Friday, March 27, 2009

China's Solution: Invest in America

Everyone is talking about China as a prisoner of the current currency problems, as the dollar gets devalued, wiping out their dollar reserves.

Here's a crazy idea: why don't the Chinese use their dollars the way international trade is supposed to work, and buy American. Why is everyone acting like their only choice is to buy more financial securities?

They should do like the Japanese in the 80's: invest in America. Specifically, use their dollars to build factories in America. Especially targeting things that the Chinese people need.

Lord, its like international balance of trade is a frickin' alien concept to the universe...

Newsflash to the Chinese, stop buying paper and debt, which only encourages our idiot politicians to do fiscally unsound things, and invest directly in American industry, which will both expand your bottom line and give you a great ability to trade with America.

Wednesday, March 25, 2009

Sign the Petition to Cancel National Debt

To: US Congress and State Legislatures

We, the undersigned Americans, hereby call upon both houses of the US Congress to promptly pass, and upon the state legislatures to ratify, a constitutional amendment repealing section 4 of the 14th amendment, prohibiting future indebtedness and deficit spending on the part of the federal government, and repudiating all federal government debt and debt service obligations accrued prior to the ratification of said amendment.

The Undersigned

go here to sign the petition

The Repudiation of the US National Debt Petition to US Congress and State Legislatures was created by and written by Thomas L. Knapp (

update 4/16/09 noon: 11 signatures

Campaign to Cancel the National Debt

Join the Campaign to Cancel the Washington National Debt

We hereby resolve that most of the national debt is not a legitimate debt of the American people nor the future generations who would otherwise find their prosperity and financial security sacrificed for the profit of a few corrupt global financial elites and the politicians they own and control.

Thankfully, our Patriot Founding Fathers provided Article Five of the United States Constitution for a future time of congressional, judicial and presidential tyranny which provides for an option to assemble a national Convention to propose amendments to the United States Constitution as an alternative to the process of securing two-thirds approval in both houses of Congress.

We must work to pass "The Washington National Debt Constitutional Amendment" and repudiate much of the Washington government debt before it bankrupts every private American citizen. We fear the massive increase in the level of indebtedness due to the meltdown and depression will first bring down the Treasury market followed by the US dollar and this will destroy the American economy for years to come.

Washington’s illegitimate national debt is growing exponentially due to the bailouts as Congress tries to jumpstart a depression threatened economy but the added debt load will soon bankrupt our nation and impoverish every productive, working American.

To stop the economic tidal wave that will destroy the financial security and wealth of every American along with their savings, real estate, retirement plans, investments and their promised Social Security and Medicare benefits we have established "The Washington National Debt Constitutional Amendment Campaign" to cancel much of Washington’s debt before it is too late.
The Campaign will bypass a corrupt Congress and the leadership of both political parties often controlled by special interests at the national level and seek a debt solution through the constitutional amendment process starting at the state level which will repudiate any Treasury debt issued or rolled over after the deadline of 12/22/2013, exactly 100 years after the establishment of the Federal Reserve System.

The proposed constitutional amendment will first call upon the state legislatures to ratify an amendment repealing Section 4 of the 14th Amendment which outlawed even questioning the validity of the national debt; "The validity of the public debt of the United States, authorized by law….shall not be questioned", followed by language to further prohibit future indebtedness and deficit spending by the federal government and repudiate all federal government debt (except for obligations for Social Security Trust Funds) and debt and interest service obligations accrued after the 12/22/2013 deadline regardless of when the amendment is ratified by 2/3 of the states.

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Tuesday, March 24, 2009

Weimar Hyperinflation Details

How Does Inflation Get out of Control?

Many people consider Weimar Germany to be the worst hyperinflation ever, but it was just the best publicized. In fact, there have been hundreds of hyperinflations recorded in world history. According to Dollar Daze, the majority of all national currencies ever issued have been destroyed by hyperinflation.

So, what exactly causes a hyperinflation? Essentially, it boils down to a psychology in the government, a refusal to balance the budget combined with widespread financial guarantees to its citizens. Rather than balance expenditures with taxes or cut expenses, the government simply prints the money to make it's budget work. The printing of money causes a gradual inflation, which feeds itself. The alternative to inflation is unemployment and liquidation, which the government cannot abide, so the ever-widening budget gap is funded with ever-greater money printing.

Obviously, it is impossible not to notice that we have embarked upon that path today. Our government has determined to spend, borrow, and print its way out of an economic downturn. It is a first for the American government, which has one of the oldest stable currencies in the world, younger than only the British Pound. It is also a first time in the history of the world that the international reserve currency has flirted with hyperinflationary policies.

The following are some excerpts from a book on the Weimar hyperinflation, vignettes of the people's experiences, and their psychology which both enabled and sought to cope with the economic catastrophe. In the end, the German authorities did not choose to end their hyperinflation. Right to the very end, they consciously chose the path of hyperinflation to avoid the alternative of economic downturn. They considered inflation to be stimulation and dealt with its consequences, right up until the point when they could no longer forestall unemployment with stimulation, because they reached the point of both monetary insolvency AND high unemployment. At that point, the country's economic basis was nigh-well destroyed. The longer they delayed the economic adjustment, the more painful it finally was, and that on top of years of accumulated pain brought on by the hyper-inflation itself.

Much as it may have been recognised that stability would have to be arranged some day, and that the greater the delay the harder it would be, there never seemed to be a good time to invite trouble of that order. Day by day through 1920, 1921 and 1922 the reckoning was postponed, the more (not the less) readily as the prospective consequences of inflation became more frightening. The conflicting objectives of avoiding unemployment and avoiding insolvency ceased at last to conflict when Germany had both.

The take-off point in the inflationary progress, after which the advent of hyperinflation was but a matter of time, the point indeed when it became self-generating and politically irreducible except for short periods, was not indeed to be found on the graph of the currency depreciation, or of the velocity of its circulation, or of the balance of payments deficit. Nor in Germany's case did it notably coincide with some ultimate crisis of confidence in the mark, at home or abroad — Rathenau's murder, or the occupation of the Rhine ports, or the London Ultimatum, all of which had immediate seismic effects upon it. Rather it lay on the falling curve of political possibility, with which was closely linked the degree of political power and courage that the government, sorely pressed as it was, was able to muster.

What really broke Germany was the constant taking of the soft political option in respect of money. The take-off point therefore was not a financial but a moral one; and the political excuse was despicable, for no imaginable political circumstances could have been more unsuited to the imposition of a new financial order than those pertaining in November 1923, when inflation was no longer an option. The Rentenmark was itself hardly more than an expedient then, and could scarcely have been introduced successfully had not the mark lost its entire meaning. Stability came only when the abyss had been plumbed, when the credible mark could fall no more, when everything that four years of financial cowardice, wrong-headedness and mismanagement had been fashioned to avoid had in fact taken place, when the inconceivable had ineluct-ably arrived.


If prices went up, people demanded not a stable purchasing power for the marks they had, but more marks to buy what they needed. More marks were printed, and more, and more. Inflation, already in its fourth year when revolution overthrew the old regime, added a new, overwhelming uncertainty to the many uncertainties that attended the birth of the Weimar Republic.

Thus were the Government's plans drawn up, wilfully and simply, for financing the war — not by taxation, but by borrowing; and with the printing press as the well to supply both the needs of the Government and the growing credit demand of private business. Taxation was to play not the smallest part in meeting the costs of war before 1916. Helfferich had actually announced to the Reichstag in March 1915 that the war was to be financed exclusively by borrowing. Issue after issue of War Loan transformed the greater part of German private fortunes into paper claims on the State. Our enemies, especially Britain, took another line. They met the cost of war with taxes aimed primarily at those industries and groups to whom the war spelled prosperity. Britain's policy of taxation proved socially more equitable than Germany's policy of War Loans which lost their value after the war was over …

As the war machine lumbered expensively on, circumstances and policies combined to pull the wool over the financial eyes of the German people, not least those classes who had most to lose. Every German stock exchange was closed for the duration, so that the effect of Reichsbank policies on stocks and shares was unknown. Further, foreign exchange rates were not published, and only those in contact with neutral markets such as Amsterdam or Zurich could guess what was going on. It was never clear how much the steep rise in domestic prices was due to economy measures and war shortages rather than to inflation — and even the relevance of those prices was rendered dubious by the much higher black market rates. Only when the war was over, with the veil of censorship lifted but the Allied blockade continuing, did it become clear to all with eyes to read that Germany had already met an economic disaster nearly as shattering as her military one. The scales may have fallen at last from German eyes with the coming of peace, but that did not mean that the difficulties and injustices created by war-time inflation had passed unnoticed.

It must be admitted generally now that the cause of the depreciation of our currency and of the purchasing power of the mark was neither the commercial balance during the war nor the estimate of our military situation abroad; but in the exploitation of our currency for the purpose of obtaining money for the Treasury, that is to say in a fictitious increase of our total income. In as much as the country issued milliards in the form of extraordinary levies, War Loans, Treasury bills, and so on, without withdrawing from circulation corresponding amounts in the shape of taxes, it created new paper income and wealth incessantly, while the real national wealth was steadily being diminished by the war.

Even the most respectable of Austrian citizens now breaks the law, unless he is prepared to starve for the sake of obeying it … The fact that the future is so uncertain has led to stagnation in industry and public works, and swelling numbers of unemployed supported by the State … yet it is impossible to get domestic servants or indeed any sort of workers …

The State has been obliged to put 10,000 kronen notes into circulation — each equivalent to two years' income from my capital. A suit costs about six times what it was in 1913, but some things like food are a hundred or two hundred times as much … Paper clothes are being sold. Never had I dreamed it possible that one could purchase so little for 10,000 kronen … Jealousy and envy flourish in this atmosphere, and if one has procured some harmless article of food, one is careful to conceal the fact from one's fellow men. Hunger reigns inexorably and selects its dumb and uncomplaining victims above all from the middle classes …

Twice a day we are all forced to await the quotation of the Zurich bourse. Every fresh drop in its value is followed by a wave of rising prices … The confidence of Austrian citizens in the currency administration of the State is shaken to its foundation. The State which is perpetually printing new banknotes deceives us with the face value … A housewife who has had no experience of the horrors of currency depreciation has no idea what a blessing stable money is, and how glorious it is to be able to buy with the note in one's purse the article one had intended to buy at the price one had intended to pay.

Speculation on the stock exchange has spread to all ranks of the population and shares rise like air balloons to limitless heights … My banker congratulates me on every new rise, but he does not dispel the secret uneasiness which my growing wealth arouses in me … it already amounts to millions.

The cost of living since the outbreak of the war had risen by nearly twelve times (compared with three times in the United States, almost four times in Britain and seven times in France). Food had accounted for half the family budget then, but now nearly three-quarters of any family's income went on it. The food for a family of four persons which cost 60 marks a week in April 1919, cost 198 marks by September 1920, and 230 marks by November 1920. Certain items such as lard, ham, tea and eggs rose to between thirty and forty times the pre-war price. On the bright side - in contrast to Austria - the official unemployed figure was low, and only 375,000 people were on the dole.

Indeed, the apparent health of industry was one of the factors which most effectively confused the inflation issue. Bolstered by a financial programme geared to subsidising in various vital ways an industrial front which continuous depreciation of the currency had already made highly competitive in foreign markets, the lot of German industry had materially improved over the previous twelve months.

Inflation provided the answer to the equation. If a budget did not balance, the deficit had to be made good somehow. In October 1920 Germany's national debt stood at 287,800 million marks. At the old 1914 parities this sum equalled £14,400 million; but at the new it represented only £1,200 million.* (Great Britain's national debt amounted then to £8,075 million.) A year before Germany's great inflation is generally thought to have started, Germany's national debt had all but been wiped out.

The daily creation of fresh paper money which the government requires in order to meet its obligations both at home and abroad (services and goods which it is 'obliged both to render and deliver') inevitably decreases the purchasing value of the mark and leads to fresh demands, which in turn bring about a further decline, and so on ad infinitum.

Even progressive increases in taxation could not completely meet the situation, since new impositions meant an increased cost of living, which automatically reduced the purchasing value of the mark, and in turn brought about more inflation and budget instability.

The newspaper complained of the 'quite small capitalist upper class' making huge profits by taking advantage of the exchange fluctuations, while foreigners were using the discrepancy between the home and foreign values of the mark 'to purchase our goods en masse'. It demanded that profits on exchange and dollar speculations be taxed intensively, and went on:

Blackett noted that the rent restriction Acts hit much the same classes, who were 'forced to starvation in order to subsidise the German workman's wages and the employer's profits'. The bread and rail subsidies, financed by inflation, combined with the rent restriction, enabled the foreigner to buy German goods well below world prices and, if he lived in or visited Germany, to travel, eat and occupy houses at ridiculously cheap rates. 'A gradual process of buying up and carrying off Germany's movable capital, secondhand furniture, pianos, etc., is taking place at the expense of Germany as a whole.'

SOCIAL unrest was one of the obvious symptoms of inflation. The disease, the Austrian and German financial world seemed to agree, was itself not containable without international goodwill and a significant relaxation of the obligations under the peace treaties. Germany's politicians therefore set about relieving the symptoms wherever possible. More measures were brought in so that the government might be seen publicly to be dealing with profiteering. The Prime Minister of Bavaria even submitted a Bill to the Reichsrat to make gluttony a penal offence.

But in this respect conditions are hopelessly unhealthy, and the public will continue to be swayed by rumours and to speculate either in goods or in stocks and shares.

The previous fall in the mark had also produced unfortunate results by driving the population in shoals into the shops in a mania of purchasing. While abusing the foreigner for buying out Germany with his profitable rate of exchange, the native has been no whit behind in emptying the shops of their stocks … Many thought that their money would soon have no value whatever and that it must be exchanged for goods while there was yet time: others realised that the purchasing mania would help the falling rate of exchange to raise prices, and they therefore bought on speculative grounds.

The press pointed out that a disastrous slump in trade could not but ensue when the purchasing power of the population was exhausted, and that meanwhile the poorer classes were suffering. All efforts, however, were in vain to drive sense into a panic-stricken people, and articles in the shops could be seen being marked up to a higher price day by day.

In the eight years since 1913, the price of rye bread had risen by 13 times; of beef by 17. Those were the commodities which had fared best. Sugar, milk (at 4.40 marks a litre), pork and even potatoes (at 1.50 marks a Ib.) had risen between 23 and 28 times; butter had gone up by 33 times. These were only the official prices — real prices were often a third higher — and all these prices were roughly half as much again as in October, only two months before.

The brief December recovery of the mark brought no relief. That event, which caused unemployment transiently to treble to 3 per cent, gave another warning of what would inevitably have to be suffered when, one day, the printing presses stopped printing banknotes to order. Before the war, when the mark was sound, there were normally about 9,500 bankruptcies a year. As wartime inflation increased, the number regularly dropped, from 7,739 in 1914, to 807 in 1918. The total number in 1921, during the first seven months of which the mark was fairly stable, was 2,975, more than double the 1920 figure and three times that of 1919.* (The annual bankruptcy figures from 1912 were: 9,218, 9,725, 7,739, 4,594, 2,279, 1,240, 807, 1,015, 1,324, 2,975.) The 1921 figures were the most indicative; for in comparing the number of bankruptcies during the various months of the year it could be shown that a falling mark was associated with a decline in bankruptcies, and vice-versa. The largest number, 845, was in the spring when the mark stood highest; but after it reached its lowest in November the number was 150. The Frankfurter Zeitung commented: 'It gives some inkling of the awful debacle which may be expected if a rapid and permanent improvement of the mark actually takes place.'

It was natural that a people in the grip of raging inflation should look about for someone to blame. They picked upon other classes, other races, other political parties, other nations. In blaming the greed of tourists, or the peasants, or the wage demands of labour, or the selfishness of the industrialists and profiteers, or the sharpness of the Jews, or the speculators making fortunes in the money markets, they were in large measure still blaming not the disease but the symptoms.

It was significant enough that union, demands were still for higher wages to meet rising prices rather than, before all else, stable prices and a stable currency. A few of the financially sophisticated could be heard blaming the government, and the Finance Minister in particular, but a typical view was that prices went up because the foreign exchange went up, that the exchange rate went up because of speculation on the Stock Exchange, and that this was obviously the fault of the Jews. Although the price of the dollar was a matter for almost universal discussion, it still appeared to most Germans that the dollar was going up, not that the mark was falling; that the price of food and clothing was being forcibly increased daily, not that the value of money was permanently sinking as the flood of paper marks diluted the purchasing power of the number already in circulation.

Most successful businessmen, however, stuck happily to the heresy that only by a continually falling exchange rate could Germany compete in neutral markets. After them, the deluge. Neither they, nor the politicians, nor the bankers — with distressingly few exceptions — perceived any direct connection between inflation and depreciation. And yet, as the printing presses churned out bank notes the exchange continued rapidly to fall. What impressed the ordinary politician was the danger of social unrest which would, in his opinion, inevitably arise if there were any scarcity of currency. He could not see, or intentionally ignored, the obvious danger which proceeded from continuous inflation. Social unrest appeared, just the same.

ONLY the country people were surviving in Germany in any comfort: anyone who lived off the land had the readiest access to real values. It was not surprising that even when they ensured that the money receipts for their goods were no more than equivalent in purchasing power to what they were used to, they were accused of extortion — the more so if they delayed the sales of produce in the full knowledge that prices would be higher the longer they waited. Erna von Pustau went to stay in the country and asked her hosts bluntly what they were doing with all the money they were squeezing out of the townspeople. They replied candidly that they were paying off their mortgages. The principle of Mark gleich Mark had helped agriculture enormously: for the country people, landowners, farmers or peasants, life had started again. At the end of August 1922 when the mark passed 2,000 to the dollar — 9,000 to the pound — a mortgage of seven or eight years' standing had been 399/4OOths paid off. When Frau von Pustau returned home the talk in the family was about prices going up, about the credits which had to be reduced, about the middle-class party, about big business and the workers who always asked for more … The contrast between country and city was so enormous that it cannot be understood by people who have not lived through it.

To condemn the individual's struggle for survival in such chaotic circumstances as either selfish, or unnatural, or wrong, was in many ways unjust. When people do not understand what is happening, or why it is happening, and have no idea about what to do about it, and are not told, panic must follow. Even so, that the countrypeople were behaving naturally brought no comfort to townspeople who had no goods to barter, and whose incomes remained static.

On September 9 the financial authorities announced that in the previous ten days 23 milliard marks had been printed and distributed, representing 10 per cent of the total circulation of paper in the country. 'The daily production of the Federal printing press,' the newspapers dutifully recorded, 'has now risen to 2.6 milliards of paper marks. In the course of this month it will be increased to almost 4 milliards of paper marks, at which figure it is hoped the shortage of money will be definitely overcome.'

Shortage of liquid cash, indeed, was acute, and the July emergency money law was coming into its own. Large industrial concerns began to pay their workmen partly in notes and partly in coupons of their own, which were accepted by local tradesmen on the understanding that they would be redeemed within a very short time. Municipalities, too, started to issue their own currencies, aware that any delay in receiving their pay packets would dangerously aggravate workers whose main concern was to spend them before they depreciated. The cities and towns developed a parallel fear of unemployment which on a large scale might lead to outbreaks of Communist-inspired disorder, and so began artificially to create employment for their staff. The citizens of Frankfort noted with alarm that large tracts of quite serviceable road were being repaired outside the town and that the overhead system of telephone wires was being converted into an underground one.

At home in Germany, where people were resorting to trade by barter and progressively turning to foreign currencies as the only reliable medium of exchange, new Orders were brought in relating to the purchase of foreign bills and the use of foreign exchange to settle inland payments. In addition to imprisonment, fines could now be imposed of up to ten times the amount of an illegal deal.

Sure enough, in the Ruhr, numerous factories were using various devices to avoid having to put men out on the streets. Bochumer Verein, in Essen, for example, engaged 1,500 men making stock articles for railways although there was no immediate requirement for them. Such measures, however, were only possible for firms with big financial reserves, and small firms were already dismissing workers in small numbers. With the November price increases -butter at 800 marks a lb., eggs at 22 marks each — shops were also cutting down on assistants because sales were dropping off.

The disparity between the rise in the cost of living and the rise in wages had now become very marked. Whereas since the war the former had gone up by about 1,500 times, the wages of the miner — in November 1922 the best paid worker — had gone up by barely 200 times. With the mark in mid-November at 27,000 to the pound and 6,400 to the dollar, and with prices following the course of both with unfailing regularity, not only were wages in general failing to keep pace but the workers were not even being paid what was their due. Owing to the shortage of paper money of all kinds, federal currency or Not geld, they were finding that by the time the balance was paid it had lost 50 per cent of its value. The best-paid workers were unable to purchase the barest necessities of life. The others and — as ever — those on fixed incomes or dependent on savings suffered accordingly.

Bonar Law, who fully appreciated that the stabilisation of the mark meant, for Germany, unemployment, an industrial crisis and enormous financial strain, whereas failure to stabilise meant catastrophe, was now equally unable to convince the French Prime Minister of the futility of amassing vast quantities of German paper marks by means of retortionary or extortionary measures.

'Inflation is like a drug in more ways than one,' remarked Lord D'Abernon. 'It is fatal in the end, but it gets its votaries over many difficult moments.' Hopelessly addicted, the Reichsbank ploughed on.

Petty crimp? the crime of desperation, was flourishing. Pilfering had of course been rife since the war, but now it began to occur on a larger, commercial scale. Metal plaques on national monuments had to be removed for safe-keeping. The brass bell plates were stolen from the front doors of the British Embassy in Berlin, part of a systematic campaign unpreventable by the police even in the Wilhelmstrasse and Unter den Linden. That members and families of the British Army of the Rhine suffered severely from burglaries probably reflected the fact, not that thieves had particular animus against the forces of occupation, but that these days foreigners were so much more robbable than anyone else. Over most of Germany the lead was beginning to disappear overnight from roofs. Petrol was syphoned from the tanks of motor cars. Barter was already a usual form of exchange; but now commodities such as brass and fuel were becoming the currency of ordinary purchase and payment. A cinema seat cost a lump of coal. With a bottle of paraffin one might buy a shirt; with that shirt, the potatoes needed by one's family. Herr von der Osten kept a girl friend in the provincial Capital, for whose room in 1922 he had paid half a pound of butter a month: by the summer of 1923 it was costing him a whole pound. 'The Middle Ages came back,' Erna von Pustau said.

Communities printed their own money, based on goods, on a certain amount of potatoes, or rye, for instance. Shoe factories paid their workers in bonds for shoes which they could exchange at the bakery for bread or the meat market for meat.

DR SCHACHT, the author of the reform, had no illusions about its shortcomings. He understood that the Rentenmark could hold the tide only so long, that new credits from abroad were essential, and that for that reason no departure could be made (despite the pleadings of the government, desperate for money) from the strictest discipline. Nothing could be done that would put at risk the currency stability or the budgetary balance. 'After a long devaluation,' Schacht held on January 24, 1924, 'stability can only be regained at the cost of a severe crisis. We are in the midst of this crisis. External commerce is at a standstill. The balance of trade is active [i.e. in Germany's favour] only because imports have ceased as importers have no means of paying. Industry is living on old stocks.'

Their numbers amounted to millions, and none was on the list of receivers of unemployed or short-time relief. They were the ones who had had their wealth shot away by the war, without knowing it. They looked in vain for charity to help, but the charitable institutions and the religious societies, just like the literary and scientific foundations and many of the universities and hospitals, had equally had the fountains of their incomes reduced to a trickle or less. Any who had held industrial debentures had lost their capital, to the benefit of industries who redeemed those debts with worthless paper. Any who had held industrial shares in 1913 would have had their capital reduced by three-quarters, and a pittance paid in dividend totals over the years -- but in practice most people had panicked long since and sold the bulk of their shares for what they could get for them to the industrial profiteers and speculators who amassed the nation's wealth to themselves, paying themselves not dividends, but 'fees'. Germany's capital had been redistributed in the most cruel way, no longer spread reasonably evenly among millions, but largely in coagulated blobs among the new plutocracy.

It was widely remarked that the destitution inflicted by the inflationary process was not general. The very evidence, indeed, of great wealth — ostentatiously flaunted by the new rich who had it -misled many observers, including the French, into supposing that Germany's refusal to pay reparations on the nail was Teutonic knavery. The existence until the Ruhr invasion of full employment, an obviously prosperous working class, a buoyant economy, a booming home market, a strongly competitive position in foreign markets, factories bursting with production — all made possible by the vast scale of Germany's borrowing — could have fooled anybody.

Once more, however, here was a false dawn. Germany's trouble was that the inflation boom had never been liquidated. Stabilisation had ended the period when entrepreneurs could borrow as much as they wished at the expense of everyone else. A vast number of enterprises, established or expanded during monetary plenty, rapidly became unproductive when capital grew short. More realistic transport, fuel and food prices, and the return of rents to economic levels meant that wages, too, had to be raised substantially in real terms.

Firms that mushroomed during the inflation now found that the real interest they paid on loans for the first time was positive rather than negative, lower though the rates appeared to be. Perhaps most significant, for the first time they were obliged to pay real taxes, many of which were extremely high because of the necessity rapidly to balance the budget and to bring official salaries, which had fallen disastrously, up to an acceptable level again. Companies were often unable to buy new machinery after stabilisation came, so much so that huge stocks of unsold iron and coal began to build up in the Ruhr. Not even the foreign loans flowing in were able to prevent the seizing up once again of the Ruhr mining industry where pit after pit, especially any producing poor quality coal, was forced to close. Workers were to flock from pit to agriculture, from mines and quarries and engineering to the production of food and direct consumer goods, and to building. Hugo Stinnes himself had been deceived by the artificial prosperity of inflation into a fanatical confidence in the future of coal. It was the post-stabilisation depression in the coal, iron and steel industries, contriving even the depopulation of Ruhr townships, which led eventually in June 1925 to the collapse of the Stinnes empire.

The Stinnes debacle demonstrated above all that great industrial possessions could not be held without adequate liquid resources (as early as June 1924, Stinnes had been trying to pledge Bochumer Verein and Gelsenkirchen shares against Dutch loans); and that vertical combines were inefficient and unprofitable except under the exceptional conditions which had bred them.

Germany which had undergone almost every conceivable form of collapse during the previous six years — military, political, social, financial, economic — now crashed downwards again just as her many times demoralised people had supposed that, with international help, she was beginning to rise from her knees. Confidence was shattered. The flow of foreign money slackened. The Reichs-bank policy of credit restriction was maintained as firmly as ever to counteract a net outflow of gold and foreign exchange. The shifting of the working population was accompanied by a new, terrifying increase in unemployment and short-time working. Because labour was a buyers' market, those with work were nonetheless often compelled to work a 54-hour week. There was such an alarming rise in the cost of living that to prevent agitation the index had to be cooked. And there was a new, spectacular toll of bankruptcies. Much though public works were instituted to try to mop up labour, the unemployed figure had passed 1,300,000 by December 1925, and was gathering pace daily. The return of rational conditions had brought a necessary but brutal slimming of the immensely swollen public services: those who had been dismissed from the posts and the railways were now being joined not only by former miners and steel-workers but by the many who had started businesses on their own.

In the inflationary period new factories were built, old establishments reorganised and extended, new plant laid down, participations in all fields of industrial activity bought up, and the great amorphous concerns founded. Too late, it was found that this process had undermined the capital structure of the country: capital was frozen in factories for which, because of the extermination of the rentier and the reduction of the real wages of so many of the great consumer classes, there was no economic demand. Once the demand for goods was shut off and the flow of cash dammed, the fate of the productive apparatus was sealed. Even in 1924, firms of undoubted solidity and large assets were unable to pay out trifling sums of money. In 1926 that apparatus was still too great in relation to the working capital and the nation's power of consumption. Thus, whereas in 1913 there were 7,700 bankruptcies, and in 1924 only 5,700, the figure for 1925 was 10,800; and between the third quarter of 1925 and the second of 1927, bankruptcies numbered 31,000 — a rate of 15,000 a year.

In practice, furthermore, a great many bankruptcies were refused by the courts in the absence of assets with which to meet claims. Between May and November 1925, the number of protested bills per week doubled from 2,691 to 5,406. Many banks were immobilised by having had to lend to their industrial customers who had had to be kept alive but now could not repay. The banks found it prohibitively hard and unrewarding to liquidate securities, and under those conditions were unwilling to take over bankrupt factories in lieu of money. With shares now at far below value in a moribund Stock Market, there were endless sellers and no buyers.

Throughout the later inflationary years the shrill argument had gone on over who was to blame and what was the cause of the unceasing, increasing financial crisis — never a true crisis because instead of coming to a head it always did the impossible by getting even worse. Month upon month every excuse was found for it but the right one; every attempt made to stem the fall of the mark but the fundamental one.

Nor was German honour inflation-proof. The corruption among officials in 1924, Lord D'Abernon reported, was 'appalling', whereas before the war bribery had been almost unknown, and a high degree of uncorruptibility evident in public and private, if not always in commercial, life. There were few in any class of society who were not infected by, or prey to, the pervasive, soul-destroying influence of the constant erosion of capital or earnings and uncertainty about the future. From tax-evasion, food-hoarding, currency speculation, or illegal exchange transactions — all crimes against the State, each of which to a greater or less degree became for individuals a matter of survival — it was a short step to breaching one or other of the Ten Commandments.

In Germany not until well after the return to stability did the nature and extent of the corruption in high places begin to be known. Events like the sentencing in March 1924 to three years' gaol of Dr Zeigner, the egregious ex-Premier of Saxony, for corrupt practices and bribery had raised scarcely a ripple. The end of the year brought to light a far more formidable array of financial scandals, enough to confirm the view that the old universal integrity had sunk in the whirlpool of inflation, and to deliver another stunning blow to the nation's morale.

How great does inflation have to be before a government can no longer control it? Most economists accept that mild inflation has certain therapeutic advantages for a nation which must deal with the social and economic problems to which industrial democracies are usually subject. Most electorates still accept the statements of their politicians' pious intentions in regard to controlling ever rising prices: and yet the Deutschmark, the currency of the country which had most reason to fear inflation, lost two-thirds of its purchasing power between 1948 and 1975. The pound lost almost half its purchasing power between 1970 and 1975. In neither instance, however, did such depreciation represent a deliberate, cynical policy; which, no doubt, would also have been claimed by the German bankers and governments of the early 1920, who looked for causes of their monetary difficulties beyond their own printing press and tax system — and found them, without difficulty and to their complete intellectual satisfaction. It remains so that once an inflation is well under way (as Schmb'lders has it) 'it develops a powerful lobby that has no interest in rational arguments.' This was as true for Austria and Hungary as for Germany.

There came a stage when it was politically impossible to halt inflation. In the middle of 1920, after the brief post-Kapp Putsch period of the mark's stability, the competitiveness of German exports declined, with unemployment beginning to build up as a result. The point was presumably not lost on the inflators. Recovery of the mark could not be achieved without immediate repercussions in terms of bankruptcies, redundancies, short-time working, unemployment, strikes, hunger, demonstrations, Communist agitation, violence, the collapse of civil order, and thus (so it was believed) insurrection and revolution itself.

In war, boots; in flight, a place in a boat or a seat on a lorry may be the most vital thing in the world, more desirable than untold millions. In hyperinflation, a kilo of potatoes was worth, to some, more than the family silver; a side of pork more than the grand piano. A prostitute in the family was better than an infant corpse; theft was preferable to starvation; warmth was finer than honour, clothing more essential than democracy, food more needed than freedom.

Student Loan Jubilee

Student loans contribute to the problem of over-priced and unaffordable education. Additionally, they lead people to wrack up debt that can't be paid off, at a time when they are too young to understand the long-term implications. And, most unjustly of all, student loan debt cannot be discharged, ever, not even in bankruptcy. All in all, it is a very unjust and exploitative system, and student loan debt should be high on the list of areas for Jubilee forgiveness.

In just two short months, Robert Applebaum has become something of a spokesman for a generation of people burdened with student loan debt. Applebaum, a 35-year-old attorney in New York, started a Facebook group in January called "Cancel Student Loan Debt to Stimulate the Economy," fed up with news reports about bank executives spending millions to redecorate their offices and receiving hefty bonuses. "I wanted to rant, so instead of sending an e-mail to a couple of my friends, I decided to start a Facebook group," says Applebaum, who finished law school owing $80,000 in student loans. "I figured maybe just a few of my friends would join."

He was wrong. By the end of the second week 2,500 people had joined, and the group now has more than 138,500 members, many of whom are pressing their representatives in Congress for legislation that would forgive student loan debt. "It's just snowballed," says Applebaum.

Student loan repayment can be difficult for young people starting off their careers and has become even more challenging now with the economic downturn, as recent graduates lose their jobs or struggle to land one. Groups like Applebaum's on Facebook, and other organizations such as, are part of a new movement advocating for an overhaul of the country's troubled student loan system. Frustrated with often unaffordable monthly payments, loans that are nearly impossible to discharge, and restrictive loan repayment plans, student borrowers are pushing the government and private loan companies to devise new solutions.

Assets of a Couch and a TV

"I think the economic crisis and the sort of clamor from borrowers like we see on that Facebook group should help make that case," says Edie Irons, a spokeswoman for the Project on Student Debt, a Berkeley (Calif.)-based nonprofit that raises awareness about student financial aid. "The size of the group really illustrates how concerned people are."

Applebaum, who graduated from Fordham Law School in 1998, took a job as an attorney at the Brooklyn District Attorney's Office after graduation, at a starting salary of $36,000 a year. His salary was so low that he put his loans in forbearance for five years, until they ballooned to $100,000. "Despite having a law degree, I'm middle class and I don't have any money at all," he says. "I don't own a house or a car. My only assets are my couch and television."

Applebaum is one of thousands of graduates struggling with the repercussions of student loans years after graduation. There were nearly $131 billion in outstanding private loans in 2008, according to Mark Kantrowitz, founder of, which tracks the college financial aid industry. In addition, there is $544 billion in outstanding federal loans for fiscal year 2009, up from $502 billion in 2008, according to the Education Dept.

Shackled by Student Loans

Meanwhile, the average debts of students graduating with loans rose from $18,796 in 2006 to $20,098 in 2007, according to the Project on Student Debt.

For some, the debt is unshakable. Mel Crow of American Fork, Utah, owes $60,000 in student loans from his days at the Academy of Art University in San Francisco. He has spent the last five years struggling to find a computer animation job in his field, with no luck. His parents had to refinance their home so he could consolidate his loans, and he now pays them $500 a month with the $10.50-per-hour he earns at a local cosmetic company. If he defaults on his loan, his parents will lose their home, Crow says. Meanwhile, he and his wife, an algebra teacher, are barely scraping by, living in the basement of her parents' home. Because of Crow's debt, he says the couple will have to delay buying a home and having kids for several years.

"Sometimes I think going to school is the worst single mistake I've ever made," says Crow, a member of Applebaum's Facebook group and the first in his family to attend college. "I could have worked at Wal-Mart (NYSE:WMT - News) for four years and been in a better position than I am now. I feel like I'm almost a slave to this debt."

Signs of Change

Others, like Eric Zapata, an aircraft mechanic in California, say their student debt is a constant worry. Zapata owes about $48,000 in student loans and worries he won't be able to afford an engagement ring for his girlfriend. "I've been saving now for two years, but I haven't been able to get the ring yet," he says. "The $400 in monthly (debt) payments just kills me."

There are already some signs that change is on the way, at least for those with federal loans. The Income-Based Repayment plan, part of the College Cost Reduction and Access Act of 2007, will provide some relief to federal student loan borrowers when it goes into effect on July 1. The program will cap most borrowers' monthly payments at less than 10% of their gross income for 25 years, after which any remaining debt will be forgiven. Another program, the Public Service Loan Forgiveness, allows borrowers to make income-based repayments and have their debt discharged after 10 years. "These programs actually provide some major help now and in the immediate future," says Irons of the Project on Student Debt.

But the situation is not quite as rosy for private loan borrowers. Many of these debtors have been unable to meet their monthly payments, putting their loans in forbearance for several years or, in the worst-case scenario, defaulting on their loans. Making matters worse for private borrowers is a clause in the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act that included private student loans as one of 10 debts that can't be forgiven in bankruptcy cases.

Continuing the Fight

Alan Collinge, author of The Student Loan Scam and founder of, has been a student loan activist for nearly four years. He is working to reverse the bankruptcy laws and establish limits on how lenders pursue borrowers. Collinge graduated with three degrees in aerospace engineering from the University of California several years ago and $38,000 in student debt, which he's still working to pay off. He's traveled around the country talking to elected officials and working to restore what he considers "basic consumer" rights. As of yet, he's had no luck, but he hasn't given up hope. "Until someone shows me why student loans should specifically be exempt from bankruptcy protections, it's definitely a fight worth fighting," he says.

Wednesday, March 18, 2009

Debt Spending Inflation is Taxation, not Stimulus

Fantastic piece below about government-caused inflation. Printing money, as the Fed today calls it, quantitative easing or buying bank assets or whatever, is legal counterfeiting! It is a form of taxation. As this article brilliantly puts it, it is not placing a debt burden on a future generation, it is really stealing money from people today.

Think about it! The government prints the money today (the so-called debt) to co-opt economic resources now. That money removes wealth from people's pockets today, by debasing the value of their dollars because of the inflation of the money supply. It is the ultimate trickery. People think they are getting a stimulus, but in reality, they are getting screwed because of of their money is worth less. Rather than declare a Jubilee, which would honestly and openly cancel debt to the benefit of the common man, the government is determined to inflate the dollar to clear our debt, to the disadvantage of the common man.

Legal counterfeit blends with the genuine money supply and is indistinguishable from it. It is, therefore, more insidious and, through sheer volume, vastly more destructive of the power of the monetary unit than is illegal counterfeit. It inevitably manifests itself in higher prices of goods and services. The public is bewildered by the higher prices, and it requires but slight propaganda by the author of the inflation, the Government, to deflect criticism onto private business which, in the end, is always obliged to bring the bad news of rising prices to the people. The public does not realize that it is, in effect, indirectly paying taxes over the merchant's counter instead of paying them directly to the tax collector. The Government finds this a ready way to increase taxation without being detected.

To collect sufficient taxes to balance an extravagant budget brings citizen resistance if the tax collection is obvious. However, inflation taxation is not only covert; it operates by seemingly putting a dollar into the taxpayer's pocket instead of taking one out. By lavish counterfeiting and spending, the Government increases the number of dollars in circulation and thereby creates an appearance of prosperity.

We delude ourselves, moreover, if we think that deficits, or government "debts," are deferred taxes to be paid by future generations. They are current taxes, paid not only by the non-bondholders to the bondholders as interest, but by the bondholders themselves through the depreciation of the purchasing power of the dollars represented by the very securities that they hold.

Strictly speaking, there is never and there cannot be a government deficit. All government expenses are and must be paid by taxes. What is commonly called taxes is merely that shown in formal tax revenues, whereas the amount which is called deficit is in reality another bracket of taxes—inflation taxes—and this the most vicious form, since it disturbs and ultimately destroys the monetary system upon which the entire economy depends.

Even tax-conscious persons think only of the taxes shown by government revenue receipts. They tell us that the United States is approaching the danger point of a tax collection rate that is thirty per cent of the national income. They do not realize that it has already passed beyond this point, because they do not reckon the unaccounted taxation, actual and potential, through the depreciation of the dollar -- inflation taxation. As inflation accelerates, the rate at which conventional taxes are levied will not be able to keep up with the national income—this despite the false dollar prosperity floating the citizenry into progressively higher income tax brackets. The relative percentage will decline, giving to those who take this narrow view the impression of a decline in taxation. It is but a fool's paradise. Can anyone blame the politician for employing this painless way of plucking the goose?

Thus it may be seen that more than fifty per cent of today's dollar is "water" injected by government-created "dollars." But this is not to say that the total supply of counterfeit has yet manifested itself. Actual inflation and potential inflation are two different things. Prices are determined not by the total monetary unit supply relative to the total goods supply, but rather by the amount of each that actually meet in the market. All of these dollars are being held out of the market, hoarded under the illusion that they will grow through savings. But even with a moderate rise in prices, more is lost from the principal than accrues from interest or dividends. Gradually, this will become more and more evident to more and more people, thus causing holders of government securities and savings deposits to convert into goods and property. This will bring into the market a flood of dollars that are now inactive.

The resulting price rise will pinch the population of low and fixed incomes and thus throw upon the government the obligation (under the now prevalent idea that the government owes every man a living) to issue additional counterfeit dollars. This in turn will cause further price rises, calling for further counterfeit and so forth until the dollar is completely extinguished.

Realism therefore compels us to recognize that inflation will continue until the point is reached at which the dollar will be worthless. The Government will find it much easier to let taxation by inflation wipe out its debt than to liquidate its debt through direct taxes by running a surplus budget. The nation born under the slogan, "No taxation without representation," is now practicing taxation by misrepresentation.

Financial Survival Strategies - International and Local

It is amazing to read about China's and Russia's current financial strategies, because they are the exact same as mine. For the exact same reasons, too: the impending dollar collapse.

China is using its dollars to buy up cheap hard assets, just as I am. Russia is attempting to create a new non-dollar exchange system, just as I am.

Clearly, the writing is on the wall. Everyone who isn't blinded by wishful thinking can see it. There is no magical happy ending in the works for the dollar-denominated economic system.

If you don't like my advice, take it from the Chinese and Russians: stock up on hard assets and productive capacity, and get involved in a non-dollar exchange system. At least then you will be partially insulated from the coming economic shocks.

If you have the capital, investing in productive capacity will be especially profitable after the dollar collapse. After the dollar collapse, imports will no longer be cheap, in fact, the price of everything will skyrocket. The updside is, made-in-America will make economic sense again. The US manufacturing base will have the opportunity to rebuild itself from the ground up. Unfortunately, in the meantime, we will face massive unemployment, and the economy will be hampered by the government's socialist policies.

China inoculates itself against dollar collapse

At G20, Kremlin to Pitch New Currency

Jim Rogers Warns of Serious Inflation

The U.S. risks sending the world into a depression as its bailouts of failed companies rob healthy businesses of capital, investor Jim Rogers said.

“The U.S. is taking assets from competent people and giving them to incompetent people,” said Rogers, chairman of Singapore-based Rogers Holdings and the author of books including “Investment Biker” and “Adventure Capitalist.” “That’s bad economics.”

People should be prepared for inflation as governments worldwide are printing money to prop up economies at a time when commodities supply is under pressure, Rogers said.

“We’re going to have serious, serious inflation down the road,” said Rogers, who owns gold and silver. “I wish I knew when.”

Calls to return to the gold standard, when currencies were backed by bullion owned by governments, are flawed because it is “not going to solve our problems,” he also said.

Monday, March 16, 2009

Alert - Treasury Capital Flow Negative

Well, this is the beginning of the end for the dollar. Appropriate that we are hearing about this just days after the Chinese publicly question their dollar denominated investments. They have been in sell mode for at least a month. Even the mainstream AP article mentions how catastrophic this will be for the dollar. The Greater Depression mentality won't really set in until the current wave of bailout plans completely fail because they can't be financed. When state governments are laying people off by the thousands, public works are slashed, and the cost of everything is skyrocketing, THEN people will begin to realize how bad it is.

WASHINGTON (AFP) – Foreign investors sold a net 43 billion dollars in long-term US securities in January as the flow of capital turned negative, US Treasury data showed Monday.

The decline in foreign holdings was the steepest since August 2007.

The decline came after a revised capital surplus of 34.7 billion dollars December.

If the decline persists, it could spell trouble for the United States, which is issuing massive amounts of debt to finance its economic recovery efforts.

The Treasury data showed a decline in both private purchase and official government or central bank purchases of US securities, including US Treasury and agency bonds, and to a smaller degree, equities.

When short-term securities are added to the figures, it shows a capital deficit of 148.9 billion dollars.

For all of 2008, the US had a capital surplus of 609.9 billion dollars including 514.8 billion in long-term debt held by foreigners.

Last week, US officials scrambled to assure China that its hundreds of billions of dollars in US bonds were safe, after Premier Wen Jiabao expressed concerns about "the safety" of its investments.

Analysts say a loss of confidence in US Treasury securities could cause a dramatic drop in the dollar and force Washington to pay higher interest rates.

Sunday, March 15, 2009

Alternative Money Systems and Barter

Found a few nice resources online providing a discussion of a number of different potential monetary systems and barter networks.

I do not think a system that declares all labor to be equal is workable. Nor, frankly, do I think a fully-backed money system would work. Raw barter is especially cumbersome and must be made more efficient.

I think a real bill system with cash redemption backing, combined with a barter network, is the best alternative system. But these systems provide a nice ground for brainstorming:

The current barter exchange groups are really not suitable for mass consumption, as they are limited to a select group of businesses, and are run on a for-profit basis.

A real bills clearinghouse and barter network for the masses needs to be super cheap, as close to transparent as possible, and open to all.

Real Bills of Personal Credit in Practice

This was quite the amazing find for me, as it precisely summarized a system that I had independently came up with myself. In fact, it adds a number of key elements that make it better than what I had envisioned. The one thing their paper had not envisioned, that I had, is the vital role of the real bills clearing house in maintaining a book of customer ratings. It is essentially like an e-bay rating, or Amazon rating, a compilation of the opinions of the many people you have done business with.

For dealing with times of monetary chaos, these little real bills of personal credit will be like gold. For a nation dealing with the basic problem that few people do anything economically productive, being all cubicle critters, the basic question for many of us will be: what can I do, what can I offer you? What exactly am I going to fill out on this slip of paper for my trading service?

Our new economy will be based much more heavily on personal services, much like the economies of old. Our standard of living going down means our wages will fall, which sounds real bad but has some nice upside. When wages fall, all kinds of economic services become feasible again that have been wiped out of the market in the last 30 years. Think of maids and housekeepers for example. 100 years ago, such services were quite common, but as the cost of labor skyrocketed, the service disappeared.

Thus, if you are a displaced cubicle worker, your service may be "Mending clothes", or "Cleaning house" and that may be a worthwhile economic trade. As a general rule, all the repair skills will roar back to life, as the cost of new and imported goods rises it will become sensible to keep repairing old things rather than always replacing them.

Thursday, March 12, 2009

Europe Needs a Jubilee too

Europe is also facing a financial catastrophe because of excessive debt, in their case given to Eastern European countries. The economies in the region are collapsing because of the withdrawal of funding and the collapse of prices (i.e. deflation). Yup, debt deflation depression there too, and the only solution is Jubilee! Why is no one talking about this???

The headline writers are calling it Europe's own subprime. Basically, what has happened is that banks in the more developed Western Europe have lent huge amounts of money to consumers in Eastern Europe.

The banks which have lent money belong to countries like Austria, Belgium, Greece, Italy and Sweden. Consumers who have borrowed from these banks belong to countries like Poland, Hungary, Romania, Ukraine and other countries which were a part of the erstwhile Union of Soviet Socialist Republics (USSR).

Stephen Jen, managing director and chief currency economist, Morgan Stanley estimates that Eastern Europe has borrowed around $1.7 trillion and needs to repay or roll over around $400 billion this year, which is around one-third of the entire gross domestic product (GDP) of the region. That's a lot of money to be repaid.

But how did it start in the first place? As the stock market and the real estate market boomed across the world, Western European banks saw a huge opportunity in lending in Eastern European countries where the financial system was not very developed. A majority of the lending happened for construction and consumer loans. With real estate prices on their way up, people were happy to go out and borrow.

Also, these loans were made primarily in euros or Swiss francs, and not in the local currencies of the countries. These loans were also at a lower rate of interest compared with local currency loans.

What also encouraged people to borrow in foreign currencies is something experts are now calling "convergence play." Most Eastern European countries over the next few years were hoping to move to euro as their currency from their current currencies. This encouraged borrowers to borrow in euros, and pay a lower interest rate, rather than borrow in their domestic currencies and pay a higher interest rate. Banks giving out these loans assumed that as these countries moved to the euro currency, the standard of living will also move towards the more developed, Western European countries.

And now, it is this foreign currency borrowing that is causing all the problems. Take the case of a country like Poland, where almost 60% of the home loans taken were in Swiss francs. Around one year back, 100 Polish zlotys (the currency of Poland) fetched 45 Swiss francs; today, 100 Polish zlotys are worth 30 Swiss francs.

What does that do for a Polish citizen who is earning in zlotys and is expected to repay his loan in Swiss francs? Let us say the equated monthly instalment (EMI) to repay a loan stood at 1,000 Swiss francs a month. Around a year back, he would have needed 2,222 zloty (1000 x 100/45) to buy 1000 Swiss francs. Now, he would need 3,333 zloty (1000 x 100/30) to buy 1000 Swiss francs. This means the EMI has gone up by 1,111 zloty or 50% in just one year.

Why has this happened? As I mentioned earlier, most of the loans given out in Eastern European countries were given out as real estate loans and consumer loans. The real estate bubble the world over burst around one and a half years back and since then, prices have been falling. Western European banks obviously saw this, and more or less stopped lending in Eastern European countries. Also, with so much of debt denominated in foreign currencies, there was a mad scramble among the citizens of Eastern European countries to buy and hold foreign currencies like euro and the Swiss franc. When that happened, the demand for the foreign currencies increased, leading to their value against currencies like the Polish zloty going up. This basically meant that people who were earning in zlotys and had borrowed in euros or Swiss francs saw their EMIs go up dramatically.

This humongous increase in EMIs does not go down well for economies whose GDP is contracting, which basically means that people are losing jobs and those who have jobs are seeing their incomes come down. This increases the chance of people defaulting on these loans. Take the case of a country like Ukraine, whose economy contracted by 12% in the three months from October to December. This has primarily been on account of steel prices crashing. Steel is a major export for the country.

Or take the case of Latvia, whose economy shrank by 10.5% in the December quarter. Most of these Eastern European countries are essentially commodity exporters and as you would know, commodity prices the world over have crashed. On the whole, these countries are expected to contract by 3% this year.

So banks which have lent to borrowers in these countries are in huge trouble. Take the case of Austrian banks. Estimates suggest that they have lent $289 billion to Eastern Europe. A large portion of this lending is in Swiss francs, which these Austrian banks have borrowed from Swiss banks. The Austrian finance minister, Joseph Proll, recently said that even if 10% of this lending goes bad, the Austrian financial system will go broke. With much of this money borrowed from the Swiss, the Swiss might also get into some trouble.

Now you might ask, why not just rescue these banks, like they have in the United States and the United Kingdom, by simply printing money?

The trouble is most of the Western European nations have euro as there currency. For the European Central Bank to print money, it would need each of its 16 members to say "Yes" to the decision. And that, as you would agree, is easier said than done.

The other problem is that most of these banks are too big for the countries they are domiciled in. The lending of the Austrian banks to Eastern European banks stands at $289 billion, as I mentioned earlier. This is equivalent to 70% of the Austrian GDP.

Given this, it is very difficult for the host countries to rescue these banks. They would need help from larger countries like France and Germany, which are steeped in their own problems, and are not in a mood to oblige. Other than this, most European banks have exposure to all the trouble in the United States. Not a good scene at all.

How about the International Monetary Fund (IMF) coming to the rescue of these countries? I guess it's well beyond the IMF as well. The IMF has reserves of around $200 billion. Of this, it has already exhausted a huge amount in rescuing countries such as Belarus, Hungary, Iceland and Ukraine.

Most of the Eastern European countries were formerly communist countries and have only recently moved to be being democracies with elected governments. Some experts feel the governments in these countries could pass laws to allow repayment of foreign loans in local currencies, and that would hurt the Western European banks even more.
And as if all this was not enough, European banks have given out nearly three-fourth of the loans worth $4.9 trillion given out to the emerging markets. Most emerging markets are in big trouble now. I guess I will leave that for the next email. Or maybe you could tell me about it.

That's it for now. I'll try to miss you, as much as you do.

Take care.

Wednesday, March 11, 2009

Hayek on Inflation, Unemployment, and Money

Inflation causes Depressions. The solution is stable money, which Hayek sees guaranteed by competing money (a gold standard no longer being possible, in his opinion). Fascinating dialog, and our theories of where to go forward should start here.

Hayek's one sentence statement about the destructive effects of inflation bode very ill for us today. The giant inflationary bubble economy of the last 20 years has left us a legacy of massive restructuring that needs to occur. America has been artificially held high by the status of the dollar as reserve currency, enabling our entire debt- and deficit-based economic-governmental structure.

Hazlett: How does inflation cause unemployment?
Hayek: By drawing people into jobs which exist only because the relative demand for the particular things is temporarily increased, and these employments must disappear as soon as the increase in the quantity of money ceases.

Hazlett: Yet, if the United States, for example, went through a period of temporarily high unemployment--say we have double the current rate of unemployment for one to two years--wouldn't all the automatic income-maintenance programs, such as unemployment insurance, welfare, etc., run up such an enormous bill as to bankrupt the federal government, which already runs a deficit of S50 billion or $60 billion in a so-called recovery period?
Hayek: Yes, they probably would. There would be an enormous political struggle on the question of whether social-security benefits ought to be adapted to inflation or cut down. I don't think that you can effect a permanent cure without a substantial alteration of the social-security system.

Hayek: Yes, they do occasionallv. The trouble is, in the mechanical system what forces politicians is the gold standard. The gold standard, even if it were nominally adopted now, would never work because people are not willing to play by the rules of the game. The rules of the game that the gold standard requires [say] that if you have an unfavorable balance of trade, you contract your currency. That's what no government can do--they'd rather go off the gold standard. In fact, I'm con- vinced that if we restored the gold standard now, within six months the first country would be off it and, within three years. it would completely disappear.

The gold standard was based on what was essentially an irrational superstition. As long as people believed there was no salvation but the gold standard, the thing could work. That illusion or superstition has been lost. We now can never successfully run a gold standard. I wish we could. Its largely as a result of this that I have been thinking of alternatives.

Hazlett: You have, at various times, championed a commodity-reserve monetary system and competition in the money supply. Are these practical alternatives to a govemment con- trolled central banking system?

Hayek: Yes. I have been convinced that while the idea of the commodity-reserve system is a good one, practically it is unmanageable. The idea of accumulating actual stocks of com- modities as reserves is so complex and impractical that it just cannot be done.

Then I came to the conclusion that the necessity of actual redemption of the real commodities is only necessary if you have to place a discipline on an authority which otherwise has no interest in keeping its currency stable. If you place the issue of money in the hands of firms whose business depends upon their success in keeping the money they issue stable, the situation changes completely. In that case, there is no necessity of depending upon their obligation to redeem in commoditei: it depends on the fact that they must so regulate the supply of their money that the public will accept the money for its stability. This is better than anything else.

From an interview in 1977.

Tuesday, March 10, 2009

Jubilee Political Movement

Obviously, in order to implement Jubilee, a political movement is necessary.

The financial oligarchs currently control government policy, and have largely brainwashed the masses into accepting their version of economic theory.

The Jubilee movement must educate people on the reality of new economic system, while gathering a political movement to demand debt forgiveness.

The time has come, populist outrage is rising every day, setting the stage of Jubilee.

Take action in your local community to get organized, and coordinate with other Jubilee organizers to form up the national movement.

$50 Trillion Lost Last Year?

So $50 Trillion in financial assets were lost last year. So what?

The weird part is, everyone acts like this is totally real. In fact, it is complete fantasy. We are acting out our own bizarre economic fantasy play, wherein financial instruments are confused with real wealth.

Unfortunately, our current economic system is based on the fantasy that financial instruments are equivalent to real wealth, and our real economy is hitch to these financial instruments like a carriage to the horse. The horse has died so the carriage just sits there.

In reality, we are no less wealthy than we were last year. We have the same skills and materials that we had then. The fantasy of money has us mesmerized, so that our real economic activity stops because of the collapse of the money system.

Given the loss of $50 trillion in paper value, how many loans will not be paid off, how much debt will now be unpayable? We desperately need to establish an economy that is unhitched from the dysfunctional money system.

The first step is to cancel the debt and allow our productive economy to escape the madness of a crushing weight of debt, which is based on fictional asset prices and expectations from bubble times.

The IMF actually quantifies the amount:
Developing nations will bear the brunt of the contraction and they will face a shortfall of between $270 billion and $700 billion to pay for imports and service debts, the Washington- based World Bank said.

Friday, March 6, 2009

1 in 5 Underwater, Water Still Rising

My question is always this: what happens when everyone is underwater? What will we do then? That time is coming soon. The percentages are already mind-boggling. The problem began with housing, and the solution has to start there as well.

More American homeowners are drowning in debt, according to a new research report. As of the end of 2008:

Because home prices continue to drop across most of the country, the mortgage debt on about 20% of all U.S. single-family homes exceeded the estimated current value of those properties as of Dec. 31, says First American CoreLogic, a real estate information firm based in Santa Ana, Calif.

That proportion will rise to 25% of single-family homes if prices fall another 5%, the firm said.

The problem is most acute in Nevada, where the percentage is 55%, followed by Michigan (40%), Arizona (32%), Florida (30%) and California (30%).

Stripping out those five hard-hit states, the national percentage is about 14%. In New York State, the tally is just 4.7%.

Being underwater isn’t a huge problem for those who can afford their mortgage payments and don’t need to move any time soon. But it can make it difficult or impossible to refinance or sell a home.

And it causes some homeowners to wonder whether they would be better off walking away from their homes and renting something similar for a much smaller monthly outlay.

Thursday, March 5, 2009

Legal Aspects of Mortgage Jubilee

A debt jubilee could occur with a simple act of Congress. The law would simply have to declare forgiveness of debt, and include a clause to prevent lawsuits. It is that simple. As the following article indicates, the threat of lawsuit by investors is keeping many mortgage servicers from modifying notes. Unless they have legal protections from lawsuits, people are not going to put themselves at risk. A Jubilee Proclamation would have to contain language preventing lawsuits.

WASHINGTON -(Dow Jones)- The success of the Obama administration's plan to cut mortgage payments for millions of at-risk homeowners hinges on congressional action to shield mortgage servicers against lawsuits from investors, a top mortgage industry official said.

The plan, which the administration kicked off Wednesday, is heavy on incentives for mortgage servicers and borrowers, but provides no protection for servicers against lawsuits from mortgage investors who might become angry about the modifications.

Roughly 60% of seriously delinquent U.S. mortgage loans are concentrated in " private label" mortgage-backed securities, or MBS, which are not issued by Fannie Mae (FNM) and Freddie Mac (FRE).

Such mortgages "probably won't be modified until there's a safe harbor," David G. Kittle, the chairman of the Mortgage Bankers Association, said. "The incentives are not enough to protect anyone from a lawsuit."

Under the program, the government would pay mortgage servicers a $1,000 one- time fee to reduce borrowers' mortgage payments to 38% of their income for five years. The government would then match the cost of further interest rate reductions or other measures intended to bring mortgage payments down to 31% of borrowers' income.

The government would make generous annual payments to servicers and borrowers if the loan stays current. The only incentive for mortgage investors is a $1,500 payment for modifying loans that are not yet delinquent.

The program does nothing to address what has been one of the biggest impediments to loan modifications during the housing crisis - the misalignment of the interests of mortgage servicers and mortgage investors in private-label securities.

Companies servicing pools of mortgages packaged as private-label securities are bound by contracts with investors in the securities. The contracts vary, but typically require servicers to act in the best interest of the investors. That is often not a simple calculation. For example, a loss modification action by a servicer could potentially benefit some investors of the pool at the expense of others.

Mortgage investors have mounted lawsuits against servicers who have performed loan modifications they deemed against their interest.

Under the administration's program, participating mortgage servicers are required to "use reasonable efforts" to waive the contracts where they bar modification. However, the program does not override the contracts.

The administration, which estimates its program could help as many as 3-4 million people obtain more affordable mortgage payments, supports legislation pending in the U.S. House that would give mortgage servicers a safe harbor against investor lawsuits. "We would expect the legislation process to continue, " a senior White House official told reporters during a background briefing Wednesday.

Some housing experts said the program is likely to reach its targets despite the lack of a safe harbor because the payments to servicers are so generous they will tip the scales in favor of modifying a loan.

"They need the servicers to cooperate. They've sweetened the pot enough that that's going to happen to a large degree," National Community Reinvestment Coalition President John Taylor said. He called the lawsuit issue an " exaggerated problem."

Thomas Lawler, a housing economist from Leesburg, Va., said the incentives would spur mortgage servicers to modify loans by giving them the funds to staff up. Servicers haven't been aggressive "because they haven't been adequately staffed and they haven't been incentivized to do so" in a tanking housing market, he argued.

A feature of the program that would institute a "net present value" test could also help spur more loan modifications by giving mortgage servicers some cover from investors, Taylor said.

Participating servicers must run all loans that are at least 60 days delinquent or deemed at risk of imminent default through the test. They are required to modify loans where the net present value of the cash flows under a modification scenario exceed the net present value of the cash flows in the absence of modification.

The mortgage industry offered praise for the plan. Officials have exhorted borrowers to be patient with lenders as they cope with an expected deluge of modification requests.

"The plan appropriately balances the interest of homeowners, mortgage servicers and investors," Jamie Dimon, chief executive of JPMorgan Chase & Co. ( JPM), one of the largest servicers, said in a statement.

Mortgage Principal Reduction is the Only Solution

The pressure is building on bankers right now. They are starting to realize the necessity of principal reductions, although they are still resisting. If you are a homeowner, your best alternative is to join a homeowner's union, and use the power of collective bargaining and striking. That's right, striking. As in, time for a mortgage strike. The fat cats need to do the right thing and write down the mortgage principal for honest hard working home owners, or it is time for a mortgage strike.

One in five borrowers in the $10.5 trillion U.S. mortgage market owes more than their property is worth, according to First American CoreLogic Inc., a real estate data company based in Santa Ana, California. Just one in 10 have received the principal reductions that research demonstrates is more effective at preventing defaults than the temporary payment reductions promoted by banks and the federal government. “You have to take the poison out of the water at the source,” says Ron D’Vari, 50, the former head of structured finance at New York-based investment adviser BlackRock Inc. and now chief executive officer of his own investment advisory firm, NewOak Capital LLC. “You have to go to the borrower, and you need to create liquidity at the borrower level.

One reason banks resist lowering borrowers’ principal is that doing so could threaten their solvency. In the worst slump since the Great Depression, the banks’ unrealized losses exceed their capital cushions by $400 billion, according to Nouriel Roubini, a professor of economics at New York University’s Leonard N. Stern School of business. When three of the biggest mortgage lenders, Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. announced plans late last year to modify as many as 1.3 million mortgages, only Charlotte, North Carolina-based Bank of America explicitly pledged reductions of principal on some loans. Under an agreement with states investigating the lending practices of its Countrywide Financial Corp. unit, the bank said it would modify 400,000 Countrywide mortgages at a cost of $8.4 billion.

Home prices have dropped 30 percent since the market peak in June 2007, according to New York-based Radar Logic Inc., which tracks real estate sales in 25 markets. December 2009 contracts traded on the company’s RPX index signal a further 16.5 percent decline this year. “If your collateral is worth significantly less than the loan, it may be better to compromise and get half a loaf than hold out for the whole loaf and get nothing,” says David Dietze, president of Point View Financial Services Inc., an investment adviser based in Summit, New Jersey.

While the government and banks agree that loan restructurings are their best defense against an increase in the record 2.3 million foreclosures last year, so far they have focused on temporary rate reductions and deferred payment plans that rely on economic recovery and rebounding home values. President Barack Obama announced a $75 billion rescue plan Feb. 18 that promotes more affordable monthly payments for as many as 9 million borrowers through government-subsidized interest rates and extended loan terms up to 40 years. The administration today issued guidelines for the program. Obama also endorsed “cramdown” legislation that would authorize bankruptcy judges to renegotiate the terms of distressed borrowers’ mortgages closer to market values. Homeowners would have to exhaust all other options before using the bankruptcy court to reduce their loan payments, House Majority Leader Steny Hoyer said yesterday. Lenders also say that reducing homeowners’ mortgage balances precludes them from sharing in the properties’ eventual recovery and creates an incentive for all borrowers to seek concessions, even those who aren’t in danger of defaulting. “It suggests enormous and lasting damage to our mortgage markets and real estate values, which as a homeowner I don’t particularly want to see,” says Gary Townsend, 57, a former federal banking examiner who is now CEO of the investment firm Hill-Townsend Capital LLC in Chevy Chase, Maryland.

Bank resistance to more aggressive action was reflected in a December study by the Comptroller of the Currency, a federal banking regulator. After six months, more than 55 percent of the loans modified last year re-defaulted, that report showed. By comparison, 28 percent of homeowners whose modifications trimmed their principal by a fifth or more were late after six months, according to research by Diane Pendley, a managing director of Fitch Ratings in New York.

The Obama administration’s failure to close the negative- equity gap means that its plan “will likely join the dud parade of federal rescues,” says John Kiff, an International Monetary Fund economist in Washington. While buying time for the financial system to stabilize and the economy to recover, the government program steers clear of restoring homeowners’ lost equity, a more effective method of stemming foreclosures, according to research by Credit Suisse Group AG, Goldman Sachs Group Inc. Less than 1 percent of the 88,830 modifications tracked by the California Department of Corporations from January through September last year included reductions of principal. By comparison, 47 percent of the restructurings lowered borrowers’ interest rates, according to the state agency. One in 10 revisions from a national sample in November included decreases in principal, wrote Alan M. White, an assistant law professor at Valparaiso University in Valparaiso, Indiana, in the paper, “Deleveraging the American Homeowner: The Failure of 2008 Voluntary Mortgage Contract Modifications.”

DellaCamera, 55, the principal of DellaCamera Capital Management LLC, says that government reluctance to force banks to write down the value of distressed loans and securities to prices that buyers are willing to pay creates “gridlock,” delaying bad-debt workouts and an eventual recovery. “We felt there was going to be an opportunity going forward, not anticipating that it would be as bad and ugly as it is,” says DellaCamera. He says he has bought about $125 million in distressed mortgages, a 10th of his target, through affiliate National Asset Direct Inc., based in San Diego.

Dietze, 53, of Point View Financial, says he still expects banks to bounce back and says that discipline in the credit markets is important to both borrower and lender. “I think there’s no traditional banking business in the world that’s better than lending a good borrower money that they must pay back under pain of losing their roof overhead. “Right now, everyone is concerned about the value of mortgages and depreciating residential real estate that secures it,” Dietze says. “But from an investor’s standpoint, you know that business is going to come back.”

“The banks need to flush out all the bad assets", says Louis Amaya, 44, NAD’s chief investment officer. “Let guys like us buy them, service them, reliquefy them into good loans.” The process will “put a lot of them out of business,” Amaya says. “There’s going to be some hard, short-term pain that needs to happen in order for us to start rebounding.”