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Globalisation debt & banking

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Globalisation debt & banking

8th Nov 2011, 19:33

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Thank you Mr Burrito for the explanation.
Once one understands that the billions exist only as numbers generated by a computer the question now is are we being manipulated somehow to believe there is an actual crisis?
BH
8th Nov 2011, 20:35

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BH, - manipulated into believing there is a crisis, yes. But the "crisis" is for the banks, not so much the ordinary folk. There are actually two economies in one system. There is the "real economy" where you & I exist, then there is the financial economy. This financial economy dwarfs the real, yet is a derivative of the real. But because it so big, it drives the real economy - a feedback loop.

I've also shown these charts before, the first is the classic "Exeters Pyramid"

(click to expand)

Look carefully at the numbers T is for trillion. Then think about this, the global economy is ~60 T in size, yet the derivatives in the system is 1600 T, the financial world is 20 times the size of the real world. How can this work? The maths simply does not compute to my way of thinking. (This is a nice cross-check against the the first chart in my my post #200. Both correlate to some number that is at least 10x actual GDP)

Someone clever then came up with a modification to Exters pyramid

The narrow point is the choke. The problem is converting the claims to asset through the choke point of the neck. When people lose faith in the "paper claims" - money, bonds, stock and decide they want something real or tangible, they need to move through the choke.

Hyperinflations are one example of "loss of faith" in the currency system - or moving through the choke. These are currency NOT economic events. As you can see from second chart, if the population suddenly decides en mass that currency system is not a good store of value for some reason, they all panic and try to get rid of the paper claims, then not all of the claims will be able to pass through the neck before the paper side becomes worthless.

Now you understand why Greece is so important, Even though its debt is small relative to the whole system, the writedown of just 1/20th or so of the global debt means the banking system is out of capital, and so insolvent. No country can be allowed to default. Therefore, more paper claims are manufactured by the central banks to prop up the system. The object of the game is simply to keep the fraud going for as long as the population continues to have believe that the system will continue to work for them, ie have faith in the system.

While the system is still working, the government gets its share of the bargain - control, and the elite get its side of the deal, the ability to convert paper wealth converted to real wealth (land, oil, minerals, productive capacity). The object of the exercise is simply to sustain "the game" for as long as possible, to milk to most out of the population. They all know the paper game is going to end, eventually.
9th Nov 2011, 21:48

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Tick tock

Australian dollar dumped on EU worries
From: AAP
November 10, 20117:14AM

THE Australian dollar has fallen more than US 2 cents on the leadership crisis in Greece, and record highs for Italian bonds.

Talks to form a unity government in Greece faltered overnight, with the major parties unable to agree on who should lead the country.
Talks to secure a new leadership and agree on a debt bailout have been ongoing for three days, after Prime Minister George Papandreou stood down on Monday.
Talks have now been put on hold until tonight.
Meanwhile, Italian 10-year bonds reached yields of 7.4 per cent, a record high, despite Prime Minister Silvio Berlusconi's agreement to resign yesterday.
Fears Italy may be coming closer to insolvency were reflected in European markets, which continued to drop after the announcement.
US stocks have also responded, with the Dow Jones Industrial Average recently down more than 400 points.
At 06:30 AEDT this morning, the Australian dollar was trading at \$US1.016, down from \$US1.0362 yesterday.
Interesting how a week ago Berlusconi was arrogantly clinging to power, personal wealth and Hookers !
This mess is far from over. Greece's debt is half of what Italy's is, and only half of Greece's actual debt default has been propped up. This is just the fuse that has been lit. Italy owes around 2.5 trillion and then of course you have Uncle Sam at a debt of close to 15 trilion. Why do you think Silvio has done the bolt from politics? He is probably down at his bank trying to draw out whatever he can before the doors are closed permanently.
People just don't get it, this is not a world financial crisis unfolding that has origins commencing this year, 2008 or 1980. We are talking decades of borrowing, poor monetary management and controls, succesive governments putting their heads in the sand and clicking their heels saying 'it will be ok, I know it will be ok'!
Some things cannot be saved or repaired, the current crisis reflects that. Research Germany 1920 - 1923, superb example. Also research the Nixon era. When Nixon became President in 1969 he and others had no idea that on the surface the US economy looked sound, lower interest rates and lots of jobs, but the Nam war was raging, masking the underlying perilous state of the USA economy.
Anyway, enough said, plenty of great data out there worth studying. But Obama is the new puppet in this. He had no true inkling of what actually lurked beneath Wall Street and the Fed when he took power. Obama received a political death sentence the day he was elected and did not even know it.
Remember - Finance, economies and money are cyclic, just like weather patterns. And they cycle approximately every 36 years, we are now at around 40 years since the last major economic malfunction which melted down around 1971 -73, remember a little thing called 'seperating the gold standard from the dollar value'? That was one contributing factor.

Top it off and you have that nupty Gillard offering to assist Greece with a few billion of our own dollars (somebody fire up the printing press, we need more money to send to Greece because we certainly don't have that sitting in the bank, hang on, let's borrow it from China, everybody else does!), which is ludicrous, the party is over folks, Greece will still default, and when it does what will the Carbon Queen do then - find money to send to Italy, then America?? Swanny is obsessed with a budget surplus, fool. All that is is a smoke and mirrors pony show, surplus is a terminology to pyschologicaly fool the Australian public into thinking we are debt free, we aren't. We are racking up debt at a rate of \$100 million per day, fact. Having a surplus does not mean we don't have massive debt squirrelled away in another corner of the room.

Finally, remember the USA pulling it's troops out of Nam starting around 1973? Why? America was broke. Sound familiar, Obama started pulling troops out of the middle east around 12 months ago with the program escalating recently? Why? America is broke. It is all cyclic my friends. Problem is that this time the problem is on a scale never before seen in history. The deck of cards is falling, brace for impact.
10th Nov 2011, 06:54

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10th Nov 2011, 19:35

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11th Nov 2011, 00:40

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11th Nov 2011, 05:12

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@breakfastburrito
Thanks again.
I am struggling through the concept that the finance system is more like a pyramid marketing scheme than a system that is based in each countries real wealth.

I am seriously considering becoming a dope smoking hippie and withdrawing from the madness.
11th Nov 2011, 10:52

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Blackhand.... I'm with ya...See you in Byron for a joint
11th Nov 2011, 21:59

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Originally Posted by blackhand
I am struggling through the concept that the finance system is more like a pyramid marketing scheme than a system that is based in each countries real wealth.
Unfortunately, a Ponzi scheme is exactly what this "game" is. Think about it another way. Its really a game of promises - you give me something now (labour), and I promise to give you that something back + EXTRA later, much later. Paying tax to receive a pension is the classic case. Forgoing something now (sacrifice, forgone income) to be rewarded in the future (pension for life) is the psychology at work.

The problem is when the reward becomes due, with a paper/credit scheme, the value of that reward can be arbitrarily adjusted by the controllers of the scheme. Whilst in nominal terms it can be higher, in purchasing power it can be less: here is an example:

...Wallich explained that inflation "is technically an economic problem. I mean the breakdown of our standards of measuring economic values, as a consequence of inflation." The strong are smart enough to understand that inflation "introduces an element of deceit into our economic dealings." Contracts are no longer made to "be kept in terms of constant values," but one party understands this better than the other.

Wallich went on to emphasize that "the increasing uncertainty in providing privately for the future pushes people who are seeking security toward the government."
Chairman Greenspan: A Fiat Mind for a Fiat Age, June 15, 2010 by Frederick J. Sheehan

Henry C. Wallich was Federal Reserve Board Member in the 1970.
That essay is a very good historical study of the situation since the 1950 to now, worth a read.

The controllers of the system understand the physiology and the "paper game", and manipulate it for their own gain.

If you really want to move onto something that will provide a brilliant original piece of thinking, reviewing the history of money & the question of "what is money" back to antiquity visit: Moneyness: FOFOA. This is a big piece, it traverses a huge range of terrain. Conceptually it is quite daunting, but he is probably the best "money" thinker on the web. Not the easiest of reads and it will take quite a while to get through, so make sure you leave time to read it.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~

The Veil of Secrecy at the Fed Has Been Lifted, Now It's Time for Change

Senator Bernie Sanders

As a result of the greed, recklessness, and illegal behavior on Wall Street, the American people have experienced the worst economic crisis since the Great Depression. Millions of Americans, through no fault of their own, have lost their jobs, homes, life savings, and ability to send their kids to college. Small businesses have been unable to get the credit they need to expand their businesses, and credit is still extremely tight. Wages as a share of national income are now at the lowest level since the Great Depression, and the number of Americans living in poverty is at an all-time high.

Meanwhile, when small-business owners were being turned down for loans at private banks and millions of Americans were being kicked out of their homes, the Federal Reserve provided the largest taxpayer-financed bailout in the history of the world to Wall Street and too-big-to-fail institutions, with virtually no strings attached.

Over two years ago, I asked Ben Bernanke, the chairman of the Federal Reserve, a few simple questions that I thought the American people had a right to know: Who got money through the Fed bailout? How much did they receive? What were the terms of this assistance?

Incredibly, the chairman of the Fed refused to answer these fundamental questions about how trillions of taxpayer dollars were being spent.

The American people are finally getting answers to these questions thanks to an amendment I included in the Dodd-Frank financial reform bill which required the Government Accountability Office (GAO) to audit and investigate conflicts of interest at the Fed. Those answers raise grave questions about the Federal Reserve and how it operates -- and whose interests it serves.

As a result of these GAO reports, we learned that the Federal Reserve provided a jaw-dropping \$16 trillion in total financial assistance to every major financial institution in the country as well as a number of corporations, wealthy individuals and central banks throughout the world.

The GAO also revealed that many of the people who serve as directors of the 12 Federal Reserve Banks come from the exact same financial institutions that the Fed is in charge of regulating. Further, the GAO found that at least 18 current and former Fed board members were affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis. In other words, the people "regulating" the banks were the exact same people who were being "regulated." Talk about the fox guarding the henhouse!

The emergency response from the Fed appears to have created two systems of government in America: one for Wall Street, and another for everyone else. While the rich and powerful were "too big to fail" and were given an endless supply of cheap credit, ordinary Americans, by the tens of millions, were allowed to fail. They lost their homes. They lost their jobs. They lost their life savings. And, they lost their hope for the future. This is not what American democracy is supposed to look like. It is time for change at the Fed -- real change.

Among the GAO's key findings is that the Fed lacks a comprehensive system to deal with conflicts of interest, despite the serious potential for abuse. In fact, according to the GAO, the Fed actually provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.

The GAO has detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves.

For example, the CEO of JP Morgan Chase served on the New York Fed's board of directors at the same time that his bank received more than \$390 billion in financial assistance from the Fed. Moreover, JP Morgan Chase served as one of the clearing banks for the Fed's emergency lending programs.

Getting this type of disclosure was not easy. Wall Street and the Federal Reserve fought it every step of the way. But, as difficult as it was to lift the veil of secrecy at the Fed, it will be even harder to reform the Fed so that it serves the needs of all Americans, and not just Wall Street. But, that is exactly what we have to do.

To get this process started, I have asked some of the leading economists in this country to serve on an advisory committee to provide Congress with legislative options to reform the Federal Reserve.

Here are some of the questions that I have asked this advisory committee to explore:

1. How can we structurally reform the Fed to make our nation's central bank a more democratic institution responsive to the needs of ordinary Americans, end conflicts of interest, and increase transparency? What are the best practices that central banks in other countries have developed that we can learn from? Compared with central banks in Europe, Canada, and Australia, the GAO found that the Federal Reserve does not do a good job in disclosing potential conflicts of interest and other essential elements of transparency.

2. At a time when 16.5 percent of our people are unemployed or under-employed, how can we strengthen the Federal Reserve's full-employment mandate and ensure that the Fed conducts monetary policy to achieve maximum employment? When Wall Street was on the verge of collapse, the Federal Reserve acted with a fierce sense of urgency to save the financial system. We need the Fed to act with the same boldness to combat the unemployment crisis.

3. The Federal Reserve has a responsibility to ensure the safety and soundness of financial institutions and to contain systemic risks in financial markets. Given that the top six financial institutions in the country now have assets equivalent to 65 percent of our GDP, more than \$9 trillion, is there any reason why this extraordinary concentration of ownership should not be broken up? Should a bank that is "too big to fail" be allowed to exist?

4. The Federal Reserve has the responsibility to protect the credit rights of consumers. At a time when credit card issuers are charging millions of Americans interest rates of 25 percent or more, should policy options be established to ensure that the Federal Reserve and the Consumer Financial Protection Bureau protect consumers against predatory lending, usury, and exorbitant fees in the financial services industry?

5. At a time when the dream of homeownership has turned into the nightmare of foreclosure for too many Americans, what role should the Federal Reserve be playing in providing relief to homeowners who are underwater on their mortgages, combating the foreclosure crisis, and making housing more affordable?

6. At a time when the United States has the most inequitable distribution of wealth and income of any major country, and the greatest gap between the very rich and everyone else since 1928, what policies can be established at the Federal Reserve which reduces income and wealth inequality in the U.S?

Given the growth of the Occupy Wall Street movement and given the concerns of millions of Americans about Wall Street, we now have a unique opportunity to make significant changes to one of the most powerful and secretive agencies of the federal government. One thing is abundantly clear: Americans deserve a Federal Reserve that works for them, not just the CEOs on Wall Street.
Huffington Post
13th Nov 2011, 03:41

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Don't be fooled, the UN, in reality are a sleeping dormant giant is pivotal to the Illuminati as they will be used to carry out the Illuminati's 'dirty work'. The UN and it's octopus like tentacles will help bring about the supposed NWO which is the Illuminati's 'end game'. This is a game being played out in a physical and spiritual battlefield.
Are you for real!!!
Ah I get it, you are already at Byron Bay.

BH
13th Nov 2011, 08:08

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What happened just then? Epic derail and train crash! Did the Scientologists just poke their heads over the parapet, or something?
That's unfortunately the trouble with conspiracy theories. Nobody can actually find these guys. Maybe they spend H24 on their private jets being in-flight refuelled by secret UN forces. Do I hear the theme from Goldfinger in the background?
14th Nov 2011, 01:33

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Behold the EFSF structured finance vehicle. Money as a "Structured Finance Product".

EFSF the Magnificent

If you can understand this chart, then you probably have nothing to fear from the system. If on the other hand, like me you struggle, then there is much to be wring your hand about.

If you look carefully enough and have paid attention, then you would understand that this looks exactly like a Collateralized debt obligation (CDO) - Right down to the "tranching" or tiering of risk through an SPV - Special Purpose Vehicle. Yet, this is what our "money system" has become. If knowledge is power, and you can't understand the complexity of something like this, its highly likely you are going to end up on the wrong end of the deal.
14th Nov 2011, 02:42

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Very good flow chart Burrito, it nicely depicts the flowing loop in layman's terms.

P.S
I removed my earlier post about the U.N, my reason is that I don't yet think the majority of people would understand the rationale behind the post except to label me a loonie, conspiracy theorist or both!
However, in Burrito's flow chart you will recognize the IMF who are coincidently making for themselves a louder and louder voice of late, correct? The IMF is a branch of the UN. My point is that there are some interesting links and interests from several players in the global economic game being played out.
Question for yourselves to answer is 'what are the overall interests of the UN in all of this?'. And no - peace, unity and harmony for the good of mankind is the wrong answer.
20th Nov 2011, 08:04

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Bankers taking over the world conspiracy theories?... proved correct this week. Watch a series of bloodless coup's by the bankers roll out across the Western world over the next decade or so. Sh!t just got real.

What price the new democracy? Goldman Sachs conquers Europe

While ordinary people fret about austerity and jobs, the eurozone's corridors of power have been undergoing a remarkable transformation

STEPHEN FOLEY FRIDAY 18 NOVEMBER 2011

The ascension of Mario Monti to the Italian prime ministership is remarkable for more reasons than it is possible to count. By replacing the scandal-surfing Silvio Berlusconi, Italy has dislodged the undislodgeable. By imposing rule by unelected technocrats, it has suspended the normal rules of democracy, and maybe democracy itself. And by putting a senior adviser at Goldman Sachs in charge of a Western nation, it has taken to new heights the political power of an investment bank that you might have thought was prohibitively politically toxic.

This is the most remarkable thing of all: a giant leap forward for, or perhaps even the successful culmination of, the Goldman Sachs Project.

It is not just Mr Monti. The European Central Bank, another crucial player in the sovereign debt drama, is under ex-Goldman management, and the investment bank's alumni hold sway in the corridors of power in almost every European nation, as they have done in the US throughout the financial crisis. Until Wednesday, the International Monetary Fund's European division was also run by a Goldman man, Antonio Borges, who just resigned for personal reasons.

Even before the upheaval in Italy, there was no sign of Goldman Sachs living down its nickname as "the Vampire Squid", and now that its tentacles reach to the top of the eurozone, sceptical voices are raising questions over its influence. The political decisions taken in the coming weeks will determine if the eurozone can and will pay its debts – and Goldman's interests are intricately tied up with the answer to that question.

Simon Johnson, the former International Monetary Fund economist, in his book 13 Bankers, argued that Goldman Sachs and the other large banks had become so close to government in the run-up to the financial crisis that the US was effectively an oligarchy. At least European politicians aren't "bought and paid for" by corporations, as in the US, he says. "Instead what you have in Europe is a shared world-view among the policy elite and the bankers, a shared set of goals and mutual reinforcement of illusions."

This is The Goldman Sachs Project. Put simply, it is to hug governments close. Every business wants to advance its interests with the regulators that can stymie them and the politicians who can give them a tax break, but this is no mere lobbying effort. Goldman is there to provide advice for governments and to provide financing, to send its people into public service and to dangle lucrative jobs in front of people coming out of government. The Project is to create such a deep exchange of people and ideas and money that it is impossible to tell the difference between the public interest and the Goldman Sachs interest.

Mr Monti is one of Italy's most eminent economists, and he spent most of his career in academia and thinktankery, but it was when Mr Berlusconi appointed him to the European Commission in 1995 that Goldman Sachs started to get interested in him. First as commissioner for the internal market, and then especially as commissioner for competition, he has made decisions that could make or break the takeover and merger deals that Goldman's bankers were working on or providing the funding for. Mr Monti also later chaired the Italian Treasury's committee on the banking and financial system, which set the country's financial policies.

With these connections, it was natural for Goldman to invite him to join its board of international advisers. The bank's two dozen-strong international advisers act as informal lobbyists for its interests with the politicians that regulate its work. Other advisers include Otmar Issing who, as a board member of the German Bundesbank and then the European Central Bank, was one of the architects of the euro.

Perhaps the most prominent ex-politician inside the bank is Peter Sutherland, Attorney General of Ireland in the 1980s and another former EU Competition Commissioner. He is now non-executive chairman of Goldman's UK-based broker-dealer arm, Goldman Sachs International, and until its collapse and nationalisation he was also a non-executive director of Royal Bank of Scotland. He has been a prominent voice within Ireland on its bailout by the EU, arguing that the terms of emergency loans should be eased, so as not to exacerbate the country's financial woes. The EU agreed to cut Ireland's interest rate this summer.

Picking up well-connected policymakers on their way out of government is only one half of the Project, sending Goldman alumni into government is the other half. Like Mr Monti, Mario Draghi, who took over as President of the ECB on 1 November, has been in and out of government and in and out of Goldman. He was a member of the World Bank and managing director of the Italian Treasury before spending three years as managing director of Goldman Sachs International between 2002 and 2005 – only to return to government as president of the Italian central bank.

Mr Draghi has been dogged by controversy over the accounting tricks conducted by Italy and other nations on the eurozone periphery as they tried to squeeze into the single currency a decade ago. By using complex derivatives, Italy and Greece were able to slim down the apparent size of their government debt, which euro rules mandated shouldn't be above 60 per cent of the size of the economy. And the brains behind several of those derivatives were the men and women of Goldman Sachs.

The bank's traders created a number of financial deals that allowed Greece to raise money to cut its budget deficit immediately, in return for repayments over time. In one deal, Goldman channelled \$1bn of funding to the Greek government in 2002 in a transaction called a cross-currency swap. On the other side of the deal, working in the National Bank of Greece, was Petros Christodoulou, who had begun his career at Goldman, and who has been promoted now to head the office managing government Greek debt. Lucas Papademos, now installed as Prime Minister in Greece's unity government, was a technocrat running the Central Bank of Greece at the time.

Goldman says that the debt reduction achieved by the swaps was negligible in relation to euro rules, but it expressed some regrets over the deals. Gerald Corrigan, a Goldman partner who came to the bank after running the New York branch of the US Federal Reserve, told a UK parliamentary hearing last year: "It is clear with hindsight that the standards of transparency could have been and probably should have been higher."

When the issue was raised at confirmation hearings in the European Parliament for his job at the ECB, Mr Draghi says he wasn't involved in the swaps deals either at the Treasury or at Goldman.

It has proved impossible to hold the line on Greece, which under the latest EU proposals is effectively going to default on its debt by asking creditors to take a "voluntary" haircut of 50 per cent on its bonds, but the current consensus in the eurozone is that the creditors of bigger nations like Italy and Spain must be paid in full. These creditors, of course, are the continent's big banks, and it is their health that is the primary concern of policymakers. The combination of austerity measures imposed by the new technocratic governments in Athens and Rome and the leaders of other eurozone countries, such as Ireland, and rescue funds from the IMF and the largely German-backed European Financial Stability Facility, can all be traced to this consensus.

"My former colleagues at the IMF are running around trying to justify bailouts of €1.5trn-€4trn, but what does that mean?" says Simon Johnson. "It means bailing out the creditors 100 per cent. It is another bank bailout, like in 2008: The mechanism is different, in that this is happening at the sovereign level not the bank level, but the rationale is the same."

So certain is the financial elite that the banks will be bailed out, that some are placing bet-the-company wagers on just such an outcome. Jon Corzine, a former chief executive of Goldman Sachs, returned to Wall Street last year after almost a decade in politics and took control of a historic firm called MF Global. He placed a \$6bn bet with the firm's money that Italian government bonds will not default.

When the bet was revealed last month, clients and trading partners decided it was too risky to do business with MF Global and the firm collapsed within days. It was one of the ten biggest bankruptcies in US history.

The grave danger is that, if Italy stops paying its debts, creditor banks could be made insolvent. Goldman Sachs, which has written over \$2trn of insurance, including an undisclosed amount on eurozone countries' debt, would not escape unharmed, especially if some of the \$2trn of insurance it has purchased on that insurance turns out to be with a bank that has gone under. No bank – and especially not the Vampire Squid – can easily untangle its tentacles from the tentacles of its peers. This is the rationale for the bailouts and the austerity, the reason we are getting more Goldman, not less. The alternative is a second financial crisis, a second economic collapse.

Shared illusions, perhaps? Who would dare test it?
What price the new democracy? Goldman Sachs conquers Europe - The Independent.
20th Nov 2011, 11:04
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UK to take up EURO??

An Ad, but to the point.
Hey Ray you don't have Harriers anymore!
(In stereo I'm afraid!)

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27th Nov 2011, 21:21

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(40 years is referencing Nixon closing the gold window (15 Aug 1971) and moving to a pure paper fiat currency)
28th Nov 2011, 03:31

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I like Steve Keen a lot. I like his very pragmatic realistic view of things. Especially the truthful notion of waiting for those in control to die off or retire before a new wave of thought can be entertained to elicit positive change. Sad but true. Applies in many other areas of life as well....
30th Nov 2011, 04:09
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The Gathering Storm

5th Dec 2011, 01:07

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Nothing new under the sun

Source: Counterpunch

WEEKEND EDITION DECEMBER 2-4, 2011
Hammurabi Knew Better

Debt Slavery – Why It Destroyed Rome, Why It Will Destroy Us Unless It’s Stopped
by MICHAEL HUDSON

Book V of Aristotle’s Politics describes the eternal transition of oligarchies making themselves into hereditary aristocracies – which end up being overthrown by tyrants or develop internal rivalries as some families decide to “take the multitude into their camp” and usher in democracy, within which an oligarchy emerges once again, followed by aristocracy, democracy, and so on throughout history.

Debt has been the main dynamic driving these shifts – always with new twists and turns. It polarizes wealth to create a creditor class, whose oligarchic rule is ended as new leaders (“tyrants” to Aristotle) win popular support by cancelling the debts and redistributing property or taking its usufruct for the state.

Since the Renaissance, however, bankers have shifted their political support to democracies. This did not reflect egalitarian or liberal political convictions as such, but rather a desire for better security for their loans. As James Steuart explained in 1767, royal borrowings remained private affairs rather than truly public debts. For a sovereign’s debts to become binding upon the entire nation, elected representatives had to enact the taxes to pay their interest charges.

By giving taxpayers this voice in government, the Dutch and British democracies provided creditors with much safer claims for payment than did kings and princes whose debts died with them. But the recent debt protests from Iceland to Greece and Spain suggest that creditors are shifting their support away from democracies. They are demanding fiscal austerity and even privatization sell-offs.

This is turning international finance into a new mode of warfare. Its objective is the same as military conquest in times past: to appropriate land and mineral resources, also communal infrastructure and extract tribute. In response, democracies are demanding referendums over whether to pay creditors by selling off the public domain and raising taxes to impose unemployment, falling wages and economic depression. The alternative is to write down debts or even annul them, and to re-assert regulatory control over the financial sector.

Near Eastern rulers proclaimed clean slates for debtors to preserve economic balance

Charging interest on advances of goods or money was not originally intended to polarize economies. First administered early in the third millennium BC as a contractual arrangement by Sumer’s temples and palaces with merchants and entrepreneurs who typically worked in the royal bureaucracy, interest at 20 per cent (doubling the principal in five years) was supposed to approximate a fair share of the returns from long-distance trade or leasing land and other public assets such as workshops, boats and ale houses.

As the practice was privatized by royal collectors of user fees and rents, “divine kingship” protected agrarian debtors. Hammurabi’s laws (c. 1750 BC) cancelled their debts in times of flood or drought. All the rulers of his Babylonian dynasty began their first full year on the throne by cancelling agrarian debts so as to clear out payment arrears by proclaiming a clean slate. Bondservants, land or crop rights and other pledges were returned to the debtors to “restore order” in an idealized “original” condition of balance. This practice survived in the Jubilee Year of Mosaic Law in Leviticus 25.

The logic was clear enough. Ancient societies needed to field armies to defend their land, and this required liberating indebted citizens from bondage. Hammurabi’s laws protected charioteers and other fighters from being reduced to debt bondage, and blocked creditors from taking the crops of tenants on royal and other public lands and on communal land that owed manpower and military service to the palace.

In Egypt, the pharaoh Bakenranef (c. 720-715 BC, “Bocchoris” in Greek) proclaimed a debt amnesty and abolished debt-servitude when faced with a military threat from Ethiopia. According to Diodorus of Sicily (I, 79, writing in 40-30 BC), he ruled that if a debtor contested the claim, the debt was nullified if the creditor could not back up his claim by producing a written contract. (It seems that creditors always have been prone to exaggerate the balances due.) The pharaoh reasoned that “the bodies of citizens should belong to the state, to the end that it might avail itself of the services which its citizens owed it, in times of both war and peace. For he felt that it would be absurd for a soldier … to be haled to prison by his creditor for an unpaid loan, and that the greed of private citizens should in this way endanger the safety of all.”

The fact that the main Near Eastern creditors were the palace, temples and their collectors made it politically easy to cancel the debts. It always is easy to annul debts owed to oneself. Even Roman emperors burned the tax records to prevent a crisis. But it was much harder to cancel debts owed to private creditors as the practice of charging interest spread westward to Mediterranean chiefdoms after about 750 BC. Instead of enabling families to bridge gaps between income and outgo, debt became the major lever of land expropriation, polarizing communities between creditor oligarchies and indebted clients. In Judah, the prophet Isaiah (5-9) decried foreclosing creditors who “add house to house and join field to field till no space is left and you live alone in the land.”

Creditor power and stable growth rarely have gone together. Most personal debts in this classical period were the product of small amounts of money lent to individuals living on the edge of subsistence and who could not make ends meet. Forfeiture of land and assets – and personal liberty – forced debtors into bondage that became irreversible. By the 7th century BC, “tyrants” (popular leaders) emerged to overthrow the aristocracies in Corinth and other wealthy Greek cities, gaining support by cancelling the debts. In a less tyrannical manner, Solon founded the Athenian democracy in 594 BC by banning debt bondage.

But oligarchies re-emerged and called in Rome when Sparta’s kings Agis, Cleomenes and their successor Nabis sought to cancel debts late in the third century BC. They were killed and their supporters driven out. It has been a political constant of history since antiquity that creditor interests opposed both popular democracy and royal power able to limit the financial conquest of society – a conquest aimed at attaching interest-bearing debt claims for payment on as much of the economic surplus as possible.

When the Gracchi brothers and their followers tried to reform the credit laws in 133 BC, the dominant Senatorial class acted with violence, killing them and inaugurating a century of Social War, resolved by the ascension of Augustus as emperor in 29 BC.

Rome’s creditor oligarchy wins the Social War, enslaves the population and brings on a Dark Age

Matters were more bloody abroad. Aristotle did not mention empire building as part of his political schema, but foreign conquest always has been a major factor in imposing debts, and war debts have been the major cause of public debt in modern times. Antiquity’s harshest debt levy was by Rome, whose creditors spread out to plague Asia Minor, its most prosperous province. The rule of law all but disappeared when publican creditor “knights” arrived. Mithridates of Pontus led three popular revolts, and local populations in Ephesus and other cities rose up and killed a reported 80,000 Romans in 88 BC. The Roman army retaliated, and Sulla imposed war tribute of 20,000 talents in 84 BC. Charges for back interest multiplied this sum six-fold by 70 BC.

Among Rome’s leading historians, Livy, Plutarch and Diodorus blamed the fall of the Republic on creditor intransigence in waging the century-long Social War marked by political murder from 133 to 29 BC. Populist leaders sought to gain a following by advocating debt cancellations (e.g., the Catiline conspiracy in 63-62 BC). They were killed. By the second century AD about a quarter of the population was reduced to bondage. By the fifth century Rome’s economy collapsed, stripped of money. Subsistence life reverted to the countryside.

Creditors find a legalistic reason to support parliamentary democracy

When banking recovered after the Crusades looted Byzantium and infused silver and gold to review Western European commerce, Christian opposition to charging interest was overcome by the combination of prestigious lenders (the Knights Templars and Hospitallers providing credit during the Crusades) and their major clients – kings, at first to pay the Church and increasingly to wage war. But royal debts went bad when kings died. The Bardi and Peruzzi went bankrupt in 1345 when Edward III repudiated his war debts. Banking families lost more on loans to the Habsburg and Bourbon despots on the thrones of Spain, Austria and France.

Matters changed with the Dutch democracy, seeking to win and secure its liberty from Habsburg Spain. The fact that their parliament was to contract permanent public debts on behalf of the state enabled the Low Countries to raise loans to employ mercenaries in an epoch when money and credit were the sinews of war. Access to credit “was accordingly their most powerful weapon in the struggle for their freedom,” Richard Ehrenberg wrote in his Capital and Finance in the Age of the Renaissance (1928): “Anyone who gave credit to a prince knew that the repayment of the debt depended only on his debtor’s capacity and will to pay. The case was very different for the cities, which had power as overlords, but were also corporations, associations of individuals held in common bond. According to the generally accepted law each individual burgher was liable for the debts of the city both with his person and his property.”

The financial achievement of parliamentary government was thus to establish debts that were not merely the personal obligations of princes, but were truly public and binding regardless of who occupied the throne. This is why the first two democratic nations, the Netherlands and Britain after its 1688 revolution, developed the most active capital markets and proceeded to become leading military powers. What is ironic is that it was the need for war financing that promoted democracy, forming a symbiotic trinity between war making, credit and parliamentary democracy which has lasted to this day.

At this time “the legal position of the King qua borrower was obscure, and it was still doubtful whether his creditors had any remedy against him in case of default.” (Charles Wilson, England’s Apprenticeship: 1603-1763: 1965.) The more despotic Spain, Austria and France became, the greater the difficulty they found in financing their military adventures. By the end of the eighteenth century Austria was left “without credit, and consequently without much debt,” the least credit-worthy and worst armed country in Europe, fully dependent on British subsidies and loan guarantees by the time of the Napoleonic Wars.

Finance accommodates itself to democracy, but then pushes for oligarchy

While the nineteenth century’s democratic reforms reduced the power of landed aristocracies to control parliaments, bankers moved flexibly to achieve a symbiotic relationship with nearly every form of government. In France, followers of Saint-Simon promoted the idea of banks acting like mutual funds, extending credit against equity shares in profit. The German state made an alliance with large banking and heavy industry. Marx wrote optimistically about how socialism would make finance productive rather than parasitic. In the United States, regulation of public utilities went hand in hand with guaranteed returns. In China, Sun-Yat-Sen wrote in 1922: “I intend to make all the national industries of China into a Great Trust owned by the Chinese people, and financed with international capital for mutual benefit.”

World War I saw the United States replace Britain as the major creditor nation, and by the end of World War II it had cornered some 80 per cent of the world’s monetary gold. Its diplomats shaped the IMF and World Bank along creditor-oriented lines that financed trade dependency, mainly on the United States. Loans to finance trade and payments deficits were subject to “conditionalities” that shifted economic planning to client oligarchies and military dictatorships. The democratic response to resulting austerity plans squeezing out debt service was unable to go much beyond “IMF riots,” until Argentina rejected its foreign debt.

A similar creditor-oriented austerity is now being imposed on Europe by the European Central Bank (ECB) and EU bureaucracy. Ostensibly social democratic governments have been directed to save the banks rather than reviving economic growth and employment. Losses on bad bank loans and speculations are taken onto the public balance sheet while scaling back public spending and even selling off infrastructure. The response of taxpayers stuck with the resulting debt has been to mount popular protests starting in Iceland and Latvia in January 2009, and more widespread demonstrations in Greece and Spain this autumn to protest their governments’ refusal to hold referendums on these fateful bailouts of foreign bondholders.

Shifting planning away from elected public representatives to bankers

Every economy is planned. This traditionally has been the function of government. Relinquishing this role under the slogan of “free markets” leaves it in the hands of banks. Yet the planning privilege of credit creation and allocation turns out to be even more centralized than that of elected public officials. And to make matters worse, the financial time frame is short-term hit-and-run, ending up as asset stripping. By seeking their own gains, the banks tend to destroy the economy. The surplus ends up being consumed by interest and other financial charges, leaving no revenue for new capital investment or basic social spending.

This is why relinquishing policy control to a creditor class rarely has gone together with economic growth and rising living standards. The tendency for debts to grow faster than the population’s ability to pay has been a basic constant throughout all recorded history. Debts mount up exponentially, absorbing the surplus and reducing much of the population to the equivalent of debt peonage. To restore economic balance, antiquity’s cry for debt cancellation sought what the Bronze Age Near East achieved by royal fiat: to cancel the overgrowth of debts.

In more modern times, democracies have urged a strong state to tax rentier income and wealth, and when called for, to write down debts. This is done most readily when the state itself creates money and credit. It is done least easily when banks translate their gains into political power. When banks are permitted to be self-regulating and given veto power over government regulators, the economy is distorted to permit creditors to indulge in the speculative gambles and outright fraud that have marked the past decade. The fall of the Roman Empire demonstrates what happens when creditor demands are unchecked. Under these conditions the alternative to government planning and regulation of the financial sector becomes a road to debt peonage.

Finance vs. government; oligarchy vs. democracy

Democracy involves subordinating financial dynamics to serve economic balance and growth – and taxing rentier income or keeping basic monopolies in the public domain. Untaxing or privatizing property income “frees” it to be pledged to the banks, to be capitalized into larger loans. Financed by debt leveraging, asset-price inflation increases rentier wealth while indebting the economy at large. The economy shrinks, falling into negative equity.

The financial sector has gained sufficient influence to use such emergencies as an opportunity to convince governments that that the economy will collapse they it do not “save the banks.” In practice this means consolidating their control over policy, which they use in ways that further polarize economies. The basic model is what occurred in ancient Rome, moving from democracy to oligarchy. In fact, giving priority to bankers and leaving economic planning to be dictated by the EU, ECB and IMF threatens to strip the nation-state of the power to coin or print money and levy taxes.

The resulting conflict is pitting financial interests against national self-determination. The idea of an independent central bank being “the hallmark of democracy” is a euphemism for relinquishing the most important policy decision – the ability to create money and credit – to the financial sector. Rather than leaving the policy choice to popular referendums, the rescue of banks organized by the EU and ECB now represents the largest category of rising national debt. The private bank debts taken onto government balance sheets in Ireland and Greece have been turned into taxpayer obligations. The same is true for America’s \$13 trillion added since September 2008 (including \$5.3 trillion in Fannie Mae and Freddie Mac bad mortgages taken onto the government’s balance sheet, and \$2 trillion of Federal Reserve “cash-for-trash” swaps).

This is being dictated by financial proxies euphemized as technocrats. Designated by creditor lobbyists, their role is to calculate just how much unemployment and depression is needed to squeeze out a surplus to pay creditors for debts now on the books. What makes this calculation self-defeating is the fact that economic shrinkage – debt deflation – makes the debt burden even more unpayable.

Neither banks nor public authorities (or mainstream academics, for that matter) calculated the economy’s realistic ability to pay – that is, to pay without shrinking the economy. Through their media and think tanks, they have convinced populations that the way to get rich most rapidly is to borrow money to buy real estate, stocks and bonds rising in price – being inflated by bank credit – and to reverse the past century’s progressive taxation of wealth.

To put matters bluntly, the result has been junk economics. Its aim is to disable public checks and balances, shifting planning power into the hands of high finance on the claim that this is more efficient than public regulation. Government planning and taxation is accused of being “the road to serfdom,” as if “free markets” controlled by bankers given leeway to act recklessly is not planned by special interests in ways that are oligarchic, not democratic. Governments are told to pay bailout debts taken on not to defend countries in military warfare as in times past, but to benefit the wealthiest layer of the population by shifting its losses onto taxpayers.

The failure to take the wishes of voters into consideration leaves the resulting national debts on shaky ground politically and even legally. Debts imposed by fiat, by governments or foreign financial agencies in the face of strong popular opposition may be as tenuous as those of the Habsburgs and other despots in past epochs. Lacking popular validation, they may die with the regime that contracted them. New governments may act democratically to subordinate the banking and financial sector to serve the economy, not the other way around.

At the very least, they may seek to pay by re-introducing progressive taxation of wealth and income, shifting the fiscal burden onto rentier wealth and property. Re-regulation of banking and providing a public option for credit and banking services would renew the social democratic program that seemed well underway a century ago.

Iceland and Argentina are most recent examples, but one may look back to the moratorium on Inter-Ally arms debts and German reparations in 1931.A basic mathematical as well as political principle is at work: Debts that can’t be paid, won’t be.

This article appears in the Frankfurter Algemeine Zeitung on December 5, 2011.

MICHAEL HUDSON is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy. He can be reached via his website, [email protected]
12th Dec 2011, 07:54

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"The System Has No Way of Solving The Problem.": U.S. Economist Richard Wolff about the Crisis in the U.S. and Europe
24.11.2011

The first 30 second intro is in German, but the interview is in English

Transcript
The crisis in the U.S. and Europe is not a pure financial crisis, says Wolff. Especially in the U.S. wages have stagnated or even declined since the 70ies with increasing working hours. To keep the consumption going private households and the state had to build up huge debts while assets have concentrated more and more in a small group of capital owners. Instead of paying higher wages workers got loans from the capital owners. At the breakout of the crisis in 2007/2008 this construction collapsed. The system has no way of solving the problem. "The irony is that all the attention these days is on little Greece or Italy. But the much bigger problem is the U.S.", says Wolff. The States already have as debt more than their GDP. These growing debts are like a "big elephant" running towards Europe. But nobody wants to deal with that. The unprecedented Occupy movements have been very succesfull so far. They unite different movements, challenge the capitalist system and get sympathy from the majority of the population.

Gäste:
Richard Wolff: Professor of Economics Emeritus, University of Massachusetts, USA

Transkript:
Kontext TV: Welcome to KontextTV Richard Wolff.

Richard Wolff: Thank you very much for inviting me.

Kontext TV: Richard Wolff, talk first about the economic and financial crisis in the US. It's deepening right now, what are the causes for the crisis and how is this crisis in the US linked to the crisis in the Eurozone right now ?

Kontext TV: We are seeing protests all over the place, we are seeing the Occupy movements in the United States. Yesterday there was a general strike in Oakland, unprecedented strike one has to say. We are seeing protests in Greece and Spain. What are your thoughts on these movements. And where are they heading ?