Municipal defaults: what's the real risk to main stream America?

Late last year, financial forensic analyst Meredith Whitney predicted that 50 to 100 municipal bond defaults were coming and the damage could be up to $200 billion.  To date we have not seen this wave of defaults start and credible people like Mish believe her estimates of damage were a bit too high in the first place.  While all eyes were focused on this, the real story has gone underreported.  Actual muni defaults don't directly impact mainstream America because generally it is only the richer, more sophisticated investors which hold munis.  Yes, they are also held in pension funds which does spread the reach of potential negative impact but those funds are generally well diversified and so a failure of any one sector is not going to be the end of the world.

The real story for many more Americans is that the municipalities are in deep trouble and struggling for survival because of their debt load.  As a result of this, their interest rates and the cost of insuring their debt have been rising while their credit ratings have been sliding.  The net result is a rapid decline in their borrowing which directly affects their infrastructure spending and all the jobs which depended on it.  The folly of the concept of borrowing to consume is being understood by city managers and so they are changing their ways.  The net result is much less spending going forward.  They already borrowed from today's budget 2, 5, 10 years ago so the consumption of today must be reduced dramatically in order to pay for prior consumption.  It doesn't take much looking around to see the effects.  For example, Cisco's CEO is being very forthcoming about why its earnings are in a slump saying, "public sector spending remains depressed in the United States and elsewhere...".

The sad thing about borrowing to consume is that everyone else is likely doing it at the same time.  That means a lot of credit based money is created from thin air and is then pushed into the market where it chases up the price of equipment like Cisco's routers and infrastructure equipment.  So not only did cities go into lots of debt, they did so while paying top dollar for the equipment.  In other words, they over paid for the infrastructure they got. 

As credit based demand diminishes, so will prices because buyers set the prices in the market place, not sellers.  Falling prices lead to falling revenues and less product development which means layoffs.  You can clearly read that writing on Cisco's wall in the above link.  They will double down on video conferencing and cut other lines.  I know that Chambers is not perfect as a CEO.  I know that Cisco played Dot Bomb for all it was worth, participating in a massive vendor finance scam "selling" equipment to customers like the Russians which it had to know could never pay.  It eventually resulted in a 2 billion dollar write down for bad inventory management (cough cough)  - an unprecedented number at the time.  However, since then I think Chambers has been a lot more honest with investors which of course has not been good for its stock price.  After all, honesty is the enemy of any debt Ponzi.  Of course those who are honest the soonest will most likely be the survivors and the thrivers over the long run.  Having said that, Chamber may want to tone back the negative rhetoric for awhile because the CSCO stock chart is not looking good.
 
After the initial collapse following Dot Bomb, the shares got a short covering bounce back up to just about the level of the 38% fib before rolling over.  At this point a very nasty head and shoulders could be forming.  If that declining neckline breaks down then the shares could return to the fair valuation for a stock that only pays a 24 cent per share annual dividend.  Assuming a 5% dividend return is what investors will demand in the future, that comes to a share price of $5.  Given that our inflation is at least 5%, why would anyone store their money in a stock that doesn't return at least that much on a dividend basis?  Perhaps they might do it hoping for share price appreciation based on greater fool theory.  If so, good luck with that strategy going forward.

Economati's Path To Prosperity solution

The news is all abuzz these days with John Ryan's so called "Path To Prosperity".  I don't even have to read it.  I already know it is just more unrealistic political posturing and stalling because our debt situation is a no win deal.  There is no easy way out.  Of course, for those who need to sift through all the numbers before they will recognize the obvious, Mish discusses it in great detail.  The bottom line is that whatever they do is going to lead to a crash eventually because a crash is already built into the scam.  Ponzi schemes always crash in the end.  You cannot posture and pose your way out of bankruptcy.  The main ideas behind the Dem's and GOP's respective plans for prosperity are some combination of more taxation and less government spending.  But if they tax us more then the economy will suffer and so will their ability to tax us.  And if they cut government spending then the GDP will plummet because deficit based government spending is too big a part of the economy to just cut off.  That's all you need to know.  The rest is just posturing and noise.

Things that I think are especially telling about Ryan's plan are:

• It ignores the impact on the economy of cutting government spending.  Put differently, where was the Plan To Prosperity in March of 2009 when the stock market was in major tankage, jobs were plummeting, etc.?  It was nowhere to be found because you don't put austerity measures in place when things are already difficult for the people if you want to avoid getting hanged in the streets.  But now that historically massive stimulus and money printing has revived the economy somewhat, all the loons are coming out of the woodwork as if we are so strong now that we can actually cut back on that which drove the recovery.  I've said it before and I'll say it again: when the stimulus and spending turn into cuts and austerity then the industries which were expanding on the back of government spending will just stop.  When the free money stops everything will revert to the ugly mean.  In other words, it may look like a good time for austerity but from now on there will never be a good time.  As soon as we try to implement austerity the very act of doing so will cause a recession (or worse).
• It ignores the cost of interest on the existing debt to say nothing of the new annual debt that will be created under his plan.  What if interest rates go up to 7, 8, 10% or more like they did in the past?  Sorry, the "plan" doesn't cover that eventuality even if it is the most likely thing that will eventually happen.
• It talks about stuff which may or may not happen long after Ryan is done with politics.  Seriously, how can Ryan credibly make a plan which some future politician is going to have to suffer for?  When things are hard on the people they (stupidly) turn to government for help as if government is some endless pit of free wealth to draw upon.  The guy that replaces Ryan is going to catch the heat 4, 6, 10 years down the road for things that the Ryan plan puts in place today.  When that happens, the new guy will renege on all the promises and deals.  So nothing will ever actually happen despite all the posturing today.

Because of the above, there is no traditional thinking that is going to work.  And thus I present to you the Economati path to prosperity.

Instead of having budget theater, making endless unkeepable promises about paying the debt while racking up even more debt, JUST STOP.  Stop and take the pain now.  Do it now while we are relatively strong.  Tell the world that we are defaulting on our loans.  At the same time, declare all internal debts null and void.  In other words, repudiate all debt because it will never be paid off anyway.  Do this intelligently so that, for example, someone who has already defaulted on their house and is not making payments does not end up with a free house.  Also, the property investor leveraged to the hilt should not get to keep a bunch of property that he only has 5% stake in.  We would need to create a set of rules for the tear down of the credit scam which would make everyone a winner in some way without making leveraged gamblers big winners.  For example, put limits on the amount of debt repudiation per individual or company and then require them to either pay off the remaining places with cash or just give them back to whoever loaned them the money to buy them in the first place.

At the same time, make it binding law that government at all levels must balance the budget using real accounting, not fake off balance sheet accounting.  Make it illegal for US governments of any level to take on debt for any reason, ever again.  Period.  Too bad if Katrina 2.0 happens, no debt would be allowed to address it.  Instead, save for the rainy days in advance.  Gee, what a concept, huh?  And don't let people use insurance as a way to avoid saving in advance for catastrophes.  Insurance is just another leveraged money game. 

Get rid of the dollar and replace it with a true gold backed currency with real audits of the gold supply by someone other than government.  Get rid of fractional reserve banking.  Stand down 2/3 of our military at least (thus reducing pressure on others to beat their plowshares into swords).  At the end of the day we would have a society more focused on living, learning, growing our knowledge, making life better for our fellow citizens and other noble causes than on the blind pursuit of money and consumption for consumption's sake.

If this sounds crazy, consider that we already defaulted on the world before without causing WW3.  We promised that the dollar would always be backed by gold and then we closed the gold window resulting in the biggest default in human history even if most people did not understand it as such.

Reasoning behind the Economati path to prosperity:

• What's done is done, it cannot be undone.  Making further lies and promises will only piss people off more than they already have the right to be.  Piss people off too much and it leads to war which is completely unproductive.  True leadership would be to explain how the whole global economy is one big debt Ponzi that will eventually collapse so the sooner it happens the better.  
• What cannot be paid will not be paid.  Acting like we can pay just pushes out the healing.  It attempts to fool people who are getting very tired of always being conned.
• The US did not acquire debt in a vacuum.  Those loaning the US money should have recognized the risks involved.  That they did not is their problem at this point.
• Everyone else in the world is in debt too!  If the US takes this path, everyone else will follow our lead. 
• Everyone gets something in this deal.  The main way to avoid people wanting to go to war is if they get something out of the solution.
• After the Grand Default, fairness will rule the day immediately and going forward.  If the US does not produce enough stuff to consume then it will not consume as much because no debt will be allowed in the trade balance equation.  A measure of wheat grown by the US will be traded for the iPod built in China.  Nobody will accept debt notes in exchange for real goods.  The vendor finance scam would be over forever and the world would be a better place for it.
• The value of physical labor will increase to a fair level.  There will be no need for unions or minimum wage laws.  These things had to be put in place because the money supply is corrupt and game-able by those at the top.  But moving to an honest money supply which is devoid of fiat currency and fractional reserve lending will mean that elite have to do their own work because their leveraged scams will have collapsed.  Can you imagine rich people mowing their own lawns, cleaning their own pools, painting their own houses and doing other physically intense labor? 
• Bankers and moneymen will no longer be treated as the top crust of society because they will no longer get massive compensation for basically being clerks and con men.  The banking profession will thin out rapidly and become the home of plodding accountants and book keepers again.  Those leaving the banking industry will find real jobs where perhaps their cleverness can be put to economically productive, non-fraudulent use again.

No Dem or GOP solution can claim to have the positive effects of the Economati solution and they certainly can't do anything so quickly that our children will see positive benefits instead of dragging them through our ongoing debt crisis for the rest of their lives.

The coming bust of China's credit bubble

I (and many others) have been writing for some time now that China has grown way too fast for it to be something real and sustainable.  Several years ago, Hugh Hendry toured China's biggest cities which had been popping out skyscrapers at an incredible rate for a decade.  His video showed one huge building after the next completely finished but sitting completely empty.  Such things are not possible if people are spending their own money because nobody wants to have hard earned cash tied up in a depreciating asset or one that has high monthly maintenance costs when it produces no monthly income.  Thus, when you see such malinvestment you immediately know that a credit bubble is taking place.  It is only through the ability to borrow money cheaply that speculators can put up buildings like that in the hopes that someday there will be demand for the office space (and housing and shopping malls...) at lease rates which make the whole thing economically viable.  Mish did another piece on the China bubble today where he quotes Nouriel Roubini on the matter.  If you think China is a good long term investment then his article and his links are all well worth your time.

I think the whole massive overbuilding game is not so accidental as it might appear.  If I put myself in the position of the Chinese government then it is actually not an unreasonable strategy given the big picture circumstances.  Look, they have to keep a bunch of people employed or the people will riot.  It's as simple as that.  Sure, you can just maintain a highly agrarian stance with many people living a hand to mouth existence as China has done historically but when the rest of the world is consuming resources as fast as it can, that is a losing strategy.  It means everyone else gets smarter and more capable while you are left in the dust.  It also means that at some point everyone else will have consumed all the resources and then they will come looking for more in your backyard.  Their over-consumption will have fueled the development of a highly technical military which you will not be able to repel.  They will justify everything they do in the name of their national security.  The movie, "Independence Day" comes to mind.  Perhaps another applicable analogy is two different strains of bacteria competing on a Petri dish.  Self control is a losing strategy when others are consuming as quickly as possible.  This is the plague that fiat currency and fractional reserve banking has wrought upon the world: you can't just do the right thing and survive.   You have to over-consume before the next guy does, or else.

So what do you do if you are the Chinese?  Well, they tried being the labor source for the US and Euroland and what they found out was that all they were getting in exchange for their hard labor was colored paper of rapidly depreciating value.  They knew the vendor financed export economy model was a scam but again, what are they going to do?   Chinese people do not have the money to consume the stuff they build (which in and of itself shows the absolute ridiculousness of the global fiat money system).

So China began building massively internally using its fake paper income from the west as collateral for internal loans.  Nobody would have lent them the kind of money they needed to do all this building without that collateral.   Now, if the Chinese government just did all of this building using their dollar based savings directly then the world would be flooded with dollars instead of them being re-invested back into US debt which takes them off the market and slows inflation of the dollar.  China does not want the dollar to inflate because its dollar based savings would evaporate; it would have worked a couple decades for the US for basically free as voluntary slave labor if the dollar hyperinflates.  So instead of Chinese government doing direct investment, it began doing internal investment using a level of temporary indirection in the debt (i.e. a debt shell game).  In other words, it learned from America's experience with Dot Bomb whereby lots of debt based spending was happening by corporations and banks but they were just a proxy for government spending because when they failed their bad debt ended up on the government anyway.

China's banks will eventually need to be bailed out because of massive over-lending and malinvestment (the use of the money to build cities and highways to nowhere).  The unsustainable debt they are taking on will be assumed by the Chinese government (something which now seems to be the recurring norm in the US anymore). At some point the debt Ponzi in China will collapse and everyone who has been riding the back of  China to prosperity (Australia, Canada as commodity exporters, heavy equipment builders like Caterpillar, etc.) will collapse with them.  It's all predictable and thus I have to assume its all preplanned in some form or fashion.  I can't stress enough how none of this could possibly be happening if we had an honest money supply.  Everything else is noise on a relative basis.  Until we fix the scam of fiat currency and fractional reserve lending we will remain on the same path as bacteria on a Petri dish.  We will rush to consume all we can in a very unproductive and unsustainable way until nothing is left and then we will all crash or we will all go to war to fight over whatever natural resources might remain. 

Richard Russell (Dow Theory Letters) senses dollar collapse accelerating

King World News likes to report on the commentary of the famous octogenarian financial news letter author, Richard Russell, who has been writing his insightful financial newsletter since 1958.  If you believe that there is nothing new under the sun when it comes to finances (only remakes of past scams), Russell is the guy to listen to because he has been there, done that, seen it all.  In a recent review of Russell's newsletter, King World News reports that Russell continues to be a dollar bear and even fears that the collapse of the dollar may be accelerating.

Russell knows that someone has to pay for all the excesses of the past 30 years in addition to continual overspending at the federal government level.  He also knows that we have one of 3 basic ways to accomplish a drastic reduction in the reliance on borrowing:

1. cut federal spending dramatically
2. increase taxes dramatically
3. inflate the currency

Item number 1 is not going to happen without a revolution of some sort (not necessarily violent but not discounting this possibility either).  There are several reasons why I believe this.  First and foremost is that the federal government is now big enough that it has taken on the qualities of a living, sentient being.  It wants to live, grow, reproduce and consume.  Most importantly, like any living thing it will defend itself if attacked.  Simply starving it of needed revenues will be considered an attack, an assault on its security.  Not letting it grow and reproduce will be considered an attack.  In fact, stopping it from doing anything it wants will be considered an attack and even treasonous.   Politicians have been talking about cutting federal spending every year but it only goes up each year exponentially.  You really have to be pretty weak minded at this point to believe it is actually interested in cutting spending.  Budget theater is all we will get until the federal government is forced, somehow, to stop deficit spending.  There will be no significant voluntary reductions at this point.  They are now talking about cutting $4 trillion over 10 years.  Sounds like a big number but that is only $400 billion per year and our annual deficit is $1.3 trillion.  So that's an increase in debt of roughly $1 trillion per year if they can actually agree to this cut (which they won't).  Besides all that, the federal spend is a huge part of our fake GDP.  Cutting federal spending will lead to a massive reduction in GDP.  If they let that happen then the world will see that the emporer has no clothes.

Item number 2 is going to be very difficult to implement because it has been shown that overt taxation reaches a point of diminishing returns.  If you suck all the capital out of the economy via taxes then investment and growth crashes and jobs collapse.  If it gets too bad then it generally leads to civil unrest or worse.  They will talk about higher taxes but nothing significant will actually happen.

Item number 3 is the easy way out for the con men.  With inflation they don't actually have to tell people they are raising their taxes and suffer the back lash.  Inflation is the silent tax that most people don't even understand is a tax.  I estimate that only 10-20% of the people in this country understand that inflation is nothing but a tax.  People actually blame "the greedy Arabs" for higher oil prices and "the greedy farmers" for higher food prices.  They just don't get it that when Bernanke prints more money from thin air that it waters down the buying power of the money you already hold as well as that of your monthly salary.  Inflation is sneaky taxation. 

In addition, government actually cares about two kinds of people: those who vote and those who are economically productive.   They care about those who vote for obvious reasons and they care about those who are economically productive because without them who would there be to steal from in order to buy the votes from those who vote?  When things get really bad (read "foreigners stop loaning us money") then the protected class must always be those who are productive and taxable.  When you inflate the money supply, inflation eventually results in wage increases right along with food and energy prices.  That means that workers take some pain but over time their salary will make up for some of it if the inflation stops long enough for a new equilibrium to form. 

On the other hand, retirees living off of fixed income and entitlements are not producing anything for politicans and statists to steal and so they are a prime target for government to attack.  We have a lot of savings in this country and when people get old they become too weak to fight.  Thus, inflation steals their money by reducing the purchasing power of their savings and the government really doesn't feel the heat because of it.  As Sheen might say, "#Winning!".  The final reason why inflation is going to be the mechanism of choice for paying for ridiculous government spending is that it destroys the value of everyone's dollars globally, not just the dollars held by US citizens.  Thus, inflation spreads the tax pain to non US citizens who don't get any of the trickle down benefit of the government spending.

Today Monex is selling silver Austrian Philharmnic 1 Troy oz. silver coins for $41.59 each (when bought in quantities of 100).  1 Troy oz gold Phils just broke $1500 each (when bought in quantities of 10) for the first time ever. 

Smart man, that Richard Russell.

Harry Dent: "The Fed is checkmated here"

Aaron Task recently reviewed market maven Harry Dent and the video can be found here.   Harry basically lays out the case for the end of the debt Ponzi although he does not use those words.  In short, the stock market bounce since March 2009 has been driven by low rates and other Fed stimulus.  The Fed has been doing this in order to battle deflationary deleveraging (in other words, reduction in the money supply caused by the destruction of credit and the paying off or defaultig on debt).  Bernanke knows what Alan Greenscam knows: if housing and other asset prices fall then banks will no longer be able to ignore the bankruptcy that is already built into their balance sheets but which regulatory forbearance is allowing them to legally ignore.  Bernanke's goal is to give banks essentially free money which they turn around and loan out for 4-6%.  The spread for the banks is 3-5 points or more.  That is generally a formula for making easy money.  The hope is that banks can "earn" enough money like this over the course of years in order to become solvent again. 

But this time, as Dent points out, it seems to be turning out differently.  Instead of loaning that money to people with no jobs, banks are avoiding that trade in fear of not getting repaid.  It should be clear by now that the whole concept of monetary honesty and integrity has collapsed for many people in the economy who are simply following the examples set by government and the banks.  It is no longer considered a big social crime to live in your home without making the payments.  Five years ago everyone would have frowned on this practice to say the least but today there is a lot of understanding and even sympathy for people in this position.

Dent claims that money which banks are borrowing from the Fed but which they don't lend for housing is instead going into other (gambling) assets, including the stock market, thus driving them higher.  Banks have learned that it is impossible to get into cash very quickly when a crash comes if they are invested in nonliquid assets like housing.  That's why they like paper assets so much at this point.  They think that they can just bail out with the click of a computer mouse. This widespread mentality where everyone thinks they can be faster to bail than the next guy is just the kind of setup required to achieve the massive stock market collapse that Dent sees coming later this year.  What banks are finding is that on the way up there is lots of liquidity but if this thing rolls over like Dent thinks is going to happen then everyone is going to find out very quickly what a phony market the stock market actually is.  There will be very little liquidity for the next crash and that means that sellers will have to lower prices big time in order to move their inventories of essentially worthless company shares.  In other words, not everyone can get out of a Ponzi scheme whole.  Duh.

Dent also suggests that the Fed is now damned if they provide more stimulus and damned if they don't.  He says they are checkmated here.  Nobody knows the actual timing of these things but I agree (and have written it myself many times over the past years) that the Fed will appear to omnipotent for a long time and then suddenly people will lose confidence in its ability to manipulate everything.  People will come to a sort of mass understanding that The Wizard of Fed is just a tired old man running a machine that uses smoke and mirrors to dazzle the economically ignorant.  In other words, the herd will finally wake up and realize what a scam the Federal Reserve is and once that happens there is nothing the Fed is going to be able to say or do to stop the herd from stampeding for the exits.  The details will include things like rising interest rates but the real reason for the move will be that the herd loses confidence in the con men and the con game they have been running.

Dent also believes that gold and silver will be negatively affected by these events.  In truth, if people's wealth gets sufficiently wiped out then there is a reduced need for wealth preservation mechanisms like gold and silver.  If people get massive margin calls on their leveraged debt and they happen to own some gold and silver then they will sell the gold and silver in order to cover those margin calls.  So yes, gold and silver could take a big dip along with the markets if Dent's predictions come true but once the smoke clears it will be physical gold and silver emerging as clear leaders again because everything else will be very difficult to trust.  If people don't store their remaining wealth in gold and silver after a big crash then what would they store it in, the dollar?  Maybe for a very short time but history shows that the dollar is a very poor mechanism for long term storage of wealth.  Also, the dollar (being a debt instrument) is the basis of the global debt Ponzi.  The value of Ponzi assets tends to decay exponentially in the end stages of the Ponzi. 

Even if all of people's wealth is wiped out in a global economic melt down, people will continue to work after the crash.  This will create new value and that will need to be stored somehow.   At that point gold and silver would probably have lots of appeal to the masses.

China learned too well from western crony capitalists

Today Mish gave a report of the Chinese economy which is well worth reading.  Since Greenspan told us long ago that a stable (crony capitalism, fractional reserve lending based) economy depends on stable housing prices, that is one area to keep an eye on in China.  Mish's summary on Chinese real estate: "China has the world's biggest property bubble and it will [eventually] bust".

China is now struggling with keeping the debt Ponzi spinning in its own country.  Crony communism is no better than crony capitalism it seems.  People are borrowing tons of money to build unproductive assets and it's now a big economic problem.  After acknowledging months ago that inflation was becoming a problem for its people, China began increasing capital reserve requirements for its banks (net effect is less lending) along with making token increases in its interest rates.  Although the changes were pretty small, China's economy slowed down faster than people expected.  China is now figuring out that there will never be a good time to tighten.  It is now in the same debt death spiral as the US.

The Keynesian lie is that government should stimulate the economy when the people themselves have decided to pull back their spending.  In other words, if people don't want to spend then government should spend in their names.  This has the dual effect of pushing money into the economy and punishing savers which government hopes will force them to spend (which they do, but on gold and silver instead of on overpriced housing).  The Keynesian con says that if government stimulates now then it can reverse the stimulation later when things get running properly again.  In other words it treats the economy like a bad heart that just stops beating once in a while.  If that were the case then the correct action would indeed be to defibrillate and get the heart running again.  Once the patient is revived he can go back to work to pay off the cost of calling the paramedics.  But the economy is not a heart that has stopped, it's a car that has run out of gas.  So injecting starter fluid into the carburetor is only going to make the engine roar wildly and over-rev for a short period of time and then die again.  You can't keep a car with an empty gas tank running for very long with starting fluid and only an idiot (or a used car salesman who is trying to sell you the car) continues to think that it is possible.

And so now China struggles between:

1. leaving stimulus in place which causes inflation which increases the price of food to the point where people threaten to riot. 
2. pulling back the stimulus which slows the economy causing people to lose their jobs and not have food money (causing them again to threaten to riot). 

It's pretty clear how this has to turn out at some point.  All roads appear to lead toward riots; China is likely to see significant social unrest at some point.  There is no telling how bad it will be but I think after the Tiananmen experience back in 1989 the people are not going to be pushed around by corrupt government this time.  They will be better prepared and more united.  They will have better communications and better organization.  No doubt they are getting word of what is happening in the Middle East and North Africa today (even though the Chinese government tries to censor that news).  They have seen what is possible when the masses organize and march on the relatively few in government.

All of this is just waiting for some catalyst to implode.  Nobody can predict if the catalyst will ever materialize or what it will be but the risk level that it will show up and kick off major social events in China is going to be code orange and higher for years to come.

Funny money system causing historic levels of discontent

In recent commentary from the web site Marketwatch.com, Paul Farrell proclaims that we either tax the super rich now or face a revolution.  Paul sort of has it right but not really.  We don't need to tax the super rich.  We need to take down the corrupt system by which they became ridiculously wealthy at the expense of everyone else.  The end result is essentially the same although the nonviolent revolution method would take a few years to achieve the more normalized distribution of wealth that Paul is calling for.

In the famous Parker Brother's game, "Monopoly", someone always ends up with all the property and money.  At some point you simply can't move without having to pay so much rent that you go bankrupt.  At that point, the game is over.  In real life it's really not much different.  Those at the top are playing a game.  They think of it as a game.  They call it a game.  To them it is actually a game.  It doesn't matter if the losers of the game are hurt because at their level they aren't exposed to the problems.  But make no mistake, to them it is a game and they are gaming it for all it is worth.

Unfortunately, it's not a game.  It's real life.  In real life the losers don't just go away quietly.  Instead, they eventually gather in force on the streets with hanging nooses and firebombs looking to extract revenge and justice from "them" (whoever that is).  It's not that the masses want violence but rather that they simply do not understand the mechanics of the game and so they do not see any other recourse.  The masses see that despite working hard every day they are not getting ahead.  They know something is wrong.  They know they are getting screwed but they cannot put their finger on exactly how it is happening and so they (including people like Paul Farrell) address the symptoms instead of going after the root cause.  Their ignorance into the strategies of the elite for playing the game only causes more problems and suffering than we really need to have in order to fix this scam.

The game being played by the elite should be called "Steal The Labor of the Ignorant Masses".  That is the essence of what they are doing.  Throughout history this game has been played by the elite in various forms.  The Egyptians enslaved many peoples and stole their labor giving them just enough food and water to survive while forcing them to create the wonders of the Egyptian culture.  Pharaohs and their cronies sat back and enjoyed the wealth generated by the work of slaves.  In medieval times, kings and lords owned the lands and the serfs were basically slaves to them.  There is no way that kings and lords could have lived in such luxury without the theft of labor of the uneducated masses.  More recently the American south imported slaves so that plantation owners could live big lives based on slave labor.

The elite have always known that all future value comes from the labor of man multiplied by machines and energy.  Thus, the game has always been to find new and innovative ways to steal the labor of man.  In ancient times the use of outright force was the tool of choice.  In more modern times, the elite have figured out that guile and trickery is even more effective than force in the theft of labor.  Using guile you cannot steal 100% of a person's work output which is what Egyptian elite were able to do with their slaves but the reduction in per person theft is made up for in volume.  If you just steal a relatively modest percentage of everyone's productive output and if the number of elite and elite cronies don't grow too big then unimaginable amounts of wealth can be concentrated into the hands of the few.   When a person accumulates wealth in ridiculous excess of what he could create by working a normal job then you have to ask how this can be fair.  How can one man contribute enough to society to be worth 50 million dollars much less 500 million or in the case of our uber-rich, 50 billion?  Were they millions of times smarter and harder working than the rest of us or did they simply stand on a lot of broad shoulders?

This is where we find ourselves today.  Because of modern technology and automation, the productive output of the world is such that everyone could live a very nice life.  I say again, we do not have a problem with there being enough prosperity.  The problem is that the elite game players are concentrating it into their own hands.  When a man (or woman) works his/her whole life under a system of this kind of prosperity then one would expect that he/she could feed, clothe, shelter and provide medical care for him/herself throughout his/her working life and then all through retirement until death.  Unfortunately, this is not going to be the case because Social Security is bankrupt and so is Medicare.  Those were scam programs set up by scammers and they will collapse when the bulk of the boomers try to cash in.

The main mechanism of partial slavery today is the corrupt money supply which consists of fiat currency and fractional reserve banking.  The con men at the top get first access to freshly printed funny money and they spend it while prices are low.  By the time the rest of us get access to that same money, the presence of the new money has pushed up prices so that our buying power is less than those with first access even though we are spending the same amounts of money.  In addition, the elite give themselves access to crazy leverage that normal people could never command.  Thus when times are good they make a killing.  Of course when they get too greedy and their leveraged bets fail, the bill is placed on the backs of the ignorant people who stupidly believe that the world will end if corrupt banks are allowed to fail.

Taxing the rich is a horrible solution to the problem because it is the "feel good" solution that attacks the symptoms while leaving the problem of having a corrupt money supply remain intact.  The uber rich aren't really evil, they just play the game better.  So instead of punishing them, change the game so that it is not a corrupt scam by its very nature.  If we just massively tax the rich they will flee the country and take their cash with them.  It's called capital flight.  Instead, we need to come up with a system whereby the con men can't just print up more money and create more credit for themselves at will because this, and this alone, is the source of their power over the rest of us.  If we had an un-gameable, honest money supply consisting of a real, trusted, citizen-audited gold standard (and/or real gold and silver coins which need no auditing) then the elite would have to start working for a living like the rest of us.  They could no longer steal our labor through the con game of inflation and hyper leveraged bets which they could never pay off if they lose.

Step one is to eliminate and discredit the Federal Reserve which is the organization responsible for running the con.  Step two is to create an honest money supply and transition into it over time.  Step three is to eliminate fractional reserve banking.  Step four is to dismantle our government consumption machine which now has an annual budget of 3.5 trillion dollars with 1.5 trillion of that being funded by debt.  No honest money supply can exist when the government requires debt in order to fund its existence.  By the way, none of this is new thinking.  Proponents of so called "Austrian School" economics have been saying the same thing for years.  Unfortunately, they have been in the minority while the con men gamed the living crap out of the global financial system.

We need a peaceful revolution which is led by informed people who are focused on eliminating the con game without tearing down our public infrastructure, not the violent one that Paul Farrell warns us about which would consist of ignorant people tearing down much of what we have already paid for.  That requires that people educate themselves and become proactive messengers and organizers of change instead of waiting until the situation turns hyper-critical resulting in a social meltdown.  The coming years will determine if Americans have what it takes to be something more than a very large version of Libya.