(April 23, 2010)
The Central State and Financial Plutocracy are bound in a
mutually beneficial, highly predatory partnership.
The Mainstream Media is missing the Big Story in the SEC/Goldman Sachs filing:
the Central State needs the predatory "too big to fail" investment
bankers to churn out the credit, leverage and insider deals the State needs to survive
in an era of exponentially rising debt.
There are adverse ethical and financial consequences of this partnership; in the short-term,
the rot has been papered over, and simulacrum "reforms" to sooth public anger will be
passed. But the partners each depend on the other for their very existence, and threatening
one threatens both.
Two long-time contributors recently checked in with insightful commentaries
on this issue. We start with Zeus Y.:
I'm sad to say, I find myself agreeing with your comments about gaming the system
becoming the system. The WSJ article you cited
(An Economy of Liars)
uses a libertarian argument to push for
deregulation with enforcement of key staples/norms of capitalism. However, if
enforcement is captured by the same forces that give rise to crony capitalism,
which is an elephant in the room the current "reform" bill fails to address,
neither regulation nor de-regulation will matter. Regulation will be ignored
because there are no enforcements or consequences. De-regulation will only allow
market mechanisms to be more distorted and shrouded. This is what people talk
about when they say "regulatory capture."
But when you have "capture of culture" so that norms are so skewed as to bail out
the perfidious and punish the responsible, how can one expect healing and growth
of the economy? That is what we have now, and taking a pain pill in the form of
borrowing or lowering interest rates will not address the underlying disease.
Indeed as with taking pain relievers to cover up the pains caused by a devastating
disease, you will only ensure your demise. We require not only transparency and
accountability but awareness and viable responses about what to do, not only with
the fraud and its perpetrators, but the damage they have left in their wake once
we turn up the rot.
This is why no one seems interested in real investigation, enforcement, justice,
fairness, or even free enterprise at all. They sense the rot and don't want to
be pinned with cleaning it up once they are made aware. Our own landlords will
not sign on for a free lead test for our house by the county with our two-year
old in it, because if they knew, they would have to be responsible and disclose
this fact to future renters. They simply will not agree to do it because short-term
self-interest is more important than doing the right thing. Short-term self-interest,
for them, has become the "right thing." The moral decay is evident, and that is
what really makes your assessment uneasingly accurate. If there is one thing we
have learned is that people without moral guidance will only see what they are
incentivized to see in terms of their short term personal interest.
Without a moral compass, short term, cannabalistic greed presides, and I have not
known any economy to thrive on that premise for long. I don't know what form
the downfall takes, but until we give a hoot about something greater than our
personal fear and comfort we can assure that we keep falling.
Thank you, Zeus. Next up, Harun I. who refers to this chart I recently posted,
which shows total credit as a percentage of U.S. GDP exceeds the extremes of World war II.
Here is Harun's commentary:
Your post and Mr. Hui's article are important indeed.
Housing and the Collapse of Upward Mobility)
But I couldn't help but wonder
how people thought this would turn out? Did they really believe that coming out of
college with a student loan the size of a mortgage for an education in basket weaving
would leave them discretionary income or a balance sheet that was able to expand much
further (I have a family member with $80,000 in student loans for a degree in journalism.
She cannot afford the payments with her salary so what does she do? She defers the
payments while she runs up more debt going to grad school! Insanity at its finest).
Of course upward mobility is stunted proportionate to the level of debt carried,
debt is a claim on future earnings. What did they think would happen when they
bought into a monetary system that demands that future demand be brought forward on
a compounding basis? Did they not understand that this must come at the expense of
More to the point, in a sphere of finite resources, who thought
or thinks that consumption at an exponential rate and therefore depletion at an
exponential rate would leave room for future generations to keep consuming more?
Only someone disconnected from reality could think this could continue indefinitely.
But that is what mass manias and delusions are all about.
Is it any wonder that the 1% are doing so well? They are the writers of the debt
everyone else is buying...and we allow them to do this without a dime of their own
capital. As an aside, I am completely confounded that the majority of the retail
market buys options when over 80% of options expire worthless. Who do they think
is writing the majority of those options? Institutions and the very wealthy are
writing those options. And when those options even look like they may produce a
loss for the writers the sheer power of their actions protecting those positions
makes sure they expire worthless. But the public willingly continues to take the
long odds. The masses keep buying the debt and the long odds, do not understand
the rules of the game and wonder why they are losing.
Buying a home does not make one wealthy because home equity does not really exist.
All of this has been one grand illusion that has turned into a slow motion train
wreck as it hits the immovable object of reality. How can it be that a home is the
"middle class generator of wealth" when 66% of people retire into poverty and 65%
of Americans are homeowners? I know of all the elegant equations but the simple
fact is that they are not borne out in reality.
If I sell a stock, bond, or commodity I can take that money and do as I please.
I don't have to downsize my standard of living or borrow (encumber future earnings)
to get at the equity in those instruments. A house is a peculiar beast in terms of
"equity". It either has to be sold and its occupant goes to live in a much smaller
dwelling in order to enjoy the "equity", or one must borrow (create a liability)
to get at that "equity". Either way the standard of living will decline. Therefore,
I find the notion of home "equity" quite absurd.
People in general need to educate themselves on
Present Value. They must understand
its implications to what their money is worth now and at any point in the future.
When they do, a much clearer picture will arise pertaining to debt, interest rates,
inflation and "equity".
I would like to see the "too big to fail" institutions fail but when the reality of what that
means starts to impact pensions and 401K's, federal, state, and municipal income
streams, and it is realized that the government cannot borrow enough to support
a destitute population, I think the 99% will sing a different tune.
The more I watch this debacle the more I am convinced that Cheney's "deficits
don't matter" comment was not arrogance but candor based upon his understanding
of the futility of the situation.
Additional commentary 2
It is essential (in a Ponzi scheme) that there be ever growing amounts of new
capital to make payouts. Remember, not too long ago everyone was crooning about
growth. Every fraud and swindle was counted as GDP growth, now we are beginning
to realize that it was all one big fraud.
Bernanke tells us point blank in his famous helicopter speech that he can
"theoretically" make us spend by making it unprofitable to save. Greenspan spoke
of the "global savings glut" that caused the bubbles. Pensions, 401K's, sovereign
wealth funds are all pools of savings that had to be eaten to keep the debt as
money scheme expanding. And with high quality risk exhausted there had to be a
way to sell the low quality risk.
If we want to understand, very clearly, the rise and fall of the middle class and
how debt has affected this, all we need to do is look at the Credit Market Debt
as a Percentage GDP you recently posted. The post WW II bull market that ended
in 1968 occurred with very low debt levels and the middle class thrived.
The 1982 -2000 bull market saw debt levels soar and the middle class lost ground
(it took two incomes and high levels of debt to accomplish what once took one
income and very low levels of debt).
Two financial WMD's have gone off in less than a decade and from a logarithmic
perspective it just looks like a mild consolidation when, in real terms, stocks
and bonds have lost more than half their purchasing power and still are not at
their historic relative lows. Structurally, debt is proportionately higher that
at the start of the Great Depression and getting worse at an increasing rate,
unemployment, if recorded properly would be exploding, and government spending
(expanding debt) is the only driver of GDP. Fraud is now a way of life, it is SOP.
There is not enough money
in the hands of consumers to create the stupendous growth that is required by all
the obligations (entitlements) that have been created. It is not a matter of desire,
it is a matter of capability. We cannot produce and consume enough at a rate necessary
to keep up with exponentially exploding entitlements. CDO and CDS, before they were
given legal certainty in the CFMA of 2000, went from about $60 billion to over
$600 trillion. Without this explosion of credit money system death would have
occurred some time ago. We need the tremendous leverage that only Wall Street
can create to keep from this farce from disintegrating rapidly. If not, we have
what we have now: an exploding public balance sheet.
In the post industrial age in a country that produces nothing but hands out
entitlements to everybody how do you generate returns to satisfy this? Not only
is GS necessary to maintain status quo but so are the rest of the TBTF banks.
In the end this will fail spectacularly, it has already started. The end game
is the Casino Economy where gaming the system is the way to produce returns
needed (at least for a time) to maintain our illusory state. Just think, after
the greatest credit expansion in history, we are still broke and continuing to
Thank you, Harun. Here is a bonus chart of the inflation-adjusted Dow Jones Industrial
Average, which shows the Bull Market of the last decade was as illusory as the
"prosperity" built on the sand of home equity lines of credit and bogus mortgage-backed
If you haven't visited the forum, here's a place to start. Click on the link
below and then select "new posts." You'll get to see what other oftwominds.com readers and
contributors are discussing/sharing.
is now open for aggregating our collective intelligence.
Order Survival+: Structuring Prosperity for Yourself and the Nation and/or
Survival+ The Primer
from your local bookseller or from amazon.com or in ebook
A 20% discount is available from the publisher.
Of Two Minds is now available via Kindle:
Of Two Minds blog-Kindle
"This guy is THE leading visionary on reality.
He routinely discusses things which no one else has talked about, yet,
turn out to be quite relevant months later."
--Walt Howard, commenting about CHS on another blog.
NOTE: contributions are acknowledged in the order received. Your name and email
remain confidential and will not be given to any other individual, company or agency.
Thank you, Andrew M. ($20), for your extremely generous contribution
to the site.
I am greatly honored by your support and readership.
Thank you, John W. ($20), for your stupendous ongoing generosity
to the site (from central China).
I am greatly honored by your support and readership.
Or send him coins, stamps or quatloos via mail--please
request P.O. Box address.
Your readership is greatly appreciated with or without a donation.
For more on this subject and a wide array of other topics, please visit
All content, HTML coding, format design, design elements and images copyright ©
2010 Charles Hugh Smith, All rights
reserved in all media, unless otherwise credited or noted.
I would be honored if you linked this wEssay to your site, or printed a copy for your own use.