Iceland Unleashes Confiscatory “Exit Tax” On Wealth Deposits

While on the one hand, Iceland's decision to inch towards lifting its capital controls is a positive step, it appears what they give with one hand they are taking with another. Just as we predicted three years ago, the muddle-through has failed and there are only hard choices left and sure enough BCG's envisioned 'wealth tax' appears to be rearing its ugly head once more. As Morgunbladid reports, Iceland plans to impose an exit tax as part of removing capital controls, anticipating all bank assets will be subject to the levy, regardless of whether assets are held in local (ISK) or foreign exchange.

 

As Bloomberg reports,

Iceland’s plan to impose an exit tax as part of removing capital controls anticipates all bank assets will be subject to levy, regardless of whether assets are held in ISK or FX, Morgunbladid reports without saying how it obtained the information.

 

Part of program may also include forcing foreign holders of ISK assets to swap ISK at discount to a 30-yr FX bond; bond to carry interest rate less than 3%: Morgunbladid

 

NOTE: Iceland task force on capital controls’ removal met yesterday with representatives of Kaupthing Bank hf, Glitnir Bank hf and LBI hf. The country may proceed with lifting controls early next year, according to task force member Lee C. Buchheit

As we concluded previously,

…between household, corporate and government debt, the developed world has $20 trillion in debt over and above the  sustainable threshold by the definition of "stable" debt to GDP of 180%.

 

The facts according to which all attempts to eliminate the excess debt have failed, and for now even the Fed's relentless pursuit of inflating our way out this insurmountable debt load have been for nothing.

 

The facts which state that the only way to resolve the massive debt load is through a global coordinated debt restructuring (which would, among other things, push all global banks into bankruptcy) which, when all is said and done, will have to be funded by the world's financial asset holders: the middle-and upper-class, which, if BCS is right, have a ~30% one-time tax on all their assets to look forward to as the great mean reversion finally arrives and the world is set back on a viable path.

*  *  *

Slowly but surely it is being enacted…




via Zero Hedge http://ift.tt/1uolu6h Tyler Durden

This Trickle Will Soon Become a Flood

By: Chris at http://ift.tt/12YmHT5

I cracked a rib a week ago. Don’t ask. Every time I breathe deeply, turn my body or laugh I am reminded that a tiny portion of my body, namely my damned rib, is involved in the process.

It got me to thinking how much our present crop of bureaucrats are like my busted rib. Everywhere you turn they’re there to inflict pain and remind you that life can indeed be painful.

After the ’08 crisis the government and regulators swooped in and decided it was time to have a crackdown. The government is always having a crackdown on something, terrorists in sandals, oven mitts and marigolds, or some other absurdity. Never, ever do they accomplish what they profess. They’d be better off cracking down on talking dogs, or cloudy days.

After ’08 the regulators pretended to go after the banks, and we pretended to believe them. That’s how it works. Behind the scenes however the little guy trying to deposit a few thousand bucks into a bank now has to jump through hoops that defy common sense, and now foreign banks simply won’t take US citizens. Why would they?

Investors participating in private deals have to jump through hoops and entrepreneurs raising capital have to be super careful about who they talk to – lest they not be accredited.

Over the last few months our private group, Seraph, led the Series A on a private company based in the US. Because the deal was a US deal we used a Delaware LLC structure as an SPV. 130 pages later, tens of thousands of dollars in costs and investors could participate. What on earth the Patriot Act, which took up about 30 pages on its own, has to do with my investing my own money into a private company, I have no idea. We’ve done deals from Mongolia to Iraq, to New Zealand and many more so we have some metrics to compare.

In New Zealand, where there is zero capital gains tax or dividend tax, we can set up and run an SPV with a 3 page document where all shareholders are registered and 100% transparent online and it can be done for less than a nice dinner in New York.

KYC has never been a problem but increasingly is becoming a problem for US citizens. The onus is no longer just on US citizens to report but now on anybody that said citizens land up transacting with. Thanks FATCA!

Compliance has become so onerous that brokers and custodians are refusing to take stock in private placements. The compliance costs are simply too high for them to make it worth their time.

What happens when brokers won’t register the stock? Investors find it too time consuming and painful, and when that happens they simply don’t invest capital, and when that happens pray tell how small and medium sized business which has always been the lifeblood of every healthy economy fund growth?

Governments hold a near monopoly in absurdity but what I wanted to discuss today is what they’re doing in the hedge fund world and how the regulatory overreach will be ensuring monopolies are created as smaller funds are eliminated.

The reason I discuss this topic is because I’ve spent the last few months doing extensive due diligence on different corporate structures and the compliance issues associated with them. It’s been a truly enlightening experience and I’d like to share some of my findings with you today.

It started with a conversation I had with a gentleman running a multi-billion dollar hedge fund. He explained to me in detail why his firm is scrapping the hedge fund model and moving to a simpler less onerous business model – a private limited holding company which will be domiciled in Hong Kong.

This was followed by dozens of conversations with fund managers, service firms, lawyers, accountants – all from multiple jurisdictions. What I learned was that the majority of hedge fund managers were either ignorant of a good many of the obligations they had and were therefore operating “illegally” especially with respect to capital raising activities.

Another group knew of various regulations but in their own words told me that if they had to abide by them they’d go out of business. The cost of compliance would mean them closing their doors. The only way for these guys to survive is to get substantial assets under management (AUM) in order for the 2% of fees charged to be able to cover all the additional expense.

Another good friend who runs a fund here in SE Asia commented to me that if he was going to do it all again there is absolutely NO WAY he would setup as a hedge fund: “I can’t keep up with all the laws and requirements, its impossible to remain compliant if you’re a small shop.”

It also matters less and less where the hedgies domicile. A Cayman fund, for example, cannot openly solicit European investors unless it pays a fee and becomes registered to do so in the European Union. Ditto the US.

To give you a sampling of some of this lunacy. New IRS laws designate a hedge fund a PFIC or “Private Investment Company” should the fund have not transacted for a period of time, which is worded in such a fashion that this period of time is discretionary upon the IRS.

The implications are severe due to the way the IRS treats PFIC’s. To provide some colour let us for a moment consider we’re running a hedge fund and let us further consider that the market looks particularly frothy and we want to go to cash and sit it out for a few months. Bam! Capture!

Inactivity will automatically designate us a PFIC. No forms need to be filled in, no minutes of any meeting documented, nada. We’re now in a new regime. Brilliant. Furthermore we can’t get from PFIC status back. Nope, we’ll have to liquidate our entire asset base, paying the full, much higher tax rate designated to PFIC’s and then go set up a new fund because – hey, that was so much fun.

Hedge fund managers with their mind in neutral are in for a nasty shock as the clamp down on funds not operating based on existing regulations and requirements heats up. As Western governments head into 2015 with un-payable and increasingly unserviceable debt levels they’ll be looking for every last penny they can find. To understand how bad those debt levels are, I strongly suggest downloading our free debt report here. It’ll blow your mind.

Internally we ran some numbers on successfully running a hedge fund and honestly I can’t say it makes much sense to do so for under $50 million dollars which is really the absolute bare minimum to make it work economically. Below that all your compliance and regulatory costs will be costing you a disproportionate amount of AUM. It’s simple enough math. I actually don’t think it makes much sense unless you can hit $250M and then if you can why would you bother?

Sure a fund structure can be more attractive to investors due to a perception, rightly or wrongly of greater transparency but the cost of accessing that capital is rising sharply. For the successful funds out there they are typically turning away capital so why on earth would they bother having all the pain? I don’t invest in funds but if I did I would be questioning a fund manager who can simply by changing his corporate structure immediately boost returns to shareholders.

Let’s take a look at some numbers.

Compliance cost

We can see that smaller funds spend far more on compliance as a percentage of AUM than their larger competitors, and further that North American fund managers are spending 4X more than their Asian counterparts and 2X more than their European friends.

Changes due to regulation

In a report published by KPMG an extensive survey was done and it was found that 52% of European fund managers said they had considered moving their fund domicile and management company to other jurisdictions as a result of regulatory changes. Furthermore 50% of fund managers with assets of $5 billion and up said they had considered exiting markets or lines of business as a result of regulatory pressure.

What is happening is that there is going to be a coming wave of hedge funds which will be incorporating as companies. Limited liability companies, partnerships, anything but the heavily regulated hedge funds.

Regulatory and compliance requirements have exploded since the GFC resulting in costs associated rising sharply. This has had the effect of barriers being created for smaller operators and in order for hedge funds to survive assets under management (AUM) have to be substantially larger to offset the increased costs.

This is a trend whereby we will be seeing less hedge funds entering the market and at the same time the large funds will likely merge and buy up smaller funds in order to produce better economies of scale due to these rising costs as margins are compressed. At the same time, as one very smart hedge fund manager who is in the $1B plus range said to me: “Why bother, just use a holding company.”

Someone is going to make a bunch of money servicing hedge funds who will be restructuring their entities as the compliance hammer comes down…

– Chris

 

“The only thing that saves us from the bureaucracy is its inefficiency.” – Eugene McCarthy




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The Game Is Rigged: Why Americans Keep Losing To The Police State

Submitted by John Whitehead via The Rutherford Institute,

“The truth is that the State is a conspiracy designed not only to exploit, but above all to corrupt its citizens.”—Leo Tolstoy

My 7-year-old granddaughter has suddenly developed a keen interest in card games: Go Fish, Crazy Eights, Old Maid, Blackjack, and War. We’ve fallen into a set pattern now: every time we play, she deals the cards, and I pretend not to see her stacking the deck in her favor. And of course, I always lose.

I don’t mind losing to my granddaughter at Old Maid, knowing full well the game is rigged. For now, it’s fun and games, and she’s winning. Where the rub comes in is in knowing that someday she’ll be old enough to realize that being a citizen in the American police state is much like playing against a stacked deck: you’re always going to lose.

The game is rigged, and “we the people” keep getting dealt the same losing hand. Even so, we stay in the game, against all odds, trusting that our luck will change.

The problem, of course, is that luck will not save us. The people dealing the cards—the politicians, the corporations, the judges, the prosecutors, the police, the bureaucrats, the military, the media, etc.—have only one prevailing concern, and that is to maintain their power and control over the country and us.

It really doesn’t matter what you call them—the 1%, the elite, the controllers, the masterminds, the shadow government, the police state, the surveillance state, the military industrial complex—so long as you understand that while they are dealing the cards, the deck will always be stacked in their favor.

Incredibly, no matter how many times we see this played out, Americans continue to naively buy into the idea that it’s our politics that divide us as a nation. As if there were really a difference between the Democrats and Republicans. As if the policies of George W. Bush were any different from those of Barack Obama. As if we weren’t a nation of sheep being fattened for the kill by a ravenous government of wolves.

We’re in trouble, folks, and changing the dealer won’t save us: it’s time to get out of the game.

We have relinquished control of our government to overlords who care nothing for our rights, our dignity or our humanity, and now we’re saddled with an authoritarian regime that is deaf to our cries, dumb to our troubles, blind to our needs, and accountable to no one.

Even revelations of wrongdoing amount to little in the way of changes for the better.

For instance, after six years of investigation, 6,000 written pages and $40 million to write a report that will not be released to the public in its entirety, the U.S. Senate has finally concluded that the CIA lied about its torture tactics, failed to acquire any life-saving intelligence, and was more brutal and extensive than previously admitted. This is no revelation. It’s a costly sleight of hand intended to distract us from the fact that nothing has changed. We’re still a military empire waging endless wars against shadowy enemies, all the while fattening the wallets of the defense contractors for whom war is money.

 

Same goes for the government’s surveillance programs. More than a year after Edward Snowden’s revelations dominated news headlines, the government’s domestic surveillance programs are just as invasive as ever. In fact, while the nation was distracted by the hubbub over the long-awaited release of the Senate’s CIA torture, the Foreign Intelligence Surveillance Court quietly reauthorized the National Security Agency’s surveillance of phone records. This was in response to the Obama administration’s request to keep the program alive.

 

Police misconduct and brutality have been dominating the news headlines for months now, but don’t expect any change for the better. In fact, with Obama’s blessing, police departments continue to make themselves battle ready with weapons and gear created for the military. Police shootings of unarmed citizens continue with alarming regularity. And grand juries, little more than puppets controlled by state prosecutors, continue to legitimize the police state by absolving police of any wrongdoing.

 

These grand juries embody everything that’s wrong with America today. In an age of secret meetings, secret surveillance, secret laws, secret tribunals and secret courts, the grand jury—which meets secretly, hears secret testimony, and is exposed to only what a prosecutor deems appropriate—has become yet another bureaucratic appendage to a government utterly lacking in transparency, accountability and adherence to the rule of law.

It’s a sorry lesson in how a well-intentioned law or program can be perverted, corrupted and used to advance illegitimate purposes. The war on terror, the war on drugs, asset forfeiture schemes, road safety schemes, school zero tolerance policies, eminent domain, private prisons: all of these programs started out as legitimate responses to pressing concerns. However, once you add money and power into the mix, even the most benevolent plans can be put to malevolent purposes.

In this way, the war on terror has become a convenient ruse to justify surveillance of all Americans, to create a suspect society, to expand the military empire, and to allow the president to expand the powers of the Executive Branch to imperial heights.

 

Under cover of the war on drugs, the nation’s police forces have been transformed into extensions of the military, with SWAT team raids carried out on unsuspecting homeowners for the slightest charge, and police officers given carte blanche authority to shoot first and ask questions later.

 

Asset forfeiture schemes, engineered as a way to strip organized crime syndicates of their ill-gotten wealth, have, in the hands of law enforcement agencies, become corrupt systems aimed at fleecing the citizenry while padding the pockets of the police.

 

Eminent domain, intended by the founders as a means to build roads and hospitals for the benefit of the general public, has become a handy loophole by which local governments can evict homeowners to make way for costly developments and shopping centers.

 

Private prisons, touted as an economically savvy solution to cash-strapped states with overcrowded prisons have turned into profit- and quota-driven detention centers that jail Americans guilty of little more than living off the grid, growing vegetable gardens in the front yards, or holding Bible studies in their back yards.

 

Traffic safety schemes such as automated red light and speed cameras, ostensibly aimed at making the nation’s roads safer, have been shown to be thinly disguised road taxes, levying hefty fines on drivers, most of whom would never have been pulled over, let alone ticketed, by an actual police officer.

 

School zero tolerance policies, a response to a handful of school shootings, have become exercises in folly, turning the schools into quasi-prisons, complete with armed police, metal detectors and lockdowns. The horror stories abound of 4- and 6-year-olds being handcuffed, shackled and dragged, kicking and screaming, to police headquarters for daring to act like children while at school.

 

As for grand juries, which were intended to serve as a check on the powers of the police and prosecutors, they have gone from being the citizen’s shield against injustice to a weapon in the hands of government agents. A far cry from a people’s court, today’s grand jury system is so blatantly rigged in favor of the government as to be laughable. Unless, that is, you happen to be one of the growing numbers of Americans betrayed and/or victimized by their own government, in which case, you’ll find nothing amusing about the way in which grand juries are used to terrorize the populace all the while covering up police misconduct.

Unfortunately, as I make clear in my book A Government of Wolves: The Emerging American Police State, we’re long past the point of simple fixes. The system has grown too large, too corrupt, and too unaccountable. If there’s to be any hope for tomorrow, it has to start at the local level, where Americans still have a chance to make their voices heard. Stop buying into the schemes of the elite, stop being distracted by their sleight-of-hands, stop being manipulated into believing that an election will change anything, and stop playing a rigged game where you’ll always be the loser.

It’s time to change the rules of the game. For that matter, it’s time to change the game.




via Zero Hedge http://ift.tt/1vRuPYU Tyler Durden

ToRTuRiNG JuSTiCe…

Those Who Can’t Be Nailed

CBS NEWS–After a review of the Senate Intelligence Committee’s full report, the Justice Department is not expected to initiate any criminal charges against any CIA officers who participated in or authorized the Retention, Detention and Interrogation (RDI) program.

This means the Justice Department is standing by its earlier decision not to pursue criminal charges.

Its investigators also reviewed the Committee’s full report and did not find any new information that they had not previously considered in reaching their determination.

The admissible evidence, the Justice Department concluded would not be sufficient to obtain and sustain convictions beyond a reasonable doubt.

He Who Can: If You Can’t Nail Him For What You Don’t Like, Nail Him For Something Else 

HUFFINGTON POST–The Justice Department is unlikely to prosecute anyone connected to the brutal torture techniques outlined in a Senate report released on Tuesday, but the one man already sitting in jail in connection with the CIA’s interrogation program tried to draw public attention to it.

In an interview with ABC News in 2007, former CIA agent John Kiriakou was one of the first to acknowledge the existence of the CIA’s torture program. Federal authorities brought criminal charges against him in 2008 for revealing the name of a covert agent to a reporter.

Kiriakou pleaded guilty to those charges in 2012 and is currently serving a 30-month federal prison sentence.

“I believe I was prosecuted not for what I did but for who I am: a CIA officer who said torture was wrong and ineffective and went against the grain,” Kiriakou said last year.

Justice Served

BLOOMBERG VIEW–In short, then, the [DOJ’s Torture Memos] worked: The Department of Justice gave the CIA a free pass to torture without being punished. The legal analysis may have been wrong or morally monstrous, and the CIA appears to have lied to the Department of Justice. But even discounting the political factors that make it unlikely a president would prosecute the CIA, the legal ground for proceeding would be very rocky.

Serious crimes were committed. They’re going to go unpunished.

WB7

Is this farcical outcome surprising to anyone?

Can we expect this outcome to deter acts of government sanctioned torture in the future? 

Well, I suppose we can now hold our breath waiting for those morally solvent Europeans, Poland for example, to carry the ball of justice…

 

 

.

 

.




via Zero Hedge http://ift.tt/1DdwSv8 williambanzai7

The Economy Is Worse than During the Great Depression

Underneath the Propaganda, the Economy Is In BAD SHAPE …

We noted in 2013 that the British economy is worse than during the Great Depression.

The Washington Post's Wonkblog pointed out in August that Europe is stuck in a "Greater Depression" … worse than the Great Depression.

Well-known economist Brad DeLong agrees. As does Paul Krugman.

Historian, economist and demographer Neil Howe provided the following charts via Forbes last month, showing how dire the situation is in Europe:

Great Depression v. Great Recession, United Kingdom GDP

Great Depression v. Great Recession, Europe GDP

The chart for the U.S. doesn't look as bad …

But as Howe notes:

These figures don’t mean that the Depression was definitely worse. Though it was deeper, it … likely will be shorter than the Great Reces­sion in the United States. The recovery in the ‘30s occurred much faster than it has in recent years.

 

***

 

What’s more, from 1933 on, U.S. GDP grew at a blistering average rate of over 8% per year for the next eight years. And that includes one recession year: 1938. By 1941, 12 years after the Great Depression began, U.S. GDP was 41% higher than its pre-downturn figure. This is almost certainly a much higher level, relative to 1929, than the United States will see by 2019, relative to 2007.

Indeed, Pulitzer prize-winning economic reporter David Cay Johnston showed last year that Americans bounced back faster after the Great Depression than the "Great Recession".

As we pointed out in 2012, the much-hyped "recovery" may be a myth:

What Do Economic Indicators Say?

We've repeatedly pointed out that there are many indicators which show that the last 5 years have been worse than the Great Depression of the 1930s, including:

Mark McHugh reports:

Velocity of money is the frequency with which a unit of money is spent on new goods and services. It is a far better indicator of economic activity than GDP, consumer prices, the stock market, or sales of men’s underwear (which Greenspan was fond of ogling). In a healthy economy, the same dollar is collected as payment and subsequently spent many times over. In a depression, the velocity of money goes catatonic. Velocity of money is calculated by simply dividing GDP by a given money supply. This VoM chart using monetary base should end any discussion of what ”this” is and whether or not anybody should be using the word “recovery” with a straight face:

In just four short years, our “enlightened” policy-makers have slowed money velocity to depths never seen in the Great Depression.

 

[It's gotten much worse since then.]

(As we've previously explained, the Fed has intentionally squashed money multipliers and money velocity as a way to battle inflation. And see this)

 

Indeed, the number of Americans relying on government assistance to obtain basic food may be higher now that during the Great Depression. The only reason we don't see "soup lines" like we did in the 30s is because of the massive food stamp program.

 

And while apologists for government and bank policy point to unemployment as being better than during the 1930s, even that claim is debatable.

What Do Economists Say?

Indeed, many economists agree that this could be worse than the Great Depression, including:

Bad Policy Has Us Stuck

We are stuck in a depression because the government has done all of the wrong things, and has failed to address the core problems.

 

For example:

  • The government is doing everything else wrong. See this and this

Quantitative easing won't help … it will only make things worse.

 

This isn’t an issue of left versus right … it’s corruption and bad policies which help the super-elite but are causing a depression for the vast majority of the American people.

 

The government and the banks are doing all of the wrong things. See this and this.

And Europe is doing all of the wrong things, as well:

If a patient is bleeding out, doctors have to suture the wounds before they decide whether to give more blood or to taper off the amount of transfusions.

 

But Europe has never treated the wounds …  As we noted in 2011, failing to prosecute financial fraud – on either side of the Atlantic – is extending the economic crisis.

 

In 2012, we pointed out that European (and American) governments were encouraging bank manipulation and fraud to cover up insolvency … trying to put lipstick on a pig.

Indeed:

  • Quantitative easing hurts the economy. Even the Bank of England and the creators of QE admit that it is “pushing on a string“.  But the UK did tons of QE instead of actually fixing the economy

Heck of a job, guys …




via Zero Hedge http://ift.tt/1DdwQUc George Washington

It’s Different This Time… Rig-Count Edition

In July 2008, crude oil prices peaked and began to fall quickly. After 2 months they had dropped 30%, but being the smartest extrapolators in the room, producers piled on the rig count driving it higher and higher until around 5 months after oil prices peaked… the rig count completely collapsed. Today, it has now been almost 6 months since oil peaked and began its accelerating free-fall and rig counts have just started to drop (still 2% above the June peak oil levels)…  

 

There is always a lag… and with permits down 40%, let’s just see if it’s different this time…

 

Of course, it’s different this time… it’s way worse! All these rigs are backed by massive debt loads at drastically lower costs of funding than is possible now… but we should ignore that, right?

 

Charts: Bloomberg




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Revelations From The Torture Report – CIA Lies, Nazi Methods And The $81 Million No-Bid Torture Contract

Submitted by Mike Krieger Of Liberty Blitzkrieg

Revelations From The Torture Report – CIA Lies, Nazi Methods And The $81 Million No-Bid Torture Contract

After initially helping to devise the “enhanced interrogation” efforts, they were designated as the only two contractors allowed to oversee these interrogations at sites around the world. In 2005, they formed a company to receive contracts from the CIA. According to the Senate report, the base value of their contract in 2006 was in excess of $180 million.

By the time the CIA terminated their contract in 2009, the consulting firm founded by the two men had collected $81 million in taxpayer money. In May of that year,ProPublica reported, the firm abruptly gave up the lease on its Spokane, Washington, headquarters and disconnected the phone.

Still, according to the Senate report, the CIA will provide $5 million in indemnity costs to the firm to cover all legal expenses for potential criminal prosecution and investigations through 2021.

– From the Huffington Post article: Architects Of CIA Torture Program Raked In $81 Million, Report Reveals

 

One of the greatest propaganda successes of the consolidated and corporate owned mainstream media in the US. has been the ability to convince many naive Americans that people with fascist tendencies do not exist in our society, and it they do, they certainly don’t occupy the highest halls of power.

One of the key points I try to get across in my writing is that the sociopathic mindset knows no borders, and a society that ignorantly believes that its “leadership” consists of good people with a moral high ground is a society of sheep primed for slaughter. Not only do fascist types exist at the highest levels of the U.S. status quo, the smart ones will typically do everything they can to attain such positions. Why?

As I noted recently in the post, In Great Britain, Protecting Pedophile Politicians is a Matter of “National Security”:

I’ve long written about how the percentage of sociopaths within a group of humans becomes increasingly concentrated the higher you climb within the positions of power in a society, with it being most chronic amongst those who crave political power.

 

The reason for this is obvious. Those with the sickest minds, and who wish to act upon their destructive fantasies, understand that they can most easily get away with their deeds if they are protected by an aura of power and ostensible respectability. They believe that as a result of their status, no one would dare accuse them of horrific activities, and if it ever came to that, they could quash any investigation.

One of the reasons the Senate “Torture Report” is so important, is that it forces Americans to confront the fascists and torture profiteers in their midst. Without this report, allegations of wrongdoing at the top of the U.S. status quo can be easily dismissed as “conspiracy theory.” Hopefully, now that we have some proof, we can start to meaningfully confront the cancer metastasizing within our society.

This post will be spilt into three separate parts, each of which will zero in on a separate aspect of what we have learned from the report. The first part goes back to an article in the Atlantic from 2007 titled: “Verschärfte Vernehmung.” Verschärfte Vernehmung in German translates to something like “enhanced interrogation”, and the article explains the disturbing similarities of what the U.S. government is doing to what the Nazis did in Germany a generation ago. First take a look at the following:

Screen Shot 2014-12-10 at 12.27.38 PM

More from The Atlantic:

The phrase “Verschärfte Vernehmung” is German for “enhanced interrogation”. Other translations include “intensified interrogation” or “sharpened interrogation”. It’s a phrase that appears to have been concocted in 1937, to describe a form of torture that would leave no marks, and hence save the embarrassment pre-war Nazi officials were experiencing as their wounded torture victims ended up in court. The methods, as you can see above, are indistinguishable from those described as “enhanced interrogation techniques” by the president. As you can see from the Gestapo memo, moreover, the Nazis were adamant that their “enhanced interrogation techniques” would be carefully restricted and controlled, monitored by an elite professional staff, of the kind recommended by Charles Krauthammer, and strictly reserved for certain categories of prisoner. At least, that was the original plan.

 

Also: the use of hypothermia, authorized by Bush and Rumsfeld, was initially forbidden. ‘Waterboarding” was forbidden too, unlike that authorized by Bush. As time went on, historians have found that all the bureaucratic restrictions were eventually broken or abridged. Once you start torturing, it has a life of its own. The “cold bath” technique – the same as that used by Bush against al-Qahtani in Guantanamo – was, according to professor Darius Rejali of Reed College, In Norway, we actually have a 1948 court case that weighs whether “enhanced interrogation” using the methods approved by president Bush amounted to torture. The proceedings are fascinating, with specific reference to the hypothermia used in Gitmo, and throughout interrogation centers across the field of conflict. The Nazi defense of the techniques is almost verbatim that of the Bush administration…

 

Freezing prisoners to near-death, repeated beatings, long forced-standing, waterboarding, cold showers in air-conditioned rooms, stress positions [Arrest mit Verschaerfung], withholding of medicine and leaving wounded or sick prisoners alone in cells for days on end – all these have occurred at US detention camps under the command of president George W. Bush. Over a hundred documented deaths have occurred in these interrogation sessions. The Pentagon itself has conceded homocide by torture in multiple cases. Notice the classic, universal and simple criterion used to define torture in 1948. 

 

What I am reporting is a simple empirical fact: the interrogation methods approved and defended by this president are not new. Many have been used in the past. The very phrase used by the president to describe torture-that-isn’t-somehow-torture – “enhanced interrogation techniques” – is a term originally coined by the Nazis. The techniques are indistinguishable. The methods were clearly understood in 1948 as war-crimes. The punishment for them was death.

Back in 2007 when that Atlantic article was written, a large percentage of people were willing to give the U.S. government and the CIA the benefit of the doubt. That’s not the case today, which is why I am hopeful that the Senate report, along with the Snowden revelations, will ultimately force the public to admit to itself it has been propagandized and things aren’t as they are told on the television set. Only if we know there is a problem can we start to fix it.

With that concerning introduction out of the way, let’s move on to some of the conclusions reached by the Intercept upon analyzing the report. We learn that:

For the CIA officials involved in torture, one thing was clear from the very beginning: The only way they would be forgiven for what they did was if they could show it had saved lives.

It was the heart of their rationale. It was vital to public acceptance. It was how they would avoid prosecution.

Specifically, they pointed out: “states may be very unwilling to call the U.S. to task for torture when it resulted in saving thousands of lives.”

And so, when the tragically predictable sequence of events began to unfold – and torture, as it always has, produced false confessions and little to no intelligence of value – admitting that it had failed was not even an option.

Instead, those involved made up stories of success.

They insisted that Abu Zubaydah was a top al Qaeda figure who, only after being waterboarded, provided information that foiled a major attack on the U.S. – even though Zubaydah wasn’t in al Qaeda, the plot was a farce, and the only related information he provided came before he was tortured.

They cast Khalid Sheikh Mohammed’s false confessions as deadly threats, then announced they had been thwarted.

They viciously brutalized people, some of them entirely innocent, and described what they were doing as an art and a science.

There are no indications the CIA is ready to turn things around, of course. CIA Director John Brennan went to extraordinary lengths to  stymie and discredit the investigation. And now, he is rebuffing its conclusions.

There are descriptions of sleep deprivation that “involved keeping detainees awake for up to 180 hours, usually standing or in stress positions, at times with their hands shackled above their heads.”

The report identifies 26 detainees, out of the CIA’s 119 in total, who the agency itself determined should never have been held at all. That unfortunate group includes “Abu Hudhaifa, who was subjected to ice water baths and 66 hours of standing sleep deprivation before being released because the CIA discovered he was likely not the person he was believed to be,” and “Nazir Ali, an ‘intellectually challenged’ individual whose taped crying was used as leverage against his family member.”

A particular sore point is the inaccurate information the CIA fed to Congress. First CIA officials disavowed torture, and promised that the Senate Intelligence Committee would be notified about every individual detained by the CIA. Then came the misinformation and the outright subterfuge.

A 2005 proposal from Senator Carl Levin to establish an independent commission to investigate detainee abuse, for instance, “resulted in concern at the CIA that such a commission would lead to the discovery of videotapes documenting CIA interrogations.” As a result, the CIA destroyed them.

Hayden told the Senate Intelligence committee: “Punches and kicks are not authorized and have never been employed.” But interviews conducted for two CIA internal reviews described the treatment of Gul Rahman, the detainee was died at the Salt Pit. One witness stated:

[T]here were approximately five CIA officers from the renditions team… they opened the door of Rahman’s cell and rushed in screaming and yelling for him to “getdown.” They dragged him outside, cut off his clothes and secured him with Mylar tape. They covered his head with a hood and ran him up and down a long corridor adjacent to his cell. They slapped him and punched him several times… a couple of times the punches were forceful. As they ran him along the corridor, a couple of times he fell and they dragged him through the dirt (the floor outside of the cells is dirt). Rahman did acquire a number of abrasions on his face, legs, and hands, but nothing that required medical attention. (This may account for the abrasions found on Rahman’s body after his death. Rahman had a number of surface abrasions on his shoulders, pelvis, arms, legs, and face.)

But the report provides new, horrifying details about what it calls COBALT – the notorious Salt Pit facility in Afghanistan, that one CIA official described as a “dungeon.”

The CIA kept few formal records of the detainees in its custody at COBALT. Untrained CIA officers at the facility conducted frequent, unauthorized, and unsupervised interrogations of detainees using harsh physical interrogation techniques that were not—and never became—part of the CIA’s formal “enhanced” interrogation program. The CIA placed a junior officer with no relevant experience in charge of COBALT. On November [REDACTED], 2002, a detainee who had been held partially nude and chained to a concrete floor died from suspected hypothermia at the facility.

Most notably, CIA “headquarters” informed DOJ and White House officials in July 2002 that Abu Zubaydah’s interrogation team believed he possessed information on terrrorists and terrorist threats in the U.S. “The CIA officials further represented that the interrogation team had concluded that the use of more aggressive methods ‘is required to persuade Abu Zubaydah to provide the critical information needed to safeguard the lives of innumerable innocent men, women, and children within the United States and abroad,’ and warned ‘countless more Americans may die unless we can persuade AZ to tell us what he knows.’”

But according to the CIA cables the Senate investigators reviewed, the interrogation team had not made any such determination — quite the contrary. They wrote that they were operating under the assumption that Zubaydah was “not holding back actionable information concerning threats to the United States beyond that which [he] has already provided.”

In 2003, George W. Bush’s included the following language:.

The United States is committed to the world-wide elimination of torture and we are leading this fight by example. I call on all governments to join with the United States and the community of law-abiding nations in prohibiting, investigating, and prosecuting all acts of torture and in undertaking to prevent other cruel and unusual punishment. I call on all nations to speak out against torture in all its forms and to make ending torture an essential part of their diplomacy.

But when then-CIA general counsel John Rizzo heard about that statement – along with a quote from White House Press Secretary Scott McClellan that all prisoners being held by the U.S. government were being treated “humanely” — he panicked.

Rizzo wanted to make sure this didn’t represent a change in policy.

He called John Bellinger, then the legal advisor to the National Security Council, to “express our surprise and concern at some of the statements.”

Rizzo told his CIA colleagues that it “might well be appropriate for us to seek written reaffirmation by some senior White House official that the Agency’s ongoing practices… are to continue.”

CIA director George Tenet then sent a memo to National Security Advisor Condoleezza Rice seeking reaffirmation of White House support because “recent Administration responses to inquiries and resulting media reporting about the Administration’s position have created the impression that these [interrogation] techniques are not used by U.S. personnel and are no longer approved as a policy matter.”

Not coincidentally, it was right about then that the CIA started making a major effort internally to build the case that what they had been doing was effective.

But the convoluted story Bush told was completely untrue and unsupported. The CIA “validated” the claim with a June 2003 cable, leaving out any mention of a March 2003 cable which showed that information about the alleged plot, such as it was, actually came out before KSM said anything.

“Terrorists held in CIA custody have also provided information… [that] they helped stop a plot to hijack passenger planes and fly them into Heathrow or the Canary Wharf in London,” Bush said.

But according to Senate investigators:

A review of records indicates that the Heathrow Airport and Canary Wharf plotting had not progressed beyond the initial planning stages when the operation was fully disrupted with the detentions of Ramzi bin al-Shibh, KSM, Ammar-al-Baluchi, and Khallad bin Attash. None of these individuals were captured as a result of reporting obtained during or after the use of the CIA’s enhanced interrogation techniques against CIA detainees.

Furthermore, CIA operational cables and other records showed “that the use of the CIA’s enhanced interrogation techniques played no role in the identification of Jose Padilla or the thwarting” of any plot. When Zubaydah provided information on a “dirty bomb” attack, he didn’t identify Padilla by name – and in any case, whatever he did say was while talking to the FBI, three months before the CIA started torturing him. And the CIA first heard about Padilla from a foreign government, the report states.

This is why you don’t trust people who in many cases lie and deceive for a living to tell the truth.

Just in case all that wasn’t bad enough, it has also come to light to two individuals seen as the masterminds of the torture program made $81 million from it. They were also in charge of overseeing the program’s effectiveness. You can’t make this stuff up. From the Huffington Post:

WASHINGTON — Two psychologists were paid $81 million by the CIA to advise on and help implement its brutal interrogation program targeting detainees in the war on terror, according to the Senate torture report summary released Tuesday.

The contract psychologists are identified with pseudonyms — Grayson Swigert and Hammond Dunbar — like most of the individuals named in the Senate Intelligence Committee’s report on the CIA program. Published reports dating back to 2007, however, identify the two men as James Elmer Mitchell and Bruce Jessen, both former members of the military.

BoingBoing also ran a story on James Mitchell, which includes a video interview of the man that can be found here.

The Senate report details how Swigert and Dunbar traveled the world for the CIA, devising and carrying out interrogations using tactics that meet widely accepted definitions of torture. The two men were also entrusted with judging whether their methods were successful. Not surprisingly, they reported to their CIA bosses that their methods were crucial to persuading prisoners to divulge high-value information.

Although Jessen has previously said that a confidentiality agreement prevents him from discussing his work for the CIA, the two men in 2007 issued a statement saying, “The advice we have provided, and the actions we have taken have been legal and ethical.” They added, “We are proud of the work we have done for our country.”

 

The report reveals that for Dunbar and Swigert, that work was also a cash cow.

 

After initially helping to devise the “enhanced interrogation” efforts, they were designated as the only two contractors allowed to oversee these interrogations at sites around the world. In 2005, they formed a company to receive contracts from the CIA. According to the Senate report, the base value of their contract in 2006 was in excess of $180 million.

No bid torture contract. Classy.

By the time the CIA terminated their contract in 2009, the consulting firm founded by the two men had collected $81 million in taxpayer money. In May of that year,ProPublica reported, the firm abruptly gave up the lease on its Spokane, Washington, headquarters and disconnected the phone.

 

Still, according to the Senate report, the CIA will provide $5 million in indemnity costs to the firm to cover all legal expenses for potential criminal prosecution and investigations through 2021. The firm has already received $1.1 million from the CIA to cover legal expenses, much of that related to interviews with the Senate Intelligence Committee. In addition, Swigert and Dunbar received payments of $1.5 million and $1.1 million, respectively, as individuals.

 

The company would come to employ an undisclosed number of former CIA officers (the figure is redacted in the report) while the torture program would ultimately be staffed largely by contractors. At least officially, this gave the CIA a certain distance from the brutality that was used. According to the report, contractors accounted for 85 percent of the program’s staff by 2008.

 

According to the Senate report, neither Swigert nor Dunbar had any relevant experience in traditional interrogation methods used by the CIA and the FBI. “Neither psychologist had experience as an interrogator, nor did either have specialized knowledge of al-Qa’ida, a background in terrorism, or any relevant regional, cultural, or linguistic expertise,” the report states.

 

This lack of experience was seen as bonus by the CIA as the two men were tasked with implementing a new form of interrogation.

The idea was to create a “level of helplessness” that induced the detainee to provide the desired information. As detailed in the report, tortured detainees often provided false information just to tell their captors something.

 

As early as 2003, the report shows that concerns were raised about the conflicts of interest that could arise when Dunbar and Swigert, who devised and monitored the aggressive techniques, were also tasked with judging their effectiveness. Essentially, the two were being paid to assess their own work, a practice that violated the CIA’s stated policy.

 

Conflicts of interest were “never more graphic,” the Senate report notes, than when Dunbar and Swigert performed all three phases of an interrogation. First, they “applied an [enhanced interrogation technique] which only they were approved to employ.” Second, they “judged both its effectiveness and detainee resilience.” And third, they “implicitly proposed continued use of the technique — at a daily compensation reported to be $1800/day, or four times that of interrogators who could not use the technique.”

Simply incredible. As I have said before,  pretty much EVERYTHING in the U.S. is a money-making racket.

Finally, the Huffington Post also reported on the fact that nearly 1 out of every four countries on earth participated in one way or the other in the U.S. torture. This revelation so scared Secretary of State John Kerry that:

Secretary of State John Kerry indicated before the Senate document was released that he is worried about the global outrage that could follow the report. For Kerry and other diplomats, the evidence revealed in the Senate document could prove critically embarrassing for friendly governments, vindicate the narrative that the U.S.’s human rights record is no better than those of its foes, and show that the U.S. is willing to throw partner nations under the bus.

This is sort of the point isn’t it. The U.S. government justifies all of its militaristic and other interventions overseas using this false narrative that it holds some sort of moral high ground. It should now be abundantly clear to everyone that this invented ethical position is a total fabrication.  

I can summarize my thoughts on this entire matter with the following tweet:




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For Anyone That Still Believes Collapsing Oil Prices Are Good For The Economy

Submitted by Michael Snyder via The Economic Collapse blog,

Are much lower oil prices good news for the U.S. economy?  Only if you like collapsing capital expenditures, rising unemployment and a potential financial implosion on Wall Street.  Yes, lower gasoline prices are good news for the middle class.  I certainly would rather pay two dollars for a gallon of gas than four dollars.  But in order to have money to fill up your vehicle you have got to have an income first.  And since the last recession, the energy sector has been the number one creator of good jobs in the U.S. economy by far.  Barack Obama loves to stand up and take credit for the fact that the employment picture in this country has been improving slightly, but without the energy industry boom, unemployment would be through the roof.  And now that the “energy boom” is rapidly becoming an “energy bust”, what will happen to the struggling U.S. economy as we head into 2015?

At the start of this article I mentioned that much lower oil prices would result in “collapsing capital expenditures”.

If you do not know what a “capital expenditure” is, the following is a definition that comes from Investopedia

“Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. This type of outlay is made by companies to maintain or increase the scope of their operations. These expenditures can include everything from repairing a roof to building a brand new factory.”

Needless to say, this kind of spending is very good for an economy.  It builds infrastructure, it creates jobs and it is an investment in the future.

In recent years, energy companies have been pouring massive amounts of money into capital expenditures.  In fact, the energy sector currently accounts for about a third of all capital expenditures in the United States according to Deutsche Bank

US private investment spending is usually ~15% of US GDP or $2.8trn now. This investment consists of $1.6trn spent annually on equipment and software, $700bn on non-residential construction and a bit over $500bn on residential. Equipment and software is 35% technology and communications, 25-30% is industrial equipment for energy, utilities and agriculture, 15% is transportation equipment, with remaining 20-25% related to other industries or intangibles. Non-residential construction is 20% oil and gas producing structures and 30% is energy related in total. We estimate global investment spending is 20% of S&P EPS or 12% from US. The Energy sector is responsible for a third of S&P 500 capex.

These companies make these investments because they believe that there are big profits to be made.

Unfortunately, when the price of oil crashes those investments become unprofitable and capital expenditures start getting slashed almost immediately.

For example, the budget for 2015 at ConocoPhillips has already been reduced by 20 percent

ConocoPhillips is one of the bigger shale players. And its decision to slash its budget for next year by 20% is raising eyebrows. The company said the new target reflects lower spending on major projects as well as “unconventional plays.” Despite the expectation that others will follow, it doesn’t mean U.S. shale oil production is dead. Just don’t expect a surge in spending like in recent years.

And Reuters is reporting that the number of new well permits for the industry as a whole plunged by an astounding 40 percent during the month of November…

Plunging oil prices sparked a drop of almost 40 percent in new well permits issued across the United States in November, in a sudden pause in the growth of the U.S. shale oil and gas boom that started around 2007.

 

Data provided exclusively to Reuters on Tuesday by industry data firm Drilling Info Inc showed 4,520 new well permits were approved last month, down from 7,227 in October.

If the price of oil stays this low or continues dropping, this is just the beginning.

Meanwhile, the flow of good jobs that this industry has been producing is also likely to start drying up.

According to the Perryman Group, the energy sector currently supports 9.3 million permanent jobs in this country

According to a new study, investments in oil and gas exploration and production generate substantial economic gains, as well as other benefits such as increased energy independence. The Perryman Group estimates that the industry as a whole generates an economic stimulus of almost $1.2 trillion in gross product each year, as well as more than 9.3 million permanent jobs across the nation.

 

The ripple effects are everywhere. If you think about the role of oil in your life, it is not only the primary source of many of our fuels, but is also critical to our lubricants, chemicals, synthetic fibers, pharmaceuticals, plastics, and many other items we come into contact with every day. The industry supports almost 1.3 million jobs in manufacturing alone and is responsible for almost $1.2 trillion in annual gross domestic product. If you think about the law, accounting, and engineering firms that serve the industry, the pipe, drilling equipment, and other manufactured goods that it requires, and the large payrolls and their effects on consumer spending, you will begin to get a picture of the enormity of the industry.

And these are good paying jobs.  They aren’t eight dollar part-time jobs down at your local big box retailer.  These are jobs that comfortably support middle class families.  These are precisely the kinds of jobs that we cannot afford to lose.

In recent years, there has been a noticeable economic difference between areas of the country where energy is being produced and where energy is not being produced.

Since December 2007, a total of 1.36 million jobs have been gained in shale oil states.

Meanwhile, a total of 424,000 jobs have been lost in non-shale oil states.

So what happens now that the shale oil boom is turning into a bust?

That is a very good question.

Even more ominous is what an oil price collapse could mean for our financial system.

The last time the price of oil declined by more than 40 dollars in less than six months, there was a financial meltdown on Wall Street and we experienced the deepest recession that we have seen since the days of the Great Depression.

And now many fear that this collapse in the price of oil could trigger another financial panic.

According to Citigroup, the energy sector now accounts for 17 percent of the high yield bond market.

J.P. Morgan says that it is actually 18 percent.

In any event, the reality of the matter is that the health of these “junk bonds” is absolutely critical to our financial system.  And according to Deutsche Bank, if these bonds start defaulting it could “trigger a broader high-yield market default cycle”

Based on recent stress tests of subprime borrowers in the energy sector in the US produced by Deutsche Bank, should the price of US crude fall by a further 20pc to $60 per barrel, it could result in up to a 30pc default rate among B and CCC rated high-yield US borrowers in the industry. West Texas Intermediate crude is currently trading at multi-year lows of around $75 per barrel, down from $107 per barrel in June.

 

A shock of that magnitude could be sufficient to trigger a broader high-yield market default cycle, if materialized,” warn Deutsche strategists Oleg Melentyev and Daniel Sorid in their report.

If the price of oil stays at this level or continues to go down, it is inevitable that we will start to see some of these junk bonds go bad.

In fact, one Motley Fool article recently stated that one industry analyst believes that up to 40 percent of all energy junk bonds could eventually go into default…

The junk bonds, or noninvestment-rated bonds, of energy companies are also beginning to see heavy selling as investors start to worry that drillers could one day default on these bonds. Those defaults could get so bad, according to one analyst, that up to 40% of all energy junk bonds go into default over the next few years if oil prices don’t recover.

That would be a total nightmare for Wall Street.

And of course bond defaults would only be part of the equation.  As I wrote about the other day, a crash in junk bonds is almost always followed by a significant stock market correction.

In addition, plunging oil prices could end up absolutely destroying the banks that are holding enormous amounts of energy derivatives.  This is something that I recently covered in this article and this article.

As you read this, there are five “too big to fail” banks that each have more than 40 trillion dollars in exposure to derivatives.  Of course only a small fraction of that total exposure is made up of energy derivatives, but a small fraction of 40 trillion dollars is still a massive amount of money.

These derivatives trades are largely unregulated, and even Forbes admits that they are likely to be at the heart of the coming financial collapse…

No one understands the derivative risk positions of the Too Big To Fail Banks, JP Morgan Chase, Citigroup, Bank of America, Goldman Sachs or Morgan Stanley. There is presently no way to measure the risks involved in the leverage, quantity of collateral, or stability of counter-parties for these major institutions. To me personally they are big black holes capable of potential wrack and ruin. Without access to confidential internal data about these risky derivative positions the regulators cannot react in a timely and measured fashion to block the threat to financial stability, according to a National Bureau of Economic Research study.

So do we have any hope?

Yes, if oil prices start going back up, much of what you just read about can be averted.

Unfortunately, that does not seem likely any time soon.  Even though U.S. energy companies are cutting back on capital expenditures, most of them are still actually projecting an increase in production for 2015.  Here is one example from Bloomberg

Continental, the biggest holder of drilling rights in the Bakken, last month said 2015 output will grow between 23 percent and 29 percent even after shelving plans to allocate more money to exploration.

Higher levels of production will just drive the price of oil even lower.

At this point, Morgan Stanley is saying that the price of oil could plummet as low as $43 a barrel next year.

If that happens, it would be absolutely catastrophic to the most important industry in the United States.

In turn, that would be absolutely catastrophic for the economy as a whole.

So don’t let anyone tell you that much lower oil prices are “good” for the economy.

That is just a bunch of nonsense.




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About That $40 Billion Uber-Valuation: Mapping Where Uber Has Been Banned Around The World

Just a week after raising capital implying a $40 billion-plus valuation, Uber is coming under significant pressure as their operations are banned in various nations, death threats in others, and some of its drivers were accused of committing crimes against customers and the public. As the following map shows, there is room for growth but increasingly Uber's disruption is being disrupted…

 

Chart: Reuters

*  *  *

From death threats in Greece:

“Thymios Lymberopoulos, the outspoken president of Attica’s taxi federation, on Thursday declared that any cab drivers found to be working with international ridesharing service Uber, which recently extended its operations to Greece, should be “hanged.”

 

“Any cabbies who betray the taxi, like modern-day Judases, for 30 pieces of silver, should be hanged,” Lymberopoulos wrote in comments on his Facebook profile page. “The war has just begun,” he wrote, adding that all taxi owners should keep their eye on drivers renting their vehicles.

Uber's week of woes is continuing with:

Authorities in San Francisco and Los Angeles taking legal action against the internet-based taxi firm. District attorneys in San Francisco and Los Angeles claim Uber made "untrue or misleading representations" regarding the quality of its own background checks on drivers.

It has been banned from operating in New Delhi following the alleged rape by a driver of a female passenger.

Meanwhile, a judge in Madrid has ordered a temporary halt to the service and Thai authorities say the firm lacks proper registration and insurance.

Uber is yet to comment on the latest legal cases against it.
*  *  *

But apart from that – yeah it's worth $40 billion – why not!!!!




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Deflation Is Winning (And Central Banks Are Running Scared)

Submitted by Brian Petti via Peak Prosperity,

Remember in the early part of the last decade, long before he was appointed the Chairman of the Federal Reserve, Ben Bernanke penned an article that caught widespread public attention entitled, “Deflation: It Can’t Happen Here” ?

Bernanke was referring to the deflationary pressures Japan had been dealing with for more than a decade. In the article, Bernanke laid out a game plan for how the Fed would respond if the US ever faced deflationary pressures. His miracle antidote for battling deflation? Printing money. Lots of it.

Little did anyone know at the time that this game plan would become the Fed’s exact response to the credit market crisis and deflationary impulse that erupted in 2008 and 2009.

Moreover, this game plan of printing money was ultimately adopted by every major world central bank in the wake of the meaningful downturn of that period.  We continue to live through this grand and unprecedented global experiment.

Huffing & Puffing

Fast forward six years to the present. Since early 2009, central banks globally have printed more than $13 trillion. In addition, governments across the planet have increased their borrowings at historic proportions (the US just crossed $18T – another new high!), all in an effort to stimulate economies and avoid deflationary pressures. Total US Federal debt has more than doubled in five years, an increase of $9.5 trillion and counting. The objective? Generate inflation.

In addition, central bankers have not been bashful about explicitly targeting inflation rates they would like to achieve in their respective countries.  We know that in the prior cycle, the attempted reconciliation of credit excesses in the private sector was a key reason the US and global economies experienced a deflationary impulse.  Academically, an increase in inflation allows debtors to pay down debt with “inflated dollars” (assuming wages rise), clearly a motivating factor in global central bank decision making over the last half decade. And certainly “inflated dollars” would also allow governments to ease their own ever-accelerating debt burdens. Please remember depreciated currency allows the perception of inflation and “inflated dollars”.

So where do we find ourselves today?

Have the global central banks vanquished the deflationary demon? Have they “created” enough inflation via money printing to allow debt burdens to melt away? Has the Bernanke deflationary antidote been a success for the Fed and their global central banking brethren?

But Where's The Inflation?

We can start with a very simple look at the year-over-year change in the US consumer price index. What we see is that the current level of rate of change in consumer prices is pushing the lows of the current cycle from 2009 to present.  We are not seeing any meaningful inflationary pressures in consumer prices.  Yes, selective consumer goods such as food and health care costs have risen, but we have seen deflationary pressures in electronics prices and in non-essential areas of consumer spending.  We’re now seeing it in energy prices.  On balance, inflationary pressures are modest at best at the headline level.

It just so happens that the favorite inflation gauge of the Fed itself is what's called the personal consumption expenditures price deflator.  Remember that personal consumption drives roughly 70% of US GDP.  Moreover in the current cycle, the Fed professed to believe in the “wealth effect.”  If the Fed could engineer higher household balance sheet values (stock prices and real estate values), their belief was that consumers would feel wealthier and would increase consumption.  Unfortunately this has not come to pass.  Isn’t this clearly the reason the Fed ended Quantitative Easing?

The lack of inflationary pressures in the personal consumption expenditures deflator is clear in this next chart. The message is similar to that of the CPI.  Despite unprecedented money printing (academically thought to be very inflationary) by global central banks, the consumer expenditures price inflation needle has barely moved. Rather, it's pushing multi-decade lows and is an outcome anything but desired by the Fed.

The simple message: Quantitative Easing has failed to generate inflation. Stated alternatively: QE has not been able to overcome still extant deflationary pressures.

One last data point that's very important in terms of the message of the financial markets themselves: You may remember that a few decades ago, the US began issuing inflation-protected Treasury bonds. One would receive coupon income and the CPI rate for the year as a potential total investment return from these bonds.  The securities are known as TIPS – Treasury Inflation Protected Securities.  There's a calculation in the financial markets that has come to be known as the “TIPS inflation breakeven rate”.  This is calculated by taking the yield on a non-inflation protected Treasury bond and subtracting from it the like maturity TIPS coupon yield, leaving us the implied forward inflationary expectations of the financial market. 

In the next chart we are looking at the 5 year inflation expectations rate that is derived by subtracting the yield on a 5-year US Treasury bond from the yield on a 5-year TIPS bond. Once again, the message is strikingly similar to the CPI and personal consumption inflation numbers: the financial market’s expectations for forward inflation is pushing multi-year lows at 1.4% in recent months.

What's important to note is that over the current cycle, inflation expectations in the US (as measured by the TIPS inflation break-even rate) have spiked up temporarily five times, only to turn back down each time. Again, this has occurred while the Fed has printed close to $4 trillion and US Federal debt has simultaneously more than doubled.

Although I won't drag you through a detailed analysis, each time inflation expectations have fallen to current lows, the Fed restarted QE. These restarts also came on the heels of 10% and 20% stock market corrections.  But as we stand here today, current financial market expectations of forward inflation are no higher than they were in late 2009!

Deflation Is Winning & Central Banks Are Running Scared

Just what does all of this tell us?  It tells us that global central banker actions in printing over $13 trillion of new money over the last 6 years have been insufficient to surmount still existing deflationary forces.  It tells us the probability of further global deflationary impulses are very real.  This has direct implications for any sector of the economy or financial markets whose fundamentals are negatively leveraged to deflationary pressures (think banks, real estate, etc.)  Be assured the central bankers are more than fully aware of this.

 

During October, the US stock market experienced close to an 8% correction, before recovering all of the losses in less than ten trading days.  Foreign markets corrected and recovered in tandem.  On the exact day of the stock market bottom, three important global central banker actions occurred:

  • The European central bank stated they would begin printing money and buying assets within days.
  • The People’s Bank of China delivered a one-time $32 billion immediate stimulus package (after announcing a one-time $100 billion package literally one month prior), and
  • a US Fed member publicly suggested that “if needed, the Fed could do QE4.”

The stock market had not even corrected a historically normal 10% before global central bankers were on the scene to promise ever more printed money.  Moreover, the Fed had not even concluded QE3!  Why would something like this occur unless deflationary pressures were still a significant concern of central banks globally?  They could not even allow the equity market to correct at a normal level without yet another intervention, verbal or otherwise.

As a final anecdote of current central banker deflationary concern: on the last day of October, global financial markets were greatly surprised by the Bank of Japan.  Japan has been engaging in money printing really for decades now, all to no avail in terms of turning their economy.  The money printing heat was turned up significantly in late 2012 when Shinzo Abe was elected prime minister.  Since then, the value of the Yen has declined by 35%.  Despite all of this turbo-charged money printing, the two negative GDP reads over the last two quarters place Japan in academic recession.  Forget growth, unprecedented money printing could not even prevent perceptual recession!

On the last day of October the Bank of Japan (BOJ) announced they would increase their money printing from $70 billion monthly to $90 billion.  At this rate, the BOJ will essentially buy all newly issued Japanese government debt looking out over the foreseeable future using money printed out of thin air.  There is no precedent for this across history.  Once again, global stock markets went vertical with the news of yet another central bank driven liquidity tsunami to come. 

What's Coming Next            

So, if central bankers are obviously still very worried about deflation, should we as investors worry?

Or will even more money printing in Japan, and elsewhere around the world, eventually be the solution? 

We need to watch the global inflation numbers very closely as we move ahead.  We need to remember that the major global central banks (US Fed, Bank of Japan, European Central Bank and the People’s Bank of China) have already pushed interest rates to or near zero.  As such, the efficiency of their policies now rests virtually entirely on their supposed ability to generate inflation.  An ability that has proven elusive for six years now.

In Part 2: What Deflation Means For Investors, we examine the receding level of global liquidity and explore what will happen to all the asset classes so dependent on that — up until now — ever-rising tide. The global financial system is now completely tuned for a world of more liquidity, more credit. It's not prepared, and perhaps not able, to deal with the new set of rules deflation is poised to usher in.

Click here to access Part 2 of this report (free executive summary; enrollment required for full access)

 




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