Month: May 2017

How Debt-Asset Bubbles Implode: The Supernova Model Of Financial Collapse

Authored by Charles Hugh Smith via OfTwoMinds blog,

When debt-asset bubbles expand at rates far above the expansion of earnings and real-world productive wealth, their collapse is inevitable. The Supernova model of financial collapse is one way to understand this.

As I noted yesterday in Will the Crazy Global Debt Bubble Ever End?, I've used the Supernova analogy for years, but didn't properly explain why it illuminates the dynamics of financial bubbles imploding.

According to Wikipedia, "A supernova is an astronomical event that occurs during the last stellar evolutionary stages of a massive star's life, whose dramatic and catastrophic destruction is marked by one final titanic explosion."

A key feature of a pre-supernova super-massive star is its rapid expansion. As the star consumes its available fuel via nuclear fusion, the star's outer layer expands. Once there is no longer enough fuel/fusion to resist the force of gravity, the star implodes as gravity takes over.

This collapse ejects much of the outer layers of the star in an event of unprecedented violence.

The financial analogy is easy to see: when rapidly expanding debt consumes a critical threshold of earnings (fuel), the equivalent of gravity (default, inability to service the enormous debt) triggers the collapse of the entire debt/leverage-dependent financial system.

As I explained yesterday, if earnings stagnate or decline while debt races higher, eventually earnings are insufficient to service the debt and default is inevitable. The other problem that arises as more and more of earned income goes to debt service is that there is less and less disposable income left to support consumer spending–the lifeblood of economies worldwide.

Once debt service absorbs a significant chunk of household earnings, recession is the inevitable result as spending collapses once more debt cannot be loaded on households. In other words, debt is limited by earnings. If earnings decline, or fall far behind the expansion of debt, eventually borrowers can no longer borrow more, or refuse to borrow more.

At that point, consumer spending falls and recession generates a self-reinforcing cycle of declining sales, profits, employment and wages. Recession further reduces the ability and appetite for more debt, and this acts as "gravity" in the super-massive debt-star.

Financial supernova collapse has two pathways which we call deflationary and inflationary. But the key point here is these are simply different pathways to the same result: the collapse of the financial system.

In a deflationary supernova, defaults–and the avoidance of additional debt–are the gravity that overwhelms the forces of expanding debt. Once the losses and risk are visible to all participants, the herd psychology changes, and participants no longer believe that central banks "are now the ultimate power in the Universe."

Central banks can create currency and credit, but they can't create earnings or productive real-world wealth. These are the limiting dynamics of any debt-dependent system.

The fantasy is that free money–limitless credit to corporations and Universal Basic Income to debt-serfs–will magically create earnings and expand productivity. But this FantasyLand exists only in overheated self-serving imagination: in the real world, free credit is used to buy back stocks and indulge in other financialization trickery, not invest in higher productivity.

And the debt-serfs scraping by on Universal Basic Income have no ability to borrow more and few means to generate meaningful productivity gains.

The other pathway to implosion is to print currency with sufficient abandon that debtors have enough money to service their debts. Emitting sufficient new free money to re-set all the unpayable debt destroys the purchasing power of the currency–a supernova implosion that is little different than the deflationary implosion. The inflationary pathway results in the destruction of the currency, impoverishing everyone holding the currency.

While the idea of debt jubilee is appealing to everyone who doesn't own debt-based assets (mortgages, auto loans, student loans,etc.), it is anathema to those who do own most of the debt-based assets–who just happen to be the wealthy and powerful who run our pay-to-play "democracy."

If history is any guide, the wealthy and powerful who run our pay-to-play "democracy" will never relinquish their wealth. Only a financial collapse can re-set the system.

The financial implosion triggers social and political upheavals. Recall that one person's debt is another entity's asset. When debt is blown off in either a deflationary or inflationary implosion, all the "wealth" represented by debt is also blown off.

So what survives a financial supernova? There are three classes of things that are still functioning after a debt/fiat-currency supernova: real-world tools/productive assets that were owned free and clear, and non-fiat-currency financial assets that are difficult for failed states and central banks to steal/expropriate.

The third class is human/social capital, i.e. the knowledge and experience in your head. Not only will my Skil 77 power saw still be around, so will my knowledge of how to be productive with this tool.

Proponents of precious metals and cryptocurrencies both see their favored assets as survivable assets that are difficult to steal/expropriate. It's difficult to predict just how desperate failing Status Quo institutions will get as their debt-fiat-currency dependent "wealth" and "power" implodes, but we are probably safe in assuming they will get fanatically zealous about stealing/expropriating everything they can get their self-serving hands on before the tides of History wash them away.

If they take my Skil 77 power saw, what are they going to do with it? Sell it for pennies to a crony of the central state? How will removing my ability to be productive help sustain their imploding regime? Removing productive capacity and suppressing my willingness to be productive will only hasten the collapse of their failed regime.

The Venezuelan Bolivar is the model of currency collapse: this is not some long-ago history–this is the present:

And how much did expanding debt boost productivity? Oops! Rapidly expanding financialized (i.e. unproductive) debt is Kryptonite to productivity.

Expanding credit has fixed everything! That's precisely what the Imperial managers think just before the debt supernova implodes.

Federal debt has tripled–no problem, let's triple it again, and then triple that. There is no upper limit on how much currency the Empire can borrow or print, right? "We are the ultimate power in the Universe now," etc.

Gravity eventually overpowers financial fakery. Central banks can add zeroes to currency and the super-wealthy can use their unlimited lines of credit to buy up everything in sight, but when the Empire collapses, the debt-assets of the super-wealthy are blown off in the supernova along with all the other artificial constructs of our corrupt, corrupting, rapacious, exploitive system.

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This Son of Immigrants Fought For His Country While Rep. Steve King Dodged the Draft

My Uncle Nick—my godfather and the man for whom I’m named—died last week at the age of 84. He was a really great uncle, brother to my mother and his other siblings, husband to his wife, and father to his daughters.

He was also, in the repugnant, nativist parlance of Rep. Steve King (R-Iowa), “somebody else’s baby.” That is, he was born to immigrants from Italy and thus, according to King and other xenophobes, incapable of helping to “restore our civilization.” (For more on that, go here.)

Except that Nick Guida did make America a better place, first and foremost by being a good son, brother, husband, father, and uncle. He was a hardworking guy and even started his own business. He also served in Korea when called up to that bloodbath. (Steve King, in contrast, avoided service in Vietnam via college three college deferments even though he never actually graduated. Nick’s older brother, my Uncle John, served in World War II during the invasion of Italy, the very country his parents had left behind. My mother and my Aunt Lee, the only surviving member of her family, did their share to make America a better place, too, in all sorts of ways despite only learning English when they went to school.

I don’t want to waste much time just a couple of days before my uncle’s funeral thinking about politicians, pundits, and demagogues who grotesquely dismiss whole groups of people who were, or are, “somebody else’s babies.” But for those of us who are within a few generations of being American, I think it’s vitally important to remember how much our parents and grandparents were vilified for wanting to come here to create a better life for themselves and their children. In fact, my Italian grandmother, homesick for her family, traveled back to her birthplace with her oldest child and got locked out of America for several years due to immigration restrictions passed in the early 1920s. Like Mexicans and Arabs today, Italians were not considered desirable. In the 1890s, in the wake of a mass lynching of nine Italians accused of murdering the New Orleans chief of police, Theodore Roosevelt said the extra-judicial killings were “a rather good thing.” A future governor of Louisiana proclaimed Italians as “just a little worse than the Negro, being if anything filthier in [their] habits, lawless, and treacherous.” In reality, Italians in early 20th-century America had it much better than blacks, but it didn’t mean they had it particularly easy.

Today’s immigrants (legal and illegal) come from different countries than 100 years ago, but like those in the past, they start businesses at higher rates than natives, use less welfare, and cause less crime. Go ahead, look it up.

Despite the rhetoric of the Steve Kings and Donald J. Trumps of the world, immigrants and immigration are not antithetical to “making America great again” or, less dramatically, making the country a slightly better place than it was before my Uncle Nick was born. I won’t be thinking about Steve King during Thursday’s funeral, I’ll be thinking about all the people my uncle helped during his life and how lucky we all were to know him. I’ll be thinking, too, about my Italian grandparents, who never spoke English and yet somehow helped build this country nonetheless. And I’ll be thinking about today’s immigrants and children of immigrants, and hoping they get a fair shake in 21st-century America.

And maybe next week, I’ll start thinking about what sort of arguments might actually help change the contemporary discussion about immigrants and immigration from one that is filled with anger and invective to one characterized by a sense of history and a willingness to talk about facts.

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A Voice of Reason Speaks Regarding ‘The New Cold War’

Last week was interesting for me. I spent about half my time getting up to speed with the latest happenings in the crypto-coin world, and got really excited about a lot of what I saw. In fact, this was the first time I became totally consumed by the space in several years, going back to when I first investigated and started becoming involved with Bitcoin.

What really caught my attention is the booming ICO market, and while it’ll invariably produce its fair share of total scams, I find it nonetheless captivating. I’m attracted to its dynamic wild west spirit, as well as its capacity to function as an alternative funding mechanism for startup projects utilizing a wider participatory structure consisting of anyone with a bit of crypto currency and a high-risk tolerance. It’s an entirely new experimental ecosystem funded by crypto currencies (mostly ethereum, but also bitcoin). It’s pretty mesmerizing (for more see: A New Financial System is Being Born).

Spending so much time on this esoteric world kept me away from following U.S. politics as closely as I typically do, which was a great thing. The level of discourse from nearly all sides of the political spectrum has turned so toxic, divisive, hysterical and counterproductive, leaving that environment for several days made me feel great, as if I had taken a vacation from idiot island. As such, today I again decided to spend some time reading up on the crypto-coin space and getting further up to speed on ICOs and how they work. That said, I realize I still need to pay attention to the crazy happenings in the wider world around me, so I thought I’d share an interview with a rarity in today’s political discourse, a voice of reason.

What follows are excerpts from a Slate  interview with Stephen F. Cohen, professor emeritus of Russian studies and politics at NYU and Princeton:

continue reading

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Police Union Appeals Firing of Cop Who Killed Tamir Rice

The Cleveland police union is filing an appeal of the termination of Officer Timothy Loehmann, who two years ago shot and killed 12-year-old Tamir Rice and today was fired for lying on his job application.

After the 2015 shooting, Buzzfeed revealed that Loehmann had not disclosed he was about to be fired for dismal performance when he resigned from his previous position in Independence, Ohio. Cleveland police say they didn’t request Loehmann’s personnel file from Independence before hiring him. Had they done so, they would have learned that Loehmann had been deemed “unfit for duty” because of his “dismal” firearms performance. (Among other problems, he had become “distracted and weepy” during an exercise at a gun range.)

Like other public employee unions, police guilds produce rules that protect bad actors. Loehmann had been on the force for less than a year before killing Rice. The Cleveland police union has successfully persuaded arbitrers to overturn terminations before. In one infamous 2014 case, the union argued a cop shouldn’t have been fired for losing his service weapon during a bar fight because other cops who had done “far worse” had not been dismissed. This time around, it’s arguing that Loehmann did not break any department policy.

Rice’s mother told reporters today that she’s relieved Loehmann has been let go. She added that she hopes “the termination sticks and he isn’t brought back after an arbitration hearing.”

One way to avoid such bad hires would be to start a police offenders’ registry that tracks such problem officers. Unfortunately, police unions and friendly lawmakers have helped create a climate where a police job is seen as a right, not a privilege. The Cleveland police union defended the shooting from the beginning, insisting it was justified because the 12-year-old Rice was “menacing.” Other unions jumped in too—the head of the Miami police union tweeted a photo of the slain pre-teen with the caption “act like a thug and you’ll be treated like one.”

After the shooting, county prosecutor Timothy McGinty recommended, and a grand jury agreed, not to press charges against Loehmann. McGinty was voted out of office a few months later in the Democratic primary. The other officer on the scene when Loehmann killed Rice was suspended for 10 days and ordered to undergo additional training. The union is also appealing that suspension.

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Kathy Griffin ‘Beheads’ Trump in Art Stunt, Obama Cuba Policy Could Be Reversed: P.M. Links

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Pentagon Says It Has Successfully Shot Down A Simulated ICBM Attack

Update: according to the Missile Defense Agency, the test was a success:

  • U.S. MISSILE INTERCEPT TEST A SUCCESS, DEFENSE AGENCY SAYS
  • MISSILE DEFENSE AGENCY SAYS PRIMARY OBJECTIVE WAS MET
  • AGENCY SAYS SYSTEM PERFORMANCE STILL TO BE EVALUATED

* * *

As previewed last week, on Tuesday afternoon the US began the first ever missile test involving a simulated attack by an intercontinental ballistic missile, firing off an interceptor from Vandenberg Air Force Base in California, according to a Reuters witness located at the airbase. The long-planned experiment comes amid increased tensions over North Korea’s ballistic missile tests.

Ground-based Midcourse Defense (GMD) element launches during a flight test
from Vandenberg Air Force Base, California, U.S., May 30, 2017.

As part of the historic attempt to intercept an inbound ICBM, a Ground-based Midcourse Defense (GMD) interceptor was fired from the Vandenberg. The target vehicle, designed to resemble an ICBM, was fired from Kwajalein Atoll in the Marshall Islands.

The intercept should take place shortly over the Pacific Ocean. Reuters adds that it could be several hours before the U.S. military discloses whether the Ground-based Midcourse Defense (GMD) interceptor struck its target. The Kwajalein atoll is approximately 8,000 km (4,972 miles) from Los Angeles, California.

While the test comes as fears mount about North Korea’s advancing program to develop an ICBM capability, Pentagon official who spoke on condition of anonymity told Stars and Stripes last week said that Tuesday’s test was planned “years in advance” and is not a direct response to recent North Korean tests of ballistic missiles.

Despite the denial, many are skeptical: while North Korea currently lacks the capability to hit the US mainland, the US military intelligence chief recently warned that such a development is only a matter of time.

The test interceptor is equipped with an Exo-atmospheric Kill Vehicle (EKV), which is supposed to destroy the target vehicle with a direct hit. “This will be the first test of an upgraded kill vehicle, and the first test against an ICBM-class target,” US Missile Defense Agency spokesman Chris Johnson said in a statement.

Deployed in 2004 by the Bush administration, the GMD has never been used it combat. This is the first intercept test since 2014. There are currently 32 interceptor missiles in Fort Greely, Alaska and four at Vandenberg. Eight more are supposed to come on-line by the end of this year, AP reported.

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Evergreen State College Chaos Reigns: “Whiteness Is The Most Violent F**king System Ever”

Via The CollegeFix.com,

A new video has surfaced of students this past week at Evergreen State College yelling and ranting about everything from “racist white teachers” and “white-ass administrators” to “black power!”  during a so-called “meeting” with President George Bridges and other college administrators.

Apparently, the activists are not pleased that this recording made its way to the Internet at large.

One of the demands listed by Evergreen students, and addressed by President Bridges, is that something be done to resolve the “theft” of the video:

“We demand that the video created for Day of Absence and Day of Presence that was stolen by white supremacists and edited to expose and ridicule the students and staff be taken down by the administration by this Friday.”

 

Next steps:

 

Based on conversations with the Attorney General’s office, the most likely course of action requires an investigation. We commit to launching an extensive forensic investigation of the theft of this video and to determining who stole it from the student. If that investigation yields a suspect, we will seek criminal charges against the individual in consultation with the Attorney General.

Good luck with that one.

Here are a few, er, highlight statements uttered during the protester takeover:

— “FUCK YOU, AND FUCK THE POLICE!”

 

— “Whiteness is the most violent fuckin’ system to ever breathe!”

 

— “I’m tired of white people talking about what black and brown people need.”

 

— “These white-ass faculty members need to be holding HIM, and HIM, and ALL these people accountable!”

 

— “FUCK YOU [President] GEORGE [Bridges], we don’t wanna listen to a GODDAMN thing you have to say! No, you shut the fuck up!”

 

— “I’m tellin’ you, you’re speakin’ to your ancestor, all right? We been here before you. We built these cities, we had civilization way before you ever had … comin’ out your caves.”

 

— “You have the fucking nerve to, like, fucking dehumanize our (unintelligible)!”

Marvel, too, at around 6:06 in the vid the protesters demand for President Bridges to put his hands down while speaking — a student even approaches him to “demonstrate” how he should do it.

Professor Bret Weinstein had told Fox News’s Tucker Carlson that the meeting with Bridges seen here was “believe it or not […] far crazier than the video” of his own (earlier) classroom chaos. He appears to be 100% correct in that assessment.

There may be no more apt description of this madness than what Carlson told Weinstein: It resembles “Phnom Penh in 1975.”

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The Glorious End of U.S. Global Supremacy [Reason Podcast]

“Power is more dispersed…and the U.S. is going to have to be decentered from having to run everything,” says Reason’s Nick Gillespie, on the big takeaway from Donald Trump’s trip to the Middle East and Europe. “We’re not necessarily going to be the one dominant country, or the indispensable nation, economically, militarily, or culturally.”

On today’s podcast, Gillespie joins fellow Reason editors Katherine Mangu-Ward and Matt Welch to discuss topics in the news, including Greg Gianforte’s body-slamming of The Guardian reporter Ben Jacobs; Trump’s big trip and what it says about the future of U.S. dominance in the world; the TSA’s proposed laptop ban on foreign flights; and the growing possibility of some sort of rapprochement, if not active alliance, between progressives sick of the Democratic Party and libertarians alienated by Trump and the two-party system.

Produced by Ian Keyser.

Mentioned in the podcast:

Veronique de Rugy on why “incessant calls for more [military] spending aren’t really about making us safer.”

The Week’s Bonnie Kristian on her unfulfilled libertarian hope that Trump’s win would lead everyone to “see why it’s risky to concentrate so much authority in the presidency…”

Salon’s interview with Libertarian Party Chairman Nicholas Sarwark.

Nick Gillespie on how the Sarwark interview actually shows “how much a progressive at Salon actually agrees with the points being made by [the LP Chairman]”

Subscribe, rate, and review the Reason Podcast at iTunes. Listen at SoundCloud below:

Don’t miss a single Reason podcast! (Archive here.)

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Photo: Trump in Brussels, May 26, 2015. (face to face/ZUMA Press/Newscom)

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Court to Grandma: You Shouldn’t Lose Your House Just Because Your Dumb Son Sold Some Weed There

Four years after the Philadelphia District Attorney seized her house without ever charging her with a crime, a 72-year-old grandmother has prevailed at the Pennsylvania Supreme Court, where justices strengthened protections for property owners against civil asset forfeiture.

In a unanimous opinion issued last Thursday, the Philadelphia Supreme Court tightened the rules for seizing property, ruling that, although police and prosecutors have the authority to take property used in illegal activities, there must be clear evidence that the property owner knew of and agreed to the crimes.

Under civil asset forfeiture laws, police can seize property suspected of being connected to a crime, even if the owner is never convicted and charged. This extends to situations where the property owner is not even involved in the alleged crime, such as a mother whose son catches a DUI while driving her car, or, in the case at hand, a grandmother whose son is arrested for selling $140-worth of marijuana to an undercover cop.

The court also said that “grossly disproportional” seizures may violate the Eighth Amendment’s protections against excessive fines. “The amount of forfeiture must bear some relationship to the gravity of the offense that it is designed to punish,” the court wrote.

The Philadelphia Inquirer reports on more details on the case:

The ruling, issued late Thursday, came in the case of Elizabeth Young, a 72-year-old grandmother from the Cobbs Creek section of West Philadelphia, whose house and minivan were seized by the Philadelphia District Attorney’s Office in 2013 after her son was arrested for selling small amounts of marijuana there.

Young contested the seizure, but Common Pleas Court Judge Paula Patrick ruled in favor of the DA’s Office, finding that Young had ample knowledge of her son’s activities because the police had searched the house and seized drug paraphernalia, but the drug dealing continued.

“I am glad that this has come to some kind of conclusion,” said Young, who has been out of the house since 2013 and is currently living in Yeadon. “I am glad that I will be here to see this thing cleared up. I never did anything wrong and I have been out of my house long enough.” […]

The Supreme Court decision upheld a December 2014 opinion by Commonwealth Court, a mid-level appeals court in Pennsylvania, overturning the seizure. The Supreme Court sent the matter back to the trial court for further review, which means there is no timetable for when Young will be able to return to her house. A team of lawyers at Center City’s Ballard Spahr represented Young pro bono.

Young is far from the only person to have her house seized by the Philadelphia D.A. for a minor drug crime that she didn’t even commit. In 2013, Philadelphia police seized the house of Christos and Markela Sourovelis after their son was arrested for selling $40-worth of drugs outside of it.

The Sourovelis’ sued, with assistance from the libertarian-leaning Institute for Justice, a nonprofit law firm that has challenged asset forfeiture laws in several states. The Sourovelis’ plight drew national media attention, and the Philadelphia D.A. eventually dropped the case. However, the city is still facing a class-action lawsuit filed by the Institute for Justice challenging its asset forfeiture program. According to the firm, Philadelphia has seized more than 1,000 homes, 3,000 vehicles and $44 million in cash over 11 years.

Between the new legal standard issued by the Supreme Court, the looming lawsuit, and a potential reformer leading the district attorney’s office—Democratic Philadelphia D.A. candidate Larry Krasner vowed to rein in the program in an interview with Reason earlier this year—the salad days of Philadelphia’s asset forfeiture machine may be ending.

The Philadelphia police officer who coordinated the undercover marijuana buys at Young’s house pled guilty and was sentenced in 2015 to three-and-a-half years in federal prison on corruption charges involving planting drug evidence on suspects.

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VIX Jumps As Yield Curve Dumps To 7-Month Lows

Macro data, the dollar, and the yield curve are 'breaking bad' so when does the Walter White market die?

 

Another day, another set of dismal data (with soft data's dump continuing)…

 

But The Nasdaq was bid (up for the 8th day in a row), because the real economy doesn't matter and buying safe-haven 200x P/E stocks is the new normal… (Small Caps had a tough day)

 

Ugly day for the big banks as bond yields tumbled… (all of which are down 2 to 4% in May)

 

Amazon topped $1000 for the first time ever at the open…

Better just hope the G3 keeps printing…

 

After 7 straight down days, VIX actually ended higher on the day (despite fading lower from the US cash open)

 

For the month of May, Nasdaq remains the winner and Small Caps the biggest loser…

 

Treasury yields dropped on the day (and all but 2Y remain lower on the month)…

 

The Long-end outperformed… (with 30Y yields closing at 6 week lows)

 

And the yield curve has crushed to pre-Trump level…

 

And even the short-end has given up on the Trumpflation trade…

 

The Dollar Index ended the day unchanged from yesterday and unchanged from Friday's close (despite some volatility)… The dollar slid as bond yields dropped…

 

Yen was strongest and CAD weakest against the Dollar today…

 

The Peso was the worst on the day after disappointing local elections

 

Crude trod water around $50 while NatGas crashed to 10 week lows…

 

While the dollar index slid all day, gold had a tough day (even as silver gained)

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