Submitted by Charles Hugh Smith from Of Two Minds

Why the Periphery Is Crumbling: The Spoils System Is Cracking

Instability starts on the periphery and moves into the core.

While it is clear that the instability in periphery nations is arising from dynamics unique to each nation, there is one unifying causal factor: the spoils system in each nation is breaking down.

Every nation-state, from brutal dictatorships to nominal democracies, ultimately depends on a spoils system that provides the various factions, classes, etc., with sufficient material and status benefits to accept the Status Quo arrangement.

The more a regime relies on oppression for its legitimacy (for example, North Korea or Saddam’s Iraq), the greater its vulnerability to erosion in the spoils system, which naturally favor the military and the regime’s Elites.

In broad brush, the spoils available for distribution are the surplus generated by the national economy. In the case of North Korea, this surplus stems from extortion (of donations from other nations), satrapy (free oil from China) and illicit activities (arms sales and counterfeiting). A common source of surplus is oil (Venezuela, Iraq, Iran) or some other desirable commodity.

The vast majority of surpluses outside oil exporting nations have been generated by three factors: cheap energy, rising productivity and the expansion of credit. If we examine periods of rapid expansion and generalized prosperity, we find these three factors were active: cheap energy, rising productivity and ample credit.

Just look at Europe and the U.S. in the 1950s and 60s, Japan in the 1960s and 70s, and China in the 1980s and 90s for examples.

Any reversal in these factors reduces surplus and the spoils being distributed. Sharply higher energy costs crimp profits and cause recessions, stagnating productivity leads to near-zero growth and institutional/state sclerosis and credit contraction leads to recession and the destruction of malinvestments.

Since ruling Elites are by definition constantly picking winners and losers, any Status Quo operated by Elites is systematically malinvesting on a gargantuan scale. This is the ontological imperative of any Elite: skim as much of the national surplus as possible and funnel it to cronies and loyal toadies. The prudent Elites (and imprudent Elites don’t last long–the spoils system is quite Darwinian) set aside enough surplus to distribute as spoils, effectively buying the complicity of key sectors, classes, factions, etc.

Thus the default policy of any ruling Elite is bread and circuses: supply the potentially disruptive masses with food and entertainment, and they’ll continue their grudging support of whatever arrangement is supplying the bread and circuses.

Any mob that appears threatening can be dissipated with a “whiff of grapeshot.”

In the U.S., the spoils system is almost unlimited: corporate welfare for capital, food stamps and SSI disability for the lumpenproletariat, big-bucks jobs as water-carriers for the Elites for technocrats in the State, finance, think tanks, elite universities and Corporate America sectors, a variety of quasi-secure lower-level positions as enforcers, lackeys, apparatchiks and factotums and a smattering of tax subsidies (mortgage interest deduction, etc.) to placate what’s left of the non-state-dependent middle class.

The spoils system is not only the foundation of every Elites’ political legitimacy, it is the thin layer of plaster that covers all the longstanding ethnic, regional, linguistic, religious and political fault lines that run beneath current nation-state arrangements.

As noted in yesterday’s entry Ukraine: A Deep State Analysis, numerous national borders were drawn after World War II (1945) with little regard for historical divisions between various groups or preceding borders.

Entire nations were penciled into existence by Imperial diktat in complete disregard for existing historical groups–Iraq and Syria being just two examples of many.

As long as the stick of repression and the carrot of the spoils system were sufficiently persuasive, the tectonic plates beneath the regime were masked. But once the spoils system and the machinery of suppression crack, the old rivalries arise anew.

The spoils system can crack for two reasons: either the national surplus declines so there simply isn’t enough spoils left to keep everyone placated, or the spoils diversion to the Elites and their cronies exceeds the tipping point of legitimacy.

Greece and Venezuela are examples of the first dynamic, and Ukraine is an example of the second dynamic. Greece essentially funded its vast spoils distribution system with borrowed money. When the regime’s free-money machine finally broke, the spoils system crashed along with the legitimacy of the Status Quo.

Venezuela is suffering a similar crash, based not on a withdrawal of credit but on the current Elites’ destruction of the nation’s oil industry and what was left of its productive private economy.

In Ukraine, the plundering of the national surplus by oligarchic Elites finally exceeded the populace’s threshold of legitimacy, and once the armed forces and police refused to murder their cousins, brothers, nieces and nephews in the streets, the Status Quo arrangement collapsed.

Now that the spoils system has crumbled, all the historical tectonics and fault lines are emerging in full force. the same can be said of Iraq and many other inherently unstable nation-states/regimes.

Why is the periphery crumbling? It’s simple: the conditions that enabled rising national surpluses and the distribution of spoils is breaking down for three reasons:

1. Energy is no longer cheap (compared to past prices)

2. The low-hanging fruit of higher productivity has all been plucked

3. The free-money flood of cheap, limitless credit is drying up

As regimes find surplus and credit are both contracting, their ability to placate every key group with spoils is also declining, and the conflicts between them can no longer be patched over with bribery or brutality.

Instability starts on the periphery and moves into the core. I have covered this in depth a number of times:

Instability Start on the Margins (October 31, 2013)

The Core-Periphery Model (June 11, 2013)

EU Leaders Throw Europe a Plutonium Life Preserver (October 27, 2011)

Everywhere, the instability from a failing spoils system is seeping from the periphery into the core: the E.U., the U.S., China and India. Two Powder Kegs Ready to Blow: China & India (January 23, 2014)

This erosion of the spoils system has a peculiar characteristic: once the old spoils system cracks and collapses, it cannot be put back together. A new arrangement arises, despite the best self-serving efforts of the current Elites.

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Act 1:  Japanese Prime Minister Had to Fly In to Fukushima In the Middle of the Night to Get the Scoop from Low-Level Nuclear Workers … Because Tepco Wouldn’t Tell Him the Truth

In this 27-second video, Amy Goodman summarizes her interview with Japanese Prime Minister Naoto Kan:

We just came from Tokyo. We broadcast for three days from Japan. And we’re going to play the interview I did with the former prime minister, the one in charge at the time [of the Fukushima disaster], Naoto Kan. He said it was extremely difficult to get a straight answer from TEPCO, the Tokyo Electric Power Company, that ran the plants, and he had to fly in. He figured the only place he could get a straight, nonpolitical answer—he flew in the middle of the night to the plant to talk to the workers to figure out whether he had to evacuate 50 million people in Tokyo.

 

This is not the first time Tepco has been less than honest:

• An official Japanese government investigation concluded that the Fukushima accident was a “man-made” disaster,  caused by “collusion” between government and Tepco and bad reactor design

• Tepco knew right after the 2011 accident that 3 nuclear reactors had lost containment, that the nuclear fuel had “gone missing”, and that there was in fact no real containment at all.  Tepco has desperately been trying to cover this up for 2 and a half years … instead pretending that the reactors were in “cold shutdown”

• Tepco admitted that it’s known for 2 years that massive amounts of radioactive water are leaking into the groundwater and Pacific Ocean, but covered it up

• Tepco falsely claimed that all of the radiation was somehow contained in the harbor right outside the nuclear plants

• Tepco has substantially under-reported the amount of radiation released at Fukushima

• Tepco – with no financial incentive to actually fix things – has only been pretending to clean it up. And see this

Act 2: U.S.Nuclear Authorities Were Extremely Worried About West Coast Getting Hit By Fukushima Radiation … But Publicly Said It Was Safe

Nuclear expert Ed Lyman – chief scientist at the Union of Concerned Scientists – said:

While the U.S. government was telling the American people there was nothing to fear from Fukushima and that U.S. plants aren’t vulnerable to the same problems, internally, they were—there was a much different story. So we’ve learned from a lot of Freedom of Information Act documents that the Nuclear Regulatory Commission and the White House were actually very concerned about the potential impact of radiation from Fukushima affecting not only Americans in Tokyo, which was more than a hundred miles away from the plant, but also Americans on the West Coast. And they were furiously running calculations to try to figure out how bad it could get. But there was no sense of this in what they were telling the public.

Indeed, Seattle residents were exposed to dangerous radioactive “hot particles” because the government didn’t warn residents:

This is similar to the Japanese government withholding radiation plume data from evacuating Fukushima residents … which caused them to evacuate to areas of very high radiation.

EneNews rounds up details on the freedom of information act information.

via Zero Hedge http://ift.tt/NcCcqx George Washington

Yesterday we reported that as part of the Ukrainian central bank’s plan to bailout the nation’s largely insolvent private banks, it would provide any needed funding but only “if they will remain under open control of the National Bank of Ukraine.” And since the new CB head Stepan Kubiv’s allegiance to Europe were already well-known, this was merely a quick and efficient way of providing Europe with all the banking details including asset holdings of the local population. Today, the annexation of the country’s banking system by a “benevolent” Europe is complete.

Itar-Tass reports that Ukraine’s national bank has imposed temporary limits to withdraw money from foreign currency deposits to sums equivalent to no more than 15,000 hryvnias (about $1,500) a day, National Bank Chief Stepan Kubiv told a press conference. Or, as the citizens of Cyprus call it – capital controls.

Why is Ukraine doing this? Because when your currency is crashing at a record pace to unseen lows, what is the best way to limit FX transactions? Simple – just minimize the amount of foreign currency that can be in circulation.

Which is also why the the central bank’s capital controls do not touch local currency: there is more than enough of that in circulation since after all Ukraine has its own currency and can print it in infinite amounts: “For hryvnia deposits you may take as much as a million or two. Banks have liquidity,” Kubiv said.

Then there was the token propaganda:

The chief banker also noted that the situation on Ukraine’s currency market was under control. “The exchange rate may move in one direction and the opposite. There are just emotions and misinformation on the financial market,” he noted.

 

He assured the national bank would toughly stop violators of the currency law. For example, inspectors were sent to eight banks that had engaged in speculation, he said.

To summarize: first banks abdicate their control to a pro-European central bank, and now the citizens face their first (of many) capital controls which incidentally will simply aggravate the fund outflow situation even more, leading to an even faster drop in foreign reserves.

Finally comes the inflation. Wait until the people start rioting – think Egypt – when the economy collapses and a loaf of bread costs its wheelbarrow equight equivalent in Hryvnias. Just how fast will the countercoup in Ukraine take place then? Recall, in Egypt it was just over a year and a half…

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While the FT promptly retracted an article on precisely the topic of gold manipulation from earlier this week (recorded for posterity here), Bloomberg appears to not have had the same “editorial” concerns and pressures, and today released an article once again slamming the final conspiracy theory that while every other asset class is manipulated, gold is in a pristine class of its own, untouched by close-banging, price fixing traders or central bankers, and reports that “the London gold fix, the benchmark used by miners, jewelers and central banks to value the metal, may have been manipulated for a decade by the banks setting it, researchers say.“

Of course, over the past 5 years we have reported time and again how official gold manipulation started in earnest some time in the 1960s (who can forget the “reshuffle club”) but we will start with a decade.

Here is what BBG finds:

Unusual trading patterns around 3 p.m. in London, when the so-called afternoon fix is set on a private conference call between five of the biggest gold dealers, are a sign of collusive behavior and should be investigated, New York University’s Stern School of Business Professor Rosa Abrantes-Metz and Albert Metz, a managing director at Moody’s Investors Service, wrote in a draft research paper.

 

“The structure of the benchmark is certainly conducive to collusion and manipulation, and the empirical data are consistent with price artificiality,” they say in the report, which hasn’t yet been submitted for publication. “It is likely that co-operation between participants may be occurring.”

 

The paper is the first to raise the possibility that the five banks overseeing the century-old rate — Barclays Plc, Deutsche Bank AG, Bank of Nova Scotia, HSBC Holdings Plc and Societe Generale SA — may have been actively working together to manipulate the benchmark. It also adds to pressure on the firms to overhaul the way the rate is calculated. Authorities around the world, already investigating the manipulation of benchmarks from interest rates to foreign exchange, are examining the $20 trillion gold market for signs of wrongdoing.

Tell us something we didn’t already know. Then again, this time may be different, because one of the authors, Abrantes-Metz, advises the European Union and the International Organization of Securities Commissions on financial benchmarks. According to Bloomberg, her 2008 paper “Libor Manipulation?” helped uncover the rigging of the London interbank offered rate, which has led financial firms including Barclays Plc and UBS AG to be fined about $6 billion in total. She is a paid expert witness to lawyers, providing economic analysis for litigation. Metz heads credit policy research at ratings company Moody’s.

By way of background, the history of gold price fixing is well-known and is one of the longest running traditions in banking:

The rate-setting ritual dates back to 1919. Dealers in the early years met in a wood-paneled room in Rothschild’s office in the City of London and raised little Union Jacks to indicate interest. Now the fix is calculated twice a day on telephone conferences at 10:30 a.m. and 3 p.m. London time. The calls usually last 10 minutes, though they can run more than an hour.

So what exactly did this “erudite” authority on manipulation uncover?

Abrantes-Metz and Metz screened intraday trading in the spot gold market from 2001 to 2013 for sudden, unexplained moves that may indicate illegal behavior. From 2004, they observed frequent spikes in spot gold prices during the afternoon call. The moves weren’t replicated during the morning call and hadn’t happened before 2004, they found.

 

There’s no obvious explanation as to why the patterns began in 2004, why they were more prevalent in the afternoon fixing, and why price moves tended to be downwards, Abrantes-Metz said in a telephone interview this week.

 

“This is a first attempt to uncover potentially manipulative behavior and the results are concerning,” she said. “It’s down to regulators to establish why there are such striking patterns but banks have the means, motive and opportunity to manipulate the fixing. The results are consistent with the possibility of collusion.”

And the punchline:

Large price moves during the afternoon call were also overwhelmingly in the same direction: down. On days when the authors identified large price moves during the fix, they were downwards at least two-thirds of the time in six different years between 2004 and 2013. In 2010, large moves during the fix were negative 92 percent of the time, the authors found.

Unpossible – the bank prop traders manipulating gold and the central banks for whom precious metals are the holy water that can destroy their fractional reserve ponzi scheme would never lie. Because otherwise the historic silver slam from May 1, 2011, in which silver cratered by $6, or about 15%, in milliseconds and ended the parabolic rise higher in the metal could be… gasp… criminal.

In other news, we may have officially run out of conspiracy theories.

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