Bernie Madoff "The whole government is a Ponzi scheme"

For at least 4 years now I have been writing that the US government and indeed the whole global economy is one big interconnected debt based Ponzi scheme which requires ever increasing amounts of debt to keep it from collapsing.   At the time my views were considered extreme but over time they have become much more main stream.  I knew I was on the right track when several months ago The Economist magazine agreed that it is a Ponzi and later so did Bill Gross of PIMCO.  Now Bernie Madoff, Ponzi king, is adding his experienced opinion.  Don't ask me why he's decided to blab now after remaining fairly quiet on the matter throughout his trial but he's clearly pulling no punches.  Perhaps his son getting suicided like that has his hackles up.  Who knows?  The point is that, unfortunately, he's telling the truth.

All Ponzi schemes eventually collapse but nobody can say exactly when because the timing has to do with confidence of the herd.  Until the herd loses confidence it is going to doggedly stick with what has appeared to work (just like Madoff participants did).  Participants in a Ponzi begin to think that winning big forever is normal.  They get used to it and become dependent upon it.  That's when the trap door opens.

I've written on several occasions how the recent US government treatment of the collapsing Ponzi closely mirrors the behavior of the original Charles Ponzi as his famous scam was collapsing.  Ponzi proved that he could extend the Ponzi for short periods of time through showmanship consisting of face time with the worried crowds, making additional but unkeepable verbal guarantees and promises on top of the old ones in order to shore them up, and even through the giving of coffee and doughnuts to people lined up in the cold to get their money out.  His story is very instructive and the wiki for it is well worth your read.

So if all of this is a Ponzi scheme which must inevitably collapse at some point, what do you need to know?  Well, the historical characteristics you should pay attention to are:

• No Ponzi in history has ever avoided collapse.
• Not everyone in a Ponzi can get out whole.  There isn't enough money in the system and there never was.  Accounting entries are Wimpy Promises or as N.J. Governor Chris Christie calls them, "fairy tale promises".
• Those who get out of a Ponzi before it collapses get out whole. 
• Signs and warnings can be present for a long time but the collapse often comes suddenly as a result of some trigger event which makes the herd lose confidence.

Go ahead and play along as long as you like but if you see really unprecedented things begin to happen suddenly here in the states then it might be wise to take action first and ask questions later.  The last ones out of a Ponzi are left holding an empty bag.

A world of misconception

The civil unrest seen around the world is starting to arrive in the states as reality about the collapsing debt Ponzi sinks in.  No, we do not have running gun battles, aircraft strafing the crowds or protesters throwing firebombs at police.

Yet.

But the hate rhetoric is winding up and the herd is going into emotional mode.   That means reason will probably take a back seat at some point.  In today's news the headline is, "NJ Union Members Told To Brace For Coming Fight"

Within that article, National AFL-CIO president Richard Trumka promised, "If we stand together and we fight together, I promise you we'll win together."

I think we have to stop there for a minute and pause.  This is not the little guy vs. the big corporation demanding fair pay and work conditions.  This has nothing to do with corporations.  It's about unionized public sector workers.  When unions fight big corporations you have to admire them because why should those corporations suck up all the profits which were generated by the labor of workers?  It makes perfect sense that profits should be shared fairly with the laborers who created them.

But again, don't let your mind be swayed in that direction because this is a different matter.  This is state workers vs. the state.   OK, so it's still David vs. Goliath, right?  The only problem with that thinking is that Goliath is not a productive economic enterprise which profits from the labor of its employees.  Instead, it is basically a semi-symbiotic parasite on the economy and on society.  Goliath has no money of its own.  It never earns money.  There are no profits to share.  Any money it does acquire must be taken from the citizens under threat of legal action.  Many of the services provided by Goliath are of little to no value to many of the people who are being legally required to pay for them. 

New Jersey is bankrupt.  They have no money.  Public employees don't care about that.  They want to view the government as an all powerful bottomless pit of wealth from which endless wondrous easy money emanates.  OK, I accept that reality.  But when Trumka stirs up the people into a fight, it is not a fight with government because government does not have what they seek to gain by fighting.  Fight with the government all day long and not another penny will flow because all the pennies are gone.  Period.  Instead, it is a fight with their fellow citizens to pay more money out of their pockets so that public employees can live better lives.

Everyone deserves a fair wage for what they do no matter who it is.  The only questions are, what is fair and do we even need what you are selling?  Public employees provide a service to the public.  But if payment for that service means that work-a-day people cannot afford their own homes or to have their own medical insurance then at some point the service can become too much of a good thing.  Can you imagine how you would react if the water company demanded that you water your lawn every day year 'round because they needed the revenue to fund their medical and retirement benefits of the type that private sector employees never get?  You lawns would be waterlogged all the time and your water bill would be astronomical.  At some point you would probably dig a well so that you could rid yourself of their parasitic services.  But when government is involved you can't do that and so the only way to say "no mas" is to decline further tax increases.

If promised benefits cannot be paid then either charge those who made the deal with fraud for knowing that they could never be paid or default on the promise like businesses do all the time.  Heck, go ahead and do both!  But whipping up the people against each other is not going to result in more money squeezed from the turnip, especially when the private sector doesn't get the same average salary and benefits as public workers.  Now that awareness on this issue is so high, the public is not going to agree to make an unfair situation even more unfair.  Let's not see people hurt and property damaged with this kind of infighting.  If public workers don't like the new deal, then quit.  That's all private workers could do when their employers imposed 10% pay cuts.  But under no circimstances does any service provider have the right or the moral imperative to force unwanted levels of service upon its customers.

Poster child in the move back toward conservatism

In his 2002 book, "Conquer The Crash" Bob Prechter clearly predicted that the social mood had peaked (think irrational exuberance) and that it had begun the march back toward conservatism.  Today's news reports that Nevada Senator Harry Reid thinks "the time has come" to end legalized prostitution in his state.  If that isn't an endorsement of Prechter's long standing views then I don't know what is.  We are in dire economic times as measured by joblessness and people living on state aid.  It's amazing to see the Senator of the state which currently has an economic monopoly on the legalized sex trade saying he wants to destroy those jobs!

Prostitution is always a sad thing but forget the morality assessment for a second, stay economic with me.  This is more than just shutting down the Mustang Ranch and the 27 brothels implied by the article.  Outside of those places prostitution is still illegal but there is something about having that kind of dual standard in place that sets the tone for everyone else.  Enforcement and stings do exist but the casinos and streets are teeming with sex "workers".  People fly into Vegas all the time to "party" and that includes plenty of prostitution.  Many of those outfits pay their taxes (protection money?) to the government and so they operate in the open as escort services.  Corporate shindigs, group meetings and individual vacation decisions rely on the quasi-legality of the activity.  No, prostitution is never on the formal agenda.  It is more of "perk".  But it adds to the air of partydom and excitement and if it goes away then some of the sparkle of Sin City will diminish with it.  That loss of sparkle will certainly turn up as economic loss at a time when the state can ill afford it.

Harry Reid knows all this yet he's suggesting it anyway and he's doing it at a time when people are shooting Senators from his state in the head.  Cutting jobs of prostitutes, pimps and the organized crime that accompanies these things seems like a good way to increase one's chances of receiving a 9mm ticket to the afterlife, but still he is doing it.  That tells me that there is an unseen move toward conservatism that he's picking up on, something that will help him win more votes than he loses by adopting this stance.  The best politicians are those who feel the pulse of the herd and then "lead" them in the direction they were already heading.  Yes, that's right, the best politicians (a word that I always use with a pejorative tone) are followers who act like leaders.  Real leaders are people like Ron Paul who tell the herd they are headed off a cliff even when they don't want to hear it.  Expect more disingenuous conservatism from our politicians going forward.

Everyone plans on fighting until the end.

It's pretty clear from global action that the Grand Debt Ponzi is rolling over.  That, folks, will likely include the eventual collapse of the completely artificial stock market rally that began in March 2009.  Everything that was artificially put into place using the income provided by the debt Ponzi will now, in time, evaporate back to whence it came.  Tunisia's president Ben Ali held out as long as he could.  So did Egypt's Mubarak.  Now Gadhafi is planning to hang on until his last drop of blood is spilt.  I can only wish him the speedy attainment of his goals. 

Here in the U.S. we see Wisconsin public workers hanging on as long as they can.  Soon it will be California teachers pension folks up in arms because it is already insolvent and the New York pension system isn't far behind.  NPR aficionados want that program to remain and the Planned Parenthood crowd is all riled up about proposed de-funding.  In a sign of the times, just last year an official with the New Jersey Teacher's Union has prayed for the death of N.J. Governor Christie for his moves to cut their funding.

The signs are all around us.  The first reaction by those affected is "What, me?  Why do they have to get rid of [me / unkeepable promises made to me / my pet feel good government funded project ]?".  Nobody bothers to ask two very important questions:

1. Where does the money come from to pay for these things?
2. If that magical money source is running dry then how can the above things continue to be paid for?

It would be nice if everyone would just figure out that we have all been conned, make the required adjustments, and get on with our lives.  Unfortunately, people don't understand that we have ALL been conned by the scam of fiat currency and fractional reserve banking.  Instead, "victims" believe it is "the other side" executing some evil plan to rip them off, etc.  Does my down play of this mean I don't think the left and the right plot against each other?  Of course I do!  But those plots have been ongoing for decades and none of them have gotten us to this point.  Besides, both left and right are getting whacked.  People are at each other's throats in a big way around the globe and it will very likely become violent here in the U.S. at some point.

Getting mad at fellow citizens about this is akin to one victim of the Madoff Ponzi getting mad at another one of the victims.  Sure the GOPs gladly funded preemptive strike wars to nowhere.   And yes, the Dems gladly funded countless social programs which basically teach people to be dependent.  And both sides have bailed out the banks big time.  The problem is that we have all been conned and we don't want to admit it.  Why?  Because that would imply some degree of greed and complicity by the "victims" who of course are pure as the driven snow. 

Huh?  Now I'm saying that the "victim" of a con is himself partially to blame?  Absolutely!  That's why I keep putting "victim" in quotes so annoyingly.  The correct term for the person who gets fleeced by a con is "patsy".   Confidence games get their names from the fact that they cannot work without gaining the confidence of the patsies.  A con man accomplishes this goal by playing on the greed of the patsies.  They convince them that they will receive something for nothing or at least a reward which is far greater than what their participation was worth.  The patsies look at the whole thing and realize something is wrong but they don't stop to ask questions because they want the items that are being promised.  They want to believe that they are worth all these luxuries even while many people in the world die each day for lack of clean water to drink.  People allow themselves to be conned.  They never stop to think about what they will do if the promised item does not even exist.  They block that possibility out.

When a Ponzi is in the collapse stages, protest is a waste of time because you can't squeeze blood out of a turnip.  There is no gold at the end of the rainbow so rant about it to the leprechaun all day long and it wont make a stitch of difference.  Folks, we have been enjoying a great quality of life based on the accumulation of debt and now it is becoming clear that we have overspent the credit card.  People who used to not worry about it are now worried about it.  It makes no sense to continue racking up more debt so that we can fund banking bailouts, wars to nowhere and, sorry to say, lifetime pay and benefits for public workers when private sector folks get none of it. 

Everything should be cut including NPR, Planned Parenthood and every other something for nothing program.  Why?  Because there is no money to pay for it!  Stop ranting about the social need for someone else to pay for these things.  If certain groups of people want them so badly let them fund them privately.  But don't continue stealing from our children to pay for these social luxuries.

Unfortunately, the current tone suggests that everyone is planning on fighting about everything until the end.

Has the USA needed to be the world's policeman all these years?

Today's news reports that two Libyan fighter pilots defected with their aircraft to Malta instead of carrying out government orders to bomb civilians. Gadhafi is failing.  This is absolutely wild because it means that the pilots feel such global eyes upon them that they would rather be named enemies of the state than carry out the evil despotic orders of a tyrant.  Obama got the Nobel peace prize for doing basically nothing.  In a fair world he would give that prize to those two brave pilots who defied the direct orders of a maniacal despot at great risk to their safety and that of their families.

At this point, Gadhafi is a dead man walking.  There is no way he can stop the protests without heavy handed threats and violence from his military hit squad and he has already ordered his helicopters to live fire on the crowds resulting in many deaths.  If he doesn't flee the country soon then his own cronies will turn on him a-la-Caesar or the people will break though his defenses and capture him.  In that case his worthless life will be cut short by the mob.  Even if he manages to escape I believe that his behavior has been horrific enough to be charged with war crimes and then executed by a formal tribunal.  This means Gadhafi is in it until the end.

At this point all the corrupt and despotic governments of the Middle East are fighting for their lives.  In true Ponzi collapse fashion, it seemed to go from a simmer to boiling over in the blink of an eye.  All of this should be proof that the world does not need the US to be the global policeman.  Have people died in their recent quests for freedom?  Yes, of course they have because freedom isn't free and it never has been.  But if you look at the staggering numbers those who died in the U.S. led overthrow of Saddam, the death toll is 100 or even 1000 times as high as what we are seeing today.  Thinking people have to believe that freedom has the lowest cost and the longest lasting effects when the affected people take care of their own problems in their own ways.  That's because when a 3rd party becomes involved it brings with it a separate agenda which clashes with what many of the local people wanted.  Foreign intervention in civil war is a Trojan horse which will end up with a foreign controlled puppet government.

Ron Paul has been teaching us this wisdom for a couple decades now.  Given that we are 14 trillion in debt and given that our deficit is growing by nearly 1.5 trillion annually, it makes perfect sense to slash the military budget massively and to bring our troops home to defend our own borders as outlined in the constitution.

New perspective: What's your personal share of the national debt?

You've probably seen various numbers bandied about on the Internet claiming to be "your share" of the national debt.  Many approaches are very simplistic - they divide 14 trillion by 320 million people and bam!, you have your share.  But that view suggests that a preemployment child will pay the same as you.  It also suggests that a retired person living on fixed income, single blue collar working mother of of 4 on welfare, and disabled persons who cannot work will all pay the same as you.

Sorry to be the bearer of bad news, but what cannot happen will not happen.  People that have no money cannot pay.  In fact, there is a legal tenet which I experienced during a divorce more than 2 decades ago which states that the person to pay for legal and court fees will be none other than the person with the ability to pay.  In short, the piper is going to get paid one way or the other and it is foolish to count on people who have no money to pay an equal share as those who do have money.  I didn't say it was foolish to want this.  I just said don't count on it because it will not happen.

So if simple division doesn't work then we could go through all sorts of complex algorithms trying to figure it out but I think there is something simple and straightforwardly representative that we can use instead.   The Gross Domestic Product is the sum total of all the economic activity that happens in the country.  It can be loosely thought of as the salary of the nation as a whole.  All of the work we all do and all of the salaries we all make are therefore directly related to GDP.  We are now in such debt that it is about equal to one year's worth of GDP (14 trillion).  The economist way of saying this is that debt to GDP is 100%.   It thus stands to reason that our individual share of this is about 1 year's wages.  You know how much you earn per year.  Does that make it more real to you?  We would all, as a nation, have to work for a whole year without getting paid in order to pay off the national debt.  Of course this would do nothing for the Wimpy Promises that government has made on behalf of social security and medicare, but hey, one problem at a time, OK?

Of course, people who make only $20k per year aren't going to be able to pay their shares no matter what because they are already living hand to mouth.  But I never said people would be able to pay their share and in fact I'm sure we will eventually default on the debt and then hope that the people we screw don't get too angry about it.  So now you might be looking down your nose at those low wage earners because they can't pay their share but if you make $100k or $150k, can you pay your share either?  High earners benefitted most from the debt Ponzi and when it collapses they will take the biggest dollar figure hit after the smoke clears.   They will still be far better off than the poor but the wealth gap is certainly going to narrow over the next decade.  The guy who gets paid $100 per hour for driving a computer is not worth 10x to society as the $10 per hour laborer who does your landscaping and cleans your pool.  Of course, those at the very top will always be at the very top because when you con people for a living it doesn't matter how the economy is doing. 

Biting deeply, spending cuts set up historic confrontation

Yeah, that's what the LA Times is saying:
http://www.latimes.com/news/nationworld/nation/wire/sc-dc-0220-gop-cuts-20110219,0,4117114.story

Oh where to start?  First of all the "deep cuts" they mention are more like surface scratches.  These dramatic terms serve to show just how spoiled and self entitled America has become.  Let's put things in a global perspective.  Are Tunisians, Egyptians, Algerians, Jordanians, Sudanese and Iranians rioting because their "deep cuts" are cutting some teachers and firemen and police and other public spending?  No!  They are rioting because prices have gone up so much that their very ability to pay for food to feed their families is being threatened.  But here in the US, when public unions might actually have to pay for a small percentage of their own health insurance or contribute to their own pension plans then it's a national tragedy.  Forget about everyone who gets by without either of those luxuries.  And on the other side, why did a right wing gun toting whacko shoot a female Senator in the head and then open fire on other innocent people, even killing a little girl?  I guess oppressive government just got the best of that moron, huh?  That idiot doesn't know oppressive!  He's a American where oppressive tyranny is nowhere near what Middle Eastern countries have been dealing with under their dictators.

Americans believe we are better than everyone else in the world which is why it makes sense that America consumes 25% of the world's energy with less than 5% of the world's population.  Makes perfect sense, right?  After all, we are soooo special.  Of course, I'm not complaining about it because being an American makes me a beneficiary of this unfairness.  But at the very least we should recognize that we have it better than everyone else and that it's not because we are smarter, better looking or harder working.  That doesn't mean we aren't smart, good looking and hard working!  But so are the rest of the people in the world.   We are all basically the same.   The main reason we have risen to such a level of relative prosperity is that we have been gaming the global money supply.  In other words, America has the best con men in the world.

Don't get me wrong.  As much as it bothers me knowing that we did not fairly earn our prosperity I am well aware that other countries would gladly take that title if they could.  As long as people are so stupid to accept a fiat currency as if it was real money then you just have to play the cards you are dealt.  At the same time, at least try to understand that the whole thing is a global debt Ponzi so that we can maintain perspective.  I'm telling you right now that the tiny cuts being proposed by the federal government are a complete joke.  They only plan to attack the deficit by less than 7%.  That means we are still adding to the debt with the remaining 93% of the original 2011 deficit.  If this tiny little cut is setting people against each other then what do you think would happen if we actually tried to balance the budget?  For more perspective, even after the proposed cuts for 2011, the new deficit will still be far higher than the deficits for 2008, 2007, 2006, etc.  This proves that government is playing the old retailer trick of marking things up and then having a 10% off sale on the inflated price.  Seriously, what kind of child mentality can't see through this?

WAKE UP AMERICA.  Our prosperity of the past 40 years was not earned, it was borrowed.  14 trillion dollars worth.  The world economy is now buckling under the strain of all the borrowing by the US and everyone else.  The Wimpy Economy is entering its last decade.  There will be something after it ends and it will be better not just for the US but for everyone on the planet.  But until we can get rid of this scammy system of corruption and lies we must avoid going at each other's throats.  Dem and GOP must not escalate the hatred and neither must public sector worker and private economy worker face off in anger which will lead to violence.  The truth is that there has been good and bad, right and wrong done on both sides.  But if we let this escalate into violence and property damage then it just makes both sides even more wrong.

America is again being given a chance to lead the world.  This will not be measured in terms of size and power of the military or in terms of good looking and charismatic speakers.  It's too late for these things to be useful leadership tools anymore.  They don't provide leadership in a corrupted global economy.  Americans need to lead the world by example in the following ways:

• Don't fight with your fellow American.  We are brothers and sisters in one of the best countries on the planet.  We have plentiful resources and smart, hard working people but we are also spoiled rotten and self absorbed because of it.  We need to realize all of this and to work through it like adults instead of fighting and tearing down the country that we have all worked to build.
• Understand the Big Debt Scam.  Understand your own personal part in it, and yes, you have played an active role.  When people warned about Madoff, nobody wanted to listen to the obvious facts.  Now many are warning about the U.S. led (but completely global) debt Ponzi which is in the final stages before collapse.  Again the facts are obvious but again nobody really wants to hear it.  Head in the sand is the order of the day.  While understandable and forgivable, it's also childish.  Real adults want to know the truth instead of putting on rose colored glasses before entering the voting polls and before considering cuts that must be made.  Real adults can do math and understand the history associated with past situations like this.
• Don't kick the "debt can" down the road for someone else to deal with just as you would not want someone doing that to you.  We already have in this country a growing divide between the left and the right which we have to work on.  We cannot add a generational divide to the mix by stealing the future of our children with exponentially expanding debt that will eventually blow up in our faces.
• Don't expect everyone else to make all the sacrifices so you can continue living as you always have.  Everyone is going to have to take the pain.  Our joint goal must now be to minimize pain.
• Don't expect others to do your thinking for you so you can sit back and be a naysayer or to complain about the new direction that must be taken.  Slough off the political and economic apathy that has defined our country since Nixon left the gold standard in the dust.  Learn with an open mind and review the facts honestly instead of twisting them in a way that you think will help you maintain the status quo.  The status quo is dying folks.  It was a credit driven status quo and it was backed by unkeepable Wimpy Promises.  Let's make a new prosperity that is based on cooperation, honesty, limited government and transparency tempered by constitutionally backed liberties and privacy.

If we can achieve the above things then the world will watch and learn from us and they will see that we are clear headed thinkers.  They will stop hating us and accusing us for all the world's ills.  It will make the world a better place.

If these things all sound like pie in the sky dreaming then just consider one thing: money makes the world go 'round and if the money is dishonest and corrupt then so will be the world.  If people work hard and accomplish great things, they can become prosperous.  Everyone looks up to them if they believe that the prosperity was deserved and earned honestly.  But when people get ahead due to vile trickery, shell games with debt, the art of the con, etc. then it causes great emotional distress and civil unrest leading to injury, death, property damage and the halting of the economy.

90% of the extreme problems faced in the US and globally would be greatly diminished within 2-3 years if we just got rid of the dishonest and corrupt money supply that we are using.  The dishonest money is the engine and lifeblood of a dishonest economy.  Returning to honesty would mean that people would get paid for adding to society instead of getting paid for being a vampire squid sucking the life out of the people. It would mean that Goldman Sachs’ employees wouldn't make a king's ransom for doing nothing of value for society and it would also mean that hard working blue collar workers would be paid fairly for their labor without having to resort to collective bargaining.  Things only get out of whack when "special people" are allowed to leverage up big time on debt or to use dishonest money printed from thin air in the economy.  As long as the system allows such things then someone will figure out how to game them for unfair advantage.  The only fix is to disallow them the ability to game the money supply and the primary mechanism for achieving this is to get rid of fiat currency and fractional reserve banking.  Return to a gold based money supply and do not let banks loan out more money than they take in deposits because doing so expands the money supply in a lopsided way eventually leading to the pain that we are faced with today.

During a good portion of my 25 year career as an engineer before I entered management, I debugged technical issues with hardware and software.  I was pretty good at it.  It takes a certain mindset to do this - one that is facts heavy and emotion light.  It takes the ability to understand and deal with root cause of the failure instead of treating the symptoms.  I find the same skill set has been useful in my 4+ year quest to understand the economy and the associated politics.  Progress can be made only after root cause is determined and corrected.  This is why I am confident that we need to do the same detection and correction process for our economy and for our society.  Unless we get rid of fiat currency and fractional reserve lending there can be no sustainable progress.  Without the indicated remedy we are doomed to an ongoing culture of booms and busts which divide the people and fuel anger and civil unrest.

It is often said that dissention is the highest form of patriotism.  If one defines patriotism as doing what is best for the country as a whole then recognizing what the root problems are and dissenting against them (while inviting others to do so as well) is patriotic.  Inciting emotional arguments like Dem vs. GOP or public vs. private sector is not good for the country as a whole and therefore can only be described as collaborating, whether knowingly or not, with the corrupt status quo.  The global and national problems are now structural due to the cancer of a dishonest money supply.  Things are going to get a lot worse before they get better.  Americans need to get used to the fact and to strive to work together to ensure things actually do get better instead of just getting progressively more cancerous.

The credit bust will turn a lot of things right side up

Everyone has been led to believe that the credit bust is a big problem.  That is about as true as saying that going cold turkey on that drug habit is a big problem.  Sure, there is going to be turbulence and pain but don't mistake the cure for being a problem.  Withdrawal is going to happen when you get used to something bad which is subsequently taken away but kicking the habit is the only path back to health.

Because of the credit based inflation of the past several decades many things have been turned on their heads so that they seem normal now even though they should not be seen as such.  One of my pet peeves is the ridiculously high valuations that people have placed on property with "character" that is close to downtown.  Realtors will be quick to talk about these gems as being "close in and near the action".  I have a different take which is that they are old and run down.  I much prefer my newer subdivision on the outskirts of the old city because it has newer water and sewer pipes and underground electrical cables and the like.  I think new shelter is worth more than old shelter.  Call me crazy.

So why do so many people believe that old, run down stuff is so valuable?  Well, when the credit money is flowing and jobs are plentiful and taxes are easy to assess on homeowners, the older stuff gets maintained better because the money exists to do so.  No, those living in areas with old infrastructure do not pay extra taxes to maintain their run down infrastructure.  All the tax money goes into a bucket and payments are made from it to solve problems as they pop up.  Of course, all the problems pop up in the older sections of town.

If you think about it, this policy is essentially a transfer of wealth from those who bought in newer neighborhoods to those who live in older neighborhoods.  The debt Ponzi tends to have that effect on the economy and you can see it in so many ways.  That is a completely economic statement so don't read anything more than that into it but it is also true.  My property taxes should go way down because my neighborhood has new roads and good pipes that never break but instead the city constantly tries to increase them in order to pay for all the problems in the older neighborhoods.  This article underscores my point about the dying old city infrastructure.   The people living there already think they pay enough in taxes to maintain their infrastructure but those people have no idea of just how expensive putting new pipes and wires and asphalt actually is.  That's why the repairs are crappy patchwork jobs that simply kick the can down the road and its why they have major problems on a regular basis. The truth is that their taxes would be much higher if they had to pay the full cost for maintaining their dying, aged infrastructure themselves.   As the credit bust wears on there will be less and less taxes collected and that's when people are going to wake up and realize that new shelter is better than old shelter.  As a result I expect that property values of older, close in real estate are going to plummet relative to the newer real estate on the outskirts.

Bottom line: if you are in the market for a house, look at the big picture beyond the house.  If the neighborhood is old then expect the infrastructure to need lots of repairs at a time when there is no money to make them.  It could result in frequent loss of service to your house and it could also result in neighborhood-specific special tax assessments by the city which could be many thousands of dollars.   But don't count on people in newer neighborhoods continuing to be assessed taxes which are spent in someone else's neighborhood because people are waking up to the unfair reality of that scam.

Problems, problems everywhere but why???

The civil unrest in Europe and the Middle East need no further introduction.   Governments are toppling, plain and simple.  The credit based money is running out and people have had enough.

Here in the states we are also starting to see civil unrest as well.  But instead of the problem being lack of reasonably priced food and other basic necessities of life, the problem is that promises that could never be kept are in fact not being kept.

When government makes future promises as part of a debt Ponzi, I like to call them Wimpy Promises.  You remember Popeye's friend who would gladly pay you back a burger Tuesday for a hamburger fronted to him today, right?  Of course, Tuesday never came.  Our government has made Wimpy Promises to millions of people, many of them in the public sector.  These promises will not be kept because they cannot be kept without borrowing and credit is becoming more expensive for everyone, including governments.

You can see the beginnings of some very well organized civil unrest in this video regarding Wisconsin public employees whose salaries and benefits are under attack:
http://www.youtube.com/watch?v=FbEFi4SFjuM&feature=player_embedded

In the following 2 part video, Armand Thieblot discusses the ills of public employees and their unions.  He talks about the abusive double dipping, 100k salaries for life during retirement and fancy medical benefits far better than normal working people could ever hope for.

Part 1:
http://www.youtube.com/watch?v=lI4AkZYbQrw&feature=player_embedded#at=278

Part 2:
http://www.youtube.com/watch?v=qH4MpQ2Miy4&feature=player_embedded

Yes, Theiblot and many others are bashing the crap out of public unions and public employees these days but all these bashers are missing the point.  The outrageous compensation of public employees is not the problem in and of itself but rather a symptom of the real problem which is that our economy is using a dishonest money supply based on debt and inflation.  Keep in mind that pension promises are a form of debt.  Instead of paying public employees a day's wages for a day's work using tax money collected from the people, public employees are being paid from the sale of bonds (debt) and they are being promised future salary and medical benefits in retirement which the state also plans to pay for with debt.  There is no way all of these current salaries and future retirement packages would be agreed to if they had to be paid for honestly with taxes.  NO POSIBLE WAY.  The only way it got out of whack was through the use of debt and Wimpy Promises and these are the pillars of a dishonest money supply. 

Sure the public employees got greedy.  So what!  This is America where people assume that if they manage to get something then it means that is the going rate and so they deserve anything they can get, right?  Do bankers apologize for making megabucks?  NO!  How about CEOs?  Nope!  The more they make, the more they think they are worth.  The only thing that makes public employees such easy targets to complain about is that banks and corporations are supposed to make their own money in the free market.  Thus, they should be allowed to pay their people whatever they want.  On the other hand, public workers are paid by other people in the economy who may or may not even want their services.  Is this the fault of the public worker?  Is it their fault that they were smart enough to form unions and to play the con game better than other people?  From a morality perspective, yes they are to blame but from a capitalistic perspective no, they have done nothing wrong and everyone who doesn't like it is just a sore loser.

But again, you have to look at how things got like this.  An honest money supply does not allow government to pay for things with debt.  If government wants something it has to tax people.  The pain of being taxed makes taxpayers stand up and push back when things are getting unfair on the part of state and federal employees.  Taxation is a feedback mechanism that limits the endless growth of government as well as abusive salary and benefit packages for public sector workers.

But when funny money, debt, inflation, etc. is used to pay government salaries instead of taxes then the citizens don't feel the pain immediately.  That feedback path is absolutely necessary for a sustainable economy and without it the eventual outcome will be that Wimpy Promises will be made until they stink to high Heaven and at some point the promises will be reneged upon.  Instead of viewing these wage and benefit claw backs as a return to fairness, those who are losing out will view it as theft and they will not be happy.  They were, after all, counting on that money.  They had planned their retirements around it and now it will not be there.  They will demand that everyone just pay higher taxes to pay for it all and those working in the private sector who are getting hit hard by the economy will push back.  The funny money scheme eventually drives a wedge between public and private sectors and the result is going to be civil unrest at the very least and more probably significant violence.

So as you look at these videos and all the other stuff happening domestically and internationally, please consider what the real problem is instead of falling for the temptation of getting caught up in the symptoms which pit citizen against citizen, dem vs. GOP, public sector vs. private sector.  Our real anger and corrective actions need to be focused on getting rid of the Federal Reserve which is responsible for our dishonest money supply.  Returning to an honest money supply means getting rid of fiat currency and fractional reserve banking and of course, an absolute demand for a balanced budget at state and federal levels every single year with no exceptions.  By the way, states are already supposed to balance their budgets but they currently do this using debt sales (bonds) and off balance sheet crap in order to do so.  That is a scam.  Normal people could not claim that they pay their bills every month if it just meant racking up larger and larger debt on the credit card so it is silly to let states do it.

These are the signs that the Ponzi is falling apart at the seams.

While this does not show up in Google news because Justin Bieber is obviously more important, look at Colin Powell distancing himself from the whole Iraq war deal:
http://www.guardian.co.uk/world/2011/feb/16/colin-powell-cia-curveball

I'm not sure whether Mr. Powell wants people to consider him a lying snake or a complete idiot because it's hard to see what other choice he leaves us.  Are we really to believe that Colin Powell, who was a key figure in building the case for the ridiculous and unnecessary 2003 invasion of Iraq, would engage in such activity without knowing every single possible detail?  Are we to believe that he would take someone else's word for anything in the matter of invading a sovereign country and the taking of more than one hundred thousand lives?  All I can say is that if this is true then I don't see how he qualifies to be the milkman much less Reagan's National Security Advisor, a 4 star general and GW Bush's Secretary of State.  Sorry Mr. Powell, I have seen you talk on TV many times and it is clear that you could not be that stupid.  I guess that leaves just one other option.

Why do you think Mr. Powell is taking the time to lament all these unfortunate happenings right now?  His involvement is long over so it just seems strange that he's going to all this trouble to do the big mea culpa.  Maybe he's just having trouble sleeping at night and wants to clear his conscience.  Or maybe, just maybe he is looking all around at things happening here and abroad.  Maybe he is sensing that the big debt Ponzi which fueled a heck of a lot of immoral and illegal behavior over the past 2 decades is coming to an end.  And maybe, just maybe he has read his history books and he has concluded that if people ever take to the streets in anger that he might find himself a target for his part in said activities. 

In fact, I predicted many times in past posts that when the Ponzi finally begins to collapse that one of the signs would be the elite turning on each other, ratting each other out, saying and doing anything they can to distance themselves from the big con job in the hope that they are spared the fate of despotic leaders once the people catch on.  It's the same thing that happens when mob members get caught and they realize they are on their own to sink or swim.  Keep dancing, Mr. Powell.  The music is still playing.  When they arrest GW Bush for war crimes you'd better start looking for a non-extradition country if you plan on sticking to your story that you didn't know the WMD "evidence" was just a trumped up excuse to go to war.  Nobody is going to buy that, sir.  Nobody.

In related news, the New York Times comments on Madoff's recent statements that big banks knew about his Ponzi scheme but they said nothing.  What's interesting is why Madoff is suddenly blabbing.  Where was all this chatter during his trial?  He didn't turn anyone in or even speak much in his own defense.  He decided to take the fall for everyone as if he could possibly pull off a 50 billion dollar heist like that all by himself in a vacuum.  That's about as believable as Colin Powell not knowing who the source of the WMD "intelligence" was that convinced the American people to back the Iraq invasion.

So why did Madoff take the fall alone?  Well, if you look at mob cases of the past this sort of thing used to happen all the time.  Guys would take one for the team.  But why am I talking about the mob?  We haven't heard anything from that sector since they put John Gotti away back in the early 1990s.  It's like organized crime sort of went into remission after that. 

Or did it?  Maybe the mob simply figured out that you can steal a lot more money with a briefcase than with a gun.  Maybe Bernie thought it would be safer to just keep quiet about the new face of organized crime made up of Wall St. criminals.  Ah, but then his son suddenly died, the victim of an apparent suicide.  You know, the mob used to "suicide" people too when they felt the need.   Not long after that, as if by some grand coincidence, Madoff decided for the first time to have an interview in which he would talk about the bad old days.  In the interview, Madoff yaps like a dog about how bankers basically knew what was going on but showed a "willful ignorance" to it.

Yeah, these are the kinds of things that happen during the wind down of any corrupt system.  All the dirty money that was available to be made has been made.  Now we are in cutting back mode, at least in speeches to the public.  In any case, some showing of austerity must be made in order to calm the herd and you can bet that some of the criminals out there are not going to get what they thought they were going to get and this fact will set them at each other's throats.   Watch and see.

A modern day John Henry tale

We are, as a species, within a stone's throw of something fantastic.  It's difficult to say when it will actually show up in our lives but with technology expanding exponentially it’s a fair bet to believe that it will happen sooner rather than later.   As a lead in, perhaps you remember the story of John Henry, mighty railroader.  That story was the parable of mankind’s transition from the age of human powered production to the industrial age of machine powered production.   In the story, John Henry fights a valiant battle against a steam powered jackhammer in order to save the jobs of those work crews which would be replaced by the new technology.  In the story, the Herculean Henry pulls off a victory by swinging two hammers instead of one.  His effort was never a true depiction of what an average man could do and yet he only barely beat the machine.  As if to underscore the Pyrrhic victory, Henry dies of overexertion after the match.

Today, with the information age already in high gear, we are seeing the new version of the John Henry story which is ushering in the age of machine powered thinking.  The assault on man's long standing intellectual dominance actually started in 1997 when IBM created a computer they called Deep Blue whose goal was to beat the world's chess champion.  Many people thought the computer had no chance because chess is such a game of intense strategy that they believed no computer program could be written that could keep up.  Unfortunately for them they failed to understand that humans are biological machines that, when dissected logically, begin to closely resemble complex computer systems.  This means we have no inherent advantages over silicon based intelligence.  All it requires is evolution in order to catch up.  To underscore the point, Deep Blue beat the world chess champion of the day, Gary Kasparov.

Nowadays, tech savvy people widely understand that chess is a game which is well suited to massively parallel computing.  The computer tries every possible move that it can within a given time period and then runs the best outcomes through some probability filters in order to select the best next move.   That can mean looking hundreds of moves ahead involving billions of potential piece placements whereas Gary Kasparov indicated that his look-ahead limit was more like 12-14 moves.  Kasparov commented after the game that the computer showed what he perceived to be signs of "deep intelligence and creativity in the machine's moves" leading him to claim that IBM had cheated by having human intervention.  Of course that argument holds no water because it would take a chess genius as good as Kasparov in order to supply such intelligence and creativity to the machine.  In other words, had the computer programmers been stepping in to help in real time, their moves could not have impressed Kasparov in the slightest.  Kasparov was guilty of a common human shortcoming: he let ego cloud his judgment.  We are an ego driven species.  We are used to being at the top of the intellectual food chain and it violates our sense of stability and normalcy if something artificial can outperform us.

Enter the most recent John Henry competition: IBM's Watson computer vs. human champions in the TV game Jeopardy.  What an eye opener.  The computer understands not only the questions but the entire context of the game.  We are not simply talking about fast look up of obvious data here - a person sitting in front of a computer Googling the answers would not win.  Watson has to deal with puns and rhymes and clichés and in fact entire paradigms.  This is not just the rapid consideration of the billions of combinations of a finite set of possible moves as was the case with Deep Blue.  This is the thoughtful juxtapositioning of words and facts and implications and innuendo.  Surprisingly, Watson's not just winning, it's kicking ass!

As a software engineer I know that Watson is "just" a machine with software running on it.  I don't pretend to understand all of the advanced strategies and clever learning algorithms that Watson's programmers employed but I do know that it's not magic.  Still, watching Watson play that game against the best humans we can find for it to compete against is really something.  I also know that, as was the case in John Henry vs. the steam hammer, average people are not nearly as capable as the top Jeopardy players.  Watson is showing what we might call "intelligence" which is clearly genius level.

Even though the mythical John Henry won the day, steam powered tools won the war.   Anyone who tried to use human power to compete with steam power was fighting a losing battle.  Fast forwarding through time we now see that industrial operations and manufacturing have been pushed into the background by the information age and the new leaders are the ones who saw the trend in advance and employed it to their advantage.  Watson is now showing us that the day of Artificial Intelligence (AI) is very near.  I don't care how great a business person you might be, if you are up against someone who is using Watson-like AI against you then you won't stand a chance. 

Perhaps even more interesting will be the Watsonification of politics.  Wow.  Imagine participating in a presidential debate against 7 or 8 of the brightest political minds in the world.  Instead of coming empty handed and empty headed in a relative sense, Candidate X shows up with a Bluetooth earpiece which is connected to Watson - political edition.  Each time the other debaters say something, the computer analyzes their political thrust and then draws upon history, famous quotations, current events, facts and figures - you name it - in order to come up with a response that is better, more accurate and more human-resonant than anyone else on stage. 

As Candidate X gets the whisper in his/her ear from the Bluetooth device, he/she just parrots the information verbally - a huge advancement over Obama and his teleprompter!  The success of Candidate X would breed more use of AI in all forms of real time human decision making.  At some point we might be faced with computers defining the human experience!  Like it or not, this is coming no matter what we think or want.  As long as there is a short term advantage to be had, humans will exploit it regardless of the long term consequences.  If we outlaw the use of these things in the future then only outlaws will have access to them.  Watson is coming.

Obama's fiscal savings program: add 13 trillion to national debt by 2022.

Obama is now talking up his plans to cut the national budget by dollar figures which amount to noise and rounding errors.  The real news is that he seeks to double the national debt over the next 10 years.
http://www.kansascity.com/2011/02/14/2655708/obamas-budget-would-add-13-trillion.html

Unfortunately, the truth is a bit worse than the news.  The entire global financial system is a debt based Ponzi scheme.  There is no way to shut it down gracefully and our "leaders" know it.  Everyone is so dependent on the government these days it's not funny.  Real cuts will bring angry people into the streets with bad intent.  If you haven't been paying attention lately, Tunisia and Egypt have told their leaders to walk away on their feet or be carted out on their backs.  The leaders walked away in both cases. There is also serious unrest in Syria, Jordan, and now Iran.  Armenia is also heating up.  The global herd is restless.  Hillary Clinton is applauding the unrest in Iran.  I wonder what she will be saying when it's Americans telling her and the rest of the corrupt DC elite to get out either on their feet or in a stretcher.

Yes, everyone is dependent on government these days.  Everyone.  The obvious ones are those on food stamps, section 8 housing, unemployment or other social safety nets.  But what about those on social security which recently went fiscally bankrupt and is now operating in the red?  Yes, they are dependent too.  And so is everyone who owns a home because if government wasn't holding interest rates down then housing prices would absolutely crater.  Can you even imagine the damage if rates went back up over 12% like they were back in the 1980s?  Of course everyone who wants to buy a house but has no downpayment is also dependent on government to keep those rates down and so is anyone with an adjustable rate mortgage.

Of course you might not be in any of those groups but I bet you like the government subsidized gasoline price of $3 a gallon, right?  Oh, you think that's high?  Go anywhere in Europe and you will see that it is more like $5-$7 per gallon.  Government subsidizes gas prices through borrowing.  Also, the cheap Chinese goods that we get to pick through on any given day are all effectively price subsidized by government borrowing. When we are unable to make the promised payments on our debt you will see fuel prices skyrocket right along with clothing and food and everything else because our sovereign credit will be made very expensive or cut off completely.

Yeah, Obama's out there with his shiny new budget talking about how he's cutting back, blah blah blah.  Still, if the debt goes up exponentially what kind of weak minded idiot would listen to Obama brag about cutbacks?  Seriously!  At the start of Bush 2 the debt was 7 trillion.  A decade later it is now 14 trillion.  And Obama is now telling us that a decade from now it will be 26.35 trillion.  Of course, there is no way it will be that low.  Neither dems nor GOPs ever hit their budgets - they are two sides of the same corrupted and rusting silver plated steel coin.  The new budget, ridiculous as it is, will be blown.  We will have an "unexpected" expense like another needless war in the middle of a desert or perhaps we can fight Russia over who owns Antarctica or maybe we can even start a war on the moon this time.  Whatever.  They will find a way to spend more because it's all part of the con.  But even if they do hit that ridiculous Obama budget it will still represent a clear pattern of doubling the national debt every 10 years and that, folks, is an exponential function.  And it isn't because Obama is any better or worse than Bush.  It's because they both inherited a debt Ponzi that started way back in the Kennedy era.  The writing was on the wall regarding the debt Ponzi's eventual demise back in 1971 when Nixon was forced to abandon the gold standard.  The system is corrupt and it corrupts almost everyone who works within it.

Do you honestly think we can ever stop borrowing at this exponential rate?  Really?  REALLY??  What makes anyone think it is possible?  The fact is that it's no longer possible to stop voluntarily because it will lead to massive civil unrest as the money raining out of Helicopter Ben's flying conmobile dries up.  The only way we will stop is due to lack of suckers willing to loan us cheap money.  That's when we are going to have our own little slice of Tunisia and Eygpt right here in the states.  So many people are going to get screwed out of what they thought they had that it will send the people into the streets looking for answers or revenge, whichever they come across first.  Banks will fail and the already fiscally bankrupt FDIC won't be able to cover any significant amount of the defaults.  Food, clothing and other prices will skyrocket reducing the buying power of the $500k+ that you have socked away in your 401k so that is spends like it was only $50k.  Nobody can say when the Ponzi will collapse.  It could be 2 months or 12 years but it's a very good bet that it won't last forever.

But for all this scary talk, the path to safety is perfectly clear.  If the problem is that the government is running a debt based Ponzi scheme then look at how people who got out of Madoff's Ponzi scheme pulled it off and follow their lead.  The simple answer is that they got out before it collapsed.  For them getting out meant converting Madoff accounts into dollars before the herd caught on.  For the government run Ponzi scheme, getting out means getting out of the US dollar and out of dollar denominated assets before the herd catches on.  How do you get out of the dollar? 

Follow the yellow brick road.  Follow the yellow brick road.  Follow, follow, follow, follow, follow the yellow brick road.

In other words, dollar cost average into gold which is the only true form of money that modern societies have ever used.  Just buy gold instead of contributing to a 401k or some other government controlled money trap.  Don't buy all at once.  Don't try to time the market.  Don't worry if it goes down 15% and don't get excited if it goes up 15%.  It's a long term wealth storage mechanism, not a gambling vehicle.  Just save gold on a regular basis and forget market timing, flash crashes, government defaults, etc.  If you want to get a bit more leverage, buy some silver too.  And always take physical posession of the metal.  ALWAYS.  A bird in the hand is worth 1000 birds in the bush in a finanicial crisis.  Of course you should talk to a financial advisor blah blah blah as if they know anything more than anyone else blah blah blah.  Getting out of the dollar means getting out of the gambling casino.  You might give up some short term gains but you will not have to endure long term losses.

Is government drinking too much of its own Kool-Aid?

Recent news items:

• Geithner says we need to phase out government support for Fannie and Freddie.  In case you didn't know, the government is just about the only entity loaning housing money at present.  Of course, the government doesn't have any money of its own to lend.  It has to either print it up from thin air or borrow it from someone else.  As long as interest rates are low and inflation is muted, government can fund low interest rate home loans.  When rates rise and inflation stirs the people up then the government has to stop that backdoor bailout for the banks.  The fact that Geithner is starting to talk about pulling support might be a signal that government thinks we are out of the weeds and thus it's time to pull back some of the stimulants.  Either that or perhaps China's recent interest rate hikes threaten to strengthen their currency and send some of our inflation back home.  Either way, the housing market is still headed down and cutting back on Fannie and Freddie funding for home purchases is only going to make that worse.  Not that this is a bad thing but rather that it can't be good for bank's balance sheets leading and it could lead to a so called double dip.  If so then Geithner might have to back track on his desire to stop subsidizing the housing market.  If that happens then people might start to figure out that we can never get off the stimulants without causing a crash anymore than a drug addict can stop the drugs without withdrawal pains.
•  In potentially related news PIMCO, the world's largest bond fund and a financial entity that recently bragged that it had developed its own Ponzi escape strategy, recently cut its holdings of US government debt to the lowest level in two years. Coincidence?  Maybe.  But PIMCO's Bill Gross pulled no punches in his bragging statement in the above link.  He said, "Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic."  Gross went on to say that PIMCO was basically going to stay in the game while the free money was being given away courtesy of the government and the federal reserve but that PIMCO had a bail out plan.  That implies they had some triggers in place which, if tripped, would send PIMCO skating for the side door leaving the rest of us turkeys holding an empty bag.  I have to praise Bill Gross for his honesty while at the same time I despise his blatant gaming of the system.  Lots of people who don't know how money works are going to get left holding an empty bag for retirement because Bill Gross is going to skate out with their money just like those early to exit Madoff's scam got out whole.  These greasy money elite always make my skin crawl when I see the stuff they get away with at the expense of the rest of society.

What in the heck is hyperinflation, really?

Lots of pundits in the economic news talk about hyperinflation but few take the time to discuss what the term actually means.  Unfortunately, I believe many of them have no clue what hyperinflation really is.  In this post I will break it down into terms that are both accurate and simple.

Before delving into hyperinflation, please take a second to review what inflation actually is.  Rising prices is not inflation although it is often a symptom of inflation.  If you live on a small island and all the land becomes developed then you have to expect the prices of real estate to rise simply because land has become scarce.  Is this inflation?  Of course not.  It’s supply and demand, one of the most basic economic principles.  Value derives from scarcity and so when things we want become scarce we have to pay more for them.  Thus, rising prices is not inflation.

Inflation is actually an increase in the money supply relative to the stuff for sale in the economy.  The money supply consists of the monetary base (the money created by the Federal Reserve) PLUS the true value of all debt in the economy at any given time.  Note that inflation can cause prices to rise and in the long run it generally has that effect.

So from this explanation it logically follows that hyperinflation is caused by government printing up money and taking on debt at a really, really rapid pace, right?  As it turns out, no, this is not right even though this is the context in which most economic writers tend to discuss hyperinflation. 

During hyperinflation, the value (the buying power) of the money falls at a breathtaking rate.  In extreme examples, the buying power of the currency can reach zero.  If there was really a mathematical relationship between hyperinflation and the increase in the money supply then it would take an infinite increase in money supply in order for the currency to go to zero.  Of course it is impossible to print and borrow to infinity so the math clearly shows that the direct link is not there.

So if increasing the money supply is not the direct cause of hyperinflation then what is?  Well, the first thing people have to stop and realize is that our money has no intrinsic value.  I didn’t say it has no value, only that the value isn’t intrinsic.  The value is only what people believe it to be.  Our money lost all intrinsic value when Nixon closed the gold window in 1971.  Before that time it was possible to convert dollars into gold bullion at the rate of $35/Troy oz.  After that time you could bring 20 truckloads of $100 bills to the government and you would not get one single speck of gold from them in return.  That lack of convertibility made the money intrinsically worthless overnight even if most of the people haven’t figured it out yet and thus continue to behave as if the money has value.  Since that time, money only has the value that people perceive it to have.  If ever there comes a day that people perceive that the money has no value then it will indeed have no value.

Hyperinflation is the process by which people begin to wake up to the fact that the money has no value.  Hyperinflation occurs when people realize en masse that they are being conned and as a result they begin requiring a lot more of the currency in exchange for their goods and services.  In extreme cases, such as Zimbabwe and Weimar Germany after WW1, people become so aware of the scam that they stopped accepting the money at all.

Again, the money never had any intrinsic value if it wasn’t convertible by the issuing authority into something of value upon being presented with demand to do so by those holding the currency.  The fact that people treat such money as if it had value doesn’t change the fact.  People traded Enron shares and smiled at their Madoff account statements as if they had value well past the point that they in fact had no real value but that blissful ignorance didn’t change the fact that they really had no value.  Hyperinflation is, at the end of the day, nothing more than a partial or complete loss of confidence in the currency which, in extreme cases, causes it to trade at its intrinsic value of zero.  Yes, it is generally caused by abuses performed by the authority issuing the currency but it could happen for a variety of reasons not related to massive new printing.  For example if a government were to default on its debt promises then it would cause a big loss of confidence in that government and in the money it controlled.  That would certainly lead to a bout of hyperinflation like it recently did in Iceland.

Perhaps a short story will help communicate this fact.

Let’s say a criminal owns a big casino.  The first thing he does is go out and buy a bunch of colored plastic chips so that people can buy them and then use them to play at the gaming tables.  People are willing to do this because those are the owner’s rules – he does not accept real money at his tables – only the plastic chips provided by the house.  People are told that if they are ever tired of playing they can cash out and get dollars back.  The fact that those chips are supposed to be backed by dollars gives them confidence to use the chips in the first place.  In other words, the chips are convertible into dollars when players demand that the issuing authority -the casino owner- do so.

Now, this particular casino is so massive that people never need to leave.  They have a room there, eat at restaurants there, buy clothing, get married and have kids there.  They even work there.  Because of this they live their whole lives in the casino. 

But over time the casino owner, a notorious criminal, steals all of the money that players had used to buy chips with over time.  Of course, he doesn’t tell the players this and they continue living and playing blissfully with the casino chips.  Of course, if they ever try to cash out then they would find out that the chips had become worthless because there is no longer any money available to buy them back.  Even though the chips are actually worthless, they are still traded within the casino for room and board, clothing at the shops, etc.  People haven’t tried to cash out and are thus clueless about the loss of convertibility of the chips into dollars.

Whenever the owner shows up and wants to buy clothing or to eat, he simply manufactures more chips and spends them on what he wants.  He wants to be popular and he also wants to keep people in the casino so he is well known for buying meals (he is particularly fond of the pork dinner) and round after round of drinks at the bar.  Everyone looks up to him and respects him because he is so generous.  Of course it’s easy to be generous when you don’t have to work for your money but the real reason for the owner's generosity is so that people hang around hoping to get something for nothing.

This goes on for many years.  As the owner continues to print more chips, things begin to cost more chips in the casino thanks to the magic of inflation - the number of chips floating around the casino increases relative to the amount of goods and services to buy.  Over time, rooms go from 10 chips per night to 20.  A meal goes from 2 chips to 4 and so on.  But it happens slowly over time and while this is happening a day’s wage goes up from 40 to 80 chips so people still retain much of their buying power even though prices are going up.  Because of this, nobody complains about rising prices.

Once in awhile, someone tries to leave the casino.  He/she is tired of the same old thing, tired of living under someone else’s house rules, and tired of seeing the casino owner have unlimited spending power without doing any work.  It is clear that something is badly amiss.  So the person goes up to the cashier with a bucket of chips saying “cash me out”.  Of course there is no cash and so casino security takes the person out back, administers a good beating and threatens a short and painful life if anyone else is told about the incident.

Over time, more and more people leave and they get the same treatment.  Eventually, some of the people decide not to be intimidated and they begin talking about what they know and word begins to filter its way back into the casino.  At first, the people in the casino -especially the long term residents- laugh it off.  The owner is too generous and too nice a guy to ever do anything like what the “conspiracy nut jobs” accuse him of.  And that bit about the casino being broke is so ridiculous!   HA! HA! HA!  After all, look at all of the well dressed, well fed people running around the casino!  Ain’t no poverty here!  Of course what the people don’t know is that the casino owner has been borrowing food and clothing from other trusting souls in the outside world and selling these things within the casino at a significant discount.  Those loaning the goods assume that they will be repaid some day because they look at all the activity going on in the casino and assume it means the casino owner is making a bundle.  Of course, if they had any brains they would realize that if the casino owner was rich he would have no need to borrow from others to keep those in the casino fed and clothed…

Eventually, however, the evidence about the bankruptcy of the casino builds.  One day, several concerned casino patrons decide to test the system once and for all.  They get together as a group and approach the cashier cage with their chips, all demanding to cash out at once.  The owner sends security (who have recently adopted uniforms reminiscent of jackbooted fascist regimes of the past) but the dissenting group is too big to take down.  The resulting commotion causes a scene and, within a very short span of time, everyone gains awareness that the casino in fact does not have any money to back the supposed value of the chips. 

Over the coming days and weeks people begin trying to exchange their chips for something of value because they have lost confidence in the value of the chips.  At some point there are so many people bidding up prices of food, suits, hotel rooms, etc. that the prices skyrocket due to the sudden demand.  It’s not that people suddenly needed more food or clothing but rather that they wanted to exchange the chips which they realized to be valueless for something of real value.  In other words, they begin to hoard stuff very rapidly.

Finally the day comes when people simply stop accepting chips in trade for anything.  At this point everyone has come to the realization that they have been conned and there are no more suckers willing to take worthless chips in return for food and clothing or other things of real value.  The chips are just cheap plastic and the casino owner has stolen all the money that was supposed to be backing them.  Despite the fact that people have been trading chips for years and years within the casino, their buying power has gone to zero in very short matter of time.

That, my friends, is the truth about hyperinflation and now you know why the government kept filling the media with requests for everyone to "have confidence" during the first wave of the financial melt down that ended in March 2009.  Without confidence the system will collapse because any confidence game needs the patsies to be confident for it to work.  This is also why nobody can predict when hyperinflation will arrive;  the mood of the people is a difficult thing to predict.  The only thing that is fairly predictable is that you can't fool all the people all the time and at some point you can't fool any of the people any of the time.  Given the rate at which people are waking up, that day will likely come in the next decade and perhaps a lot sooner.  The point of mass awareness is always sped up by government's demonstrated lack of ability to fulfill its promises.  Lots of promises have been made to retiring boomers that cannot be fulfilled and so that is the most likely trigger for the mass awakening IMO.

Calm before the storm: end of the bail out era

While everyone is distracted with happenings in the Middle East, The Independent reports that states are quietly going to the federal government looking for big bank style bailouts.  They are doing this because they are bankrupt and if they make the cuts they need to make in order to balance their budget then it is going to mean pulling the safety net out from underneath tens of thousands of people.  When that happens history shows that the next step is generally widespread civil unrest.  Hungry people tend to get a bit cranky it seems.

When we look around it is hard to really see that anything is seriously amiss.  Most people are still working, the electricity and water still work, everything looks pretty normal.  There is no rioting in the streets, no firebombs being thrown, no cars being turned over and no mass looting taking place.  Politicians are not being dragged through the streets.  It makes people who are reporting on the true state of things look a bit like alarmists or possibly conspiracy theorists.  It's a strange feeling having people cock their heads sideways and roll their eyes when I explain the math to them.  Math doesn't matter to people, only the here and now and the current perception matters.  I was warning people before the housing bubble and the stock crash that these things were coming.  Some listened, some didn't.  That's just people.  Of course that's how Ponzi schemes work.  All is OK until they collapse and then everyone gets a sudden wake up call.  What's happening at the state and federal levels is Madoff on steroids.  It is guaranteed to collapse at some point.

Nobody can predict the exact future and the timing is always the hardest part.  Heck, look at the Bible!  Jesus predicted all sorts of things for the end of the world but the timing he would not commit to.  He admitted he didn't know the timing; he said only God knows the timing.  That's how difficult it is to predict the timing of future events!  Still, lots of people can lay accurate odds about the general direction.  It's just not that difficult to see where the math is taking us.  If states don't get a bail out I can say with pretty high confidence that poor people who lose their food stamps and section 8 housing subsidies are going to be wondering rather loudly why banks got bailed out but poor people got thrown under the bus.  They are unlikely to just quietly starve to death and if they are allowed to build momentum it will affect everyone because angry crowds target everything and everyone they see.  The major issues we have to work through are all symptoms of the overarching debt Ponzi:

• States are bankrupt and will soon have no choice but to default on their debt in some form or fashion.  What cannot be paid will not be paid.  This will initially affect pensioners, pension funds, and bond holders but it will crash the credit rating of the states so they can no longer borrow cheaply.  Over time everyone will suffer from infrastructure that is run down with no money to maintain it.  How do I know this?  Because it was all debt financed to begin with.  That means that the people of the states couldn't really afford it.  That is best case.  Worst case is that angry poor people decide that if they don't have food to eat then nobody else is going to have anything nice either.
• The commercial real estate meltdown is going to be as bad or worse than the residential real estate meltdown.  The math says it's coming and it's difficult to see how banks are going to handle it gracefully. 
• The Federal Reserve can try to print its way out of these problems but interest rates are rising rapidly which means the rest of the world is tired of loaning us bail out money at ridiculously low interest rates.  They are beginning to want higher interest rates to compensate them for the risk they are taking that they might not get repaid.  The Federal Reserve has just about shot its wad and we should not expect the government to be able to intervene in the next crisis the way it has in the past.  Contrary to popular belief, the government is not made of money although it sometimes looks that way.  A limit will be reached at some point and then the pain step forward front and center and rising interest rates are the canary in the debt Ponzi coal mine.
• Euroland is by no means done with its problems.  Ireland will probably default on sovereign debt and then Spain and Portugal too.  It could set off a "contagion" which is well described as a domino chain of debt.  One failure pushes the next weaker player over the edge until everyone has collapsed.
• China has been buying stuff from everyone in order to build real estate to nowhere in order to keep its labor force from starving to death.  Of course, all that internal real estate was built using credit.  They are now raising rates to slow down the use of credit because it is causing food prices to rise rapidly and threatening the lower middle class' ability to feed itself.  As China cools down so will Australia and Canada who have been selling China commodities.  Brazil is probably in a similar boat.

In other words, pretty much everyone in the world is in the same boat at the same time.  This has not happened in a very long time.  The risk of a global economic melt down, civil unrest and even war has never been higher.  That doesn't mean all those things have to happen but to ignore risk of that degree is not terribly wise.

Diminishing influence of the US shows up in Egyptian revolution

At the start of the recent Egyptian revolution the normally loquacious US government was very quiet.  The Egyptian riots were all over the news but for several days the US said nothing.  Clearly they were waiting to see how it went before taking sides.  After several days of watching, they wound up the rusty mechanical spring of talking head Hillary Clinton who asked Egypt's leaders not to cut off the Internet and cell phone service in order to control the crowds.  Shortly thereafter, pro Mubarak forces cut off the cell phone and Internet service.  After that, useless Hillary publicly asked Egyptian leaders to let the people demonstrate and to not bring in the military.  Boom!  In rolled the tanks although they did not appear to takes sides at first.  

Upon realizing that Hillary is viewed as a joke by the rest of the world, Obama began adding his two cents to the situation.  Before Obama opened his pie hole, it actually looked like the Egyptian people were going to force Mubarak out under fairly peaceful terms.  But after Obama sided with the people calling for Mubarak to leave immediately, guess what?  Mubarak dug his heels in and convinced the military to side with him.   I guess throwing one's puppet government under the bus like that can have unintended consequences.  I can just hear the anti Mubarak crowd telling Obama ”Dooooh!  Stop helping us and get off of our side of this dispute!”.

Americans need to stay the Hell out of other people's business just as the founding fathers advised us to do.  In the words of George Washington we should "avoid foreign entanglements".  Yes we do have legitimate concerns about stability in the region because we are overly dependent on foreign oil.  But it’s about time that we figure out that our presence is no longer being viewed as a source of stability but rather as a disruptive source which causes turbulence.  Recent events associated with Hillary and Obama trying to tell others how to live may or may not just be coincidental and should be viewed as data points in understanding the bigger picture but if we begin to see a pattern of this then perhaps we should take the hint.

By the way, if there is ever large scale unrest and demonstrating in the US, rest assured that our leaders will not follow their own advice.  Take for example, Senate bill S.3480 which would give Obama the power to shut down the Internet basically for whatever reason he deems necessary.  Our political leaders have long ago exposed themselves to be two faced liars who tell others to "do as I say and not as I do".  The ongoing banking debacle contains proof after proof after proof of this.  First we accuse China of being currency manipulators but then we artificially drive our short term interest rates down to nearly zero.  That is certainly a form of currency manipulation.  In addition, by July 2011 Bernanke will have tripled the monetary base since the crash began in 2008.  That is absolutely currency manipulation!  And how many times have the US and its IMF debt slave control mechanism told 3rd world debtor nations to increase taxes and consume less (AKA “austerity measures”) so that they could pay their debt down or at least reduce their deficit?  At the same time the US is the most indebted nation in the history of man and it appears to me as if we have absolutely no intention of ever paying anything back.  In fact, our deficit continues to increase exponentially. Talk about double standard! 

Bottom line is that our leaders are just as self serving as they can possibly be and everyone else knows it.  Many Americans are finally waking up to this truth as well even though it pains us greatly to do so.  At this point it would be best if they would just sit down and shut the Hell up so that they stop building up new hate against America and her people.  The fools, con men and liars in DC certainly do not speak for me.  I am embarrassed for them because they are too shameless to feel any embarrassment for themselves.

Awesome interview of Mike "Mish" Shedlock by Spanish interviewer

Mish is the 3rd most read economic blogger on the planet.  Suffice it to say that he knows his stuff.  The recent interview is entitled "No confíen en gobiernos o bancos centrales: son los culpables de la crisis" which translates into "Don't trust governments or central banks: they are guilty/responsible for the [credit]crisis".

It is well worth your time to read the English translation at the above link because it contains so many truths that so few really understand.  Let me recap a few, but please do read the article if you want to know the full story:

• The US and every other government of the world is bankrupt.  They have avoided admitting it by papering over their losses.  The two main deceptions are failure to mark toxic assets to fair market value on the books (they account for worthless assets as if they were worth full face value), and printing money from thin air.  Mish assumes they will be able to slowly come clean over a period of perhaps 10 years.  I am not so sure that people will agree to suffer that long.
• The papering over has caused stocks and junk bonds to rise to unnatural valuations.  You really can't trust the numbers anymore because everyone is allowed to legally lie about their balance sheets.  The stock market is trading as if Bernanke is actually creating new value with his policies when in fact he is creating the illusion that real losses did not happen and do not still exist even though the losses are very real.
• Mish expects the European Union to shrink.  The weaker players cannot keep up the charade of solvency and thus are nothing but a drag on those who havent been exposed as frauds yet.  Mish fails to point out that when the weaker ones leave it means they will never repay their Euro denominated loans.  It also means that Germany and France will not be able to export as many goods to them because the credit of those kicked out or who leave the EU will be ruined.  In other words, Germany and France have fake, credit juiced economies just like everyone else which will be exposed if the EU begins to shed members.
• The Chinese economy is a massive debt based Ponzi scheme with stupidly excessive manufacturing capacity and stupidly excessive construction of cities to nowhere (cities for 1 million + people that stand empty because the locals cannot afford to move there, all built on credit..).  When China crashes it will take down Australia which is a commodity exporter.  Mish doesn't mention it but Canada, as a commodity exporting nation, is in the same boat as Australia.  All of them have huge real estate bubbles that are worse than what the US' was/is per capita.
• Don't trust governments or central banks.  The list of lies they have told is sky high and some of them were real whoppers.  They are in such dire straits that they are now making laws up as they go along (or acting in violation of existing laws) to handle whatever the problem de jour is.  None of it is well thought through because they are in crisis mode trying to save their crony capitalism system.  It is causing unintended consequences which is resulting in reduced trust of government and associated civil unrest.
• The root cause of ALL these problems is fiat currency and fractional reserve banking which are the dynamic duo of a dishonest money supply.  The money elite game this system in order to enrich themselves faaaaar beyond what they could have achieved by working for it like the rest of us.  This is why they will do anything that we are stupid enough to allow them to do in order to save it.  We would all be much better off going to an honest money supply which would include an audited gold standard and the elimination of fractional reserve banking.  Between fiat currency and fractional reserve lending, the latter is by far the bigger culprit.  It leads to credit booms and busts that cost people stability in their lives.  It leads people to give up hope and to engage in civil unrest.  It happens right under our noses because so few people understand the con game that is being played on us.  Everyone wants to treat the symptoms with more regulations while the root cause is never addressed.