boom – Page 2 – The Burning Platform

SMOKING GUN FROM THE FEDERAL RESERVE MURDER OF THE MIDDLE CLASS

“Although low inflation is generally good, inflation that is too low can pose risks to the economy – especially when the economy is struggling.” – Ben Bernanke

“The true measure of a career is to be able to be content, even proud, that you succeeded through your own endeavors without leaving a trail of casualties in your wake.” – Alan Greenspan

There you have it – the wisdom of two Ivy League educated economists who are primarily liable for the death of the American middle class. They now receive $250,000 per speaking engagement from the crooked financial parties their monetary policies benefited; write books to try and whitewash their legacies of failure, fraud, and hubris; and bask in the glow of the corporate mainstream media propaganda storyline of them saving the world from financial Armageddon. Never have two men done so much damage to so many people, so quickly, and are not in a prison cell or swinging from a lamppost. Their crimes make Madoff look like a two bit marijuana dealer.

The self-proclaimed Great Depression “expert” Ben Bernanke peddles pabulum about inflation being too low and posing dire risk to the economy, but is blasé that swelling the Federal Reserve balance sheet debt from $900 billion in 2008 to $4.4 trillion today with his digital printing press poses any systematic risk to the country and its citizens. Either his years in academia have blinded him to the reality of his actions upon the lives of real people living in the real world, or his real constituents have not been the American people, but the Wall Street bankers that pulled his puppet strings over the last eight years.

Now that he has passed the Control-P button to Yellen, he is reaping the rewards of bailing out Wall Street and further enriching them with QEfinity. Ben earned a whopping $200,000 per year as Federal Reserve chairman. He now rakes in $250,000 per speech from the very financial interests who benefited from his traitorous monetary machinations. I don’t think he will be invited to speak at any little league banquets by formerly middle class parents whose standard of living has been declining since the 1980s. Is it a requirement that every Federal Reserve chairperson lie, obfuscate, misinform, hide the truth, and do the exact opposite of what they say they will do?

“It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.” – Ben Bernanke – October 2007

Greenspan, Bernanke and Yellen have always been worried about deflation, while even the government suppressed CPI calculation reveals that inflation has risen by 108% since the day Greenspan assumed office in August 1987. The dollar has lost 52% of its purchasing power in the last 27 years of Fed induced bubbles and busts. And these scholarly academic bozos have been worried about deflation the entire time. Since Nixon closed the gold window in 1971 and unleashed the two headed inflation loving gargoyle of debt issuing bankers and feckless self-serving politicians upon the American people, the dollar has lost 83% of its purchasing power (even using the bastardized BLS figures).

Any critical thinking person with their eyes open knows the official inflation figures have been systematically understated since the 1980’s by at least 3% per year. Should the average American be more worried about deflation or inflation, based upon what has occurred during the 100 years of the Federal Reserve controlling our currency?

I’m sure Greenspan is content and proud, as he succeeded through his own endeavors in rewarding, encouraging and propagating excessive risk taking by the Wall Street cabal during his 19 year reign of error. He exited stage left as the biggest bubble in history, created by his excessively low interest rate policy, blew up and destroyed the 401ks and home values of the middle class. This was the second bubble under his monetary guidance to burst. The third bubble created by these Keynesian acolytes of easy money will burst in the near future, further impoverishing what remains of the middle class and hopefully igniting a long overdue revolution.

Greenspan’s pathetic excuse for a career has benefitted those who owned him, while leaving a trail of casualties that circles the globe. His inflationary dogma, Wall Street enriching doctrine and Keynesian motivated schemes have drained the savings and confiscated the wealth of the middle class through persistent and devastating inflation. And it was done by a man who knew exactly what he was doing.

“Under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth… The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit… In the absence of the gold standard, there is no way to protect savings from confiscation through inflation” – Alan Greenspan – 1966

The abandonment of the gold standard in 1971 set in motion four decades of consumer debt accumulation on an epic scale, currency debauchment, and real wage stagnation. The consumer debt accumulation was a consequence of the American middle class being lured into debt by the Too Big To Trust Wall Street banks and their corporate media propaganda machine, as a fallacious response to stagnating real wages when their jobs were shipped to China by mega-corporations using wage arbitrage to boost quarterly profits, their stock prices, and executive bonuses.

The bottom four quintiles have made no progress over the last four decades on an inflation adjusted basis. The middle quintile, representing the middle class, has seen their real household income grow by less than 20% over the last 43 years. And this is using the understated CPI. In reality, even with two spouses working today versus one in 1971, real household income is lower today than it was in 1971.

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The more recent data, during the Greenspan/Bernanke inflationary era, is even more disconcerting and destructive. Real median household income has grown at an annualized rate of less than 0.5% over the last thirty years. During the bubblicious years from 2000 through 2014, while Wall Street used control fraud and virtually free money provided by the Fed to siphon off hundreds of billions of ill-gotten profits from the economy, the average middle class family saw their income drop and their debt load soar. This is crony capitalism success at its finest.

The oligarchs count on the fact math challenged, iGadget distracted, Facebook focused, public school educated morons will never understand the impact of inflation on their daily lives. The pliant co-conspirators in the dying legacy media regurgitate nominal government reported income figures which show median household income growing by 30% over the last fourteen years. In reality, the real median household income has FALLEN by 7% since 2000 and 7.5% since its 2008 peak. Again, using a true inflation figure would yield declines exceeding 15%.

Greenspan and Bernanke’s monetary policies loaded the gun; Wall Street bankers cocked the trigger with their no doc negative amortization mortgages, $0 down – 0% interest – 7 year subprime auto loans, introducing the home equity line ATM, and $20,000 lines on dozens of credit cards; the media mouthpieces parroted the stocks for the long run and home prices never fall bullshit storyline, encouraging Americans to pull the trigger; government apparatchiks and bought off politicians and their deficit expanding fiscal policies, pointed the gun; and the American people pulled the trigger by believing this nonsense, blowing their brains all over the fine Corinthian leather interior of their leased BMWs sitting in the driveway in front of their underwater McMansions.

Median household income in the United States peaked in 1999. The internet boom, housing boom and now QE boom have done nothing beneficial for middle class Americans. They have been left with lower real income, less home equity, no savings, and no hope for a better tomorrow. Most states saw their median household income peak over a decade ago, with more than half the states experiencing double digit declines and ten states experiencing declines of 19% or higher. It’s clear who has benefitted from the fiscal policies of spendthrift politicians and the spineless inhabitants of the Mariner Eccles Building in the squalid swamplands of Washington D.C. – the pond scum inhabiting that town. The median household income in D.C. stands at an all-time high. Winning!!!!

A former inhabitant of Washington D.C. spoke the truth about inflation and the men who benefit from it in the 1870’s. He was later assassinated.

“Who so ever controls the volume of money in any country is absolute master of all industry and commerce and when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.” – James Garfield

The Federal Reserve, a private bank representing the interests of its Wall Street owners, has been in existence for 100 years. It has managed to diminish the purchasing power of the dollar by 95%, while causing depressions, enabling never ending warfare, allowing politicians to expand the welfare state to immense unsustainable proportions, and enriched its true constituents on Wall Street beyond the comprehension of average Americans. In 2002 Ben Bernanke made his famous helicopter speech where he promised to drop dollars from helicopters to fight off the ever dangerous deflation. After the Fed created 2008 worldwide financial collapse he fired up his helicopters, but dropped trillions of dollars on only one street in America – Wall Street. He dropped turkeys on Main Street, and we all know from Les Nesman what happens when you drop turkeys from helicopters.

Les Nesman: Oh, they’re crashing to the earth right in front of our eyes! One just went through the windshield of a parked car! This is terrible! Everyone’s running around pushing each other. Oh my goodness! Oh, the humanity! People are running about. The turkeys are hitting the ground like sacks of wet cement! Folks, I don’t know how much longer… The crowd is running for their lives.

Arthur Carlson: As God is my witness, I thought turkeys could fly.

The intellectual turkeys running this treacherous institution create a new and larger crisis with each successively desperate gambit to keep their Ponzi scheme alive. Even though Greenspan, Bernanke and Yellen are highly educated, they are incapable or unwilling to focus on the practical long-term implications of their short-term measures to keep this perverted financial scheme from imploding. Denigrating savings and capital investment, while urging debt financed spending on foreign produced trinkets and gadgets passes for economic wisdom in the waning days of our empire. Courageous and truthful leaders are nowhere to be found as the country circles the drain. Farewell middle class. It was nice knowing you.

“There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: “In the long run we are all dead.” And such shallow wisecracks pass as devastating epigrams and the ripest wisdom.” – Henry Hazlitt – Economics in One Lesson

WITHERING ON THE VINE

Whenever I see stories like the one below, I find myself focusing on the cultural and societal aspects, rather than what the writer was attempting to convey. The story captures the facts, but not the big picture of why this happened. It’s another sad story that has its roots in the delusion that debt financed spending equals wealth. The reason 30% of all the nurseries in the country have closed in the last five years is because they shouldn’t have been in existence in the first place. The demand for landscaping services in this country was falsely created by Ben Bernanke, Alan Greenspan and their printing presses. Greenspan’s interest rate policies created a false boom in housing. The false boom in housing led to a false boom in landscaping, renovations, decks, patios, appliances, and autos. Delusional Americans by the millions sucked the vaporous equity out of their houses and spent it on shit that made them feel richer. The took over $1.8 trillion out of their houses over 3 years and poured it into the economy, creating the illusion of true demand.

When the housing market crashed, the equity was vaporized, and homeowners were left with billions of debt and no cash. After the greatest housing boom in history, Americans are now left with near the lowest amount of equity in their homes in history. The boom started with Americans having in excess of 60% equity in their homes and today have less than 45% equity in their homes.

The demise of nurseries, Circuit City, Best Buy, millions of contractor jobs, and thousands of other small businesses can be directly blamed on the policies of the Federal Reserve. And now they are attempting the exact same medicine that created the misery in the first place. Their solution to a problem caused by excessively low interest rates and money printing has been to lower interest rates to zero and print money at hyper-speed. I just know it’ll work this time.

The story below glosses over the fact that the owners of this nursery made a choice to give their two daughters the weddings of a lifetime. It says this blew a hole in their budget. What is doesn’t say is that these people borrowed against their business to provide one day of extravagance for their daughters. How American of them. This is where the criminal actions of central bankers meets the stupidity, materialism and shallowness of the average American. If you can’t afford something, you don’t buy it. If you can’t afford an extravagant wedding without risking your livelihood, have a small affordable wedding. These people can blame their business failure on a struggling economy or circumstances beyond their control, but they made choices and are paying the price.

Until the people in this country come to their senses and realize that a debt financed lifestyle does not represent true wealth, we are destined to experience a depression for the ages. There will be thousands more small businesses that go under as the fake boom reaches its final bust stage.

” There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises

Chesco nursery is among many that are withering

After 25 years, Dilworth Nursery has closed. Nationwide, so have up to 30% in the last five years, an expert said.

By Anthony R. Wood

Inquirer Staff Writer

The Dilworth Nursery in Oxford, PA is being auctioned off. (Photo by Tony Wood)

The landscape of the nursery business began changing – and most definitely not for the better – about five years ago, but Jackie and Rick Dilworth didn’t expect theirs to end like this.

On Saturday, they circulated among thousands of their possessions – patio furniture, wood cabinets, kitchen items, the inventory of plants – while the practiced voice of an auctioneer spoke faster than the speed of the typical human’s comprehension.

As the result of a conspiracy of circumstances – most notably the struggling economy – after 25 years, the 13-acre Dilworth Nursery in East Nottingham Township, deep in Chester County near downtown Oxford, is closed for good.

The property is for sale, and the Dilworths aren’t sure where they’ll wind up.

“We never anticipated we’d go out this way,” Jackie Dilworth, 51, said. But they also knew, she said, that given the state of the industry, they could not continue to operate their wholesale-retail nursery, which specialized in unusual plantings for public gardens, arboretums, and landscape contractors.

“The business is not going to come back in our lifetime,” she said.

It certainly won’t happen soon, said Charlie Hall, a horticulture professor at Texas A&M University and an expert on industry trends.

Although hard data aren’t yet available, Hall estimated up to 30 percent of nurseries nationwide had closed in the last five years.

In the 1970s, he said, the nursery business was growing at a 14 percent annual rate, but that had slipped precipitously by the end of the 1990s.

He said that today’s twentysomethings could help revive the nursery trade eventually, but that it could take 15 years.

“It’s been a tough stretch for the nursery businesses and landscaping in general,” said Emelie Swackhamer, horticulturist at the Penn State agricultural extension in Lehigh County. For example, Waterloo Gardens retail shop recently shuttered its landmark Main Line store in Devon.

“People were using the equity they paid into their homes to pay for landscaping,” said Gregg E. Robertson, president of the Pennsylvania Nursery and Landscape Association. “That equity isn’t available anymore.

“The nurseries have been particularly hard-hit.”

Still, Bucks, Chester, Delaware, and Montgomery Counties have about 1,000 remaining nurseries, he said, adding, “Horticulturally, it’s one of the richest areas of the country.”

Along with a housing slump that has weakened demand for nursery stock, the industry’s troubles are deeply rooted in demographics, the experts said.

More baby boomers are moving into condos and letting the condo associations do the work. And many of the boomers staying in their homes are losing their appetite for the larger plantings nurseries sell.

In some ways, Swackhamer said, this literally has become a harder business: People are putting more money into “hardscape” – patios, decks, even outdoor additions.

“I think people want that comfort,” she said.

The Dilworths evidently were in the vortex of the industry storm. “That’s the type of nursery that’s been going out of business because of the recession,” said Susan Barton, a University of Delaware horticulturist.

The Dilworths also confronted a problem common among family-run nurseries: a lack of successors. “There’s always issues with transferring the business,” Swackhamer said.

Three years ago, the Dilworths encountered a not-so-common financial issue. Their two daughters got married, and the weddings ripped a huge hole in the Dilworths’ budget. Eschewing a modern trend, they had picked up the entire tabs.

“We did it the old-fashioned way,” Jackie Dilworth said.

Neither their daughters nor sons-in-laws wanted to continue the business.

Thus, on Friday and Saturday, the possessions accumulated over a generation – from spreaders to Adirondack chairs to Barbie dolls – were offered by Petersheim & Longenecker Auction & Appraisal Co. A pair of snowshoes went for $40; a metal patio set, $115.

About 100 people showed up to pick over plantings that included dwarf pine, blue plume cypress, and forest pansy redbud.

One of those attending, John Wallace, said that although he was sorry to see the nursery go, he would be sorrier to lose his neighbors.

“They’re very good people,” he said, “hardworking people. We’ll miss them.”

IT’S A MATTER OF TRUST – PART ONE

“All the world is made of faith, and trust, and pixie dust.” ― J.M. Barrie – Peter Pan

“The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.” – Lord Acton

Who do you trust? Do you trust the President? Do you trust Congress? Do you trust the Treasury Secretary? Do you trust the Federal Reserve? Do you trust the Supreme Court? Do you trust the Military Industrial Complex? Do you trust Wall Street bankers? Do you trust the SEC? Do you trust any government agency or regulator? Do you trust the corporate mainstream media? Do you trust Washington think tanks? Do you trust Madison Avenue PR maggots? Do you trust PACs? Do you trust lobbyists? Do you trust government unions? Do you trust the National Association of Realtors? Do you trust mega-corporation CEOs? Do you trust economists? Do you trust billionaires? Do you trust some anonymous blogger? You can’t even trust your parish priest or college football coach anymore. A civilized society cannot function without trust. The downward spiral of trust enveloping the world is destroying our global economy and will lead to collapse, chaos and bloodshed. The major blame for this crisis sits squarely on the shoulders of crony capitalists that rule our country, but the willful ignorance and lack of civic accountability from the general population has contributed to this impending calamity. Those in control won’t reveal the truth and the populace don’t want to know the truth – a match made in heaven – or hell.

“Most ignorance is vincible ignorance. We don’t know because we don’t want to know.” – Aldous Huxley

The fact that 86% of American adults have never heard of Jamie Dimon should suffice as proof regarding the all-encompassing level of ignorance in this country. As the world staggers under the unbearable weight of debt built up over decades, to fund a fantasyland dream of McMansions, luxury automobiles, iGadgets, 3D HDTVs, exotic vacations, bling, government provided pensions, free healthcare that makes us sicker, welfare for the needy and the greedy, free education that makes us dumber, and endless wars of choice, the realization that this debt financed Ponzi scheme was nothing but a handful of pixie dust sprinkled by corrupt politicians and criminal bankers across the globe is beginning to set in. A law abiding society that is supposed to be based on principles of free market capitalism must function in a lawful manner, with the participants being able to trust the parties they do business with. When trust in politicians, regulators, corporate leaders and bankers dissipates, anarchy, lawlessness, unscrupulous greed, looting, pillaging and eventually crisis and panic engulf the system.

Our myopic egocentric view of the world keeps most from seeing the truth. Our entire financial system has been corrupted and captured by a small cabal of rich, powerful, and prominent men. It is as it always has been. History is filled with previous episodes of debt fueled manias, initiated by bankers and politicians that led to booms, fraud, panic, and ultimately crashes. The vast swath of Americans has no interest in history, financial matters or anything that requires critical thinking skills. They are focused on the latest tweet from Kim Kardashian about her impending nuptials to Kanye West, the latest rumors about the next American Idol judge or the Twilight cheating scandal.

Bubble, Bubble, Toil & Trouble

Economist and historian Charles P. Kindleberger in his brilliant treatise Manias, Panics, and Crashes details the sordid history of unwitting delusional peasants being swindled by bankers and politicians throughout the ages. Human beings have proven time after time they do not act rationally, obliterating the economic teachings of our most prestigious business schools about rational expectations theory and efficient markets. The only thing efficient about our markets is the speed at which the sheep are butchered by the Wall Street slaughterhouse. If humanity was rational there would be no booms, no busts and no opportunity for the Corzines, Madoffs, and Dimons of the world to swindle the trusting multitudes. The collapse of a boom always reveals the frauds and swindlers. As the tide subsides, you find out who was swimming naked.

“The propensity to swindle grows parallel with the propensity to speculate during a boom… the implosion of an asset price bubble always leads to the discovery of frauds and swindles”— Charles P. Kindleberger, economic historian

The historically challenged hubristic people of America always think their present-day circumstances are novel and unique to their realm, when history is wrought with similar manias, panics, crashes and criminality. Kindleberger details 38 previous financial crises since 1618 in his book, including:

The Dutch tulip bulb mania
The South Sea bubble
John Law Mississippi Company bubble
Banking crisis of 1837
Panic of 1857
Panic of 1873
Panic of 1907 – used as excuse for creation of Federal Reserve
Great Crash of 1929
Oil Shock of 1974-75
Asian Crisis of 1998

Kindleberger wrote his book in 1978 and had to update it three more times to capture the latest and greatest booms and busts. His last edition was published in 2000. He died in 2003. Sadly, he missed being able to document two of the biggest manias in history – the Internet bubble that burst in 2001 and the housing/debt bubble that continues to plague the world today. Every generation egotistically considered their crisis to be the worst of all-time as seen from quotes at the time:

1837: “One of the most disastrous panics this nation ever experienced.”
1857: “Crisis of 1857 the most severe that England or any other nations has ever encountered.”
1873: “In 56 years, no such protracted crisis.”
1929: “The greatest of speculative boom and collapse in modern times – since, in fact, the South Sea Bubble.”

Human beings have not changed over the centuries. We are a flawed species, prone to emotional outbursts, irrational behavior, alternately driven by greed and fear, with a dose of delusional thinking and always hoping for the best. These flaws will always reveal themselves because even though times change, human nature doesn’t. The cyclical nature of history is a reflection of our human foibles and flaws. The love of money, power, and status has been the driving force behind every boom and bust in history, as noted by historian Niall Ferguson.

“If the financial system has a defect, it is that it reflects and magnifies what we human beings are like. Money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong. Booms and busts are products, at root, of our emotional volatility.” – Niall Ferguson

Not only are our recent booms and busts not unique, but they have a common theme with all previous busts – greedy bankers, excessive debt, non-enforcement of regulations, corrupt public officials, rampant fraud, and unwitting dupes seeking easy riches. Those in the know use their connections and influence to capture the early profits during a boom, while working the masses into frenzy and providing the excessive leverage that ultimately leads to the inevitable collapse. As the bubble grows, rationality is thrown out the window and all manner of excuses and storylines are peddled to the gullible suckers to keep them buying. Nothing so emasculates your financial acumen as the sight of your next door neighbor or moronic brother-in-law getting rich. As long as all the participants believe the big lie, the bubble can inflate. As soon as doubt and mistrust enter the picture, someone calls a loan or refuses to be the greater fool, and panic ensues. This is when the curtain is pulled back on the malfeasance, frauds, deceptions and scams committed by those who engineered the boom to their advantage. As Kindleberger notes, every boom ends in the same way.

“What matters to us is the revelation of the swindle, fraud, or defalcation. This makes known to the world that things have not been as they should have been, that it is time to stop and see how they truly are. The making known of malfeasance, whether by the arrest or surrender of the miscreant, or by one of those other forms of confession, flight or suicide, is important as a signal that the euphoria has been overdone. The stage of overtrading may well come to an end. The curtain rises on revulsion, and perhaps discredit.” – Charles P. Kindleberger – Manias, Panics, and Crashes

When mainstream economists examine bubbles, manias and crashes they generally concentrate on short-term bubbles that last a few years. But some bubbles go on for decades and some busts have lasted for a century. The largest bubble in world history continues to inflate at a rate of $3.8 billion per day and has now expanded to epic bubble proportions of $15.92 trillion, up from $9.65 trillion in September 2008 when this current Wall Street manufactured crisis struck. A 65% increase in the National Debt in less than four years can certainly be classified as a bubble. We are currently in the mania blow off phase of this bubble, but it began to inflate forty years ago when Nixon closed the gold window. This unleashed the two headed monster of politicians buying votes with promises of unlimited entitlements for the many, tax breaks for the connected few and pork projects funneled to cronies, all funded through the issuance of an unlimited supply of fiat currency by a secretive cabal of central bankers running a private bank for the benefit of other bankers and their politician puppets. Crony capitalism began to hit its stride after 1971.

The apologists for the status quo, which include the corporate mainstream media, intellectually dishonest economist clowns like Krugman, Kudlow, Leisman, and Yun, ideologically dishonest think tanks funded by billionaires, and corrupt politicians of both stripes, peddle the storyline that a national debt of 102% of GDP, up from 57% in 2000, is not a threat to our future prosperity, unborn generations or the very continuance of our economic system. They use the current historically low interest rates as proof this Himalayan Mountain of debt is not a problem. Of course it is a matter of trust and faith in the ability of a few ultra-wealthy, sociopathic, Ivy League educated egomaniacs that their brilliance and deep understanding of economics that will see us through this little rough patch. The wisdom and brilliance of Ben Bernanke is unquestioned. Just because he missed a three standard deviation bubble in housing and didn’t even foresee a recession during 2008, doesn’t mean his zero interest rate/screw grandma policy won’t work this time. It’s done wonders for Wall Street bonus payouts.

The growth of this debt bubble is unsustainable, as it is on track to breach $20 trillion in 2015. The only thing keeping interest rates low is coordinated manipulation by Ben and his fellow sociopathic central bankers, the insolvent too big to fail banks using derivative weapons of mass destruction, and politicians desperately attempting to keep the worldwide debt Ponzi scheme from imploding on their watch. Their “solution” is to kick the can down the road. But there is a slight problem. The road eventually ends.

At some point a grain of sand will descend upon a finger of instability in the sand pile and cause a collapse. No one knows which grain of sand will trigger the crisis of confidence and loss of trust. But with a system run by thieves, miscreants, and scoundrels, one of these villains will do something dastardly and the collapse will ensue. Ponzi schemes can only be sustained as long as there are enough new victims to keep it going. As soon as uncertainty, suspicion, fear and rational thinking enter the equation, the gig is up. Kindleberger lays out the standard scenario, as it has happened numerous times throughout history.

“Causa remota of the crisis is speculation and extended credit; causa proxima is some incident that snaps the confidence of the system, makes people think of the dangers of failure, and leads them to move from commodities, stocks, real estate, bills of exchange, promissory notes, foreign exchange – whatever it may be – back into cash. In itself, causa proxima may be trivial: a bankruptcy, suicide, a flight, a revelation, a refusal of credit to some borrower, some change of view that leads a significant actor to unload. Prices fall. Expectations are reversed. The movement picks up speed. To the extent that speculators are leveraged with borrowed money, the decline in prices leads to further calls on them for margin or cash and to further liquidation. As prices fall further, bank loans turn sour, and one or more mercantile houses, banks, discount houses, or brokerages fail. The credit system itself appears shaky, and the race for liquidity is on.” – Charles P. Kindleberger – Manias, Panics, and Crashes

Despite centuries of proof that human nature will never change, there are always people (usually highly educated) who think they are smart enough to fix the markets when they breakdown and create institutions, regulations and mechanisms that will prevent manias, panics and crashes. These people inevitably end up in government, central banks and regulatory agencies. Their huge egos and desire to be seen as saviors lead to ideas that exacerbate the booms, create the panic and prolong the crashes. They refuse to believe the world is too complex, interconnected and unpredictable for their imagined ideas of controlling the levers of economic markets to have a chance of success. The reality is that an accident may precipitate a crisis, but so may action designed to prevent a crisis or action by these masters of the universe taken in pursuit of other objectives. Examining the historical record of booms and busts yields some basic truths. The boom and bust business cycle is the inevitable consequence of excessive growth in bank credit, exacerbated by inherently damaging and ineffective central bank policies, which cause interest rates to remain too low for too long, resulting in excessive credit creation, speculative economic bubbles and lowered savings.

Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money through the money creation process in our fractional reserve banking system. This leads to an unsustainable credit-sourced boom during which the artificially stimulated borrowing seeks out diminishing investment opportunities. The easy credit issued to non-credit worthy borrowers results in widespread mal-investments and fraud. A credit crunch leading to a bust occurs when exponential credit creation cannot be sustained. Then the money supply suddenly and sharply contracts as fear and loathing of debt replace greed and worship of debt. In theory, markets should clear through liquidation of bad debts, bankruptcy of over-indebted companies and the failure of banks that made bad loans. Sanity is restored to the marketplace through failure, allowing resources to be reallocated back towards more efficient uses. The housing boom and bust from 2000 through today perfectly illustrates this process. Of course, Bernanke declared housing to be on solid footing in 2007.

The housing market has not been allowed to clear, as Bernanke has artificially kept interest rates low, government programs have created false demand, and bankers have shifted their bad loans onto the backs of the American taxpayer while using fraudulent accounting to pretend they are solvent. Our owners are frantically attempting to re-inflate the bubble, just as they did in 2003. Our deepest thinkers, like Greenspan, Krugman, Bush, Dodd, and Frank knew we needed a new bubble after the Internet bubble blew up in their faces and did everything in their considerable power to create the first housing bubble. If at first you don’t succeed, try, try again.

Human nature hasn’t changed in centuries. We have faith that humanity has progressed, but the facts prove otherwise. We are a species susceptible to the passions of power, greed, delusion, and an inflated sense of our own intellectual superiority. And we still like to kill each other in the name of country and honor. There is nothing progressive about crashing the worldwide economic system and invading countries for “our” oil.

History has taught that there will forever be manias, bubbles and the subsequent busts, but how those in power deal with these episodes has been and will be the determining factor in the future of our economic system and country.

Humanity is deeply flawed; the average human life is around 80 years; men of stature, wealth, over-confidence in their superior intellect, and egotistical desire to leave their mark on history, always rise to power in government and the business world; this is why history follows a cyclical path and the myth of human progress is just a fallacy.

“That men do not learn very much from the lessons of history is the most important of all the lessons that History has to teach” – Aldous Huxley

In Part 2 of this three part series I will examine the one hundred year experiment of trusting a small cabal of non-elected bankers to manage and guide our economic system for the benefit of the American people.

THIS BUST SHOULD BE A DOOZY

Automatic Earth with another reality check on the shale gas BOOM!!!

Let’s see – tremendous levels of debt, hype times infinity, Wall Street shysters, douchebags like Aubrey McClendon, delusional drillers, record low prices, high drilling costs, and low EROEI. Sounds like a perfect combination.

Shale Gas Reality Begins to Dawn

SUNDAY, JUNE 24, 2012 2:30 PM

It has long been our position at The Automatic Earth that North America is collectively dreaming with regard to unconventional natural gas. While gas is undeniably there, the Energy Returned On Energy Invested (EROEI) is dramatically lower than for conventional supplies. The critical nature of EROEI has been widely ignored, but will ultimately determine what is and is not an energy source, and shale gas is going to fail the test.

As we pointed out in Get Ready for the North American Gas Shock in July 2011, the natural gas situation is not what it seems at all:

The shale gas bubble is a perfect example of the irrationality of markets, the power of perverse short-term incentives, the driving force of momentum-chasing, the dominance of perception over reality in determining prices, and the determination for a herd to stampede over a cliff all at once.

The perception of a gas glut has driven prices so low that none of the participants are making money (at least not by producing gas) or creating value. We see a familiar story of excessive debt, and the hollowing out of productive companies dead set on pursuing a mirage.

Many industry insiders know perfectly well that the prospects for recovering substantial amounts of gas are poor, and that the industry is structured as a ponzi scheme. Still, there has been money to be made in the short term by flipping land leases and building infrastructure to handle gas.

The hype is so extreme that those who fall for it contemplate, in all seriousness, North America becoming a natural gas exporting powerhouse, and a threat to Australian LNG producers, or to Russia’s Gazprom.

This concept, constructed from a mixture of greed and desperation (at the lack of conventional gas prospects), is entirely divorced from reality. (See here for Dimitri Orlovs excellent piece on why Gazprom has nothing to worry about.)

Nevertheless, euphoric hype is extremely catching. Given that prices are driven by perception, not by reality, hype has the power to change the dynamics of an industry, exaggerating boom and bust cycles in practice. The hype has resulted in the perception of glut – that North America is drowning in natural gas. The inconvenient fact that this peception is completely wrong does not alter its power in relation to prices.

Natural gas companies gambling on shale gas have been facing prices so low – far below the cost of production – that all of them have been producing gas unprofitably. The financial risk has been increasing dramatically as the companies have been drowning in debt trying to ride out the rock bottom prices that have been the result of people believing the fantasy. Finally, casualties of the financial shenanigans involved are emerging. It is very likely that there will be many more, as companies that have tried to ride out the low prices go under.

Wolf Richter:

Natural Gas: Where Endless Money Went To Die

Alas, thanks to the Feds zero-interest-rate policy and the trillions it has handed over to its cronies since late 2008, the sweeps of creative destruction have broken down. Instead, boundless sums of money have been searching for a place to go, and they’re chasing yield when there is none, and so theyre taking risks, any kind of risks, in their vain battle to come out ahead.

The result is a stunning misallocation of capital to the tune of tens of billions of dollars to an economic activity drilling for dry natural gas that has been highly unprofitable for years. It’s where money has gone to die. What’s left is debt, and wells that will never produce enough to make their investors whole.

But the money has dried up. And drilling for natural gas is collapsing. Last week, there were only 562 rigs drilling for dry natural gas, the lowest number since September 1999…

…At $2.53 per million Btu at the Henry Hub, the price of natural gas is up 33% from the April low of $1.90 per million Btu, a number not seen in a decade.

.But even if it doubled, it would still be below the cost of production. And if it tripled, it might still be below the cost of production for most producers. That’s how mispriced the commodity has become.

CHINA – CONTINUED BOOM OR EPIC BUST

In a recent article, How China Ate America’s Lunch, Clif Carothers described what China has accomplished in the last thirty years:

In thirty short years, China was able to accelerate her GDP from $216 billion to $6 trillion. She amassed reserve capital of $3 trillion. She reversed America’s fortunes from the greatest creditor nation to the greatest debtor nation. She gutted America’s factories while creating the world’s largest manufacturing base in her own country. A measure of output that highly correlates to GDP is energy consumption. In June of this year, 2011, China surpassed the United States as the largest consumer of energy on the planet. While the U.S. consumes 19% of the world’s energy, China consumes 20.3%.

While China was growing their economy by a phenomenal 2,800%, the U.S. GDP grew from $2.3 trillion to $15 trillion – a mere 650% increase, of which 420% was due to inflation. There is no question that China’s progress has been remarkable. The question is whether that growth is sustainable and built upon a solid foundation.

In a February 2010 Casey Report article titled Is China’s Recovery a Fraud?, my thesis was the $2.1 trillion stimulus package rolled out by Chinese authorities after the 2008/2009 financial crash was leading to enormous malinvestment.

The officially announced stimulus package in November 2008 totaled $586 billion and was to be invested in key areas such as housing, rural infrastructure, transportation, health and education, environment, industry, disaster rebuilding, income building, tax cuts, and finance. In reality, the central government pumped an additional $1.5 trillion into the economy in an effort to maintain social stability through the subsidization of its industrial base. Chinese banks funneled cheap loans to state-owned enterprises in order to manufacture artificial profit margins to keep Chinese goods competitive and employment maximized. In the short term, the stimulus produced the desired effect.

Specifically, the Shanghai Index – which had topped out at 5,913 in October of 2007 and had fallen to a low of 1,678 by November 2008 – responded to the stimulus by rebounding to 3,300 in January 2010, as the chart below shows.

As with all monetary and fiscal stimuli, however, the initial high is always followed by a hangover. Today the Shanghai Index stands at 2,350, down 29% from when I penned my article. China is also experiencing accelerating inflation, a real estate bubble of epic proportions, a looming banking crisis due to the billions in bad loans made by Chinese banks as commanded by the Chinese government, and growing social unrest due to rising food and energy prices.

There are few opinions in the middle regarding the China story. People are either convinced China is a juggernaut that can’t be stopped and will become the dominant world power (a recent, global Pew Poll found that 47% of respondents think China is or will be the dominant global power), or they see a colossal bubble that will burst and cause worldwide mayhem. While some might think my world-view has a negative slant, I tend toward what I think is healthy skepticism that causes me to view things in a more realistic manner.

Based on the facts as I understand them, the Chinese government has created a commercial and residential real estate bubble in an effort to keep peasants employed and not rioting in the streets. In the case of the U.S. subprime mortgage bubble, critical thinkers like Steve Eisman and Michael Burry figured out it was a bubble three years before it burst. Jim Chanos and Andy Xei have been warning about this Chinese bubble for over a year. They have been scorned by the same Wall Street shills who denied the U.S. housing bubble. As Eisman and Burry proved (reaping billions), just because you are early doesn’t mean you are wrong.

Inflated Dreams

The table below paints a troublesome picture of rising inflation and gigantic over-investment in real estate. And this takes into account the fact that, much like the Bureau of Labor Statistics (BLS) here in the U.S. massages data, the Chinese statistics are tortured by the Party to paint the best possible picture. Even still, the Chinese government’s own numbers show inflation escalating as economic growth is slowing.

And the trend is not improving: The latest data show year-over-year inflation surging by 6.4% in June and food prices skyrocketing by 14%. With annual disposable income of less than $2,500 in urban areas and just $600 in rural areas, food and energy account for a huge percentage of the average Chinese person’s daily living expenses. The Chinese authorities are terrified by the revolutions sweeping across the Middle East and are desperate to put out the inflationary fires.

To contain stubbornly high inflation, the Chinese central bank has raised the benchmark interest rate three times this year, including the latest rate hike of 25 basis points announced on July 6. In an attempt to rein in excess lending, it has also hiked the reserve requirement ratio six times, ordering banks to keep a record high of 21.5% of their deposits in reserve.

Even with inflation surging, the Manufacturing Output Index fell to 47.2 in July – the lowest in 28 months, and indicating contraction. China’s automobile industry, which overtook the U.S. in 2010 with sales of 18 million autos, has experienced a dramatic slowdown, with growth of only 3% through June versus 32% growth last year. For all of 2011, the China Association of Automobile Manufacturers expects sales to decline versus 2010.

Real Estate Out of Reach

In response to the 2008 worldwide financial collapse, Chinese authorities unleashed $2.1 trillion of stimulus, or almost 33% of GDP. This compares to the U.S. stimulus of $800 billion, or 5.5% of GDP, spent on worthless Keynesian pork. Unlike the U.S., where no jobs were created, China’s command-and-control structure funneled the stimulus into building cities, malls, roads, office buildings, and residential units. Millions of Chinese were employed in creating properties for which there was no demand. Moody’s approximates that China’s banks have funded at least RMB 8.5 trillion (US$1.3 trillion) of the RMB 10.7 trillion of outstanding local government debt, which was a significant portion of the 2008 national stimulus package. When the central authorities tell the banks to lend, the banks ask, “How much?” The result has been soaring real estate inflation and malinvestment.

Everyone has seen the pictures of the ghost cities (Chenggong) with no inhabitants; ghost malls (South China Mall, Dongguan Mall) with no shoppers; residential towers with no residents; and roads with no cars. Analyst Gillem Tolluch from Forensic Asia Limited describes the scene in China today:

China consumes more steel, iron ore and cement per capita than any industrial nation in history. It’s all going to railways that will never make money, roads that no one drives on and cities that no one lives in. It’s like walking into a forest of skyscrapers, but they’re all empty.

There are 218 million urban households in China, and the central government ordered local governments to build 36 million more units by 2015. They just have one small problem: Prices for apartments in Shanghai and other major metropolitan areas have soared by over 100% in the last five years.

The average size of a “cheap” apartment in second-tier Chinese cities is 60 square meters (650 sq ft) and fetches an average price of $1,230 per square meter, or $73,800. Mid-tier apartments in Shanghai or Beijing sell for $3,500 per square meter, or $210,000 for an average size apartment. “When prices are over 20 times more than annual household income, it’s not affordable,” says Andy Xie, an independent economist in Shanghai. Millions of working Chinese have been priced out of ever owning property and blame the corrupt local government cronies and connected speculators. Anger is simmering among the masses.

Confirming the overvaluation, a report by the Chinese Academy of Social Science points out that in the country’s metropolitan centers today, house prices per square meter generally amount to between 50% and 100% of average annual incomes. “To secure a flat of 90 square meters, an average working family in Beijing and Shanghai will have to work for more than 50 years to pay off their loans, compared to five to 10 years in the developed world,” according to the report. Report authors Lu Ding and Huang Yanjie conclude that, “[S]ky-high housing prices have undermined housing affordability and caused great anxiety and resentment among the public, who are wary of the conspiracy among ‘speculators’ – developers and government officials in charge of real estate businesses.”

House of Cards

China has methodically and relentlessly grown their economy for the last thirty years. However, as the U.S. and Europe discovered the hard way with their real estate busts, if one makes an abundance of cheap-money loans to speculators, prices will rise far above the true value of the asset bought with the debt. And in time, the bubble must burst. The pressure in this bubble is mounting. Andy Xie lays out the real situation on the ground in China:

No other government in the world would spend that kind of money. If you go to local Chinese cities, you will see what they spent that money on: Tens of millions on just trees, parks and government buildings.

All of the major ratings agencies are warning about an impending banking crisis in China. Fitch downgraded the country’s credit rating and warned there was a 60% chance the Chinese banking system will require a bailout in the next two years. Just like the U.S., China has too-big-to-fail banks, with five banks accounting for 50% of the lending in China. In a July 2011 report, Moody’s cautioned that the non-performing loans on the balance sheets of Chinese banks could rise to between 8% and 12%, versus the 1% proclaimed by Chinese officials. China’s regulators have belatedly applied the brakes, but it is too late. The house of cards looks susceptible to just the slightest of breezes.

Fraser Howie, managing director at CLSA in Singapore, captured the essence of the coming collapse in his recent assessment:

If you are going to address the misallocation of capital in the banking system and credit system, that’s going to have huge knock-on effects on the profitability and viability of the banks. And if there were a major banking crisis, you would start to see money trying to get out of China. What would the government do to maintain stability? You could have a whole host of problems. It’s almost far too complicated to contemplate.

There is one sure thing regarding bubbles: They always pop. It’s in their nature.

“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises

Originally published in the August 2011 edition of the Casey Report.