Deep State Desperation

Submitted by Robert Gore via,

The pathetic attempts to undo Donald Trump’s victory are signs of desperation, not strength, in the Deep State.

The post World War II consensus held that the USSR’s long-term goal was world domination. That assessment solidified after the Soviets detonated an atomic bomb in 1949. A nuclear arms race, a space race, maintenance of a globe-spanning military, political, and economic confederation, and a huge expansion of the size and power of the military and intelligence complex were justified by the Soviet, and later, the Red Chinese threats. Countering those threats led the US to use many of the same amoral tactics that it deplored when used by its enemies: espionage, subversion, bribery, repression, assassination, regime change, and direct and proxy warfare.

Scorning principles of limited government, non-intervention in other nations’ affairs, and individual rights, the Deep State embraced the anti-freedom mindset of its purported enemies, not just towards those enemies, but toward allies and the American people. The Deep State gradually assumed control of the government and elected officials were expected to adhere to its policies and promote its propaganda. Only John F. Kennedy directly challenged it, firing CIA Director Allen Dulles after the Bay of Pigs disaster. He was assassinated, and whether or not CIA involvement is ever conclusively proven, the allegations have been useful to the agency, keeping politicians in line. The Deep State also co-opted the media, keeping it in line with a combination of fear and favor.

Since its ascension in the 1950s, the biggest threat to the Deep State has not been its many and manifest failures, but rather what the naive would regard as its biggest success: the fall of the Soviet Union in 1991. Much of the military-industrial complex was suddenly deprived of its reason for existence—the threat was gone. However, a more subtle point was lost.

The Soviet Union has been the largest of statism’s many failures to date. Because of the Deep State’s philosophical blinders, that outcome was generally unforeseen. The command and control philosophy at the heart of Soviet communism was merely a variant on the same philosophy espoused and practiced by the Deep State. Like the commissars, its members believe that “ordinary” people are unable to handle freedom, and that their generalized superiority entitles them to wield the coercive power of government.

With “irresponsible” elements talking of peace dividends and scaling back the military and the intelligence agencies, the complex was sorely in need of a new enemy. Islam suffers the same critical flaw as communism—command and control—and has numerous other deficiencies, including intolerance, repression, and the legal subjugation of half its adherents. The Deep State had to focus on the world conquest ideology of some Muslims to even conjure Islam as a plausible foe. However, unlike the USSR, they couldn’t claim that sect and faction-ridden Islam posed a monolithic threat, that the Islamic nations were an empire or a federation united towards a common goal, or that their armaments (there are under thirty nuclear weapons in the one Islamic nation, Pakistan, that has them) could destroy the US or the entire planet.

There was too much money and power at stake for the complex to shrink. While on paper Islam appeared far weaker than communism, the complex had one factor in their favor: terrorism is terrifying. In the wake of the 9/11 attacks, Americans surrendered liberties and gave the Deep State carte blanche to fight a war on terrorism that would span the globe, target all those whom the government identified as terrorists, and never be conclusively won or lost. Funding for the complex ballooned, the military was deployed on multiple fronts, and the surveillance state blossomed. Most of those who might have objected were bought off with expanded welfare state funding and programs (e.g. George W. Bush’s prescription drug benefit, Obamacare).

What would prove to be the biggest challenge to the centralization and the power of the Deep State came, unheralded, with the invention of the microchip in the late 1950s. The Deep State could not have exercised the power it has without a powerful grip on information flow and popular perception. The microchip led to widespread distribution of cheap computing power and dissemination of information over the decentralized Internet. This dynamic, organically adaptive decentralization has been the antithesis of the command-and-control Deep State, which now realizes the gravity of the threat. Fortunately, countering these technologies has been like trying to eradicate hordes of locusts.

The gravest threat, however, to the Deep State is self-imposed: it’s own incompetence. Even the technologically illiterate can ask questions for which it has no answers. Why has the US been involved in long, costly, bloody, and inconclusive wars in Afghanistan and Iraq? Why should the US get involved in similar conflicts in Syria, Libya, Somalia, Yemen, Iran, and other Middle Eastern and Northern African hotspots? Isn’t such involvement responsible for blowback terrorism and refugee flows in both Europe and the US? Have “free trade” agreements and porous borders been a net benefit or detriment to the US? Why is the banking industry set up for periodic crises that inevitably require government bail-outs? (SLL claims no special insight into the nexus between the banking-financial sector and the Deep State, other than to note that there is one.) Why does every debt crisis result in more debt? How has encouraging debt and speculation at the expense of savings and investment helped the US economy? The Deep State can’t answer or even acknowledge these questions because they all touch on its failures.

Brexit, Donald Trump, other populist, nationalist movements catching fire, and the rise of the alternative media are wrecking balls aimed at an already structurally unsound and teetering building that would eventually collapse on its own. The shenanigans in the US after Trump’s election—violent protests, hysterical outbursts, the vote recount effort, the proof-free Russian hacking allegations, “fake news,” and the attempt to sway electoral college electors—are the desperate screams of those trapped inside.

Regrettably, the building analogy is imperfect, because it implies that those inside are helpless and that the collapse will only harm them. In its desperation, incompetence, and corrupt nihilism, the Deep State can wreak all sorts of havoc, up to and including the destruction of humanity. Trump represents an opportunity to strike a blow against the Deep State, but the chances it will be lethal are minimal and the dangers obvious.

The euphoria over his victory cannot obscure a potential consequence: it may hasten and amplify the destruction and resultant chaos when the Deep State finally topples. Anyone who thinks Trump’s victory sounds an all clear is allowing hope to triumph over experience and what should have been hard-won wisdom.

via Tyler Durden

U.S. Startups Increasingly Tapping Debt Markets As VCs Pullback From Egregious Valuations

After investing nearly $80 billion into startups in 2015, Venture Capitalists, growing slightly weary of the $1 billion valuations being handed out like candy to every 22 year old with an app that can replace your face with that of panda, have pulled back a bit in 2016 resulting in a 10% reduction in equity capital for America’s graduating snowflakes.  But as Bloomberg points out, that’s not a problem as many of Silicon Valley’s revenue-free startups see debt capital as a better alternative anyway…sure, what could go wrong?

Venture deals in 2016—for all but the hottest startups, anyway—required founders to give up more equity in exchange for less money than they did last year. So, despite cautionary tales from tech blog GigaOm and game console maker Ouya, which both flamed out after failing to pay back lenders, U.S. startups have loaded up on debt, enabling them to borrow money without ceding a potentially lucrative stake.


No one publishes national data on venture debt, but a half dozen lenders provided numbers showing activity spiked in 2016. Silicon Valley Bank’s loan volume to venture-backed startups surged 19 percent during the past year to $1.1 billion for the quarter ending Sept 30. Wellington Financial made more than 10 new loans to venture-backed startups in 2016, double last year’s total. At Hercules Capital, annual volume is up and the average deal size increased 16 percent year-over-year to $15.6 million. TriplePoint’s volume is up more than 25 percent. Western Technology Investment CEO Maurice Werdegar called volume “robust” and described the lending environment as “hyper-competitive.”


Borrowing capital allows startups to postpone valuation negotiations that come with raising equity. Startups fear the prospect of selling shares at a lower price, known in the industry as a down round. “Folks don’t want to do down rounds or flat rounds,” says Haim Zaltzman, a partner at law firm Latham & Watkins LLP, which has handled well over 100 such loan transactions so far this year. “Debt allows you to get around that.”

Yes, no one like the “down rounds or flat rounds” which presumably come because companies aren’t performing well against their business plans.  But, according to Latham & Watkins, that underperformance makes them great candidates for the debt markets.

Of course, debt markets were increasingly tapped in late 2015 and early 2016 just as VC firms started to pull back.

Bloomberg Startups


As startups like GigaOm, Ouya and Mind Candy have found out, debt lenders are slightly less accommodating when hockey stick business plans don’t work out.  While debt can certainly help avoid the dilution of those “down rounds,” debt lenders don’t get to participate in the upside so they tend to be a little more practical in structuring deals.  In fact, as Bloomberg points out, one lender wanted to accelerate the debt “Metamarkets” if it missed it’s revenue projections by just 20%…outrageous

Despite the risk, Driscoll decided to take a loan this year. He says he didn’t consider tapping VCs again because another round would have diluted his shares too much. Driscoll says he ran a formal process, getting term sheets from five lenders along with lots of advice from Khosla Ventures and his other investors. The offers had interest rates ranging from 9 percent to 15 percent over two to five years, and the terms protecting the lenders varied. Financial covenants, especially ones permitting the lender to take control of the startup, were sometimes stringent.


One lender had a clause that would force Metamarkets to pay off the debt early if it failed to hit 80 percent of its revenue projection. Driscoll passed on that, opting instead for cleaner terms for a $14.25 million loan in October at an average rate of around 11 percent from Wellington Financial and City National Bank.

But we’re happy that Metamarkets was able to raise their $14.25mm covenant-light loan at 11% with no cash flow…we vaguely recall something bad happening with loans like that back in the olden days around 2008…but it was probably nothing.

via Tyler Durden

The US Presidency: How Important Is Hillary’s 2,864,974 Popular-Vote Win?

Submitted by Eric Zuesse via,

California alone accounted for all of Hillary’s popular-vote win, plus 1,405,004 votes

America’s Electoral College – the publicly elected representatives who select the U.S. President – voted on Monday, December 19th, and chose Donald Trump as America’s next President, though Hillary Clinton had won nearly three million more of the nation’s popular votes on November 8th than he did.

Here was the top of the homepage of the anti-Trump (and anti-Russia) Huffington Post, in America, on Monday night, December 19th, focusing on Hillary Clinton’s having won more people’s votes than Trump did:

How significant is it that Ms. Clinton had won the votes of more Americans, but Mr. Trump has won the votes of more Electors? Here are the relevant facts, by which to understand this:

In some respects, the United States of America is a federal system, not a unitary state system. The U.S. Constitution established the nation that way, and it remains in effect to this day. The Electoral College chooses the nation’s President, and it consists of Electors who represent their individual states, but it is constructed according to a formula (for weighting each state’s influence in selecting a President) that apportions the number of Electors so as to correlate rather closely with each given state’s population. Thus, the Electoral College is partly a unitary-state system (one-person-one-vote), and partly a federal-state system (each state having different-sized delegations in the Electoral College, depending upon each state’s population-size).

America’s by-far largest state, California, accounts, all on its own, for the entirety of Hillary Clinton’s popular-vote victory — and more besides.

Her win of the U.S. popular vote was two-thirds the size of her win of the California popular-vote. The one state of California accounts for 1.49 times her win of the national vote. California accounted for all of her 2,864,974 national-vote win, plus an additional 1,405,004 votes.

Figures here are from Wikipedia, as of 19 December 2016:

  • Hillary’s California victory-margin over Trump:  CA     4,269,978
  • Hillary’s nationwide popular-vote victory-margin: U.S.   2,864,974

Hillary’s nationwide 2% win by 2,864,974 votes would have been a nationwide loss by 1,405,002 votes, if she had won California by 50 %+1 vote, to 50%-1 for Trump. Instead, she won California by 61.73%, to 31.62%. (Furthermore, in the Electoral College, almost all states have established a winner-take-all-rule, so that, for example, «all 55 of California’s Electoral votes go to the winner of the state election, even if the margin of victory is only 50.1 percent to 49.9 percent» — in other words, she didn’t win any more Electoral College votes from her 61.73% California landslide win than she would have won by a bare 50%+1 win of California).

Hillary’s 4,269,978-vote win of California was 1.49 times — 49% larger than — her nationwide 2,864,974-vote win.

In addition, Hillary also scored big wins in three other big liberal states: NY, IL, and MA.

The following 3 states total to  3,592,220 votes:

  • NY      1,702,792
  • IL      944,714
  • MA      904,303

The grand total of the 4 states (NY, IL, MA, and CA): 7,862,198

But, even if Hillary had won those three states by only around 50-50, her 4,269,978-vote edge over Trump in CA would still have been 4,269,978 – 3,592,220 = 677,758 popular votes more than Trump in these four mega-liberal states together (as compared to her actual win there of 7,862,198 popular votes). That would have switched 7,862,198 – 677,758 = 7,184,440 of her votes to Trump, and so he still would have won clearly the popular vote. He and she would not have done any differently in the Electoral College than they have, in fact, done, but Trump would have scored a huge win in the nationwide popular vote — a much bigger win in the popular vote than Hillary has, in fact, won. 

If the nation had violated the Constitution and handed Ms. Clinton the win due to her 2,864,974 popular-vote victory, then it would have been handing the entire Presidency to the winner of the biggest state, and written off all the rest of the United States — where Clinton lost overwhelmingly. Fortunately, that did not happen. 

The evidence therefore shows that Trump won the Presidency by strategizing strictly upon the basis of the U.S. Constitution, and not — as Hillary evidently did — at least partly upon the national popularity-contest. He devoted his resources to the key toss-up states, and ignored the states — including CA, NY, IL, and MA — where the polling showed that his campaigning would be an utter waste of his time and money.

The four mega-liberal states — New York, California, Illinois, and Massachusetts — happen also to be America’s four national-‘news’-media centers; and, so, this reality, and Trump’s win of the election (the Electoral College), naturally strikes many in the national press (such as the owners of the Huffington Post) as being wildly at variance with their ‘rational’ expectations, because those people aren’t so intelligent, and they reason upon the basis of mental structures different from the reality. (Maybe they are also stupid enough to believe her campaign-rhetoric even though it contrasted sharply with her actual decisions and policies as a government-official.) Furthermore, they are wildly out-of-touch with the pain throughout the rest of the country, and they accept the aristocracy’s false analysis of its causes and of its solutions (the cause isn’t bigotry against women, minorities, etc. It is their own bigotry against the poor — of any group); so, they think that Hillary was ‘obviously’ better than Trump, and cannot imagine that she’s worse (or even worse, if Trump too is bad) than Trump. This blindness-to-reality enables the ‘news’ media to support vigorously the Democratic Party’s attempts to de-legitimize Trump as President. They believe strongly in the aristocracy’s ideology (that the barrier to equality-of-opportunity is more an ethnic bigotry than it is a class-bigotry) and so they continue to obsess upon ethnicity, gender, etc., even after the past year’s political results, both in the U.S. and in Europe, are showing how divorced from the reality, they actually are.

This explains why the owners of America’s ‘news’ media tend to be both perplexed and angry that Hillary Clinton (whose basic campaign theme was that there is no class-problem in America, but only many different bigotry-problems) lost this election.

via Tyler Durden

It’s Official – Monte Paschi Asks Italian Government For Bailout

So far, so expected. After earlier announcing the failure to attract any anchor investors for a private capital raise, Monte Paschi has announced that it will officially ask the Italian government for a "precuationary capital increase" – in other words a bailout. The funds will come from the newly decreed EUR20 billion bailout fund, and as Bloomberg reports will not trigger a "bail-in."

This is the third bailout in three years and reportedly the biggest nationalization in Italian history.

As Bloomberg reports, Italy will plow as much as 20 billion euros ($21 billion) into the country’s banks after Banca Monte dei Paschi di Siena SpA failed to secure its future by raising funds from investors, and other lenders could follow.

Finance Minister Pier Carlo Padoan told reporters after a cabinet meeting in Rome that he expected Monte Paschi to ask for aid.


"We will see if other banks ask for aid,” Padoan said at the press conference. Italian Prime Minister Paolo Gentiloni said EU officials agreed with Italy’s plan to provide support to the country’s banking system.

And sure enough, once the bailout decree was approved, Monte Paschi, the world’s oldest lender, late Thursday abandoned plans to raise 5 billion euros from the market.

The bank said it was scrapping the entire capital plan, including the sale of bad loans and the debt for equity swap, and confirmed in a statement that it will ask Italy for a “precautionary capital increase.”

The FT notes that Italian officials hope government intervention will put an end to MPS’s woes and restore confidence in other struggling financial institutions.

Due to EU rules designed to limit the hit to taxpayers, the government rescue will impose losses on MPS shareholders and junior bondholders, making them share some of the financial burden. As Bloomberg confirms:


With Junior bonds already trading at extreme distress the modest-to-nothing haircuts imposed are likely a relief to some as Italy noted "the burden-sharing principle will be respected but we will try to limit the damage to savers as much as possible."

"A nationalization should have been done five years ago,” said Francesco Confuorti, the CEO of Advantage Financial SA, a Milan-based investment firm. “The bank lost time, money and credibility seeking to keep the patient on life support when he was in an irreversible coma.”

The bigger problem now for Monte Paschi, as we detailed earlier, is the recent plunge in deposits, which as reported yesterday has suffered a €14bn rush of deposit outflows in the nine months from January to September this year – 11 per cent of its total deposits, as shown in the following FT chart.

Should the nationalization fail to stem the bank run, either at Monte Paschi, or other Italian banks, more bailouts are imminent.

And finally, as The FT points out, there is always Germany to mess up these plans…

One of the big concerns associated with Italy’s banking rescue is that it will worsen the country’s fiscal outlook at a time when it already has one of the highest ratios of debt to gross domestic product in Europe, at 133 per cent.


Assuming all of the €20bn is used during the coming year, that would amount to about 1.2 per cent of GDP, making it highly unlikely that Italy could meet its commitments on managing its debt under EU budget rules.


Italian officials have insisted that the rescue would be a “one-time” effort, which was temporary and therefore would not impact the structural balance, which is one of the key fiscal measures used by the EU.


The European Commission said it “takes note” of the changes to some public finance targets.

And by "take note" we pre-suppose they mean extract some pint of blood from some unsuspecting taxpaying public. 

via Tyler Durden

VIX Options Traders Flash Major Warning Signal

With VIX at multi-year lows (a 10-handle!!) and stocks at record highs amid Trumpian (Goldman) exuberance, it appears options traders in the VIX complex are anything but "believers."

SVXY is an ETF that portends to track the inverse of VIX – in other words, as VIX drops, SVXY rises…

(ignore the decay issues for now).

So, if a trader buys Puts on SVXY, he is implicitly betting on SVXY dropping which is VIX rising and, ceteris paribus, stocks dropping.

So, despite all the hope; all the promise; all the hype; why are options traders panic-buying SVXY Puts at an extraordinary clip?


We are sure this is nothing right? But while the world is awash with complacency, it appears professionals have found a quiet dark corner of the markets to buy protection against the inevitable drop without Bob Pisani seeing it.


via Tyler Durden

The Gentleman’s Guide to Self-Defense: Part 1

Guns and knives are, in many ways, the best self-defense tools.

However – as police academies across the United States teach – a bad guy with a knife can charge and kill a good guy armed with a handgun if they're 21 feet apart or less.

In other words, before you have time to draw aim and fire your gun, you may get fatally stabbed.

In addition, if you live in New York, California or another state which makes it hard to carry concealed guns and knives – or you work in the financial services, legal or other professional setting where weapons are frowned upon – you might not be able to carry a gun or knife with you during your normal work day. (And many people don't understand the Second Amendment).

In my state, for example, it's illegal to carry switchblades or even assisted-opening knives. And manual "one-handed opening knives" don't really work as advertised.

Any weapon which you don't already have in your hands may be limited in its real-world usefulness. And you obviously can't walk around brandishing your gun and knife for no good reason.

What to do?

Find an every day object which is legal anywhere in the world, in any city or state, in any work environment … and which you can hold in your hands at all times. The best self-defense weapon is one (1) you can carry with you anywhere and (2) which is an innocuous, every day item.

Self-defense expert Thomas Kurz – a judo instructor, trained in boxing and Kyokushin karate, who knows how to kill a man with an everyday pencil or pen – has designed a weapon you can carry anywhere, and which will keep you dry when it rains: the Unbreakable Umbrella.

Several top martial artists – such as stick-fighting expert Marc "Crafty Dog" Denny – have endorsed the Unbreakable Umbrella.

Because a picture is worth a thousand words, you've got to see the videos below to get why this is such a good self-defense weapon …

But first let me briefly describe my experience with the Unbreakable Umbrella.

Normal umbrellas break in a strong wind or after accidentally hitting something. I've gone through scores of umbrellas over the years, and it's frustrating.

But I hit my heavy punching bag as hard as I could with the (1) tip, (2) handle and (3) side of the Unbreakable Umbrella, and it did absolutely no damage to the umbrella.

These videos show how strong this umbrella is, and how anyone can use it for defense … without any training:

These videos show advanced applications of a weaponized umbrella:

Indeed – with training – the umbrella can successfully defend against knife attacks (which are notoriously hard to defend):

The umbrella is actually a fairly well-known gentleman's self-defense system. If you think about it, you might remember seeing it on tv and in movies … for example Sherlock Holmes or The Avengers:

Women can use it as well:

The Premium Unbreakable Umbrella is a BIFL (buy it for life) item, which comes with a lifetime warranty. Buy one, and you'll never have to buy another umbrella (you may have to replace the fabric if you get in a fight, but the rest of the umbrella will still be solid, reliable and undamaged. Kurz sells replacement fabric kits).

The Telescopic Unbreakable Umbrella is small enough to fit in laptop cases or bags, briefcases, daypacks, book bags, etc. (You can also stuff it in a pocket, although it's a little bulky for that.) With the flick-of-the-wrist telescoping action Kurz demonstrate in his videos, this could be ideal to surprise would-be attackers with the extra reach. Specifically, an attacker might think that they are out of your reach … but with a quick telescopic opening, you could reach them.

While not cheap, having a weapon that is indestructible – so that you know you can actually use to defend your life – is invaluable. The Unbreakable Umbrella is undoubtedly the best self-defense umbrella in the world … as well as a fantastic way to keep the rain off you, even in the strongest winds.

Note: I haven’t received a cent for writing this review. Kurz simply provided me review copies of the Premium and Telescopic Unbreakable Umbrellas.

via George Washington

Why Are Dollar Bills Worth Anything?

Submitted by Frank Shostak via The Mises Institute,

Why are the dollar bills in people's pockets worth anything? According to some experts, the dollar bills carry value because the government in power says so. Other experts are of the view it is because people are willing to accept it as payment.

To say that the value of money is on account of the government or on account of social convention is to say very little. In fact, what experts are saying is that money has value because it is accepted, and why is it accepted? … Because it is accepted!

The Difference Between Money and Other Goods

Demand for a good arises from its perceived benefit. For instance, people demand food because of the nourishment it offers them. With regard to money, people demand it not for direct use in consumption, but in order to exchange it for other goods and services. Money is not useful in itself, but because it has an exchange value, it is exchangeable in terms of other goods and services. Money is demanded because the benefit it offers is its purchasing power (i.e., its price).

For something to be accepted as money it must have a pre-existing purchasing power, a price. So how does a thing that the government proclaims will become the medium of exchange acquire such purchasing power — a price?

We know that the law of supply and demand explains the price of a good. Likewise it would appear that the same law should explain the price of money. But there is a problem with this way of thinking since the demand for money arises because money has purchasing power (i.e., money has a price). Yet if the demand for money depends on its pre-existent price, i.e., purchasing power, how can this price be explained by demand?

We are seemingly caught here in a circular trap, for the purchasing power of money is explained by the demand for money while the demand for money is explained by its purchasing power. This circularity seems to provide credence to the view that the acceptance of money is the result of a government decree and social convention.

Mises Explains How the Value of Money Is Established

In his writings, Mises had shown how money becomes accepted.1 He began his analysis by noting that today's demand for money is determined by yesterday's purchasing power of money. Consequently for a given supply of money, today's purchasing power is established in turn. Yesterday's demand for money in turn was fixed by the prior day's purchasing power of money.

So, for a given supply of money, yesterday's price of money was set. The same procedure applies to past periods.

By regressing through time we will eventually arrive at a point in time when money was just an ordinary commodity where demand and supply set its price. The commodity had an exchange value in terms of other commodities, i.e., its exchange value was established in barter. To put it simply, on the day a commodity becomes money it already has an established purchasing power or price in terms of other goods. This purchasing power enables us to set up the demand for this commodity as money.

This in turn, for a given supply, sets its purchasing power on the day the commodity starts to function as money. Once the price of money is fixed, it serves as input for the establishment of tomorrow's price of money. It follows then that without yesterday's information about the price of money, today's purchasing power of money cannot be established.

With regard to other goods and services, history is not required to ascertain present prices. A demand for these goods arises on account of the perceived benefits from consuming them. The benefit that money provides is that it can be exchanged for goods and services. Consequently, one needs to know the past purchasing power of money in order to establish today's demand for it.

Using the Mises framework of thought, also known as the regression theorem, we can infer that it is not possible that money could have emerged as a result of a government decree or government endorsement or social convention. The theorem shows that money must emerge as a commodity.

On this Rothbard wrote,

In contrast to directly-used consumers' or producers' goods, money must have pre-existing prices on which to ground a demand. But the only way this can happen is by beginning with a useful commodity under barter, and then adding demand for a medium to the previous demand for direct use (e.g., for ornaments, in the case of gold). Thus government is powerless to create money for the economy; it can only be developed by the processes of the free market.2

But how does all that we have said so far relate to the paper dollar? Originally paper money was not regarded as money but merely as a representation of gold. Various paper certificates represented claims on gold stored with the banks. Holders of paper certificates could convert them into gold whenever they deemed necessary. Because people found it more convenient to use paper certificates to exchange for goods and services when these certificates came to be regarded as money.

These certificates acquired purchasing power on account of the fact that these certificates were seen as representative of gold. Note that according to the regression theorem, once the purchasing power of a certificate is established it can function as money regardless of gold since now the demand for money can be established. Remember the demand for money is on account of its purchasing power.

Paper certificates that are accepted as the medium of exchange open the scope for fraudulent practice. Banks could now be tempted to boost their profits by lending certificates that were not covered by gold.

In a free-market economy, a bank that over-issues paper certificates will quickly find out that the exchange value of its certificates in terms of goods and services will fall. To protect their purchasing power, holders of the over-issued certificates would most likely attempt to convert them back to gold. If all of them were to demand gold back at the same time, this would bankrupt the bank. In a free market, then, the threat of bankruptcy would restrain banks from issuing paper certificates unbacked by gold.

The government can, however, bypass the free-market discipline. It can issue a decree that makes it legal for the over-issued bank not to redeem paper certificates into gold. Once banks are not obliged to redeem paper certificates into gold, opportunities for large profits are created that set incentives to pursue an unrestrained expansion of the supply of paper certificates. The uncurbed expansion of paper certificates raises the likelihood of setting off a galloping rise in the prices of goods and services that can lead to the breakdown of the market economy.

To prevent such a breakdown, the supply of paper money must be managed. The main purpose of managing the supply is to prevent various competing banks from over-issuing paper certificates and from bankrupting each other. This can be achieved by establishing a monopoly bank — i.e., a central bank — that manages the expansion of paper money.

To assert its authority, the central bank introduces its own paper certificates, which replace the certificates of various banks. The central bank money's purchasing power is established on account of the fact that various paper certificates, which carry purchasing power on account of their historical link to gold, are exchanged for the central bank money at a fixed rate. The central bank's paper certificates are fully backed by bank certificates, which have the historical link to gold.

It follows then that it is only on account of the historical link to gold that the central bank's pieces of paper acquired purchasing power.

Contrary to the popular way of thinking, the value of a paper dollar originates from its historical link to commodity money — which happens to be gold — and not government decree or social convention. Fiat money of the sort we use today could not and would not come about in a market setting. What the market created — gold-based money — the government had to destroy before leaving us with paper money whose value as a currency depends on the management practices of the central bank.

via Tyler Durden

China “Shocked” By Navarro Appointment, As Trump Team Proposes 10% Import Tariff

As the FT first reported yesetrday, in a dramatic development for Sino-US relations, Trump picked Peter Navarro, a Harvard-trained economist and one-time daytrader, to head the National Trade Council, an organization within the White House to oversee industrial policy and promote manufacturing. Navarro, a hardcore China hawk, is the author of books such as “Death by China” and “Crouching Tiger: What China’s Militarism Means for the World” has for years warned that the US is engaged in an economic war with China and should adopt a more aggressive stance, a message that the president-elect sold to voters across the US during his campaign.

In the aftermath of Navarro’s appointment, many were curious to see what China’s reaction would be, and according to the FT, Beijin’s response has been nothing short of “shocked.” To wit:

The appointment of Peter Navarro, a campaign adviser, to a formal White House post shocked Chinese officials and scholars who had hoped that Mr Trump would tone down his anti-Beijing rhetoric after assuming office.


“Chinese officials had hoped that, as a businessman, Trump would be open to negotiating deals,” said Zhu Ning, a finance professor at Tsinghua University in Beijing. “But they have been surprised by his decision to appoint such a hawk to a key post.”

Shortly after the announcement of Navarro’s appointment, the US Office of the Trade Representative yesterday put added more fuel to trade tensions with Chine when it put Alibaba, China’s biggest e-commerce platform, back on its “notorious markets” blacklist of companies accused of being involved in peddling fake goods.

Cui Fan at the China Society of WTO Studies, a think-tank affiliated with China’s commerce ministry, warned that Beijing would respond to any unilateral action by the incoming Trump administration. “China is preparing itself for US trade actions,” he said. “China will respond with counteractions of its own.”

China has found itself on the receiving end of diplomatic chaos for much of the past three weeks, starting with Trump accepting a congratulatory phone call from Taiwan president Tsai Ing-wen in early December, which defied almost four decades of precedent. It only escalated from there, and culminated with the confiscation of a US marine drone last week, which however, China promptly returned to the US earlier this week.

Trump’s recent rhetoric has given China cause for concern: since the call with Ms Tsai, he has publicly criticized China’s currency policies and island fortifications in the South China Sea. He has questioned Washington’s commitment to the One China policy, and also angered Beijing when he suggested that the confiscated navy drone was “stolen” by a Chinese ship. 

Wang told the People’s Daily: “We will lead the way amid a shake-up in global governance and take hold of the situation amid international chaos. We will protect our interests amid intense and complex games.”

Meanwhile, He Weiwen, deputy director of the Center for China and Globalisation, told the FT that Beijing could retaliate against US exports and restrict market access for US companies.

* * *

In short, China is angry, and may get its wish to retaliate soon, because as CNN reports (take it with a “real fake news” grain of salt) Trump’s transition team is discussing a proposal to impose tariffs as high as 10% on imports. A senior Trump transition official said Thursday the team is mulling up to a 10% tariff aimed at spurring US manufacturing, which could be implemented via executive action or as part of a sweeping tax reform package they would push through Congress.

According to CNN, Reince Priebus floated a 5% tariff on imports in meetings with key Washington players last week. But the senior transition official who spoke to CNN Thursday on the condition of anonymity said the higher figure is now in play.

Such a move would, if confirmed, would likely send the US hurtling into a trade war with other countries, especially China which is already “shocked” by recent Trump action, while sending the cost of consumer goods in the US even higher. “And it’s causing alarm among business interests and the pro-trade Republican establishment.”

The senior transition official quoted by CNN also said the transition team is beginning to find “common ground” with House Speaker Paul Ryan and Ways and Means Committee Chairman Kevin Brady, pointing in particular to the border adjustment tax measure included in House Republicans’ “Better Way” tax reform proposal, which would disincentivize imports through tax policy. The border tax, as explained here two days ago, would also lead to trade wars with key trading partners as it is the functional equivalent of a USD devaluation and is represents yet another tax on foreign exports.


Curbing free trade was a central element of Trump’s campaign. He promised to rip up the North American Free Trade Agreement with Mexico and Canada. He also vowed to take a tougher line against other international trading partners, almost always speaking harshly of China but often including traditional US allies such as Japan in his complaint that American workers get the short end of the stick under current trade practices.

And now, if CNN is correct, Trump may be about to follow through with it. The question on everyone’s lips, then, is with China having repeatedly warned it will retaliate if and when the US launched the first salvo in what will clearly be an escalating trade war, just how will China escalate.  One potential way is through its holdings of $1.1 trillion in US Treasuries and various other US assets.


As we reported earlier today, a SAFE official told reporters at a briefing that while China will make “tactical adjustments” on its US debt holdings, Beijing’s long-term investment view on US debt has not changed, and that U.S. Treasuries are China’s long-term strategic investment targets. That, too, may also change quickly.

via Tyler Durden

Why Social Security Is Doomed: “Birthrate At Lowest Level On Record”… And the Future Is Unfunded

Submitted by Mac Slavo via,

Here’s more evidence that the “recovery” never really happened, and good reason to think that the entire social safety net structure is doomed to fall apart.

The birthrate, long tied to economic growth, has been dropping to its lowest point in recorded history – both nationally and, in particular, in the state of California.

This demographic shift is bad news for the economy – in terms of housing, consumer markets, and especially for the long-term funding of social security, medicaid, medicare and other obligations that younger generations have typically been expected to pay into.

Whether or not you agree with the system in place, the fact that it is virtually certain to go bankrupt before the generation of baby boomers shift off this mortal coil should be troubling to everyone planning a future in the United States.

Official numbers show that the birthrate began to steadily decline in 2008 when the crisis hit and – unlike even during the Great Depression – hasn’t ever picked back up. 2016 saw the lowest point ever for California, even with higher births from immigrants factored in.

via the L.A. Times:

California’s birthrate dropped to its lowest level ever in 2016, according to data released by the state’s Department of Finance.


Between July 2015 and July of this year, there were 12.42 births per 1,000 Californians, the agency said this week. The last time the birthrate came close to being that low was during the Great Depression, when it hit 12.6 per 1,000 in 1933.


But, unlike after the Depression, birthrates haven’t bounced back quickly as the economy has picked up.


California has been experiencing a years-long downward trend that likely stems from the recession, a drop in teenage pregnancies and an increase in people attending college and taking longer to graduate, therefore putting off having children…


“Eventually you think about having a child and by this point in time you’re in your early 30s,” he said… when women’s fertility begins to decrease…


Similarly, the national birthrate began falling in 2008 and continued to do so through 2013, when it hit a record low of 12.4 per 1,000 people.

Already, states and cities are unable to meet their pension obligations. A very bad game of musical chairs is in the works, and unless something major changes, it could spell ruin for aging generations to come, who will be forced to contend with a shrinking pool of support – both officially and unofficially – from younger generations.

As the Wall Street Journal reported earlier this year:

Sales of single-family homes are being weighed down by what Robert Dietz, chief economist at the National Association of Home Builders, calls “the great delay,” the trend of millennials postponing milestones like marriage and having kids. Other ripple effects take years to show up, such as the drag of having fewer young workers paying into Social Security and Medicare




“Everything is slower than we expected,” said Sam Sturgeon… he predicts that the total fertility rate won’t go above 1.9 babies per woman for the next five years or longer. An ideal birth rate is around 2.1 babies per woman, demographers say, since that’s the rate that’s needed to replace the current levels of population.

Right now, there is considerable optimism about a renewed age for the free market in America. Business is being wooed back by President-elect Trump.

But in the long term, the demographic pressures could impact the care and survival of the population. All the more reason to prepare for the worst, and reduce one’s dependency on the system as much as possible.

As Michael Snyder explained, the upcoming generation of “snowflake” millenials are, as whole, reluctant to move out of their parent’s basements, have difficulty finding real jobs, are stifled by student loans and a lifetime of debt, are putting off marriage and children – and consequently, will be inadequately prepared to financial support older generations as they age.

What if social security and pensions aren’t there when you need it? What if, even after being forced to pay for Obamacare, health care is adequate or even inaccessible?

At the individual level, this is a clear incentive to prepare, and attempt to build a self-sufficient life that is not reliant on social programs or future-promises of assistance and support.

Promote your own health, and that of your family, and create a back-up plan in case one’s position in the pecking order of society should slip and fall, income should fade or medicines and health care should become out-of-reach.

The same tips to prepare for an emergency can be applied to the long game to prepare for a future of bankrupt and inept social services.

via Tyler Durden

Trump Has a Blank Check on Executive Power. Thanks Obama! (New Reason Podcast)

“Trump already looks like a thought experiment you’d make up to scare liberals straight about the concentration of executive power,” says the Cato Institute’s Gene Healy, who has a cover story in the current issue of Reason arguing that Obama’s “most lasting legacy” will be to “leave to his successor a presidency even more powerful and dangerous than the one he inherited from Bush.”

In our latest podcast, Healy chats with Editor in Chief Katherine Mangu-Ward about the most likely long-term impact of a president once touted as our first civil libertarian in the White House—and it won’t be what “your neighbor who put a ‘Hope’ sticker on his Prius” had in mind.

Click below to listen to that conversation—or subscribe to our podcast at iTunes.

Don’t miss a single Reason podcast or video! Subscribe, rate, and review!

Subscribe at iTunes.

Follow us at Soundcloud.

Subscribe to our YouTube channel.

Like us on Facebook.

Follow us on Twitter.

from Hit & Run