Some small thoughts before I go

We are off on our first family holiday in five years. I am more excited than the kids. We will be gone a month and during that time almost entirely off the grid.

Before we go I wanted to say thank you – to all of you who come to the  blog to read and think and sometimes to comment and add your thoughts. I know I have written painfully little and I am doubly grateful that you have stuck with it. Thank you to those of you who recommend articles here, to other blogs. Thank you to Jesse for picking the odd article and for highlighting articles over at Jesse’s Café Américain.

I also thought I would leave you with a scattering of thoughts.

How to deal a mortal blow to American power

There was recent announcement that the BRICS have agreed to launch a new Development bank with a $100 billion currency pool to aid countries with liquidity shortfalls. The major backer of the bank is China contributing $41 billion.

The bank will I have no doubt clear and settle certainly in Yuan and perhaps in Roubles. It will have good  working relationships with Hong Kong. 

Of more interest to me is that it will be headquartered in Shanghai. 

It seems very clear that the Chinese  and their economic allies in India and Russia as well as all the countries who are fellow travellers and variously disgruntled with Washington’s high handedness  are aiming at increasingly by-passing the dollar. The raft of bilateral agreements to settle in Yuan or Roubles that have been signed between China, Russia, Australia, Iran, various South American countries and the EU all serve notice that the days of the dollar’s pre-eminence are now numbered.

Of course the reserve status of the dollar is important for how much debt the US can carry. But even if the Yuan and the euro begin to account for a far larger proportion of international settlement this does not eradicate the dollar’s importance nor its status. obviously the euro is aiming at being used to settle gas contracts and possibly some oil contracts. If America continues to piss off Iraq’s new dictators then they could well decide to settle their contracts in euros or roubles or Yuan. 

But I think there are two further important step to watch for.  One is to do with banks, the other with courts.

The other half of the power the dollar gives America is that settlement of contracts in dollars means every nation has large dollar accounts which it uses to settle accounts and pay debts. These accounts are held in the small number of global Custodial banks. I think, from memory there are about 4 majors and they are all American: Citi, JPMorgan Chase, Bank of NY Mellon, State Street. These banks house trillions and are one of the choke points used by international lawyers. 

When Washington wants to enforce its will on a nation or when American vulture funds want to sue a crippled debtor the Custodial banks are the choke point they use. When Elliott Associates wanted to sue Argentina they did so by taking the Custodial banks that held Argentina’s money, to court and got those banks to freeze Argentina’s accounts. So the first thing I am waiting for is for the emergence of a non-American, Asian or at least Asian based bank to become a major Custodial bank.

The second thing I am looking out for is for that bank to be based NOT in NY. The bank cannot be based in NY because if it was then it would be subject to American law and specifically it would come under the jurisdiction of Wall Street’s ( and therefore Washington’s) court, which is the Southern District Court of Manhattan. Where you will find the lovely and completely independent Judge Griesa.

Griesa is Wall Street’s hanging judge. And his last judgement against Argentina and in favour of the Vultures was upheld by the US supreme court. That decision meant that Argentina will now be crippled with copy-cat appeals for payment from bond holders who had previously agreed to accept a lower settlement. More than that the judgement deals a huge blow to sovereignty in general setting a powerful precedent against any idea of sovereigns having the ability to protect themselves in bankruptcy. A protection that the private companies, including vulture funds themselves DO ENJOY. The ruling rules in favour of one strand of international law – the strand which greatly favours private capital and ignores the other older strand such as the Calvo doctrine) which gives pre-eminence to sovereign not private rights.

America is the home of vulture funds and houses the court that rules in their favour.  Those courts ruling over those banks is a major part of the projection of American power abroad. Set up a non-american bank to house those funds, and put it in a non American jurisdiction where American courts and Washington’s political power is not served and America will have been dealt an entirely peaceful but crippling blow.

So the choice of Shanghai for eth new bank is interesting. There is little attraction in avoiding American political power if you saddle yourself with another equally aggressive power such as China. So what is needed is a place beyond Washington’s reach but also not tied to closely to either China or Russia. Who would want a custodial bank subject to courts in Moscow or Beijing? Shanghai is a good place. It is less tied to Chinese banking interests than Hong Kong but still protected from America the way that Singapore, for example, might not be.

If you want to cripple American ability to enforce its will on other nations setting  up a major Custodial bank outside of Manhattan would be a very good step. The steps taken so far – increasingly by-passing the dollar when settling international accounts in favour of euros or Yuan followed by setting up a lending facility for nations in trouble that is not in dollars, avoids dollar accounts in American banks and is not controlled by the IMF are all the necessary steps which lead up to breaking the stranglehold of American custodial banks and the court which rules them.

I shall be watching.

Next a small question I have been thinking about -

What do the stock or bond markets  measure?

Once upon a time, in the fabled era of  ”buy and hold” when blue chip companies made stuff which people bought, stocks were thought to be a measure of the likely future profitability of the company that issued them.  While bonds were the sedate grazing ground of what were then still just the gentle benthic giants of the financial world, the pension companies and banks.

Then something changed.  In fact almost everything changed.

Stocks Surge Most In A Week On Worst Economic Data In 5 Years

As Zerohedge reported, the deputy chair of the Monetary Authority of Singapore (Lim Hng Kiang) said last night at a dinner that “an uneasy calm seems to have settled in markets” and that “we remain in uncharted waters.”

The way stocks and bonds continue to levitate no matter what the news has been a strange factor of our ‘recovery’. There are so many indicators which all point down that the upward march of the stock valuations is odd. GDP has not rebounded anywhere, to any degree sufficient to warrant the Dow at 17000. Even the market cheerleaders admit the recovery has not brought with it employment other than a huge increase in part-time and low paid jobs. So what are the stock movements tracking or reflecting? It seems to me they no longer reflect any economic fundamentals but instead political ones. Of course the political was always a part of what the markets noticed. But in the past the political was a smaller part and the economic profitability of the company in question or eth market in general was the larger part. Today the health and viability of the entire market and the companies who  float in it are entirely dependent on political fiat and power.  Today the stock markets are a measure, I think, of the perceived grip of the global over-class on the levers of political control. Bad economic news hits, but what counts is not that news, but the market’s estimation of what that news might do to the ability of those in power to maintain their grip on power.

The dynamic is news hits, and the market looks to see how destabilizing that news might be to the political status quo. The questions are all political. Will loose money continue? Will lobbying for further loosening of not-yet-even-in-place regulations continue? Is the will to replace national regulation ( which is far too close to democratic review) with international agreements like the TPP and TTIP and best of all TISA still ascendant? If the news does nothing to derail the political underpinnings of the present golden era then no news is bad news.  If you allow any of the above then the stock and bond markets are a measure of political control. The market measures the global overclass’s belief in their own grip on power.

To me it makes complete sense to see unemployment remain high,  austerity cutbacks eviscerate public services and the gap between the have-it-alls and the have-nothings to grin wider and wider and yet have the stock markets rise and rise as everything were fixed. Because what the market indices are measuring is the fix.

The Dow is a measure of political control not economic health.

What will sustain it?

It’s all very well watching the global overclass congratulate themselves on their own omnipotence but what will sustain their powdered and gilded society next? Like everything else in their world even their time is borrowed.

They gorged on  bail outs and then when that caused too much political grief they moved on to cheap central bank money (superlow interest rates and hundreds of billions in bond buying) as a substitute. Same money, same junkie fix, just a different means of delivery. But now what?

All that money has allowed three things, M&A’s and junk bonds and buy-backs. M&A are always talked about in terms of ‘synergies’ and creating behemoths and market leaders etc. But what are they really? I suggest M&A’s are better seen as cannibalism. A room-full of spiders with nothing to eat but each other. Eventually they must consume each. For a while the victors in the grisly struggle are plump and flush. But as time goes by they each need larger and larger prey just to survive and there are fewer and fewer of them. At some point even the survivors will starve.  M&A is a familiar phase in a market end game.

Buy Backs are when a company uses cash to buy back its own debt when that debt is cheap. The company spends its money on reducing its debt so it can say look at me I have low debt and must therefore be healthy and not at risk of not being able to service my debt. Of course the down side is the company is spending all its money on the sterile exercise of reducing its debt burden rather than on R&D or on capital investment in production. It is akin to drinking your own piss instead of looking for water.

And junk bonds. High risk, high yield bonds. The same regime of easy monetary policy/low interest rates which is keeping the financial sector alive ( high rates would kill them and they know it) but those low rates mean it is also impossible to get a rerun on an investment. So how do you get those bonus getting returns? the answer is to look for risky assets, risky loans  which do give a good return.

Easy money makes junk bonds desirable and also makes them work – for a while. The Banks want junk. The growth in junk bond issuance has been spectacular because the banks and pension funds ( devious routes)n and ETF funds (who are the banks in another guise) want the return they promise. But easy money also means the banks who buy the bonds with one hand, can lend to those junk companies and ensure their junk bonds don’t default. Neat trick. Till the market turns then the hand that lends closes and the companies can’t roll their debt from one loan to a new one which means they default on their junk bonds. Which makes those bonds crash. So many of those bonds are now sitting in the ETF market that that market will transmit the shock wave. And as I have argued in the articles I wrote about ETF I don’t think the ETF market is resilient at all despite its claims. I think the ETF market will collapse like Sub-prime did before it.But what do I know?

So what is next? What will keep the show going if loose money and the search for high yield have both been tapped out? I think the next phase is a push for deregulation. Higher leverage must be allowed again. Lower regulatory capital requirements is also a must. Both will be argued for. Lower Regulatory Capital can be achieved by allowing derivatives to be counted as regulatory capital. A major push for that particularly in America. And allowed much more freely as collateral at the FED and ECB.

What is government for?

The State is not the to serve the people. Those who currently control the state have come to believe the role of the state is to ‘help’ the ‘wealth creators’. The wealth creators are the 1%, the global overclass who have declared that they are th ones, the only ones who can create wealth. WIthout them we would all starve because we do not know how to create wealth. We, according to them, only know how to reach for hand-outs. And unless we are controlled by the state that is all we would do.

So the new job of the State according to the Wealth Creators, who just happen to be the 5% who own most of the financial assets of the world – the  very same assets that were nearly wiped out in the crash but which were saved when we bailed them out resulting in their wealth increasing hugely while we were told we had to tighten our belts  -  is to manage the expectations of the public should they get restive about bailing out the banks or start to question why banks who launder money avoid taxes are too big to fail and too big to prosecute – and if that fails then manage their actions (with water cannon if necessary).

Finance is politics. Economics is war. Peace is imposed. Thought is monitored. And freedom ? Well freedom has gone underground.

See you when I get back. Hope you will forgive this run of loose thought.

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39 Responses to Some small thoughts before I go

  1. Roger G Lewis July 22, 2014 at 6:58 am #

    Have a great Holiday David. Best wishes to you and yours.

  2. Wikispooks July 22, 2014 at 7:34 am #

    Impressive, thoughtful on-the-button stuff as always. Thanks, and enjoy your holiday

  3. steviefinn July 22, 2014 at 11:26 am #

    Wow, that’s tidied up most of the loose straggly bits within that overflowing dark cupboard in my mind.

    Fully savour & enjoy your holiday David, which I hope will be a world away from what seems to be an ever more hysterical, madding crowd.

  4. nexangelus July 22, 2014 at 1:01 pm #

    Have a great break, see you when you return. Not so small thoughts, though, to go…have to go back and re-read some parts.

  5. Biologique July 22, 2014 at 4:36 pm #

    Thank you for all your great writing and thoughts. Enjoy your well-deserved vacation. Another attack on American hegemony may well be developing in Nicaragua.

  6. Kathy P July 22, 2014 at 8:01 pm #

    What an enlightening piece. As always, your perspective is priceless. Have a wonderful holiday.

  7. Z July 23, 2014 at 12:52 pm #

    This is the first time I’ve visited this site. Great piece.

    Z

  8. Gio July 23, 2014 at 1:20 pm #

    Hello David,

    I have read your blog for over two years now and the accuracy and detail that you put into it is incredible.

    I wish you and your family and very relaxing and enjoyable holiday.

    Sincerely,

    Gio

  9. Michael from Ireland July 23, 2014 at 2:50 pm #

    Enjoy the holidays David. Hope the sun shines, the ice cream is fabulous and you can relax. Thought provoking article too…

  10. Andrea July 23, 2014 at 3:40 pm #

    Thank you for your blog and have a wonderful time on your holiday.

  11. Jesse July 23, 2014 at 4:32 pm #

    Thank you for highlighting the chokepoint which the US possesses with its jurisdiction of all the major custodial banks. It is clearly an instrument of policy.

    There is one small typo in the fourth last paragraph.
    “The State is not the to serve the people”

    Enjoy your vacation. Family is everything.

  12. Jesse July 23, 2014 at 4:39 pm #

    Here is a list of the major global custodian banks.

    http://www.globalcustody.net/sg/custody_assets_worldwide/

  13. Aaron Layman July 23, 2014 at 5:05 pm #

    Great article. Enjoy your vacation!

  14. Nicholas July 23, 2014 at 6:09 pm #

    All this anti-americanism sounds wonderful in theory, but let us not forget that we are ALL human and replacing the american dominated system with something else WILL not produce a panacea from a humanistic pov. We all come with the same greed and self-interest and will do what those in power now do given the chance. I know WE don’t believe we are like THEM but they ARE us and all the evidence points to this. So what’s gained? Consider the case of the enemy one knows is better than the one, one does not. What possible advantage would a non-american based system have? What will that be like and how could it be any better? What basis do we have to go on that the New World Order will be better? No matter how one looks at the world, the US has effective laws in place that others do not and will never have. even though they fall short. Is there a government we would prefer other than the american one? Is there a power we would rather have in their place? These are not separate issues, but if there is, how long before corruption seeps into them too? We cannot escape ourselves by playing musical chairs! Any experience with the Chinese fosters heavy suspicion of what may come. Ask Hong Kong residents. Do we really want an Indian based system? Really? How about a Russian one! As much as we hate the way things run now, there is nowhere better to go, so why are we obsessed with dismantling it? Why do we not work to improve what we have and slowly pry this existing one out of current hands and into those we might trust to improve it? A slow improvement is better than a collapse and regression to the middle ages, I think…. because that’s just what we’ll get. Enjoy your vacation.

    • Jay Cee July 23, 2014 at 7:47 pm #

      Nicholas, It is all about checks and balances.
      David, have a good time with your family.

    • Roger G Lewis July 24, 2014 at 5:38 am #

      Transparency and accountability is a prerequisite to democratic efficacy, the present system is ever more opaque and David advocates a return to democracy Nicolas. Critical examination of the system finds flaws this is not anti American much of what happens in the US is actually Non- Constitutional. The American Government is not the American people or Nation and Wall street is even less so, it is the same the world over Governments are not the people and States are not the people neither are the Corporations or financial institutions. Centralised economic and Political institutions are not the expression of a people and the communities formed by those people.
      These institutions are tools which when Broken require repair or replacement The system is most hopelessly unfit for purpose and is killing democracy in an attempt to preserve itself a most clear case of Tail wagging dog..

    • steviefinn July 24, 2014 at 11:10 am #

      I’m not sure Neoliberalism is American as such but the US obviously has everybody by the economic balls & the countries you mention have not dissimilar systems in place. I think the idea is maybe to get back to a Capitalism which is more equal & restores the ‘ American dream ‘ to the time in the 70′s before workers real incomes began to shrink away. As for it all going bang, it’s most likely that it will be those at the top that will cause that as they do not know how & when to stop & ‘ Let them eat cake ‘ doesn’t usually end well.

      Money in politics wherever it occurs needs to be sorted out & another possibility for a big bang would be the actions of the Neo-Cons in Washington who have infiltrated both parties ( Nuland – Obama & Kagan her husband was part of Romney’s team ) who are intent on perpetual war ( For the plebs of course ) & possess the unbelievable hubris to imagine that they can sow chaos & it will nicely limit itself to where they want it. Also you have the Corporate interests including the banks & military suppliers who are trying their utmost to enslave us with trade agreements in order to force us to buy their shite.

      This is not anti – American, the British were doing similar things with the East India company 200 yrs ago which led to the death of millions of Indians, a massive bailout for the company & a class of people of obscene wealth. It’s an empire thing, nothing personal.

      From Jesse : This video pretty much explains what is wrong with the way we are heading, how it became that way & how this is likely to lead to another big financial bang :

      http://jessescrossroadscafe.blogspot.co.uk/2014/07/thom-hartmann-crash-of-2016.html

  15. spyros July 23, 2014 at 7:25 pm #

    have a fine holiday, David
    also, this revealing exchange i found pertinent to the first matter you touch upon :)
    http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=12123

  16. spyros July 23, 2014 at 7:25 pm #

    Is the New BRICS Bank a Challenge to US Global Financial Power?

    Michael Hudson and Leo Panitch discuss and debate the significance of the new international development bank created by Brazil, Russia, India, China and South Africa -

  17. desmond July 23, 2014 at 7:30 pm #

    thank you Golem for a great article…. again

  18. Tao Jonesing July 23, 2014 at 7:51 pm #

    “The State is not the to serve the people.”

    I disagree. The State is to serve the people . . . on a plate.

    As the K Street lobbyists say, “If you are not at the table, you are on the menu.” (That is actually something a K Street lobbyist said to me!)

  19. JayD July 23, 2014 at 10:14 pm #

    Watch ‘Our Planet from the Air:Home’…….BBC4 for a glimpse into our collective madness……we could all use a holiday from this!! Enjoy yours David, hope you can recharge your batteries as we’re going to need plenty of energy to tackle all of this.

  20. Globus Pallidus XI July 23, 2014 at 11:05 pm #

    A great article, yes, but I think that you have missed the final, major point.

    As Keynes pointed out, beyond finance is demographics and the real world. The global population explosion has largely been engineered by the rich (yes, really, this was by design). The reason is what it has always been: a short-term desire to drive wages down and profits up. However (and this I do not think was intended) it will also completely change the nature of the economy. Finance and profits will no longer matter. We will go back to the European dark ages, where a small number of wealthy landowners own everything and everyone else is a landless peasant working for subsistence wages.

    At this point the rich won’t need finance, or profits, or markets, or anything. They will own the surplus production of their lands outright. This will also cement their social control over society: do what I say or you are fired, and thus you and your family die, because there is no other land for you to work than mine. The overall economy will be limited and stagnant, but for the aristocrats there will be plenty for palaces and fine dining etc.

    Remember feudal europe? The Black Death, by drastically cutting the population and keeping it down for generations, completely changed the society. It was demographics, and the brute law of supply and demand, which meant that farmers now trumped landowners, and which gave the society a non-trivial surplus that it could reinvest in new enterprises. We have avoided going back to feudalism because of innovations like chemical fertilizer, but that’s tapped out and everything we have now is subject to diminishing returns. (‘Green technology’ = ‘magic pixie dust’).

    When the global population hits the ceiling, market forces will turn us back to feudalism. At this point it is nearly inevitable, and it cannot be avoided by mere financial or political actions, because it will be caused by facts on the ground.

    Globus Pallidus XI

    p.s. love your name. GPXI.

  21. desmond July 24, 2014 at 11:42 am #

    to GPXI… i suspect that the human spirit in human beings will show some evolution since the ‘dark ages’.. we are not machines. there is a longing in all human beings that won’t eat dirt..

  22. aaron July 24, 2014 at 9:21 pm #

    nice post covering a lot of topics. I would point out that buy backs are when a company purchases its shares with cash proceeds. those cash proceeds could be raised from debt issuance (as Apple recently did) but not necessarily. Debt repurchases do occur (most notably for banks) but should not be confused with buybacks. The goal of normal buybacks is for companies to repurchase their shares at ‘undervalued’ levels in order to increase the pie of earnings and dividends for remaining shareholders. It is another form of return of capital for shareholders and according to M&M, a shareholder should be indifferent between a buyback and dividend (theory does not hold in a real world for a number of reasons including taxes).

    Regarding ETFs, yes I agree that their proliferation for debt products including high yield is dangerous as the underlying liquidity of the ETF beguiles the liquidity of the debt products it holds. Nonetheless, I disagree with your assertion that ETFs are a bad product – in fact quite the opposite. ETFs that track large indices such as the S&P 500 and Russell 3000 are quite important components of diversified portfolios at a fraction of the cost of mutual fund products. They represent the best of passive management which over time and via study has been clearly shown to outperform active management.

    Thanks again

  23. wirplit July 25, 2014 at 6:33 pm #

    “It is rediscovered!
    What?
    Eternity
    It is the sea melding with the sun”

    Rimbaud

    Grab some eternity David, the transcient will be waiting
    ….

  24. backwardsevolution July 26, 2014 at 9:36 pm #

    Leave behind all your cares and worries and go have some fun, make lots of memories. That’s all life really is, a collection of wonderful memories, provided we take the time to make them.

    I hope you have the time of your lives.

  25. John G July 28, 2014 at 9:19 am #

    Enjoy your holiday David.

  26. hey July 28, 2014 at 6:57 pm #

    i enjoy reading oyur posts, enjoy a safe and fun holiday, see you when you get back!

  27. wirplit July 29, 2014 at 5:30 pm #

    I am on a wonderfully peaceful island in the Adriactic but looking at the news from Gazacasts a pall over everything. Israel seems indeed in thwords of an Iranian leader like a rabid dog while the US and most of the rest of the world just twiddle their thumbs. An utter failure of moral will it seems.

  28. steviefinn July 31, 2014 at 8:44 pm #

    I don’t really follow the MSM so perhaps I am mistaken when I state that it seems to have gone very quiet in Ukraine, probably because it’s being overshadowed by the butchery in Gaza.

    Here’s a website I chanced on which gives the POV of the rebels who are waging a partisan war. There is probably a propaganda agenda here but it doesn’t read like that to me, but perhaps I’m biased – It has a horrific realism to it :

    http://cassad-eng.livejournal.com/2014/07/31/

  29. The Dork of Cork August 1, 2014 at 12:54 am #

    US terms of trade data.
    A off the scale plunge in the second quarter.

    Something big happened and nobody told us…………….REAL BIG.

    http://www.tradingeconomics.com/united-states/terms-of-trade

    Meanwhile look at France
    A mirror image ?

    Something to do with people (Masons) getting wind of currency change me thinks.
    http://www.tradingeconomics.com/france/terms-of-trade

  30. David Morey August 1, 2014 at 3:32 pm #

    A good analysis of the political void:

    http://www.conflictsforum.org/2014/conflicts-forums-weekly-comment-23-30-may-2/

  31. Phil (Mcr) August 30, 2014 at 11:19 am #

    ”terrorists”

    http://www.bloomberg.com/news/2014-08-29/next-u-s-bank-bailout-could-come-after-a-cyber-terror-attack.html

    So when the system is about to implode because it’s riddled with repayable private debts you cry ‘terrorist’ and deflect the blame. Genius.

    They want everything we have.

  32. BobRocket September 6, 2014 at 2:54 am #

    Hello David,

    hope you had a great time on holiday.

    Things here have moved on.
    What do you think of this defence spend ramp up, is to try to stimulate the economy now that it is obvious that QE doesn’t work like they wanted it to ?

    Is there any official statement as to what QE actually does

    I can understand the logic behind competitive militarisation as stimulus but wouldn’t a cooporative technological challenge on a global scale provide just as much bang for the buck.

    Do you think such an approach might work ?

    I look forward to when you get back

  33. richard September 9, 2014 at 12:50 pm #

    Not exactly a correction: Argentina chose to have the case New York because that was the law underlying the bonds. Hence Judge Griesa was simply following the path Argentina signed up to. Argentina could have chosen English Law when it wanted to borrow the money and the Court would have been in London – see for example what happened in Cyprus.

    Note that transactions denominated in dollars places the USA on the inside, in a legal sense, as France and BN Paribas found out in their dealings with Iran. That also allows the imposition of some aspects of US Law, and makes it difficult for anyone conducting business to make a transaction that is hidden from US eyes or their cyber equivalent.

  34. Golem XIV September 10, 2014 at 9:18 am #

    Hello All,

    I just wanted to thank you all – those words really don’t begin to cover it – for your comment sna dsupport over the years. I hope, really hope that I can get back to writing a little more often.

    One of the major problems I have about writing at the moment is that on the surface of official financial policy everything looks stalled or fixed depending on your point of view. Yet at the same time, beneath the surface and seemingly away from finance, almost everything is in flux. Which means unlike a few years ago, it is no longer about a critique of what our governments are ‘doing’ (which is largely just doing over what has already not worked) but trying to suggest what crucial but disguised or ignored things they are actually doing just out of view. The problem is that it can start to seem like dreaded conspiracy theorizing.

    And sometimes I have to admit I feel lmost transfixed by what I see as the sheer immensity of arrogance and wilful blindness being unfolded around us.

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