its balance sheet.  A debt cannot be settled by tendering a debt instrument (which is payable in nothing in any case) and in effect, Balance of Payments debts have not, by any means, been settled in international commerce since 1971.

The non-settlement of international balance of payments debts has produced the accumulation of huge fictitious dollar reserves on the part of exporting countries, since 1971.  The same holds for fictitious payments of export deficit debts with euros, pounds, yen or any other present-day currency.  See the following graph:

Graph_Gold Standard

Gold, up until the Bretton Woods Agreements of 1944, figured as the complement to the international exchange of merchandise or services and did settle outstanding balance of payments deficits, because it was a merchandise or commodity used as money.

According to the Bretton Woods Agreements, the fiduciary dollar was accepted as being as good as gold, with trust on the part of Central Banks upon the ability to redeem the dollar into gold.  From 1944 up until 1971 then, these fiduciary dollars were held in Central Bank reserves as a credit call upon US gold; the final payment had not been effected and was delayed as a credit granted to the US until the dollars held in reserves were to be cashed in for gold at some future date.

As it turned out, the “fiducia” or “trust” was misplaced, for in 1971 the US reneged on the Bretton Woods Agreements of 1944, “closed the gold window” and stiffed the creditor countries.  No final settlement of international commerce debts took place in 1971, nor has any taken place since then; the truth of this statement is obscured by the mistaken idea that tendering a fiat currency in payment of an international debt constitutes settlement of that debt.

Once that false idea – that fiat money can settle a debt – is accepted as valid, then the problem of the enormous “imbalances” in world trade becomes an insoluble enigma.  The best and brightest of today’s accredited economists attempt in vain to find a solution to a problem that cannot be solved except by the renewed use of gold as the international medium of commerce.
 
Regarding national commerce, the same reasoning applies.  In reality, no one engaging in commerce in any country in the world today is actually paying for purchases, that is to say, there is no any actual settlement of any debt.  All individuals, corporations and government entities are merely shuffling debts (payable in nothing) between themselves, in the form of either paper bills or digital banking money, whether in dollars or any other currency in the world.

For internal national commerce the smaller value of the silver coin was convenient for day-to-day transactions at the popular level and did constitute settlement of debt when tendered in payment, for silver is a merchandise or commodity which, like gold, can participate in commercial exchange.

Today, China and the other great Asian exporters have belatedly realized that the dollars they received as “payment” for their mass exports are nothing more than digits in American computers.  If the Chinese do not cooperate, the bankers in New York can erase those digits in half an hour, and leave China with no reserves.  For this reason, the Chinese and Asians in general are buying gold, and will continue to buy it indefinitely: computers cannot erase gold reserves.

The awful truth about China is that the Chinese acquired their formidable industrial power in the short span of thirty years at a tremendous cost:  for thirty years they worked for nothing.  China has $2.5 Trillion of reserves; China does not have any use for these reserves, they have no intrinsic value and China does not know how to get rid of them in exchange for something tangible of value; these reserves are nothing more than digits in computers in the Western world.  Net, net, net:  China worked for thirty years to provide the world with a vast quantity of merchandise, in return for:  nothing! Thirty years of slavery, to build an industrial empire!  Mexico: forced to use the protectionist “Band-Aid”

Mexico has its oil, perhaps more than we are told.  Let’s hope so!  Our economy is less complex, less sophisticated, than the US’s. According to a Mexican Treasury study carried out in 2007, 85% of Mexicans have no bank accounts – a good sign that they can get by on paper money and are not getting into trouble with credit card debt.  The Mexican economy, as we see it, is like a broad, low pyramid.  It is more stable than the American “skyscraper” economy, a highly complex economy. Mexico is better equipped to survive the present crisis than the USA.

In today’s great world financial crisis of false money, we are likely to see countries around the world resort to protectionism:  the leaders will be the same countries that so recently sang the praises of “globalization”.  In this probable case, Mexico will have to do the same. It is a far from ideal scenario, but it is imperative for lack of the gold standard.  Protectionism limits productive efficiency in any country because it limits the market for its protected products to its own national market.  A limited market hampers efficiency.  The supply of goods available to the population will be more limited and probably of lower quality at higher prices.  (Protectionism will have similar effects in the US.)

Mexico will have to restrict imports in the near future.  Otherwise, we will suffer serial currency devaluations.  Protectionism is not the best policy, but Mexico will probably be forced to resort to it, for lack of the gold standard, which would be the best means of creating jobs in the US, in the rest of the “developed” world and here.

The effective cure

If Mexico aspires to anything more, we shall have to wait for the restoration of the gold standard worldwide.  In the meantime, neither demagogy nor Socialism will solve our problems. Only the gold standard can do that.

For our industrial capacity to gain access to international markets – and for Mexicans to gain access to products from international markets – it will be necessary to restore the gold standard.  Bilateral trade agreements are not optimum.  The optimum is to have the world as a market, where payment for exports is balanced by imports and residual balances are paid in gold.  Payment in gold of export deficits and collection in gold of export surpluses is sine qua non.  Under the gold standard, Mexico would achieve sustainable prosperity and full employment for our admirable workforce.

Products from China and Asia in general, which today undermine our industrial capacity and create unemployment because we cannot compete with the extremely low wages of the Asian countries, would cease to be a problem under the gold standard; if the Asian countries, which today invade our markets, do not buy similar quantities of Mexican products – which today they do not – they would not be able to export their products to Mexico.  The gold standard would fairly balance exports with imports; it would prevent the strategic destruction of our industry and protect us naturally, without the need for protectionist barriers.

The same therapy Mexico needs – the restoration of the gold standard – is what the world requires to regain economic health and sustainable prosperity.

Under a restored gold standard, Americans will not be able to purchase goods from China, unless China purchases American goods with a similar value.  If the Chinese find nothing of value to purchase in the US, then Americans will be unable to purchase Chinese goods.  It’s as simple as that!  To continue selling to the West, China will have to open wide its doors to imports!

Gold standard imposed order and harmony

If Americans find they simply cannot purchase Chinese goods, Americans will manufacture those goods themselves.  Industries and new jobs will spring up like mushrooms immediately, to satisfy American demand.  International balance will be restored, unemployment will disappear.

Protectionism is not a cure, it is a Band-Aid. Mexico will not achieve the prosperity of which it is capable through protectionism nor by resorting to Socialist measures that crush the creative spirit of the individual. Nor can we succumb to renouncing our nationality and accepting absorption by the US, imitating all the (very costly) measures the current US administration imposes on its citizens. The ideal combination for Mexico includes a moderate dose of nationalism, a government that does not incur deficits, the institution of a monetized one-ounce silver coin, the “Libertad”, to stimulate and protect savings, and eventual participation in a new global gold standard, in which our nation can find the opportunity to fulfill its destiny.

“The gold standard is the generator and protector of jobs.”

Courtesy of: www.plata.com.mx 

http://www.plata.com.mx/mplata/articulos/articlesFilt.asp?offset=0&fiidarticulo=161

CLASSIC COMMENTARY: The Slow Decay of a Healthy Economy– Caused By the “Zombies”

Posted on June 21st, 2010

Medical Lawsuits

By Bill Bonner   The Daily Reckoning

Today, we boldly announce a NEW THEORY about the way the world works.

Yes, dear reader, you are the first to hear it.

But before we get to that, let’s talk about what’s going on in the markets.

Stocks continued shuffling along like zombies…the Dow rose 24 points. But gold shot up to $1,248 – a new record.

Makes you wonder.  Inflation is no threat to anyone…at least, not now.  The economy is recovering – at least, that’s what everyone says.  So why is gold hitting a record high?

Something must be wrong.

Something is wrong.

Gold buyers are probably just like us.  They’re not sure exactly what is wrong.  But they know something is rotten in the state of Denmark.  And Greece.  And Spain.  And New York.  And California.  In Washington, DC.  And in the Gulf of Mexico.

We just had the biggest financial crack-up of all time.  Even under ideal conditions, it will take people a long time to rebuild lost savings…to get rid of houses they can’t afford…and to restructure debt they can’t pay.  While this restructuring and adjustment is going on, you’d expect the markets to be a little punky.

But instead of letting people get on with it, the zombies have moved in.  At first, you hardly notice.  An arm here.  A leg there.  Pretty soon, you’re dead!

The percentage of the economy controlled, guaranteed, or paid for by the government is increasing.  Since the feds were already deeply in debt themselves, the only way they could spend more money was by borrowing more.  You can’t cure a debt problem by borrowing more money.  Net debt is going up.  So, there’s something wrong.  The economy isn’t recovering… It’s just not possible.

Which brings us back to our new theory…

Many are the ideas about how the world rumbles and trundles along.  Most have some sort of dialectic at the center of them…some tension between one thing and another that causes them to oscillate to and fro…some yin and yang of opposing forces, constantly battling it out for control.

Good vs. Evil.  Progress vs. Backsliding.  The proletariat against the bourgeoisie.  The moneyed elite vs. the people. Democracy vs. Totalitarianism. Freedom vs. Slavery.

Here we offer a new and improved theory with a dynamic of its own:  the producers vs. the parasites.

Yesterday, we read in the local Washington newspaper that the parasites gained more ground in suburban Maryland.  It was a minor issue on a minor page of a minor section of the paper.  But that’s the way the parasites work.  Little by little…an arm here…a leg there.

In the present instance, people who live in trailer parks can now feed on the people who own the ground beneath their feet.  The state government has added a term to their contracts that neither party agreed to.  Henceforth, if the trailer park owner wishes to close down his business, he cannot merely honor the terms of his contract with his lessees.  He must also pay them off according to a formula decreed by the legislature.  Trailer park residents have been zombified.  A bigger illustration can be found on the front page of yesterday’s paper.

BP has agreed to provide the zombies with $20 billion dollars of raw meat:  “BP backs $20 billion spill fund,” says The Financial Times.

BP is a producer.  It makes something valuable.  In fact, it makes the thing that is the pentagon’s most valuable and most important resource – liquid energy.  It does so at a profit, also rewarding all the little old ladies, lonely orphans and rich sons-of-a-gun who own its shares.  BP normally pays dividends; those dividends are currently suspended, as BP diverts cash to the spill fund.  Yes, it also makes mistakes, for which it must pay.

But circling BP today is an army of parasites.  Zombies who toil not.  Neither do they spin.

Instead, they file lawsuits and try to get something from the producers without paying for it.  BP’s Gulf disaster is a godsend for them.  Like a busload of plump English tourists delivered to a bad neighborhood…

The Democrats have always been the recipients of big donations from tort lawyers.  Many lawmakers of both parties are lawyers, which is to say they were probably parasites even before they entered public service.  It is not surprising that their instincts are the same – to leech onto productive businesses.

Remember the giant tobacco settlement?  In 1998, the tobacco companies lay down and opened their veins.  A quarter of a trillion dollars was paid out in a huge class action settlement.  The money was supposed to go to redress the damage done by smoking.  But $19 out of every $20 found its way, instead, into the pockets of the lawyers, the activists, and the bureaucrats.  That is to say – the zombies got it.

Will the oil settlement be any different?  Not likely.  The zombies will take most of it. Much of the rest will be used to turn honest working people into zombies.  Instead of finding new work in new areas, for example, Gulf-area residents will be encouraged to stay put and collect checks.  If they take up new work, the measure of their ‘damages’ will go down!

Here is our theory:  in the beginning, an economy, a business, a nation…or even a family budget…is fresh, clean and dynamic.  Over time, little by little, the parasites encrust themselves –like barnacles on a ship.  Then, they grow.  Eventually, they become as fat as ticks on a hound in the summertime…

At first, they are just nuisances.  The economy can support them.

‘The masses want bread?  Sure why not.  Give them a circus too.  And give my lazy brother-in-law a sinecure.’

Gradually, more and more people get their teeth into it.  An unnecessary department in a thriving business.  A subsidy to one group.  A special favor to another.  A make-work job…a handout…a bailout… An expense here. An extravagance there…

When things go well, the parasites take more blood.  Heck, the economy can afford it.  When they go badly, they grab the weakened host and pull it down in a feeding frenzy.  BP, are you ready?

They succeed because in most cases it is generally cheaper to go along than to fight.  Without hardly noticing, the living become cooperative zombies too.  The cigarette companies become tax collectors for the feds.  The oil companies too.  Doctors go along with nationalized health care.  Teachers get their lifetime tenure.  Ordinary citizens stand in line to be inspected at airports, counted by census takers, interrogated by tax collectors.  Soon, the whole nation is zombified.

The zombies win.  And then…there is collapse, war, revolution, bankruptcy… The zombies are killed off…new life begins.

That’s why the feds fight so hard to prevent a financial collapse.  The last thing they want is a fresh, new, healthy economy… (my emphasis added)

Bill Bonner
for The Daily Reckoning  http://dailyreckoning.com

CLASSIC COMMENTARY: Effort Shock, Future Shock and the Promise of Transformation

Posted on June 10th, 2010

Hard Work AheadBy Charles Hugh Smith    www.oftwominds.com

The Media/Marketing complex offers us all the Promise of Transformation, but it is a Devil’s Pact.

An astute reader recently sent me a link to a humorous essay with a profound message:  Effort Shock: How ‘The Karate Kid’ Ruined The Modern World (David Wong)

You know what I’m talking about; the main character is very bad at something, then there is a sequence in the middle of the film set to upbeat music that shows him practicing. When it’s done, he’s an expert.

It seems so obvious that it actually feels insulting to point it out. But it’s not obvious. Every adult I know–or at least the ones who are depressed–continually suffers from something like sticker shock (that is, when you go shopping for something for the first time and are shocked to find it costs way, way more than you thought). Only it’s with effort.  It’s Effort Shock.

We have a vague idea in our head of the “price” of certain accomplishments, how difficult it should be to get a degree, or succeed at a job, or stay in shape, or raise a kid, or build a house. And that vague idea is almost always catastrophically wrong.

Accomplishing worthwhile things isn’t just a little harder than people think; it’s 10 or 20 times harder. Like losing weight. You make yourself miserable for six months and find yourself down a whopping four pounds.

So, people bail on diets. Not just because they’re harder than they expected, but because they’re so much harder it seems unfair, almost criminally unjust.

America is full of frustrated, broken, baffled people because so many of us think, “If I work this hard, this many hours a week, I should have (a great job, a nice house, a nice car, etc). I don’t have that thing, therefore something has corrupted the system and kept me from getting what I deserve, and that something must be (the government, illegal immigrants, my wife, my boss, my bad luck, etc).”

Think about the whole economic collapse and the bad credit bubble. You can imagine millions of working types saying, “All right, I have NO free time. I work every day, all day. I come home and take care of the kids. We live in a tiny house, with two shitty cars.  And we are still deeper in debt every single month.”  So they borrow and buy on credit because they have this unspoken assumption that, dammit, the universe will surely right itself at some point and the amount of money we should have been making all along (according to our level of effort) will come raining down.

All of it comes back to having those massively skewed expectations of the world.

Though most have passed on now, making it that much more difficult to access the experience they lived, the generation of citizens who grew up in the Great Depression had radically lower expectations. I vividly recall a conversation I had in the late 1990s with my uncle and aunt, a school teacher and a social worker by profession. My uncle commented that having a steady job of any kind was his only goal after coming home from serving in B-17s in World War Two.

There are a number of factors working in this ratcheting up of expectations to impossible levels.  One is that expectations naturally arise from whatever base has been established by the previous generation. For a variety of reasons, including globalization/wage arbitrage and dependence on exponentially rising credit/debt for “growth,” the current generation will be less prosperous in terms of material possessions than the previous generation.  That is certainly one source of Effort Shock: no matter how hard you work, you won’t ever have the “easy” abundance enjoyed by your parents and/or grandparents. Cheap oil and exponential credit growth were the props supporting that abundance, and their end cannot be reversed with gimmicks.
 
But impossible expectations are also the result of Neoliberal Capitalism’s “last crisis.”  I cover this “last crisis” in depth in Survival+.

Having satiated basic needs and constructed a massive overcapacity in virtually everything (even creating the illusion of endless food, energy and water), global Neoliberal Capitalism was faced with the necessity of opening new markets.

The move to exploit cheap labor and open new markets is called globalization.
 
The opening of China and India, each of which sloughed off many of the constraints of socialism, opened up markets to newly prosperous consumers. But sadly for global coporations, the vast majority of residents were too poor to consume much in the way of goods and services.
 
So while pursuing those new international markets, global Capitalism also seeks to generate new “needs” in established economies via marketing.
 
The explosion of media and media-delivery devices has aided this program immensely.  Advanced-economy consumers are now immersed in a sea of marketing, which essentially sells one thing: insecurity.
 
While advertising still offers “bargains” and “sales” as an enticement to spend and acquire, the more profound message is:  You don’t measure up.  The standards offered as “measuring up” are impossibly high, guaranteeing that most people will feel inadequate, insecure, and needing some sort of external validation which can only be granted–surprise!–by some profitable product, service or accreditation.
 
Strangely enough, those few who ascend the heights and actually reach the pinnacle–they are slim, good-looking, well-educated and well-married, with a child or three and a secure, prosperous career–often experience a gnawing sense of anxiety or even emptiness, as in, “Is this all there is?  Why aren’t I happier?”
 
That is the dread treadmill of impossible expectations.  Keeping the treadmill running is highly profitable, as the “prize” of fulfillment and happiness is always held just out of reach.  You were “cool” last season, but oops, now you are so uncool it’s really a shame.  By stepping on the treadmill, we each seal a Pact with the Devil: we will pursue the media/marketing definition of fulfillment and satisfaction, planning to jump off once we reach our goal. But alas, fulfillment and happiness are always (by careful design) just beyond reach.

There are other causal forces at work as well: the velocity of change in globally distributed technologies.  Futurist pioneer Alvin Toffler was one of the first to popularize the consequences of the widening gap between technological and cultural changes and the institutions of society.

In answer to the question, “What led you to write Future Shock?” Toffler replied:
 
“While covering Congress, it occurred to us that big technological and social changes were occurring in the United States, but that the political system seemed totally blind to their existence. Between 1955 and 1960, the birth control pill was introduced, television became universalized, commercial jet travel came into being and a whole raft of other technological events occurred. Having spent several years watching the political process, we came away feeling that 99 per cent of what politicians do is keep systems running that were laid in place by previous generations of politicians.

Our ideas came together in 1965 in an article called ‘The future as a way of life’, which argued that change was going to accelerate and that the speed of change could induce disorientation in lots of people. We coined the phrase ‘future shock’ as an analogy to the concept of culture shock. With future shock you stay in one place but your own culture changes so rapidly that it has the same disorienting effect as going to another culture”

Here is the Wikipedia summary of his book:

Toffler’s shortest definition of future shock is a personal perception of “too much change in too short a period of time”.

Toffler argues that society is undergoing an enormous structural change, a revolution from an industrial society to a “super-industrial society”. This change will overwhelm people, the accelerated rate of technological and social change leaving them disconnected and suffering from “shattering stress and disorientation” – future shocked. Toffler stated that the majority of social problems were symptoms of the future shock. In his discussion of the components of such shock, he also coined the term information overload.

Toffler followed up Future Shock with The Third Wave and more recently (2007), with Revolutionary Wealth: How it will be created and how it wll change our lives.
 
What each individual faces is an onslaught of these forces:

1. Global Neoliberal Capitalism whose growth depends on seducing advanced-economy consumers into taking on more debt to acquire more superfluous goods and services
 
2. Political and social institutions which lag technological revolutions by a generation or more

3. Globally ubiquitous Media/Marketing which sells insecurity and dissatisfaction via unrealistic expectations and an apparently “easy” path to happiness and fulfillment (thereby inducing Effort Shock and a heightened desire for an “easy” short-cut).   

The filmic fantasy codified in The Karate Kid and hundreds of other films– the Promise of Transformation via Mastery– is integral to the media/marketing complex’s subversion of our innate drive for fulfillment.  The film industry’s depiction of gaining mastery is naturally dramatized to serve the narrative, but we should examine the narrative’s end-state through the lens of media/marketing’s goal of selling you something new and transformative.

My favorite plot device in the “tyro/longshot gains mastery” genre is the old martial arts movie ploy of a “secret technique” which is described in a scroll or book. Anyone possessing the “secret” gains instant kung-fu mastery. The hero/heroine’s challenge is to obtain the book before it falls into the covetous grasp of the evil kung fu master.
If only it were this easy. But alas, only those who have sweated blood and mastered all the foundational skills can make use of any “secret,” be it a martial arts technique, a chord change or a carpentry trick.
 
Selling the promise of transformation is easy; it’s the transformation itself which is difficult.

The Media/Marketing complex offers us all the Promise of Transformation, but it is a Devil’s Pact: in the end, we lose ourselves. What is “easy” is only a facsimile of transformation. Ownership of a product, diploma, corporate title or membership in some exclusive group is offered up as transformative, but you must sacrifice your own selfhood, autonomy and individuality to gain that “easy” transformation.
 
The transformation is thus necessarily empty of meaning. You have gained nothing but a flimsy facade, having traded away your authentic self for a mass-produced promise.
Readers often ask me to provide some practical solutions to the challenges we face, and this long, convoluted essay has led to perhaps the most important practical solution:  Opt out by stepping off the marketing/media impossible expectation treadmill.

We all see people struggling to leave an abusive marriage, or an abusive boss/job. The person trapped in the Devil’s Pact spends years rationaling the situation, and most of their inner energy goes into attempting to parse out the inner workings of their torturer.
Very little of their energy goes into trying to analyze what factors within themselves have made an obviously destructive situation so compelling to them.
 
We all want a short-cut to fulfillment, prosperity, security and happiness. That is the appeal of a no-down payment, interest-only mortgage: why spend years scrimping and saving up a down payment, when I can be a “homeowner” right now?

But it was all a chimera, a facade; the freshly minted “homeowner” actually owns nothing but a sucker’s debt. The same can be said of everyone who buys into the media/marketing complex’s promise of transformation.

The irony is that the one transformation which is profound and easy is the one which must be hidden: walking away, opting out.  The “secret technique” to weight loss and lifelong fitness is actually “easy:” walk away from the American diet pushed by the marketing/media complex, step off the impossible expectations/transformation-via-drugs-products-services treadmill, and recover yourself. Put another way: stop making yourself sick by eating “food” (the fast-food, packaged-food American diet), and regain the joys of movement, strength and self-discipline.
 
Prosperity requires prudence, frugality and an individuality which has been regained from the sell-your-soul enchantment of the media/marketing complex.
 
Once you walk away from that perfection of Hell, never to look back, then real transformation can begin. We have been trained to seek transformation in the marketplace, in medications, in institutions, or in “difficult” esoterica.  Recovering oneself is the first practical step to surviving and prospering in the years ahead.
 
I know this isn’t the practical checklist many want, but no checklist makes sense without this foundation.

By permission:  www.oftwominds.com

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