Wednesday, August 21

The Guardians of the Economy make their move: Part 2 of From Economic Collective to Police State


Photo caption: Protesters outside the Cypriot parliament voice their disgust with the original bailout (Reuters)

This post follows on Part 1 of From Economic Collective to Police State ... (August 12, 2013)

What is the sound of one pebble clapping?

On March 16, a Saturday, the Cypriot government, under pressure from the Troika, ordered without warning the country's bank accounts frozen. (I'm still not clear on whether this directive applied to every single bank on the bank-laden island nation or only to the largest banks.) The astounding event didn't make a ripple in the American mainstream television news media. By Monday, however, the media had rallied. "Russian oligarchs. International tax cheats." explained a correspondent for CNN. "International criminal moneylaunderers," chimed in Fox news. Nothing for Americans to worry about; everybody move along.

The Beeb wasn't so sure it was nothing to worry about. That evening "BBC World News America" anchor Katty Kay interviewed a former World Bank chief economist and U.S. treasury secretary named Larry Summers, who at that time was on President Barack Obama's short list of nominees for the next Federal Reserve board chairman (and still is).

Katty wanted him to explain the import, if any, of the Troika's action for American savings depositors.

At first it sounded as if Larry was answering the question with a koan. 
He replied softly, "Little pebbles."

When Katty registered no response he said more softly, "Sarajevo."

Katty, not being the Zen type, prodded Larry to proceed to his point.

After a pregnant pause Larry said that the Asian Financial Crisis, which had started in 1996, didn't immediately morph into a global one. The crisis seemed to end in one country, he noted, then materialized in another and after it seemed to end there suddenly popped up in another country, and so it went.

This discourse brought Katty's back up. She curtly pressed her original question: How was the public supposed to interpret a supposedly democratic government confiscating money in people's savings accounts?

After another pregnant pause Larry replied in voice like dead leaves rustling against a gravestone, "In a world where my spending is your income -- if every person, if every nation, tries to save more, it lowers everyone's income."

With that the clock ran out on the allotted interview time, leaving an exasperated Katty Kay to glare good-bye at her guest.

A new template for a new, improved world order

If Larry's talk about savings and income sounds familiar; yes, it would, for readers who followed my tip on July 18 to bone up on the Paradox of Thrift. To review, from Wikipedia's article:

"The paradox states that if everyone tries to save more money during times of economic recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth. The paradox is, narrowly speaking, that total savings may fall even when individual savings attempt to rise, and, broadly speaking, that increase in savings may be harmful to an economy."

There's a little more to it but the point is that it's a paradox so it's not supposed to make sense, much less guide American fiscal and monetary policies for more than a half century but that's the way the cookie crumbles.

Larry was voicing the cant that spun off from the paradox. The cant helped unseat American republicanism by substituting the consumer for the citizen and the economy for the republic.
The question was whether Larry's blithering indicated that the cant had finally unseated democracy itself.  Certainly there were indications this had already happened in Cyprus.

Massive street protests were seemingly managing to embarrass the government into agreeing to a less draconian confiscation of Cypriots' deposits than was originally announced. The question for Cypriot wage earners and pension fund managers was whether the terms of the confiscation deal that the Troika and the Cyprus government would finally settle on were always the target terms, to be presented to the Cypriot public as a compromise with having every euro they had on deposit in their banks expropriated.

The question for Americans with money on deposit in U.S. banks was whether a similar type of expropriation was planned for them.

Nah, said the Talking Heads hauled onto American news talk shows to explain the confusing situation in Cyprus. It was a local thing, having to do with the Eurozone's seemingly endless 'sovereign debt' crises. As to the rest, well, the Troika was just getting tough with Russian oligarchs, tax cheats and international moneylaunderers. (You will notice Larry said nothing to Katty about oligarchs, tax cheats, etc.)

Even American gold investor extraordinaire and gold monetarist guru Jim Sinclair, notoriously jumpy about government moves, wasn't spooked at first by the events in Cyprus. He told his readers (paraphrasing here): Bah, they're just trying to scare big money out of its cash position in the big banks. This in his view was the central planners' last frantic bluff before gold restored sanity to the monetary system. Jim told other gold investors to sit tight; gold was nearing $1,600 and once it crossed that line it would never see $1,600 an ounce again. (After Jim learned the real story about the Cyprus situation he changed his tune. Then it was, paraphrasing here, Holy smokes, run for your lives!  I trust by now he's achieved a kind of equilibrium.)

Eight days after Larry Summers's fling at playing Zen Master, and with rumors flying on the Internet that there was much more to the Cyprus situation than reported, stock market investor extraordinaire and former U.S. government official Larry Kudlow hauled one of the opinion experts at the Council on Foreign Relations onto his TV show at CNBC, America's premier financial news cable channel.

The expert, Benn Steil, explained what Larry called "the new template" for rescuing troubled banks.  The explanation was clear as mud, but it had something to do with depositors and bank bondholders taking on the burden that the taxpayer had been saddled with in the TARP bail-outs. This new, improved template would actually be a "bail-in" rather than a "bail-out," the next time American banks got into a big trouble.

This was a great idea, Larry enthused -- soak the savers and bondholders instead of the taxpayers. As if savers and bondholders aren't also taxpayers.

I don't know how many emails CNBC received within the hour from outraged American savers but the
next night, when Larry Kudlow returned to the topic of the new template, this time without Benn Steil in tow, he omitted "savers" from this commentary and just stuck to soaking the bond holders. It was the same for the next night, Thursday March 28,  which marked the last time Iknow about that Larry returned to cheerleading for the new template. By that time all hell had broken loose on the portion of the Internet that follows financial news, as the real story of the Cyprus bailout had finally surfaced on March 27 and gone viral by the 28th.

(To my knowledge, the real story never did make it onto American national television, even though 55 percent of Americans get their news from TV with only 13 percent getting news from the Internet; this, according to a Gallup poll released earlier this year. I doubt the poll broke down how many Americans who get their news from the Internet actually read Internet sources or simply watch TV news on the Internet. In any event, so much for the hype and hope that the Internet would keep the American body politic better informed.)

Was Professor Quigley right, after all?

Ellen Hodgson Brown, an American civil litigation attorney and author of Web of Debt, an investigative report on central banks; and Chairwoman of Public Banking Institute, broke the news on her website:

It Can Happen Here: The Confiscation Scheme Planned for US and UK Depositors

by Ellen Hodgson Brown
March 27, 2013

Confiscating the customer deposits in Cyprus banks, it seems, was not a one-off, desperate idea of a few Eurozone “troika” officials scrambling to salvage their balance sheets. A joint paper by the U.S. Federal Deposit Insurance Corporation and the Bank of England dated December 10, 2012, shows that these plans have been long in the making; that they originated with the G20 Financial Stability Board in Basel, Switzerland ... and that the result will be to deliver clear title to the banks of depositor funds.

Although few depositors realize it, legally the bank owns the depositor’s funds as soon as they are put in the bank. Our money becomes the bank’s, and we become unsecured creditors holding IOUs or promises to pay. (See here and here.) But until now the bank has been obligated to pay the money back on demand in the form of cash. Under the FDIC-BOE plan, our IOUs will be converted into “bank equity.” The bank will get the money and we will get stock in the bank. With any luck we may be able to sell the stock to someone else, but when and at what price? Most people keep a deposit account so they can have ready cash to pay the bills.

The 15-page FDIC-BOE document is called “Resolving Globally Active, Systemically Important, Financial Institutions.” It begins by explaining that the 2008 banking crisis has made it clear that some other way besides taxpayer bailouts is needed to maintain “financial stability.” Evidently anticipating that the next financial collapse will be on a grander scale than either the taxpayers or Congress is willing to underwrite, the authors state:
An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company [meaning the depositors] into equity [or stock]. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailed-in creditors would become the owners of the resolved firm. In either country, the new equity holders would take on the corresponding risk of being shareholders in a financial institution
No exception is indicated for “insured deposits” in the U.S., meaning those under $250,000, the deposits we thought were protected by FDIC insurance. This can hardly be an oversight, since it is the FDIC that is issuing the directive. The FDIC is an insurance company funded by premiums paid by private banks. The directive is called a “resolution process,” defined elsewhere as a plan that “would be triggered in the event of the failure of an insurer . . . .” The only mention of “insured deposits” is in connection with existing UK legislation, which the FDIC-BOE directive goes on to say is inadequate, implying that it needs to be modified or overridden.
An Imminent Risk
If our IOUs are converted to bank stock, they will no longer be subject to insurance protection but will be “at risk” and vulnerable to being wiped out, just as the Lehman Brothers shareholders were in 2008.Are you safe, then, if your money is in gold and silver? Apparently not – if it’s stored in a safety deposit box in the bank. Homeland Security has reportedly told banks that it has authority to seize the contents of safety deposit boxes without a warrant when it’s a matter of “national security,” which [another] major bank crisis no doubt will be.
Are you safe, then, if your money is in gold and silver? Apparently not – if it’s stored in a safety deposit box in the bank. Homeland Security has reportedly told banks that it has authority to seize the contents of safety deposit boxes without a warrant when it’s a matter of “national security,” which a major bank crisis no doubt will be.
Those are just a handful of paragraphs from the report, which I recommend you read in its entirety if this is the first time you're learning about it. The link in the first paragraph I quoted is from Ellen's June 22, 2009 report titled Big Brother in Basel: BIS Financial Stability Board Undermines National Sovereignty. (Note the year.) The report begins:

Buried on page 83 of the 89-page Report on Financial Regulatory Reform issued by the U.S. Administration on June 17, 2009 is a recommendation that the new Financial Stability Board strengthen and institutionalize its mandate to promote global financial stability. Financial stability is a worthy goal, but the devil is in the details. The new global Big Brother is based in the Bank for International Settlements, a controversial institution that raises red flags among the wary . . . .
[B]ut more disturbing is the description by Dr. Carroll Quigley of the pivotal role assigned to the BIS in consolidating financial power into a few private hands. Professor Quigley, who was Bill Clinton’s mentor at Georgetown University, claimed to be an insider and evidently knew his subject. He wrote in Tragedy and Hope (1966):

"[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations."
That helps explain the alarm bells that went off among BIS-watchers when the Bank was linked to the new Financial Stability Board (FSB) President Obama signed onto in April.

When the G20 leaders met in London on April 2, 2009, they agreed to expand the powers of the old Financial Stability Forum (FSF) into this new Board. The FSF was set up in 1999 to serve in a merely advisory capacity by the G7 (a group of finance ministers formed from the seven major industrialized nations). The chair of the FSF was the General Manager of the BIS.

The new FSB has been expanded to include all G20 members (19 nations plus the EU). The G20, formally called the “Group of Twenty Finance Ministers and Central Bank Governors,” was, like the G7, originally set up as a forum merely for cooperation and consultation on matters pertaining to the international financial system. But its new Financial Stability Board has real teeth, imposing “obligations” and “commitments” on its members.
Again, those are just a few paragraphs from the report, which I also suggest you read in its entirety.

With news of the BOE-FDIC paper out of the bag, suddenly quite a number of People in the Know began singing like a bird -- a bird with a sore throat because no one explained it as clearly as Ellen Brown had. More annoying than the raspy warbling was the airy attitude: Like, dude, you mean you didn't know?

If you're hoping that Ellen somehow misunderstood what these people were up to, let go of that forlorn hope. Yet unless you already know what they're talking about it can be like pulling teeth to understand their points. Consider the following quotes from Federal Reserve Board Governor Jeremy C. Stein's speech at the "Rethinking Macro Policy II" conference sponsored by the International Monetary Fund, Washington, D.C. on April 17, 2013. He's actually discussing the same topic that Ellen is, but you'd need a decoder ring to know what he's really driving at without Ellen's translations:

Regulating Large Financial Institutions
All of you are familiar with the areas of progress. Higher and more robust capital requirements, new liquidity requirements, and stress testing all should help to materially reduce the probability of a SIFI [Systemically Important Financial Institution] finding itself at the point of failure.

And, if, despite these measures, a SIFI does fail, the orderly liquidation authority (OLA) in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act now offers a mechanism for recapitalizing and restructuring the institution by imposing losses on shareholders and creditors.

In the interests of brevity, I won't go into a lot of detail about OLA. But my Board colleague Jay Powell talked in depth about this topic in a speech last month, and I would just register my broad agreement with his conclusion--namely that the Federal Deposit Insurance Corporation's (FDIC's) so-called "single point of entry" approach to resolution is a promising one. ... The Federal Reserve continues to work with the FDIC on the many difficult implementation challenges that remain, but I believe this approach gets the first-order economics right and ultimately has a good chance to be effective.

Perhaps more to the point for TBTF [Too Big Too Fail], if a SIFI does fail I have little doubt that private investors will in fact bear the losses -- even if this leads to an outcome that is messier and more costly to society than we would ideally like. Dodd-Frank is very clear in saying that the Federal Reserve and other regulators cannot use their emergency authorities to bail out an individual failing institution. And as a member of the Board, I am committed to following both the letter and the spirit of the law.

Speaking of the need for a decoder ring, Pundita readers who watched Fed Chairman Ben Bernanke's press conference in May might be thinking at this point that Ben must have lied when a reporter asked him about the Cyprus banking crisis and he replied that he hadn't been closely following the situation. He didn't lie. He just didn't mention that he didn't need to follow the situation; he knew what it was all about even before it made the news.

As to whether he lied when another reporter asked whether what happened to Cypriot depositors could happen to Americans -- again, he didn't lie within the narrow context of the question. He replied that it couldn't happen because the FDIC insured American deposits up to $250,000. Yet I'd find it hard to believe he didn't know that if the deposits have been converted to bank shares, they don't fall under the category of a deposit, which means the FDIC insurance doesn't apply.

This situation would be part of the "messy" costs to society Jeremy glided over in his speech: millions of Americans being handed worthless stock in a "systemically important" failed bank in exchange for a large chunk of their money on deposit, and having no legal recourse.

Then it was gold's turn

In quick order during the second week of April 2013 there were a number of moves against gold. These included what turned out to be a wildly incorrect story fed to Reuters about the Cyprus government having to sell its gold reserves to help finance its bail-out (see this commentary from Seeking Alpha); a recommendation by Goldman Sachs to short the price of gold -- Goldman being so entwined with the U.S. government in my opinion, I'm surprised it doesn't have a branch office set up in the Treasury building.

Despite the alarm signals the gold and silver bulls assumed all the bad news wouldn't shave much off gold or silver prices. Then, on Friday, April 12, the price of gold inexplicably plummeted. On Monday the rout continued; by then the "small" gold investor, the "retail" investor who'd bought paper gold via exchange traded gold funds, had panicked and dumped his shares. The rout had extended to silver.

At 10 PM Eastern time on Monday, April 15, USA Today's John Spence summed up the carnage in the gold market in his report, ETFs contribute to gold's plunge:
"Gold-backed exchange-traded funds (ETFs) helped fuel gold's historic rally as the ETFs allowed investors and hedge funds to easily buy the precious metal with one click of a mouse. Now, the ETFs are likely exacerbating the worst two-day fall in 30 years, which has sent the price of gold plunging more than $200 an ounce. The sharp slide has left hedge fund managers like John Paulson smarting, benefited others like billionaire George Soros [who'd shorted gold], and prompted nervous traders and individual investors to dump their holdings.[...]"

Despite his decades of experience as a very aggressive gold investor, one who'd engaged in many wars with gold bears and was a close Fed and Treasury watcher practically since he was in diapers, Jim Sinclair was stunned by the severity of the rout in the gold price. He wrote on his website (paraphrasing here) that he didn't think they'd go that far. Who's they? I don't recall that he specifically said. But the usual suspects, if one is going to suspect a U.S. government orchestrated raid on gold, are the Federal Reserve and Treasury and their friends on Wall Street, and maybe working in coordination with other major central banks. Certainly there were rumors and speculations on the Internet that the rout was government orchestrated.

When they have to, governments are capable of ganging up on speculators of all kinds, including gold speculators. And yet it wouldn't have taken much to panic the mostly unsophisticated investors who'd piled into the gold exchange funds. The bottom line is that the "physical delivery" gold market is very thin and largely unregulated. Only those with deep pockets and nerves of steel should attempt to play that kind of market -- especially in order to argue with the Federal Reserve about its monetary policy.

At the same time, speculators are capable of ganging up on other speculators, not to mention naive investors. And it's no secret that gold traditionally has many enemies on Wall Street, especially among traders who believe that if you have money to invest, it should go into stocks, or maybe a hedge fund with a nicely balanced portfolio of stocks and bonds.

In summary, I don't know whether government(s) orchestrated an attack on gold, or whether the rout was simply a classic bear raid. Either way, the rout worked out to the same difference in the view of the Guardians of the Economy: the statistical anomalies who believed that gold was a better refuge than the U.S. dollar and that they knew more about monetary policy than the Fed got a big dose of reality.

FATCA (Not to be confused with FACTA)

On October 19, 2012 Anita Greil's report for the Wall Street Journal, Wary Swiss Banks Shun Yanks addressed some negatives of the insanely draconian U.S. legislation known as FATCA:   "The new law, expected to be phased in over several years, requires foreign banks to identify Americans among their clients and to provide their financial information to the Internal Revenue Service. Just one person overlooked could mean a penalty equivalent to 30% of a bank's U.S. income. The measure, known as the Foreign Account Tax Compliance Act, or Fatca, applies globally."

The financial penalty to foreign banks is an addition to the masses of red tape that the U.S. government is wrapping around every foreign bank that dares do business with Americans for any reason whatsoever. The aim is very clearly to discourage such business and the banks are taking the hint; many now won't deal Americans.

It's gotten to the point, as Anita's report highlights, that Americans with a legitimate need to do business with foreign banks are having to change their citizenship -- even though this path can easily put the Americans on the wrong side of other aspects of FACTA, as the report details.

FATCA is so destructive to American interests there's been a move in Congress to roll back some of it. Yet the legislation fits with government's general approach to Americans who don't fall within the Economic Collective in the post-2008 financial meltdown era. 

The approach is simple: Nobody moves, nobody gets hurt.

Next up:  Dodd-Frank Actwhereupon we meet a Guardian of Financial Stability and return to pondering Larry Summers's musings.


Monday, August 12

From Economic Collective to Police State: Once Americans ceded control over their financial affairs they lost control of everything else

WANTED for CRIMES against Federal Reserve Mathematical Models

This post follows on America is becoming a police state. What's the solution? (July 18, 2013)

When money talks nobody walks

Mao famously said that all power comes from the point of a gun. Not in a republic it doesn't. All power comes from the peoples' control of their monetary wealth. Here wealth simply means an abundance -- what money earners have left over after meeting all their expenses including taxes. Whoever controls this wealth rules because while taxation provides representation, only the crushing authority of wealth -- how the people decide to spend, save, borrow, and invest their abundance of money -- imposes the discipline on government that insures taxation produces honest and adequate representation.

So here is the bottom line about whether the United States will continue to exist as a republic: Just as there's never been any such thing as a long lived monarch who doesn't control his wealth, a "rule of the people" can't last long unless the people control their wealth.

This control works out in practice to the people controlling their banking system. And by "people" I don't mean "the government of the people." I mean "the depositors." I'll expand on all this later but for any reader who thinks it can't be that simple -- tragically, it is that simple. The clearest indicator of where an independent nation stands on the freedom-oppression index is the state of its banking system, although the indicator is usually viewed, wrongly, as an effect and not a primary cause. But then how many American high school and college graduates have you met who know anything about  banking?

The bottom line was overlooked by political parties in the USA. Instead of focusing on the critical issue for a rule of the people, the parties encouraged voters to engage in distracting arguments about taxation and the size of government. All the while Americans ceded more and more control of their financial affairs by cooperating with fiscal and monetary policies designed to stave off another Great Depression.

For example, if the President appealed to the public to spend for the sake of the economy, Americans dutifully spent, even if this meant going into debt. If the Federal Reserve enacted policy that slashed the amount of interest banks paid depositors -- policy meant to stimulate greater public spending and investment in the stock market -- Americans who depended on income from the interest grumbled but didn't picket the Fed or chain themselves to bank doors in protest.

In short, there was no need for a draconian regulatory regime or what people consider a police state because Americans were so cooperative with policies that eroded their control of their wealth. Then the Great Recession of 2008 struck. After that, everything changed. Many Americans ceased being cooperative. This alarmed the Guardians of the Economy.

Meet the Guardians

The Guardians are the people, chiefly economists and financial regulators, who are tasked with the solemn duty of protecting the United States from another Great Depression. These Guardians are not to be confused with Guardians of Financial Stability, who charged themselves in 2009 with maintaining global financial stability, even though Guardians of the Economy can also be Guardians of Financial Stability. (More about the latter in the next post.)

Protecting the United States from another economic depression requires science, which in this era also requires math -- and here I do mean "require." There was an American economist and economics professor named Hyman Minsky who pointed out that personal debt played a significant role in financial panics but because he didn't create a mathematical model to illustrate the point it couldn't be accepted in mainstream economics, even though everybody realized he had an important point. (Ironically, Minsky had a degree in mathematics. Go figure. Maybe he was too busy teaching to do the math.)

However, one can't construct mathematical models using cheese tostitos. One must first gather and process vast quantities of financial and economic data, then aggregate the data. Then one must filter the aggregates through math that reflects accepted principles of economics. Here is where things get strange.

Economic Collectivism and Anomalies

There is one big problem with the statistical approach as it's applied to putting the social science of economics into practice; i.e., making it an applied science. The problem, as I mentioned in the July 18 post, is that the approach generates a type of collectivist thinking in which the individual has no objective existence apart from aggregates of data. It's this wholly abstract collective entity, usually termed simply "the economy," which determines how policymakers in governments and central banks think about fiscal and monetary issues.

I stress that this collectivism doesn't arise from a political agenda or philosophy, although it could be argued that once any kind of collectivist thinking becomes entrenched at the government level it all works out to the same difference. But it's important to recognize that the collectivism I'm talking about is a byproduct of an extreme reliance on statistical analysis when examining situations that involve large numbers of people. Sort of an occupational hazard, if you will.

The hazard is as old as people thinking in organized fashion about situations that manifest in groups, so it's not limited to economics. However, this era's sophisticated data collection methods and high speed computers, which allow for the application of mathematical modeling to massive collections of data on megapopulations, have increased the tendency for fiscal and monetary policymakers to think in collectivist terms.

It's this collectivist mindset that prompted a CBS News reporter to stand up at Federal Reserve Chairman Ben Bernanke's press conference in May, after Bernanke's testimony before Congress about the state of the economy, and ask without irony if he had any idea of the financial problems of actual people in the United States. Bernanke replied that yes he did; he explained that recently he'd visited his home town, which was still suffering from the effects of the recession, and that he had a relative who'd been out of work for many months.

So it's not as if this collectivism prevents economists from thinking in individual terms. It's just that when it comes to setting monetary policy Bernanke and members of the Federal Open Market Committee must of necessity rely on aggregated data. This means they must think in terms of a collective when devising stratagems to steer the nation away from economic calamity and help it recover from sharp economic downturns.

Where, then, does this leave the individual whose actions deviate from accepted principles of economic solutions and what data tells economists about the economy? The policymakers see the deviance as in effect an anomaly -- something that doesn't reflect the collective data. If there are few such anomalies they're excluded from the mathematical models. But when the anomalies start to pile up then the Federal Reserve, which is specifically charged with managing U.S. monetary policy, and the economists who labor along with Treasury, Congress, and the White House on the fiscal side of U.S. government policies, are at a crossroads:

They can act in the manner of real scientists: admit that their mathematical models are obsolete and that they need to revise the economic principles guiding their policies. Or they can abandon science and look at the proliferating anomalies as a kind of insurgency.

Which road do you think the Guardians of the Economy took?

Rise of the Statistical Anomaly Insurgency

Even as early as 2009 things had gotten out of control. Statistical anomalies were popping up in ever greater numbers. Many of these anomalies purchased gold as a hedge against what they presumed were coming financial calamities. In addition they began stockpiling food. Not just a couple dozen cans of creamed corn, mind you. Drive a forklift to Costco.

The survivalists weren't the worst of it, from a monetary policymaker's viewpoint. Many statistical anomalies had stubbornly refused to return to the stock market after getting burned in 2008. They paid down their debt and sat on cash in their savings account. This was skewing Chairman Ben Bernanke's prescription for the economic recovery. So the Federal Reserve began slashing interest rates and pumping more and more money into the banking system in the effort to direct the anomalies into the stock market.

Nope. Didn't work. The anomalies didn't care if the DJIA hit 20,000 and the interest on their savings accounts went down to 0.0001%. They weren't budging from their cash position. This wasn't just middle-income and middling upper-income Americans. Many rich Americans were also clinging to large cash positions.

More quantitative easing, more interest rate lowering. But like Scrooge McDuck (in his original incarnation) the anomalies quacked that a penny saved is a penny earned. Nevermore would they take a flyer in the stock market. Nor would they ever again go hog wild with their credit cards.

This selfish, miserly attitude was wrecking the mathematical models that churn statistical aggregates on the state of the Economy. And wasn't the whole point of Disney introducing the stingy McDuck character to shame Americans into not being miserly -- to get out there, open revolving charge accounts and spend, spend, spend for the sake of the economy? But those were the Dark Ages for government economists and the Fed. 1947. They were still using slide rules to do statistical analysis, for crying out loud.

Worse, in the Fed's view and the view of banks that can't exist without being propped up by Fed policy, many statistical anomalies refused to take it on the chin when banks froze up on lending after the '08 crash. With the help of some meddling anomalies in the United Kingdom and a few renegade American bankers they began setting up lending networks. Functioning, would you believe, as de facto banks, as lenders of last resort for each other, and charging interest for the loans, to boot!

Do you know what it takes to start a real bank in this country? The application forms are not measured in pages. They're measured in pounds. That's only if you don't have other businesses when you apply to open a bank; if you do, the forms are probably measured in tons. One corporation decided to consolidate all the paperwork at a single site and had to rent a flatbed truck to do it. (I am not making this up.)

But here were these -- do it yourself monetarists (by this time the Guardians were getting imprecise in their Scientifical language) making up their own policies as they went along, circumventing scores of regulatory agencies, making party favors out of red tape meant to protect the American depositor and the banking system.

To add insult to injury in the wake of the 2008 market crash the Internet had generated an entire subculture of Do It Yourselfers, who followed the advice of any self-appointed monetary expert and renegade economist who started a website.

Then these crypto-anarchists (by then the Guardians had completely abandoned Scientifical language), upped and created their own currency. Bitcoin. Virtual currency, they called it. Do you have any idea how expensive it is for a government to make currency? And here were these -- these bitbrains doing it with a few strokes on a computer keyboard. Worse, their trading in Bitcoins was screwing with monetary policy. Only the Federal Reserve has the authority to do that.

Then the criminal class got into the act, turning Tide liquid detergent into a booming black market currency. (I am not making this up.)

Now none of these anomalies considered themselves to be running monetary policy but that was just the problem: in completely disorganized fashion many Americans were creating an alternative to official monetary policy and by doing so challenging the authority of the Guardians. Worse, the very existence of so many anomalies threatened to destroy the Economic collective.

The Final Straw

Next these these cretins, these financial illiterates, these -- these hoarders of creamed corn, began demanding physical delivery of the gold they'd bought.

And it wasn't just the little guy; by 2012 wealthy Americans who'd stored gold offshore for decades began asking banks in Switzerland and Eurozone countries for their gold.

By then gold was no longer merely a hedge against inflation or calamity; it had become a hedge against the Fed's prescription for economic recovery. The third round of quantitative easing, which put no cap on the Fed's massive bond-buying program, had sent the U.S. stock market soaring but with little effect on the recession outside New York and a couple other big cities.

The runup in gold prices was fueled by speculators betting against the Federal Reserve's quantitative easing policy; they thought it was going to fail to meet its objectives. This would mean a severe 'double dip' recession possibly leading to an all-out depression. So several investment advisors were routinely telling CNBC, the premier American financial TV station, that gold could go to $2,000 an ounce and from there the sky would be the limit.

But once gold hit $2K/oz it would become completely monetized and as such rival the U.S. dollar as a major reserve currency for central banks.

Trouble was, nobody was sure how much gold was actually available for delivery. The uncertainty touched off demands among very knowledgeable gold purchasers for physical delivery of the stuff.

Then the Bundesbank got cute

As early as the fall of 2012 rumors were flying in financial circles that Germany's central bank had gone from being upset to very upset with the Federal Reserve's quantitative easing policy. We don't want to be caught in a currency war, one Deutsche Bundesbank official said, as central banks around the world slashed interest rates in a desperate attempt to keep up with the Fed's QE to Infinity approach, after QE1 and QE2 had failed to meet the Fed's target objectives.

By January of this year the word was out: the Bundesbank had asked for delivery of a big chunk of the gold bullion it kept stored in the Federal Reserve, originally as a hedge against Soviet aggression. (It also sent notice to the French central bank that it was repatriating a smaller amount of German gold stored there.)

Technically one thing didn't have to do with the other. The Bundesbank had come under a court ruling to precisely count and assay all its gold holdings. This was after the German people started getting nervous about the state of their central bank's gold reserve -- not without reason, I might add.

There was an unfortunate mistake many years ago when the Bundesbank asked for delivery of some its gold from the Federal Reserve and the Bank of England (the U.K. central bank.) When the Bundesbank assayed the gold (did they think the Germans wouldn't check?) they discovered it wasn't the "pure" bullion it had originally shipped the central banks for safekeeping. The mistake was quickly corrected but you can see how people could get nervous about such things when the price of gold heads north of a thousand bucks an ounce.

To cut a story: human nature being what it is, people hooked up the gold repatriation request with the Bundesbank's concerns about QE3 -- concerns that extended to Germany's finance ministry. So what had started out as the odd request here and there for physical delivery of gold turned into a stampede after the Bundesbank's repatriation request became news. This threatened to skyrocket the price of gold.

Look at things from a Guardian's point of view. Something had to be done to restore central authority for monetary policy, or next the whole quacking lot of insurgents would be pretending to take a vacation so they could try to open a bank account in the Grand Caymans or Luxembourg with their chump change. Precautions, they'd call it. Precautions against the coming social unrest in the USA. They were more likely to be killed by a super-sized can of Dinty Moore beef stew falling off a forklift than by a rioter.

Something was indeed done. Actually a number of things were done. That's where I'll pick up in the next post.


Wednesday, August 7

Homeland Security orders golf courses in Greater Washington, DC area shut indefinitely in response to al Qaeda threat to White House; Glenn Greenwald denies biting reporter; Wyoming town takes precautions against al Qaeda

At yesterday's White House press briefing White House Press Secretary Jay Carney fielded several questions about Homeland's directive. A reporter for ABC News asked if the golf course closings were a stunt to deflect criticism of the National Security Agency (NSA).

Mr Carney replied somewhat cryptically that the White House did not engage in "childish histrionics" every time "some 29 year old hacker upstages the President of the United States."

When the reporter pointed out that Edward Snowden was now 30 years old, Mr Carney asked, "Tell me how old I am."

The reporter was saved from briefing room Siberia when a reporter for the Associated Press sitting next to him hissed, "48."

"48," called out the ABC reporter.

A reporter for the New York Times asked if the White House could confirm or deny the rumor that Edward Snowden learned Japanese within three weeks when he was stationed in Japan, and whether it was true he'd learned passable Russian within 40 days from a basic primer on the language and hearing announcements over the loudspeaker at Sheremetyevo airport.

Mr Carney referred the questions to the CIA.

A reporter from USA Today asked Mr Carney if President Obama could take a wool scarf her mother was knitting and a down coat to the Moscow summit to give to Edward Snowden.

"It gets cold in Moscow in September," she explained. "And also could he bring him a 21 piece bucket of Kentucky Fried Chicken? He looks so terribly thin -- Edward, I mean," she added.

In answer Mr Carney removed his eyeglasses and glared at her.

"KFC has more than 80 outlets in Moscow," a Reuters reporter sitting behind her hissed.

A reporter for the Washington Post called out from the back of the briefing room, where she'd found herself seated after writing up Russia tourist tips for Edward Snowden, whether the White House could confirm or deny the rumor that Glenn Greenwald had bitten a still-unnamed reporter in the major U.S. press who refuses to cover the NSA surveillance issue.

Mr Carney referred the question to Glenn Greenwald.

"That's a lie," Mr Greenwald said via Skype from his home in Brazil. "There are 11 dogs in this house and one of them nipped the reporter in the ankle when he tripped over her, that's all." (1)

In other defense-related news: Just in case al Qaeda tries to blow up the liquor store in Mashed Potato Falls, Wyoming, the police force there has received a federal grant for training in SWAT tactics and a donation from the Pentagon of used body armor, AH-64 Apache gunship, and a M1A1 Abrams tank.

"Fred doesn't like wearing the armor," Chief of Police Eunice Parsons announced at her latest presser. But the rest of the force, consisting of a retired taxidermist and Eunice's brother-in-law, is getting the hang of driving the tank, which they deployed in July to raid an unlicensed moonshine still.

In answer to a question from a reporter for the Mashed Potato Falls Gazette, Eunice said that she didn't think the donations indicated a militarization of America's police forces.

"There's not much difference between a rifle and a tank when you get right down to it," observed Eunice. "They're both made to shoot."

I think the press conference is a help to any readers stumped by #13 on Wikipedia's list of criteria for the electronic police state.

1) Glenn rescues stray dogs; if you'd like to adopt one or just thank him for his incredible efforts to alert the public about the extent of clandestine NSA surveillance and prevent the issue from being buried by the mainstream media, you can reach him at @ggreenwald on Twitter or email him at


Friday, August 2

Archetypes and Quests

Alexander the Dark Lord, Edward the Light Bringer, Julian the Clever, Greenwald the Magnificent, Putin the Merciful Troll

Is it me, or is the NSA story beginning to resemble something Tolkien might have written? Many commentators have lectured that this is not about Edward Snowden, that it's about freedom and the abuse of power. Yes yes, but the heart cries out for something more. Echoes and correspondences, the stuff of legends, the same stories form again and again, the same actors don different costumes....

Roses for the Russian people, brickbats for the usual suspects

From the viewpoint of Russian Federation-NATO relations Edward Snowden couldn't have landed in the Russian lap at a worse time. Talk about being tested. It would have been so easy for the Kremlin to ship him back to Hong Kong or leave him in airport limbo until he withered away.

So, many thanks are in order -- not only to the Russian people as a whole but specifically to the Kremlin, to Vladimir Putin, to the Russian press, to attorney Anatoly Kucherena, to workers in Russian civil rights organizations spoke up for Edward Snowden, to workers at the Moscow airport who philosophically bore the hordes of journalists camped there, to Russian military figures and defense and policy analysts who argued in favor of asylum.

Even an entrepreneur chipped in with a job offer. Pavel Durov, founder of the social networking site Vkontakte, or VK (Russia's version of Facebook) said, "We invite Edward to St. Petersburg and will be glad if he joins our star team of programmers."

Given that his life is still very much at risk it's unlikely Ed will be able to accept the offer, even though his one-year asylum in Russia (which can be renewed) allows him to work and travel freely there. But in this case it's definitely the thought that counts.

And so I think the commentator who morosely termed Ed's stay at Moscow airport a "lonely plight" wasn't seeing the full picture at the time. Many people in Russia were working to help Ed during his stay in the airport.

And when I look through a wide-angle lens I see that during his stay at the airport thousands of people here in the USA and around the world were working to help Ed, and that many millions of people were standing up for the cause and principles he's risked his life to defend.

No, Edward Snowden has not been lonely. I'd say the fact that he hasn't been lonely shows off the human race in its best light.

[Ding!Ding!Ding!] Ah, I see that my alloted time for being nice during any one 24 hour period has just expired. Now on to the burning question of whether President Obama will cancel his Moscow side visit during the September G20 summit in St. Petersburg to show his displeasure with the Russians hosting an American fugitive from justice. And miss a chance to grandstand on the world stage about human rights? I'll believe that when I see it.

If history is any guide the next month will find:

> MI6 and CIA operatives running around Russia like chickens with their heads cut off, spreading cash to any group that has a beef with the Kremlin.

> Major press in the U.K. and U.S. incuding ones owned by News Corp. running front-page stories about the Russian government's human rights abuses going back to the Crimean War.

> This will be topped off on the eve of the G20 summit by a protest in Red Square led by Gary Kasparov chanting, 'We demand the same rights as you gave Edward Snowden!' Then Gary will be carted off by police because he refused to apply for a permit for the protest. BBC and CNN will be there to record the event while Gary screams at the cameras, 'I will never be seen or heard from again!'

Next I have a few words for China's top officials and state-run press. I would do a little less chortling about the Obama administration's "embarrassment" regarding Russia's decision to give Ed Snowden asylum.

China's government showed the spine of a jellyfish on the matter of giving Ed refuge as soon as it came under pressure from Obama's administration. That's how we got Ed's attorney in Hong Kong suddenly hemming and hawing about the possibility that he might have to be incarcerated during the months or years the government decided on his request for asylum -- and have his laptops taken away from him during that time. Only an idiot wouldn't have read that as a threat to get out of Hong Kong, or else.

I feel sure that the majority of Hong Kongers opened their hearts to Ed and wanted him to stay, so I planned never to say anything about the government's behavior. I took my cue from Edward Snowden, who has never asked for more help than he's been given by any government, and who's always expressed thanks for whatever help was given. But I changed my mind when I read comments in China's press that smack of schadenfreude at the expense of the U.S. presidency. Cut out the schadenfreude -- unless of course Hong Kong's government would like to offer Edward refuge without imposing conditions they know he can't accept.

All this said, a certain contingent in the U.S. press has made it easy for China's press to chortle by publishing headlines that shriek, OBAMA SLAPPED IN FACE BY RUSSIA and IS OBAMA GOING TO LET PUTIN GET AWAY WITH THIS BECAUSE IF HE DOES HE'S A YELLOW-BELLIED SAPSUCKER.

This happens to be the same contingent that has been largely silent in the face of Ed's revelations about the electronic police state or portrayed him as a traitor.