Thursday, December 3, 2009
Drugs, Money, and the CIA in Afghanistan
I've been writing for quite some time that the U.S. government's (and the Russians, before us) objective in Afghanistan is the country's only valuable resource and singular point of interest: heroin.
How much heroin? Nearly every pound produced on the plant; a 95% monopoly. Try $500B street (2007) to likely $1T (est. 2009) retail value, annually, according to the UN. The country's total output has more than doubled since we began occupying it.
Bush = Obama. It doesn't matter. The CIA needs the drug money. You know, times are tough all over.
So tonight, I found it mildly interesting that MSNBC, a far-right, anti-Obama organization by all measures, is reporting that Obama's war in Afghanistan is not a war at all. In fact, MSNBC reports, there are almost double the number of "contractors" in Afghanistan (103,000) than U.S. military (44,000 and climbing) . Imagine that! I wonder why? It must be all the skyscrapers going up.
Further adding to the intrigue, Vanity Fair is reporting that Erik Prince, the CEO of the U.S.A's largest corporate "contractor" in Afghanistan, Blackwater Inc., has been outed (by guess who, surprise, a high ranking source in the U.S. military who doesn't like what is going on) as a full-time CIA operative. Prince denied it, right? Wrong. He confirmed that he is, in fact, "a CIA operative."
You heard it here first.
This is disgusting corruption at the highest levels. Yes, that means Obama and Bush. Who are cousins, in case you don't read this blog regularly (as is Dick Cheney, to both of them). MSNBC reported that too, after picking it up here.
We MUST start over.
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What if scenario:
ReplyDeleteIf the public loses all faith in the FED, what happens to the FRN's that we're hoarding?
In your view, as public perception evolves (audit, anger, abolish, etc.) does this make 100% short term treasuries the "safest" investment as they are backed by the labor of the American people as opposed to the FED's promises to pay?
I don't recommend short term treasuries because they are "safe." I recommend them because they are the MOST PROFITABLE trade you can make.
ReplyDeleteCouple of reasons why...
First, once C (or similar too-big-to-fail) fails, and it absolutely will, we'll actually witness the ugly sight of about $3T bucks fighting for a few billion in Treasuries. Mostly short term Treasuries will be mobbed, to facilitate month-to-month liquidity needs.
Why? Well, will you want money in a bank with C dumping 1/5th of our total deposit pool in the garbage? That will cascade to BAC ($2T), JPM ($2T) etc...
We'll likely see VERY negative treasury yields as bids to save whatever people can save drives treasuries into the stratosphere. A good old fashioned bank run. You think that under-the-RADAR internet-based run on WAMU was bad?
Just wait.
The flat-broke FDIC will be sucking it's thumb in the fetal position, soiled in the corner. They are struggling to raise a few billion right now; they know that, politically and economically, flat-broke congress can no longer help them. The FDIC is short $15T.
$15T!
Before one carelessly quips, "well, we'll just print it." Remember, we've never printed one dime of currency in America. Never. (ok, except the original US Greenback that died with Lincoln, but that was squashed fast. Yeah yeah, and JFK's Silver Certificates, too, look how far those went). Every single penny of our currency, is, was, and always has been, a paper receipt in exchange for a for-profit bank loan. Do you see $15T in new profitable bank loans happening over the course of that acute crises? What incentive then, does the Fed have to print? Zero, they'll lose every dime they print.
So just like 1776, 1812, 1836, 1862, 1874, 1907, 1921, and 1929, they WON'T PRINT a single penny at a loss. If they did, the corporation would disappear, anyway.
Second, to answer your question more directly about what happens when Fed currency collapses, the same thing will happen that has ALWAYS happened in the USA. Hyperdeflation. We've experienced no fewer than 6 hyperdeflations during our storied national history. Zero hyperinflations.
Cash is the MOST PROFITABLE place to be in a hyperdeflation. Not necessarily the safest place to be.
We have already experienced two, massively deflationary depressions (1812 and 1836) caused by central bank failures, when our central bank took their paper funny money and vacated. (1929-1954 was one too, when the Fed went bankrupt but continued in name only)
1836 was BY FAR, the worst deflationary depression in our nation's history, when the SBUS central bank was kicked back to England by Andrew Jackson.
As a side note, I've pointed out several times that in EW terms, that 1836 mega-depression, when our ENITRE paper cash supply was extinguished following the collapse of SBUS, was America's Wave 2. W2 is always nature's small scale fractal for the ABC that follows W5. We are in that A, today.
As I always say. I don't guess. I simply know history and I understand the science of how nature moves markets better than others.
There is nothing new under the Sun.
Nothing is in doubt, here.
Everything we are experiencing has happened, time and again.
Ok I hear the question in advance. What is the safest place to be?
ReplyDeleteA: Probably silver and gold.
But that insurance only pays in the case of a USA failure. Total Chaos.
Are you going to feel "rich" in that scenario?
Even if your answer is yes, AND gold and/or silver is the thing to have, not MREs or clean water or something, it will only take a few ounces of physical metal to posses a bazillion times more wealth than everyone else.
That is exactly why I have ALWAYS recommended holding some physical metal. ...while I short the crap out of the paper metal.
i know you suggest going to treasurydirect, but what do you think about ETFs like BIL? if the most profitable place to be is in short-term Ts, don't you want to be able to "cash out", which an ETF would allow you to do?
ReplyDeleteHi notgreat,
ReplyDeleteThe best place to be, is cash in pocket. If you own too much cash to protect, electric Treasuries (the only kind left) is a true cash-equivalent with unlimited treasury backing that can be redeemed at any bank left standing, though it will probably take at least 6 months to convert to cash, so you should have 1 year (minimum) of total living expenses of hard cash in home.
Most ETFs give you no claim whatsoever to the underlying entity if the custodian fails, thus they have no Treasury backing, and will need to be brokered. So I do not recommend ETFs to trade anything but pumped up, risky paper (and I do that all the time).
I get asked a lot about 100% Treasury-backed MMFs. Those too give you no claim whatsoever to the underlying instruments, so it is really no different than owning paper stock in the host bank.
It might be the best one can do if they wish to risk their IRA or 401 on a given bank surviving as thousands fail.
FDR
ReplyDeleteThe jobs report today, and BOA paying back Tarp has bulls running down the street , as i look out my office window.
I am trying to figure out if they are running to a New Year Eve party or the slaughter house ?
I'm willing to go a little further out the curve as I don't see this cock-up resolving for many years. Isn't Afghanistan also on the route of some proposed gas pipeline? I agree the drug issue is real (and shameless) and expect to see a lot more addicted Canadian service personnel going forward but aren't resources also a factor? Not only do the western powers want them but like a wolverine, they do not want to see Russia or China get their hands on them either.
ReplyDelete"Not only do the western powers want them but like a wolverine, they do not want to see Russia or China get their hands on them either."
ReplyDeleteYes, unfortunately we haven't come that far from the BoE Opium Wars through China and Russia. It's amazing how little some things change.
FDR wrote: "What incentive then, does the Fed have to print? Zero, they'll lose every dime they print."
ReplyDeleteExcept that "losing" what they print has no downside for them. Why? Because it's *fiat* currency. It has no intrinsic value at all.
This is in stark contrast to previous cycles, where the currency was backed with *and exchangeable for* a hard asset: gold.
Now, were the Fed a normal fractional reserve bank, then "printing" money would pose a problem because not only do they have rules that they must operate under that are beyond their control, but the reserves they print against are, themselves, borrowed money. But *neither* of those things is the case for the Fed: they operate under whatever rules they choose, and the reserves they print money against are not borrowed from anyone. The Fed owes nothing.
So you cannot analyze the current situation using all of the assumptions of the past, because some of those assumptions simply aren't true anymore, and some of those untrue assumptions are critical to the outcome you're predicting.
The Fed will print whatever it has to print in order for those who own and run the Fed to retain their power. It's as simple as that.
kcb --
ReplyDeletebut if you're a banker, it seems like a deflationary outcome where you seize collateral is much preferable to one where you get paid back with worthless dollars. assuming you keep people from hanging you from a tree.
notgreat wrote: "but if you're a banker, it seems like a deflationary outcome where you seize collateral is much preferable to one where you get paid back with worthless dollars. assuming you keep people from hanging you from a tree."
ReplyDeleteThis is true, but the Fed doesn't seize anything at all as far as I know. I suppose perhaps the fractional reserve banks wind up becoming their property if they go down but I can't recall a single case where that actually happened. FDR surely has more insight into that.
Regardless, my point is that you can't examine the situation from the point of view of a traditional banker, because the Fed is anything but a traditional bank. They guys running the Fed are running the banking *system*, not individual banks themselves, so it would be a grave error to draw conclusions from a traditional banker's point of view.
The only time currency deflation is of any advantage to those who run the Fed is when it occurs while those who run the Fed are holding large amounts of currency. But as I've alluded to elsewhere, those who run the Fed are interested in something much more valuable and useful than money: power. And they derive their power from the control they exert over the government and its ability to project power across the globe.
That ability to project power is far greater now than it has ever been in the past, by orders of magnitude. Enough so that one can easily argue that on balance it simply *didn't matter* before.
If they have to choose between the money they hold becoming more valuable as a result of deflation and retaining their power through a strong, well-financed government, they *will* choose the latter, even if it means sacrificing the former. Because to them, money without power is entirely worthless. This is a fundamental change from prior deflationary periods, where the power of the federal government was relatively limited in scope and ability.
I'm not sure, but it may also be that this is the first time the total financial picture has placed the U.S. government itself in jeopardy of financial death. That is, in prior deflationary cycles, the government itself may not have been in a position where it had to borrow in order to maintain itself. It certainly has to today, however.
So if the Fed becomes the U.S. government's lender of last resort, the question is: would the Fed lend it the money needed to continue operations even if it had no expectation that it could ever be paid back? I think FDR believes the answer to be "no", because that would clearly not be "profitable" from a traditional banker's point of view.
I, however, believe the answer to be "yes", because the U.S. government is the means by which those who run the Fed project their power, and losing that would be like losing all your limbs. Furthermore, because the currency is a fiat currency, printing it and lending it out *costs nothing*, and therefore the only real price those who run the Fed pay by lending to a U.S. government that can't pay it back is a reduction in the buying power of the currency they hold, and *that is all*. That's a small price to pay to retain the ability to project military and political power across the world.
The game today is very different than it has been in the past, and it's foolish in the extreme to assume otherwise. Oh, there are significant similarities, of course, but to assume that things will go down exactly the way they have in the past is sheer folly. Elliott Waves do not, and cannot, trump cause and effect.
(sheesh, blogger's UI really sucks for replying in these threads...)
ReplyDeleteThis is true, but the Fed doesn't seize anything at all as far as I know. I suppose perhaps the fractional reserve banks wind up becoming their property if they go down but I can't recall a single case where that actually happened. FDR surely has more insight into that.
they certainly get something in exchange for their loans (and purchases, obviously). when AIG sells $25bil worth of some unit *to the NY Fed* to pay off a loan, it certainly seems like the Fed got something. what the Fed does with it now is a bit of a mystery to me, i must say. i guess FDR would say that they somehow transfer it to their shareholders, but the mechanism by which they do this is very unclear to me.
If they have to choose between the money they hold becoming more valuable as a
why do they have to choose? (see below)
I'm not sure, but it may also be that this is the first time the total financial picture has placed the U.S. government itself in jeopardy of financial death. That is, in prior deflationary cycles, the government itself may not have been in a position where it had to borrow in order to maintain itself. It certainly has to today, however.
i know this line of thinking, but consider this: if you're a large ongoing borrower like the USG, you *want* a deflationary environment, because that keeps rates low. imagine if there were double-digit T rates right now -- the govt would have to stop deficit spending overnight & balance its books -- it's the last thing the pols want.
So if the Fed becomes the U.S. government's lender of last resort, the question is: would the Fed lend it the money needed to continue operations even if it had no expectation that it could ever be paid back? I think FDR believes the answer to be "no", because that would clearly not be "profitable" from a traditional banker's point of view.
I, however, believe the answer to be "yes", because the U.S. government is the means by which those who run the Fed project their power, and losing that would be like losing all your limbs. Furthermore, because the currency is a fiat currency, printing it and lending it out *costs nothing*, and therefore the only real price those who run the Fed pay by lending to a U.S. government that can't pay it back is a reduction in the buying power of the currency they hold, and *that is all*. That's a small price to pay to retain the ability to project military and political power across the world.
as i said above, i don't think they'll have to make that choice if there's a deflation, in which there's a rush to safety of govt paper. govt borrowing is still a relatively small percentage of all borrowing, so even if they expand their share of credit markets, deflation can still make the overall pie shrink significantly. just look at the past year: overall debt has actually shrunk (see z.1), while government borrowing has skyrocketed.
now i tend to agree with you that the Fed & USG have a symbiotic relationship. i sort of have the "The Creature from Jekyll Island" view of the Fed: it's a partnership between bankers & politicians. bankers get to make their notes legal tender & charge interest on them, and the politicians get to deficit-spend without having to raise taxes. FDR seems like he has a different view, even though he has recommended the book.
The game today is very different than it has been in the past, and it's foolish in the extreme to assume otherwise. Oh, there are significant similarities, of course, but to assume that things will go down exactly the way they have in the past is sheer folly. Elliott Waves do not, and cannot, trump cause and effect.
agree with that. i enjoy FDR's unique take on the monetary & banking system, but every time he mentions waves, i sorta roll my eyes. history may repeat itself, or it may not.
"So if the Fed becomes the U.S. government's lender of last resort, the question is: would the Fed lend it the money needed to continue operations even if it had no expectation that it could ever be paid back? I think FDR believes the answer to be "no", because that would clearly not be "profitable" from a traditional banker's point of view."
ReplyDeleteThat is correct. I think the key is this:
Banks only "lend" from the socialist point of view. By socialist, I mean those who generally view economies as "run."
I am not a socialist. I believe that risk takers "borrow." (if they feel so inclined)
From that angle, there is simply no option to print cash, unless their is a genuine large-scale appetite for risk taking.
Most bankers certainly do not share my views. After 87 years of long lines and bankers hours, they probably view themselves as the center of the universe. Oh, how wrong they are.
Let's watch banks try to print their way out of this with an empty lobby; with no borrowers.
(except for people demanding the return of their deposits)
FDR wrote: "Banks only "lend" from the socialist point of view. By socialist, I mean those who generally view economies as "run."
ReplyDeleteI am not a socialist. I believe that risk takers "borrow." (if they feel so inclined)"
I'm not using any of these terms to indicate any sort of political stance. A lender is simply the entity from which the borrower is receiving money (to be paid back with interest, of course).
FDR wrote: "From that angle, there is simply no option to print cash, unless their is a genuine large-scale appetite for risk taking."
Then what kind of entity would you consider the U.S. government to be? A risk taker? It's *clearly* not taking any risks when borrowing money in the situation where it is otherwise bankrupt, because in that situation it can either borrow or it can die (lose its ability to operate).
No, there is no risk to the U.S. government from borrowing there. The risk is entirely on the lender's side of things in that case.
And that leads right back to the situation I was talking about. The Fed is the "lender of last resort" for the U.S. government. I'm not speaking in the socialist terms you referred to, I'm speaking in the capitalist terms you referred to: the lender is simply on the other side of the trade from the borrower.
If a traditional bank were to lend money to a financially-strapped U.S. government, it would be taking a risk the same as it does when lending money to any other entity, particularly if the loan in question is unsecured: in the event it fails to be paid back, at a minimum it is impacted in terms of its ability to lend further; if the "loss" is large enough, it may lose its ability to operate as a business entity, because it has obligations as well. That means that "printing money" for a traditional bank carries some risk.
None of that applies to the Fed. The Fed has no obligations. Furthermore, it incurs NO RISK when printing money. Since there is no risk to the Fed when it prints currency and lends it to others, there is no downside to it if its borrowers fail to pay it back, save for the effect that the existence of the newly printed money has on the currency supply: there's more currency in circulation after the printing operation than before, so the act of printing it is inflationary.
Therefore, the *only* downside to the Fed in lending to the U.S. government, or any other entity, is the effect doing so has on the prices of goods and services that those who own and operate the Fed would wish to buy.
Normally, if an entity is in no position to pay back the Fed, there is no incentive for the Fed to loan currency to it. That's not the case with the U.S. government, because the U.S. government is the means through which those who own and operate the Fed project power.
Therefore, when the chips are down the Fed WILL loan currency to the U.S. government even if the Fed believes that the government would never be able to pay it back.
As I said, you can't examine this situation from the point of view of a traditional banker, because those who own and operate the Fed ARE NOT traditional bankers. They are power junkies. They control the U.S. government, they control the media, and therefore they control the political landscape of the U.S. What is the loss of a little worthless fiat currency compared with the loss of all that power?
"I'm not using any of these terms to indicate any sort of political stance. A lender is simply the entity from which the borrower is receiving money (to be paid back with interest, of course)."
ReplyDelete=====
Right. I'm only saying that some people seem to think banks, like the Fed, can "just print more money."
That is like saying GM, at a whim, can flood the market with cars. Maybe they can give away a few, or discount others. But if they really had the power to make a big impact on the quantity of cars they manage to sell, they would have done that long ago.
=====
"Then what kind of entity would you consider the U.S. government to be? A risk taker? It's *clearly* not taking any risks when borrowing money in the situation where it is otherwise bankrupt, because in that situation it can either borrow or it can die (lose its ability to operate)."
=====
The gov may be able to borrow on behalf of people with credit. Everything the gov borrows on behalf of other is instantly removed from the available credit pool in the private sector. There is no free lunch.
If I am a lender and I want to determine if you can pay back what I print for you, I'm going to look at your tax burden as a debit against your income.
There's no freebie in government borrowing. They are draining cash from the economy due to inefficiencies and interest due, not adding cash.
Yes, they may defer payment to make it appear like they have no impact, but we all know that hurts the economy more, not less.
=====
"None of that applies to the Fed. The Fed has no obligations. Furthermore, it incurs NO RISK when printing money. "
=====
That would be true if they could print money and put it directly into their own pockets, but like any bank, they cannot overtly counterfeit for profit. They still have to launder their cash through a borrower in exchange for interest due.
Printing cash and giving it away for free might be a no risk option for the Fed, but that only allows others to buy more of their stuff. That is the opposite of their purpose in life. I do not believe they care to do that.
If it comes down to the economy failing if they don't give away some of their wealth to others, we know what they'll do because they've done it so many times before. The economy will fail.
FDR wrote: "If I am a lender and I want to determine if you can pay back what I print for you, I'm going to look at your tax burden as a debit against your income."
ReplyDeleteYes, of course you will -- IF YOU ARE ACTING LIKE A NORMAL BANK.
The Fed is anything but that.
For some reason, you keep ignoring the very essence of my argument, the one thing that makes lending to the government something the Fed would do even to an otherwise bankrupt nation: those that run the Fed wield their power through the U.S. government.
From the standpoint of the modern Fed, it doesn't matter whether or not the economy survives. It DOES matter whether or not the U.S. government survives with its current capabilities intact, because it is those capabilities that those who run the Fed make use of -- it is those capabilities that make the U.S. government valuable to those who run the Fed.
So yes, the Fed will lend to the U.S. government, even if it KNOWS it will never be paid back, because lending to the U.S. government costs the Fed nothing except an increase in dollar-denominated prices of goods and services, while the loss to those who run the Fed if they DON'T lend to the U.S. government would be much, much greater: the loss of their power.
You keep looking at the entire game strictly from an economic standpoint. You can't do that here. The game is much bigger and much broader than that, and is much more about power than money.
As for your assertion that they can't print money and put it into their own pocket without laundering it through a borrower, that may be true in principle but at the same time, even if they DID do such a thing, nothing of any consequence would happen to them. That is what happens when the one entity that could enforce such consequences, the U.S. government, is the Fed's servant. And that means they can, indeed, do what you claim they can't.
These people can do pretty much anything they wish, and you'd do well to stop assuming that they have to follow some set of arbitrary rules. Beyond the laws of physics, any rules these people operate under are rules they CHOOSE to operate under, and as such they can choose differently at any time.
"Yes, of course you will -- IF YOU ARE ACTING LIKE A NORMAL BANK.
ReplyDeleteThe Fed is anything but that.
For some reason, you keep ignoring the very essence of my argument, the one thing that makes lending to the government something the Fed would do even to an otherwise bankrupt nation: those that run the Fed wield their power through the U.S. government."
I'm not trying to ignore it, I've said many times that Fed lending for gov spending is irrelevant to the cash supply. (1) Commercial bank lending is where 97%+ of cash printing occurs. And (2) all gov spending is more than counteracted with tax collection of the principle and interest--all gov spending is net deflationary.
I see your argument that the gov could power from having some cash, but that is not inflationary, it is deflationary, and it will also stop the second lending to the gov is no longer profitable.
FDR wrote: "I'm not trying to ignore it, I've said many times that Fed lending for gov spending is irrelevant to the cash supply. (1) Commercial bank lending is where 97%+ of cash printing occurs. And (2) all gov spending is more than counteracted with tax collection of the principle and interest--all gov spending is net deflationary."
ReplyDeleteThe very definition of deficit spending is when the government spends more than it brings in via taxes. For your argument here to be true, the government budget deficit would have to be constant or shrinking. That's clearly not the case (quite the opposite, actually), and is much of the reason some believe we are in for some serious inflation even in the face of a faltering economy. I don't necessarily agree with them on that front (I think the picture is unclear on that), but it is a factor to consider.
Whether (or how much) government spending is a factor with respect to inflation depends on how much money the government is borrowing from the Fed (note that only borrowing from the Fed or some other fractional reserve institution is inflationary), minus tax receipts, relative to the size of the currency supply over a given time interval.
I agree that inflation from government deficit spending is not as "efficient" as inflation from fractional reserve lending, but that's a much milder claim than that government deficit spending is deflationary.
Regardless, if one were to apply your same methodology to private sector borrowing, one would conclude that it, too, is deflationary since those loans, too, must be paid back.
FDR also wrote: "I see your argument that the gov could power from having some cash, but that is not inflationary, it is deflationary, and it will also stop the second lending to the gov is no longer profitable."
Government power doesn't come from having cash -- that's merely the means by which it pays employees and contractors. Its power comes from the uses to which the labor of its employees and contractors is put. The moment the government is no longer able to pay its employees and contractors, it will no longer be able to project power and its usefulness to those who run the Fed will be at an end.
So: the second lending to the government is no longer profitable for the Fed is the second the U.S. government can no longer project military and political power in the world, since that is the primary reason the Fed would lend to the U.S. government. What sort of event do you have in mind that might cause the government to lose that ability? Since those who run the Fed gain most of their power from that ability, it is absurd to argue that those running the Fed wish to destroy the U.S. government. Such a move would be tantamount to committing suicide, something I very much doubt those running the Fed are interested in doing.
Rather, those who run the Fed will do everything in their power to keep the U.S. government going, because *that* is in their interests.