Friday, August 10, 2012

The Insanity Intensifies

Here's the exact quote from Marc Faber:  "If you put a gun on my head and you said 'you must choose either Mr. Obama or Mr. Romney,' I'd say 'please shoot.'"
That's a game we used to play in the late 90's in which someone holds a gun to your head and says, "you have to sleep with either Oprah or Hillary Clinton," and the correct answer was "pull the trigger..."

I wanted to briefly touch on three issues which were exposed this week and which need to be rectified.  First, Obama gave a speech in Ohio in which he claimed to have saved the U.S. auto industry and the associated jobs.  If there is ever a political claim that needs to be "fact checked," it's that one.  First, let's get one thing straight:  Obama "saved" some uneconomically overpaid union factory jobs by legislating a massive transfer of $100's of billions in taxpayer wealth in order to prop up General Motors and Chrysler and to prevent GMAC - the financing arm of GM - from going bust.

And we don't know the ultimate cost of Obama's "save," but it is going to cost many multiples more than the benefits generated.  We know for a fact that the Government is subsidizing the cost of leasing GM cars by guaranteeing the residual value of the car at the end of the lease.  We won't start seeing the costs of this until the generation of Govt subsidized leases start expiring (next year to two for the most part).  We also know that the Government is subsidizing the floor financing used by dealers, who then accommodate the channel-stuffing sales and massive inventories carried by GM dealers now.  I've covered both of those in previous blogs.

Now the the Government is subsidizing the re-expansion of sub-prime auto-financing.  With Government backing, GM acquired Americredit.  Americredit is a company that was on the verge of blowing up from its nuclear auto loan portfolio.  Now GM is using Americredit to drive sales:  "GM Financial auto loans to customers with FICO scores below 660 rose from 87% of total loans in Q4 2010 to 93% in Q1 2012."  Here's the LINK

It's only a matter of time before the Government support of GM backfires and the cost of Obama's "save" add $10's of billions more to the cost of keeping highly paid union employees well greased with high paychecks and bloated pension plans.  This at the expense of millions of unemployed who would likely be willing to work at restructured auto manufacturers for a lot less compensation and at no cost to the taxpayers.  And now Obama wants to apply this "business" model across several industries:  LINK  I don't even know how to respond to that other than to hope and pray that Congress stops him.

Second, the big banks have been instructed to come up with a collapse-prevention game plan in the event of a financial bomb detonating:  LINK  First, this tells us that something really ugly is getting ready to hit our system.  We can only speculate what that might be so I won't go into that.  But what I find interesting is that a big part of the "gameplan" is for the banks to identify assets they can sell in event of a market disaster.  What's hilarious about this is that in 2008 the banks were unable to sell any crappy assets other than to the Fed and the Taxpayer (Treasury).  This avenue only relieved the banks of a small portion of their illiquid assets.  Now those assets have been marked back up to fantasy valuation levels in an endeavor to exploit liberalized accounting rules and manufacture paper earnings.  I'm not sure why the Government could possibly think that these banks will have any chance in hell of unloading their crappy assets now unless the Government steps in once again.

My take on this is that it is nothing more than hypothetical exercise designed to justify the jobs, salaries and pension plan compensation of the Government idiots who came up with this idea.  We will see soon enough that this hypothetical endeavor was a complete waste of taxpayer resources because unless the the Government wants to watch as the banks quickly collapse in the next financial crisis, the Fed will once again be asked to print a lot of money and Geithner will once again expropriate $100's of billions in taxpayer money and give it to the big banks for liquidity, salaries and bonuses.

Finally, I wanted to refute a claim made by Bernanke earlier this week.  In a useless, rhetorical speech Bernanke made the claim that the growing Government-backed student loan burden was less risky than mortgage debt because student loan debt can not be discharged in bankruptcy.  This is probably one of the most absurdly incorrect and patently disingenuous statements made to date by Bernanke.

First, as everyone knows, the student loan burden under Obama has gone parabolic.  This chart shows the growth in student loans which are directly owned by the Government (sourced from John Williams' Shadow Statistics, who sourced it from the Fed):

You can click on the chart to enlarge it.  And this is only half the story.  The total amount of student loan debt outstanding is now at $1 trillion dollars.  This is bank-financed debt that is guaranteed by the Government.  I don't think anyone fails to understand that the motivation for Obama to ramp up student loan origination is that when someone leaves their job or gets terminated and then takes down a student loan to enroll at DeVries or University of Phoenix, they get removed from being counted as part of the labor force, thereby making the unemployment numbers look significantly better than they really are.  Then, they graduate with a pretty much useless degree and a large student loan debt obligation and can't find a job anyway other than maybe at Starbucks or selling i-phones.

At any rate, I had a short debate with the editor of over Bernanke's statement.  His argument was that they were more likely to pay their student loans than a mortgage because they can "strategically" default on a mortgage and get rid of it in bankruptcy.  This is empty logic as you'll see in my reply, plus a lot people with student loans rent anyway.  Here was my rebuttal:
People will pay for a roof over their head and a car before they’ll even think about paying a student loan. To begin with, everyone I know with one who isn’t making payments on their student loan is waiting for the Govt to eventually provide relief – which it will.

Even though strategic default makes sense, it’s not as common as the media makes it out to be. Most people default on their home because they simply can’t make the payments. The system let them take down too much debt. When you have Phd’s with $150k in SLMA debt working at Starbucks, you have someone who can make enough money for rent and transportation and a bag of weed who isn’t even thinking about making his SLMA payments…The idea that SLMA debt is higher quality than mortgage debt because it can’t be discharged in bankruptcy is typical ivory tower theoretical nonsense.
The explosion in outstanding student loan debt since Obama took office is another massive, unpayable debt problem that will have to be addressed with massive currency devaluation and by the Government transferring even more wealth from the dwindling part of the population that actually does work and pay taxes to the expanding part of the population that is becoming increasingly reliant on Government transfer payments to make ends meet.

It's become more like the system in "Atlas Shrugged" by the day.  Have a great weekend.


  1. Dave, your posts seldom fail to cause at least one lightbulb to turn on in my semi-necrotic brain... the idea that the student loan bubble plays into lower nominal unemployment numbers had never sunk in to me before... I kind of just pictured it as a place where more lending could be pimped in order to keep the overall money system alive (and feed it's parabolic growth needs). But that this works to keep the unemployment numbers down... really elegant shit. Very similar in a sense to the Obama increase in SSDI recipients over the same period, right? Can kicking, spring compressing, grandchildren's futures on the financial pyre. 1Kg Lunar Dragon

  2. SSDI same effect as student loans on the unemployment rate.

  3. I disagree that it is a "hypothetical exercise." It is preparation of the financial battlespace, ie how far will they have to push things. Resulting in collapse of the banks, collapsing the economy, government bailout of everything, turn students into government thugs (become our foot soldiers or you'll have to pay off that loan), hyperinflation, food riots, martial law, socialist takeover. All in the name of "saving" the country.

  4. SO how do we guess the real actual unemployment rate?

    1. The Govt reports roughly 15% using its more comprehensive U-6 report. It's buried in the NFP report and never gets reported by the media. You can get the report on the internet and look at the more comprehensive measurement parameters.

      John Williams Shadow Statistics uses the formula that the Government used in 1980 to calculate the numbers and he comes up with around 21%.

    2. Whatever the government tells you, double it. At least then you'll be getting closer to the real number (similar to when you buy a vacation package from some slick brochure that advertises a one week all-inclusive stay to some exotic destination; by the time you're done with taxes, surtaxes and God-only-knows what other taxes, fees and charges, it's double, if not more). Like Dave says, gotta read the fine print.

  5. Here is how the gov't frames it.
    1. SHTF
    2. Way too much young testosterone on the streets doing what they do best.
    3. Student loans cannot be discharged (by design)
    4. Gov't dictates that student loans must be repaid just like ROTC loans.
    5. You, young man/lady, owe the people 4 years. By the way, you look good in camouflage green and tan.
    6. You, young man/lady, get shipped off the streets of the Untied States of Amerika to one of our 750+ military bases throughout the world.
    7. Problem solved: Peace on the streets, cannon fodder overseas. Oh, those U.S. combatants controlling the U.S. sheeple come from the U.N.

  6. Student loans may not be dischargable, but that doesn't mean it WILL be paid back. Suppose a college grad decides to move to a country where extradition laws are non-existant? Try collecting on that loan! Suppose the college grad takes on a new identity/gets a social security number from someone who passed/identity theft, the student loan is uncollectable if the grad disappears and reappears under their new identity. These are just a few ideas off the top of my head how grads can get out from under the loan, there are probably a dozen more I didn't think of, but you can bet someone somewhere will post it on the world wide web. These academic eggheads, with all their c,harts algos and data never saw the housing bust, I doubt they will see the student loan bust either.

  7. An honest man or honest woman would rather die than not pay their debts, but with so many on wall street acting dishonestly- and getting away with it, the population of honest Americans is declining sharply. The 1% shouldn't expect honesty to remain a virtue with the 99%

  8. Gerald Celente on Eurozone Reckoning Day and dropped charges for Goldman Sachs!

    Welcome to Capital Account. After its yearlong investigation, the Justice Department said that it will not bring charges against Goldman Sachs or any of its employees for financial fraud related to the mortgage crisis. Is this justice or, as Gerald Celente often says, is this "just us" big bankers getting away with whatever we want?
    Also, Benjamin Lawsky, superintendent of the New York State Department of Financial Services threatened to revoke Standard Chartered's banking license after accusing the bank of laundering billions for Iran. Have we found someone to take on the big banks? This action has set off backlash from Federal regulators. Are they going after the New York regulator for doing his job or is the regulator going rogue? We will discuss with Gerald Celente, Founder of Trends Research Institute & Publisher of the Trends Journal.
    Plus, the Libor benchmark interest rates must be changed or replaced, says Britain's financial regulator. The regulator also said the future of other benchmarks, including oil, gold, and stock prices, is also under scrutiny. We ask Gerald Celente if there any place to invest that is not rigged.

  9. "An honest man or honest woman would rather die than not pay their debts." Now that is spoken like a true slave, a real true slave. I don't think William Stern would agree with you. Willie went bust in 1973 as the largest personal bankruptcy ever in the UK, not surpassed for 20 years or so a real record. When they dragged Wille into the back street branch of Nat West where they do all the receiverships down in Charing Cross where the prostitutes used to loiter on the street to give you an idea of the place. The location was chosen deliberately to intimidate and put down the bad boy borrowers. Willie turned up, alone without a lawyer and explained that his Rolls Royce outside belonged to his wife, the chauffeur outside was employed by his wife, the suit he was wearing belonged to his wife and his only assets were his gold teeth which the law prevented us from extracting. Now that's the attitude you should develop towards bankers and if everyone did it they wouldn't be a problem.

    Willei wasn't a slave.

  10. Sentinel ruling may hurt MF Global clients
    The appeals court affirmed an earlier district court ruling that the bank had a "secured position" on a $312 million loan it gave to Sentinel, which turned out to have been secured by customer money.

    Futures brokers are required to keep customers' funds in dedicated accounts to protect them from being used for anything other than client business.

    However, Thursday's ruling suggests that brokerages can use customer funds to pay off other creditors, Sentinel trustee Fred Grede told Reuters.

    "I don't think that's what the Commodity Futures Trading Commission had in mind" with its requirement that brokers keep customer money separate from their own, he said.

    "It does not bode well for the protection of customer funds."

    Worse, Grede said, is that the ruling suggests that a brokerage that allows customer money to be mixed with its own is not necessarily committing fraud.

    That may raise the bar for proving that MF Global Holdings Ltd, under then-CEO Jon Corzine, misused customer funds as it scrambled to meet margin calls to back bets on European debt in the brokerage's final days. A $1.6 billion customer shortfall remains.

    look at how corporations pay their debts...with your assets...jokes on all of us.

  11. What makes our NDAA lawsuit a struggle to save the US constitution

    Judge Forrest had ruled for a temporary injunction against an unconstitutional provision in this law, after government attorneys refused to provide assurances to the court that plaintiffs and others would not be indefinitely detained for engaging in first amendment activities. At that time, twice the government has refused to define what it means to be an "associated force", and it claimed the right to refrain from offering any clear definition of this term, or clear boundaries of power under this law.
    This past week's hearing was even more terrifying. Government attorneys again, in this hearing, presented no evidence to support their position and brought forth no witnesses. Most incredibly, Obama's attorneys refused to assure the court, when questioned, that the NDAA's section 1021 – the provision that permits reporters and others who have not committed crimes to be detained without trial – has not been applied by the US government anywhere in the world after Judge Forrest's injunction. In other words, they were telling a US federal judge that they could not, or would not, state whether Obama's government had complied with the legal injunction that she had laid down before them.

    To this, Judge Forrest responded that if the provision had indeed been applied, the United States government would be in contempt of court.

    I have mixed feelings about suing my government, and in particular, my president, over the National Defense Authorization Act. I voted for Obama.

    But the US public often ignores how, when it comes to the "war on terror", the US government as a whole has been deceitful, reckless, even murderous. We lost nearly 3,000 people on 9/11. Then we allowed the Bush administration to lie and force us into war with a country that had nothing to do with that terrible day. Presidents Bush and Obama, and the US Congress, appear more interested in enacting misguided "war on terror" policies that distract citizens from investigating the truth about what we've done, and what we've become, since 9/11.

  12. I was shocked and amazed at how many graduates there were at my nieces graduation this year in which I attended. I couldn't stop thinking the incredible number of hopeful graduates from around the country in just this one year alone with high hopes and so many white collar jobs drying up and disappearing ! The numbers don't jive. And to think that our wonderful government wants to only turn up the flame . What the hell's going on. Why is there no logic in our nation's capitol !?
    Just a piece of advice to anyone who's 18 to 27 years old...GO THE WAY OF A TRADE...learn to work your mind and your hands. You won't be sorry !

    White collar ain't what it used to be.

    You have only to thank the likes of our wonderful government , central bankers , the media ,and wallstreet for that !

  13. Peter Schiff Opens Hard-Money Bank

    You can open accounts in dollars or gold bullion at the new Euro Pacific Bank Ltd, launched by Peter Schiff. this is an awesome idea
    You can even get a “gold debit card” that you can use anywhere in the world. It’s backed by actual gold, which converts to whatever currency you’re needing at the time you visit an ATM.
    There's one catch if you are an American: you can’t open an account at this bank if you’re a U.S. citizen.

    1. Vincent from Euro Pacific Bank here. Any questions can be directed to me at

  14. Hermosa Beach meter maids making nearly $100K?

    When contemplating the many reasons cities in California and elsewhere are venturing closer to bankruptcy, look no further than the relatively lucrative and often-unjustifiable salaries bestowed on municipal employees – and the lofty pension benefits attached to the high pay.

    One of the latest examples comes from the California coastal city of Hermosa Beach, where some community service staffers who collect money from parking meters and manage their operations – positions once widely known as “meter maids” – are making nearly $100,000 a year in total compensation, according to city documents.

    There are 10 parking enforcement employees for the 1.3-square-mile beach city southwest of downtown Los Angeles, and they pull down some disproportionate compensation, considering their job functions. In fact, the two highest-earning employees for fiscal year 2011-12 are estimated to have made more than $92,000 and $93,000, respectively, according to city documents provided by Patrick “Kit” Bobko, one of five council members and who also serves as mayor pro tem. Those two have supervisory roles. The other eight parking-enforcement employees make from $67,367 to $84,267 in total compensation.

    There are four qualifications for being a city “community service officer,” Bobko told me: “You have to be able to drive a standard transmission; you have to able to handle large animals; you have to read and interpret statutes and regulations; and you have a high school diploma or equivalent.”

  15. The Road from Industrial Capitalism to Finance Capitalism and Debt Peonage

    This summary of my economic theory traces how industrial capitalism has turned into finance capitalism. The finance, insurance and real estate (FIRE) sector has emerged to create “balance sheet wealth” not by new tangible investment and employment, but financially in the form of debt leveraging and rent-extraction. This rentier overhead is overpowering the economy’s ability to produce a large enough surplus to carry its debts. As in a radioactive decay process, we are passing through a short-lived and unstable phase of “casino capitalism,” which now threatens to settle into leaden austerity and debt deflation.

    This situation confronts society with a choice either to write down debts to a level that can be paid (or indeed, to write them off altogether with a Clean Slate), or to permit creditors to foreclose, concentrating property in their own hands (including whatever assets are in the public domain to be privatized) and imposing a combination of financial and fiscal austerity on the population. This scenario will produce a shrinking debt-ridden and tax-ridden economy.

    The latter is the path on which the Western nations are pursuing today. It is the opposite path that classical economists advocated and which Progressive Era writers expected to occur, given the inherent optimism of focusing on technological potential rather than on the political stratagems of the vested rentier interests fighting back against the classical idea of free markets and economic reforms to free industrial capitalism from the surviving carry-overs of medieval and even ancient privileges and essentially corrosive, anti-social behavior.

    Where the Money Lives

    Little noticed in the academic discussions of financialization is the role of offshore tax havens, one of the big reasons the financial sector has become so powerful. In 1966, Michael Hudson, a young Chase Manhattan balance-of-payments economist, was in a company elevator when he was handed a memo by a former State Department operative. The memo came from the U.S. government, and Hudson was tasked with figuring out how much foreign money the U.S. might attract. “They were saying, ‘We want to replace Switzerland,’ ” Hudson explains. “All this money will come here if we make this the criminal center of the world. We wanted foreign criminal money, which was patriotic, but not American criminal money.”
    The money sucked into Tax Haven U.S.A., often via the “feeder” tax havens, is frequently tax-evading and other criminal foreign money, in the spirit of Hudson’s 1966 memo, and it is predominantly channeled not into productive investment but into real estate and financial business.