John Vachon Watchers October 1938 Cincinnati, Ohio. "Watching the sesquicentennial parade go by"

 

 

In the fields of economics and logic, there are basically two types of knowledge that can be communicated between people. The first one is usually through the use of indirect speech:

1) Individual Knowledge - X knows fact A and Y knows fact A, but neither necessarily know anything about the state of each others' knowledge.

e.g., X asks her dinner date, Y, if he would like to come upstairs to her apartment for a drink. Y is pretty sure he knows what’s really going on, but he doesn’t feel like having a drink and it’s possible that X is just being nice. X is pretty sure Y gets it, but it’s possible that Y is taking her offer at face value. The only thing they both know for sure is that X asked Y if he wanted to come up for a drink!

The second type is typically communicated through the use of very direct language:

2) Mutual Knowledge - X knows A, Y knows A, X knows that Y knows A and Y knows that X knows A (and X knows that Y knows X knows A, etc., etc.)

 

 

Mutual knowledge obviously has a huge influence on collective psychology and behavior in complex human systems, depending on the time and place in which this knowledge exerts itself. The Santa Fe Institute for Complexity Studies has recently made availble a video lecture by Alex Bentley, who has scientifically studied the role of "social influence and drift" in collective behavior. I highly recommend readers take a look at Bentley's lecture, which can be found here, but a brief summary will also suffice for the purposes of this article.

"Many explanations of human behavior – even among the 'social' sciences – start with people as isolated individuals, maximizing benefits versus costs. Panics or 'herding' events are often seen as anomalous departures from this norm. I would like to suggest that humans, whose very brains have evolved to handle social relations, are 'herding' much more often than commonly assumed

For a variety of modern phenomena,simple evolutionary models of social influence – or even just random copying – do remarkably well at capturing the large-scale dynamics of popular culture change

Such models offer an explanation for the often unpredictable flux of collective trends, especially in a modern society of unprecedented amount of choice and 'decision fatigue'. By then comparing to traditional societies, where both individual choice and social influence are often better informed, we can better understand how population scale data inform us about human decision-making and the dynamics of behavior change."

In the modern world of capital markets, this type of social influence and imitation provides the basis for mutual knowledge that can endogenously drive share prices higher or lower, as opposed to independent knowledge of a company’s “fundamentals” being the most significant factor in investment decisions.

e.g., Big-time Trader X tells big-time Trader Y that he and a few other big-time traders are fully invested in a certain stock with vast amounts of leverage, and big-time Trader Y imitates the leveraged investment.

So, while mutual knowledge can be a force that helps blow speculative bubbles amongst the herd, it can also be a force that incites mass resistance to oppression or even some form of revolution. Take the parable of The Emperor’s New Clothes by Hans Christian Andersen, for example. In that story, the child who pointed out that The Emperor "isn’t wearing anything at all" was not telling anyone a fact that they didn't already know.

Instead, his use of direct language alerted everyone to the fact that at least one other person, and most likely many other people, had thought the exact same thing about The Emperor – that he was completely naked. Once that mutual knowledge was established, it was used as a rallying point against the vain Emperor that intensified over time, until he was finally transformed into a more serious leader (a rather idealistic outcome when taken literally).

 

 

Still, that's the kind of mutual knowledge which builds a wealth of confidence in numbers, since people are more willing to speak/act out against those in positions of power when they can count on some level of support from others. And this is where the movements of our day find much of their core strength, whether we are talking about the “Arab Spring”, ongoing European demonstrations, mass civil disobedience such as the Occupy protests and strikes, local communities moving towards self-sufficiency or online communities fostering extensive discussion/action. 

Much of today’s popular protest momentum began with the Egyptian Revolution in January-February of 2011, where hundreds of thousands would gather in Tahir Square on a single day to peacefully express their disdain for the Mubarak government and years of economic oppression and inequality. Most of the population was already well aware of these injustices and the need for systemic change, but the act of gathering together in the Square catapulted their awareness into mutual recognition and, not very long after, Mubarak was forced to step down.

Although the Egyptians did not necessarily achieve their goals of socioeconomic redress and Mubarak was replaced with an even more oppressive military command, the presence they established in mass protest is still continuing on to this day, and not only in Egypt or the Arab region. The entire world had looked on and gained the mutual knowledge of popular resistance to oppression. Well within a year, the Arab Spring inspired protestors to amass in Liberty Square of Manhattan’s Financial District on September 17, 2011.

Again, this gathering wasn’t necessary to inform everyone present what they already knew about economic injustice and inequality; about how the supranational banks have been stealing wealth, destroying communities and ending lives and how the U.S. Government and Fed have been aiding them all the while. Some new facts are always being learned through these experiences, but the real value lies in the information being learned about each other.

The information that, not only are other people relatively awake and aware of what’s being done to them by the “1%”, but they are also willing to sacrifice their time, effort and, in some cases, physical safety towards the process of letting everyone else know who they are and where they stand. It’s a long and arduous process to be sure, and is by no means guaranteed to produce revolutionary results, but it does lay the necessary and mutual foundation for systemic change.

 

 

Since its inception in September 2011, the Occupy movement has established a presence in almost every major city in the Western world and some parts of Asia as well. Perhaps the most inspiring part of Occupy is that it so far shows no signs of repeating the mistakes of the European and American anti-capitalist resistance movements of the 1960s and 70s, which frequently used violent acts of terrorism to spread an otherwise valid message. The Occupy movement understands that, regardless of its intentions and ultimate goals, it cannot justify the use of violence against others, and that such violence will only undermine its ability to gain widespread support and be effective.

 

As a quick aside, let’s look to two of the earliest and most well known anti-capitalist activists in history – Karl Marx and Pierre-Joseph Proudhon. These two held a friendship for some years until a series of exchanges threw a bit of cold water on that intellectual fire. Marx sent Proudhon a letter inviting him to become a part of a correspondence network involving German, English and French socialists. Proudhon quickly sent a reply accepting the invitation with one very important caveat, which didn’t sit too well with Marx:

I have also some observations to make on this phrase of your letter: at the moment of action. Perhaps you still retain the opinion that no reform is at present possible without a coup de main, without what was formerly called a revolution and is really nothing but a shock. That opinion, which I understand, which I excuse, and would willingly discuss, having myself shared it for a long time, my most recent studies have made me abandon completely. I believe we have no need of it in order to succeed; and that consequently we should not put forward revolutionary action as a means of social reform, because that pretended means would simply be an appeal to force, to arbitrariness, in brief, a contradiction.

 I myself put the problem in this way: to bring about the return to society, by an economic combination, of the wealth which was withdrawn from society by another economic combination. In other words, through Political Economy to turn the theory of Property against Property in such a way as to engender what you German socialists call community and what I will limit myself for the moment to calling liberty or equality. But I believe that I know the means of solving this problem with only a short delay; I would therefore prefer to burn Property by a slow fire, rather than give it new strength by making a St Bartholomew’s night of the proprietors ...

Your very devoted Pierre-Joseph Proudhon

More recent philosophers/activists have also had their friendships divided along similar lines such as Jean-Paul Sartre and Albert Camus, with the fomer adopting a more hard-line Marxist revolutionary approach, while the latter is known for unequivocally stating that "the ends can never justify the means".

 

Our peaceful “protests” here at The Automatic Earth and on many other websites/forums are also rooted in both increasing factual knowledge and mutual knowledge. We all have different styles, perspectives, opinions, areas of expertise and general predictions, but we are mutually driven, like Marx and Proudhon, by our desire to see others opt out of the current exploitative system, take back control over their own lives and provide moral and/or physical support to families, friends, neighbors, communities and complete strangers.

Our very own Nicole Foss provides an invaluable service in this regard, as she has tirelessly traveled between communities in Europe and North America relaying TAE’s message to groups of people with varying perspectives and levels of knowledge, but all with the common yearning to know that they are not alone in this journey. The TAE Community, in general, has fostered mutual knowledge of our financial, economic, energy and environmental predicaments for many years now through the comment section.

 

Statistics for The Automatic Earth (at Blogger)

 

 

Those steadily increasing bars you see from 2008-2011 are representative of increasing mutual knowledge. Every new person that decides to “join” the community is gradually welcomed by the mutual knowledge that thousands of others are also joining or are still here. The exact numbers have been scrubbed for privacy reasons, but I can assure you that they are not insignificant. They possess just as much revolutionary potential as the movements taking place “on the streets”, as both types feed into each other and promote mutual awareness of the possibilities for change.

None of this is to say that the strategies or movements towards mutual knowledge are perfect, and some may have very significant shortcomings. As mentioned above, we would do well to dismiss any movement that actively promotes violence as a means of achieving its goals, because such strategies are both unethical and counter-productive. There is also some harm from “going all in” on these movements and using them as justifications to avoid conducting our own preparations at much smaller scales.

That risk is more pronounced with OWS than with an online community such as TAE, since the latter focuses on promoting understanding of these risks as well as a high degree of systemic independence and self-sufficiency. There is always the lingering fear that those solely relying on OWS, on the other hand, will find themselves lacking the personalized preparation that is necessary to weather upcoming storms.

That is why we must constantly balance our movements of mutual knowledge and struggle with our independent awareness of what is happening within our own lives and those of our families, friends and neighbors. Or, as Raul advised, Occupy Your Own Space. We must be conservative, vigilant and broadly revolutionary all at the same time. It is with this balance that we will all continue to mutually stray from the beaten path and discover our own trails into the future.

Orville or Wilbur Wright Kitty Hawk Drum Fish 1900 "Tom Tate, the son of Captain Tate's half-brother Daniel Tate, poses with a drum fish in front of a 1900 Wright glider"

Ashvin Pandurangi:

A Glimpse Into the Stubborn Psychology of Fish "Poker may be a branch of psychological warfare, an art form or indeed a way of life – but it is also merely a game, in which money is simply the means of keeping score." - Anthony Holden

For those unfamiliar with the game of poker, it is essentially a game where players attempt to win money from other players at their table by having the best five-card hand at showdown or by betting their opponents off of the best hand. The most popular form of poker is Texas Hold 'Em, in which each player is dealt two "hole cards" followed by a round of betting, then a three-card "flop" followed with another round of betting, a one-card "turn" with betting, and finally a one-card "river" with the last round of betting. Each player can, but is not required to, use one or both of their hole cards, and must use 3-5 cards on the board, to construct their best possible five-card hand (from best to worst - straight flush, four of a kind, full house, flush, straight, three of a kind, two-pair, pair, high card).

 

What makes poker a profitable venture for "solid" players, unlike blackjack, craps or roulette, is their opportunity to capitalize on the mental mistakes of other players, by accurately "reading" the opponent's potential range of hole cards in any given hand (mostly from betting tendencies and style of play), and accurately calculating the "pot odds" they are being laid (money that must be put in on the present and future betting rounds as a percentage of money that could be won from the pot). The pot odds calculation allows the solid player to determine the best course of action (bet, call, raise, fold) by comparing it to the equity his/her hand carries against the opponent's range.

Any course of action offering positive expected value (pot odds > odds of breaking even against opponent's range) should be taken, and ideally the single course of action offering maximum EV is the one that will be chosen. It is certainly not easy to precisely determine the expected value of a decision, especially when your facing a new opponent, but the toughest part of a solid game is remaining disciplined, unemotional and objective throughout an entire hours or days-long session . The solid player can never let the play or words of weaker opponents introduce any elements of self-doubt into his mind, because eventually they will destroy his/her edge in the game.

The opponents every solid player wants to find at his/her table are called "fish" (aka "calling stations"), because they play a large range of hands before the flop and tend to call large bets (as a % of the pot) after the flop with weak hands (high card, single pair) or draws (to a straight or flush). These players are typically very passive, meaning they almost always prefer to just call with their hands (weak and strong) rather than raise, making them an ideal opponent. When you make a decent five-card hand, you keep betting it for value against the fish, and if the fish raises your bet, then you fold everything but the strongest hands.

The best feature of a true fish is that they never learn or adapt to an opponent's style of play. They will keep calling you with weak hands even when you only show down "monsters" at the table, because they are only concerned with their own cards and they always assume you are holding even weaker than they are. There are not many real-life players who fit exactly into this idealized style of play, but there are many who generally harbor its underlying psychology - one of permanent and irrational belief in an ability to win a hand, despite any mounting evidence to the contrary. They cannot possibly conceive of folding, because that means giving up any chance of winning, slim as it may be, and also giving up any money already invested in the pot. A quick example of the typical thought-process a fish undertakes in a hand:

So you were first to act pre-flop and raised to 3x the big blind? Well I have a pretty-looking 9♦T♦ on the button, so I call to see a flop. So you bet 3/4ths the pot on a 5♦ 5♠ 9♠ flop? Well, I have top pair and a backdoor flush draw, so I call. So you again bet 3/4ths the pot after the turn produced the 2♣? Well, my draw has vanished but I still have top pair, so I will call again. So you fired a third large round at the pot after the river brings the 5♣, representing a big pair such as AA or KK?? Well I don't really care what you are representing or actually thinking, because I have a full house, so I call!!

The fish never stop to think what your strong bets out of position imply about your hand, especially given the fact that you most likely know that they are fish. If the fish do stop to think about these factors, then they most likely dismiss the thought before it has any chance to settle, since it would be too disruptive to their goal of never folding a potential winner. While the solid players are constantly engaged in several different layers of critical psychoanalysis, the fish are forever stuck in a one-track mindset. This linear form of thinking should sound eerily familiar to the collective psychology that has traditionally encompassed millions of people in the developed world, and continues to do so currently. 

After all, poker is essentially a simplified representation of financial investment in a capitalist society, and the fish are the reckless "speculators" in the broadest sense of that term, which includes most people who adhere to mainstream beliefs about "proper" lifestyle choices in their society. Those of us who are aware of the deeper and more comprehensive trends in our socioeconomic system are the solid players in the poker game of life, and the facts/data that support these trends are our bets. The broad socioeconomic trends that we are currently experiencing in the developed world are pretty clear and straightforward (leaving aside the critical issues of peak oil and climate change):

The financial model of growth in the developed world has run its course and financial assets will be significantly reduced in value over the next few years. Systematic deleveraging will lead to persistently high unemployment and widespread poverty. Societal institutions or systems that rely on financial stability will continue to deteriorate at an accelerating pace (education, healthcare, etc.). States running large fiscal deficits to support their private economies will quickly slide into insolvency and default on ambitious promises to their citizens. Housing, food and energy will become unaffordable for millions of people as wealth in the form of revenues, investments and savings is rapidly destroyed, and short-term speculative plays in the commodity space fueled by central bank liquidity will only make this dynamic worse. Political institutions or systems that have exercised power during the unprecedented financial boom will come under an equally unprecedented societal pressure and will most likely be overhauled or completely dismantled.

Over the last few years, our bets have become larger and more powerful in every way imaginable, yet the fish keep calling and expecting to see a bluff. When the stock market took a nosedive in late 2008 as a result of the sub-prime housing meltdown, the fish were initially flustered by such a strong bet against financial stability in the developed world. However, they quickly shrugged it off and regained their hard-headed "business as usual" mentality, continuing to pour more of their speculative money into the pot (stocks, real estate, bonds, consumer goods, etc.). When sovereign debt issues emerged from the Eurozone and Greece could no longer roll over its debt at anything close to a reasonable rate of interest, the fish began clamoring to make sense of such a strong bet against the fiscal solvency of states in the developed world. Of course, the bet was quickly dismissed as a pathetic attempt to sell prophecies of "doom and gloom", and the fish kept insisting that Greece was an isolated incident in an otherwise stable and prosperous region. Now that the contagion has spread to other European countries such as Spain, Portugal, Ireland and Italy, the fish almost unbelievably continue to dismiss the trend as a slight road bump on the EU's path to greater wealth and prosperity.

Almost every significant data point that has emerged during and since the events described above has either been dismissed outright or "rationalized" away. You say that new and existing home sales have sharply declined after expiration of the federal tax credit? Well, I say that doesn't matter because housing will always regain its value in due time. You say that there are millions of homes being kept off the market as shadow inventory, and more millions of homes whose legal title has been compromised by rampant banking/investor fraud? Well, I'm confident these are minor problems which can be solved with some retroactive legislation and more state subsidies to banks or homeowners.

You are claiming that the banks responsible for most of the secured lending in this country would be bankrupt if forced to mark their assets to fair market value? Well, I don't believe you because the WSJ reported that major Wall St. banks took in record revenues in 2010 and therefore rewarded themselves with record bonuses. In the mind of a fish, long-term solvency is simply not as important as winning a few pots in the short-term. There are numerous other economic/financial data points (bets) that the fish refuse to accept as an accurate representation of reality's underlying hand (re: unemployment, food stamps, pension shortfalls, stock market losses, private and public debt burdens, etc.). However, the irrational denial of fish is perhaps even more stark in the realm of sociopolitical trends.

Since early 2010, there have been many acts of politically-motivated violence across the world, ranging from individual acts and modest protests to full-blown riots and revolutions. The fish may tell you that there have "always" been people who snap and go on a killing spree, or groups that decide to protest a specific state policy, or third-world nations that spontaneously erupt in revolution, and so these events have no special systemic significance. It is true that these types of events have occurred in many places throughout the latter half of the 20th century, but they are only beginning to exhibit such strength, frequency and widespread influence after the global financial crisis.

Part of this dynamic is a reflection of how we were unable to connect the dots back then, when we were paying less attention to betting patterns and more attention to the stacks of chips sitting in front of us. The more significant factor is that systemic flaws in the global financial system have been fully exposed to the world's population, and much of this population has been forced to absorb the drastic costs of these flaws for the benefit of a few. No amount of political window-dressing by politicians, academics or pundits in a financially-dependent state can hide the ugly reality now facing its citizens.

This new reality is best evidenced by the spread of sociopolitical unrest from "peripheral" countries to the heart of our global society. Member countries of the EU are not economically or politically "insignificant" states, and their frequent protests, strikes and riots evidence a rapidly increasing frustration with both the national and regional institutions currently determining economic policy. Egypt and Saudi Arabia are not Tunisia or the Gaza Strip, and the instability of their corrupt, authoritarian political systems is fundamentally the same as that of their sponsors. Speaking of whom, the U.S., U.K., Japan and China have also witnessed their fair share of sociopolitical tumult over the last few years, and all signs point towards an intensification of this popular animosity in the near future.

In an actual poker game, the solid players derive most of their profits from the fish, so where do we find our profits in the poker game of life? It may seem counter-intuitive to say that the irrational beliefs of mainstream society have benefited us in any significant way, but there can be no doubt that we have profited. Asset prices have not collapsed yet because the fish refuse to accept reality, and this denial gives the rest of us a chance to sell what we have before realizing too many losses. Our political and social institutions remain functioning at a reasonable level, which gives us ample opportunity to physically and financially prepare for the inevitable future. The suspended reality created by the fish gives us a chance to continuously communicate our views to others, with the hope that some semblance of reason eventually gets through.

It's only when the school of fish stream towards the exits in unison that the "game" becomes wholly unprofitable for solid players. Until that tipping point arrives, our bets will continue to scream "I have a monster!" at the top of their lungs, and the fish will continue to make crying calls in stubborn disbelief. The psychology of fish always leads them from a state of comfortable wealth to one of utter destitution over time, as they incessantly chase their losses, throwing bad money after even worse money. As the total amount of money sunk into the pot exponentially increases along with net losses, the fish find it that much more difficult to simply walk away from the game. In the long-run, however, every fish goes for broke and is simply unable to purchase any more chips to play with. The solid players are then left with a minimal or non-existent edge at their tables, as the game begins to consume itself, and that's when you know it's time to get up, leave the casino and begin the long journey back home.

Lewis Wickes Hine Scavengers November 1912 Children going through Whitman Street dump. Pawtucket, Rhode Island

Stoneleigh: There are many things we have discussed here frequently that come up as questions in the comments because we are attracting new readers all the time. I thought it would be a good time to answer those questions en masse, so that there would be a URL to point to if the same questions should come up again.

The basic point is that we here at TAE are expecting deflation. Although inflation and deflation are commonly thought of as descriptions of rising or falling prices, this is not the case. Inflation and deflation are monetary phenomena. The terms represent either an increase or a decrease, respectively, in the supply of money and credit relative to available goods and services. Rising prices are often a lagging indicator of an increase in the effective money supply, as falling prices are of a decrease. There is an important distinction to be made between nominal prices and real prices, however. Nominal prices can be misleading as they are not adjusted for changes in the money supply and so do not reflect affordability. Real prices, which are so adjusted, are a far more important measure.

Nominal prices typically rise during inflationary times as there is more money available to support higher prices, but prices need not rise evenly, and some prices may fall, depending on other factors. In real terms the picture would be quite different, as increases would be smaller and decreases would larger. When nominal prices fall despite inflation, it means that the price in real terms is plummeting. For instance, global wage arbitrage allowed the price of imported goods to fall drastically in real terms. In deflationary times, nominal prices typically fall across the board, but prices need not fall in real terms, and, in cases of scarcity, may well rise.

The easy availability of cheap credit has conveyed a considerable amount of price support - price support that will be progressively withdrawn as credit tightens. Prices will fall, but the collapse of credit will cause purchasing power to fall faster than price, leading to the apparent paradox of nominally cheaper goods being less affordable in the future than nominally more expensive goods are today. Moreover, there are likely to be substantial changes in relative prices between essentials and non-essentials. As a much larger percentage of a much smaller money supply will be chasing essentials such as food and energy, there will be relative price support for those items. In other words, while everything is becoming less affordable due to the collapse of purchasing power, essentials such a food and energy will be the least affordable of all, whatever the nominal price. People commonly speak of unaffordable prices as a result of inflation, but do not realize that deflation can have the same effect, only much more abruptly.

Thanks to a credit boom that dates back to at least the early 1980s, and which accelerated rapidly after the millennium, the vast majority of the effective money supply is credit. A credit boom can mimic currency inflation in important ways, as credit acts as a money equivalent during the expansion phase. There are, however, important differences. Whereas currency inflation divides the real wealth pie into smaller and smaller pieces, devaluing each one in a form of forced loss sharing, credit expansion creates multiple and mutually exclusive claims to the same pieces of pie. This generates the appearance of a substantial increase in real wealth through leverage, but is an illusion.

The apparent wealth is virtual, and once expansion morphs into contraction, the excess claims are rapidly extinguished in a chaotic real wealth grab. It is this prospect that we are currently facing today, as credit destruction is already well underway, and the destruction of credit is hugely deflationary. As money is the lubricant in the economic engine, a shortage will cause that engine to seize up, as happened in the 1930s. An important point to remember is that demand is not what people want, it is what they are ready, willing and able to pay for. The fall in aggregate demand that characterizes a depression reflects a lack of purchasing power, not a lack of want. With very little money and no access to credit, people can starve amid plenty.

Attempts by governments and central bankers to reinflate the money supply are doomed to fail as debt monetization cannot keep pace with credit destruction, and liquidity injected into the system is being hoarded by nervous banks rather than being used to initiate new lending, as was the stated intent of the various bailout schemes. Bailouts only ever benefit a few insiders. Available credit is already being squeezed across the board, although we are still far closer to the beginning of the contraction than the end of it. Further attempts at reinflation may eventually cause a crisis of confidence among international lenders, which could lead to a serious dislocation in the treasury bond market at some point. If a debt-junkie economy can no longer easily raise funds, then interest rates would rise substantially and spending at home would be drastically cut. This would be the financial equivalent of hitting the 'emergency stop' button on the economy, as it would cause a far larger rash of defaults than anything we have seen so far. We are not there yet though. Currently the dollar is benefiting from an international flight to safety, and it will probably continue to do so for some time, despite temporary counter-trend pullbacks from time to time.

We have seen a pattern of ebb and flow of market liquidity since February 2007, when the credit crisis arguably began. A constellation of market trends has largely moved in synch with liquidity. As liquidity falls, equities fall, bond yields fall (and prices rise), commodities fall, precious metals fall, real estate falls and the dollar rises, as cash becomes king. When we see market rallies, in contrast, rallies in bond yields, commodities, and metals are also common, and the dollar experiences a pullback. We appear to be beginning a market rally at the moment, which should lead to precisely this set of trend reversals. Such a rally is only temporary relief however. It may last for a couple of months, but then the decline should resume with a vengeance.

We have a very long way to fall, and the deleveraging process is likely to play out over several years.  During this time we can expect to be mired in a worse depression than the 1930s, as the excesses that led to our current situation are far worse by every measure than were those of the Roaring Twenties. Unfortunately, we are much less prepared to face such an occurrence than were our grandparents. Our expectations are far higher, our knowledge and skill base is much less appropriate, we are far less self-sufficient and we have a structural dependency on cheap energy. This will be a very painful time. Deflation and depression are mutually reinforcing, leading to a vicious circle of decline that is very difficult to escape. It will be over when the (small amount of) remaining debt is acceptably collateralized to the (few) remaining creditors. At that point trust will begin to rebuild.

For a longer and more detailed explanation of the credit bubble and deflation see The Resurgence of Risk - A Primer on the Develop(ed) Credit Crunch. This an article I wrote in August 2007 that was recently rerun on The Oil Drum, where I used to be an editor.

John Vachon Duet September 1940 St. Mary's County, Maryland. "John and Louise Dyson, aged Farm Security Administration borrowers. Mr. Dyson was born into slavery over eighty years ago. Mrs. Dyson is the mother of fifteen children"

 

"Debt" has been used as a means of slavery throughout human history, in ancient societies dating as far back as thousands of years ago, such as those in Mesopotamia, Egypt, North/South America, etc. Debtors in these societies would be forced to relinquish their crops, land, freedom and even their wives and children to satisfy unpaid debts. Such extravagant periods of debt creation often culminated in the necessity for systemic debt forgiveness (or "Jubilee") by the decree of chiefs, emperors and kings to simply maintain some sense of social order [see Debt: The First 5000 years].

However, the decree of the all-powerful ruler no longer exists in these traditional forms, in which the rulers and landed aristocracy could easily maintain their power through force even after all lower classes’ debts were wiped out. Instead, our modern network of nation-states requires a continuous level of economic and financial coercion to exert discipline and maintain the status quo relationships of wealth, power and dominance [see The Debt-Dollar Discipline].

As explained in Our Depraved Future of Debt Slavery (Part I), our global society is facing conditions of systemic dependency, greed and malice very similar to those which existed in the American South of the late 19th century, which created a system of slavery for blacks just as ruthless as that which existed before the Civil War. The modern industrial and financial elites cannot tolerate any policies of systemic debt forgiveness, since almost all of their wealth is invested in instruments tied to those debts (including the underlying currencies).

At the same time, they cannot continue extracting surplus value when large segments of the developed world’s population remain saturated with debt, which acts to suppress aggregate demand for goods, services and capital investment. In order to continue making profits, then, they must have extensive access to very cheap labor and fixed capital inputs. They must transform the consuming classes of the first world into indentured servants and slaves through already established channels of financial and political oppression, and also pick up productive assets for "pennies on the dollar".

Last time, we looked at one obvious way in which the modern slave state has been forming – the rise of the privatized prison-industrial complex which has become a venue for detaining ever-larger numbers of people in the poorest and most socially manipulated classes of our society, such as low-level drug users and dealers. These prisoners provide a constant stream of enslaved labor to wealthy corporate interests, just like the convict leasing system of the late 19th and early 20th centuries used primarily for African-Americans.

Vast amounts of money and resources are devoted by state and federal government agencies towards maintaining a perpetual "war on drugs" that merely reinforces the very profitable industry of drug addiction, use, trafficking, punishment and imprisonment in a vicious cycle. More recently, though, we have managed to manufacture another perpetual threat/response paradigm which provides the justification for modern enslavement – the "war on terror".

Everyone should now be aware of the argument that the National Defense Authorization Act (NDAA) allows the U.S. federal government, in coordination with the U.S. military, state governments and a sprawling intelligence network, to indefinitely detain any person in any place, including U.S. citizens, suspected of participating in or aiding “terrorist activities” without any due process of law (such as formal charges and trials).

Without getting into disputes over legal interpretations of the Act or its constitutionality, it is still undisputed that this type of legislation, which is in the company of such notables as the Patriot Act, represents a clear trend towards suppressing domestic dissent and expediting the mechanisms of incarceration. When peoples of a society are burdened with vast amounts of unpayable debts, it is predictable that they will eventually protest against those debts in whatever ways they can, ranging from intentional defaults to physical resistance.

 

 

Just look at Greece, where the people are being forced to take on more external debts (with interest) through their government as these debts become increasingly difficult to pay back, and while the benefits all run to a small group of elites. They are made to suffer through brutal austerity so that they can stay in debt, just like the recidivist drug addict stays in the prison system. Inevitably, such a state of affairs leads to violent riots and protests by the masses, which, in turn, lead to violent reactions by the state, which then feed back into more violence by the people.

It is a symptom of debt slavery that has plagued societies for centuries and has even led some of them to outlaw the issuance of interest-bearing debt altogether. As stated before, though, such a path does not compute for the powerful creditors and their beneficiaries today, which is why the last thing the Eurocrats will discuss at their now weekly Summits is a policy of systemic debt forgiveness (the PSI deal does not even come close to counting). Even the Troika itself has admitted that Greece’s debt/GDP could very well remain at 160% for the next decade despite bailouts, austerity and “voluntary” debt swaps.

If you woke up tomorrow and were told that many of the Greek protestors/rioters, along with lower class tax evaders/debtors, were now being indiscriminately and indefinitely detained without judicial process and that uniformed soldiers and tanks were being deployed to the streets of Athens, would you be very surprised? I’d hazard a guess that most people who follow the news wouldn’t be, but they would still call you a fanatical nutcase if you suggested anything similar could happen in America, the "land of the free".

 

 

That is despite the fact that our private and public debt (per capita) situation is worse than that of Greece, and our level of unchecked executive authority is much, much worse. In the post-Reconstruction south, state laws were re-written and federal laws were ignored when it came to increasing the levels of incarceration and debt servitude (peonage) among blacks. Today, federal laws have all but usurped the police powers reserved to the states under the 10th amendment and become the primary mechanisms of enslavement.

Michael Barnholden’s book, Reading the Riot Act: A Brief History of Rioting in Vancouver, explains how the original “Riot Act” passed by the British Parliament in 1714 has been put into effect since that time, and how it is still active law in Canada. The act gave enormous amounts of discretion to the executive arm of government in identifying and detaining “rioters”. In his review of the book, Max Sartin points to the socioeconomic premise underlying the Riot Act that was insightfully indentified by Barnholden.

The Rain Review of Books

 

"All of the riots, from those characterized by racism to those attributed to drunkenness at sporting events, are said by Barnholden to have a connecting thread in the exploitation inherent to the capitalist economy and the need of the ruling class to garner the consent of its subjects when possible or their submission by force when necessary. The legal definition of a riot and its presentation by the media are functional to the interests of the ruling elite, at the expense of the working class, including the unemployed and prisoners.

 

Barnholden frames the question in terms of human rights versus property rights, damage to property taking precedence over harm to human beings. The author’s concept of human rights isn’t defined in the book, leaving open the question of whether such rights, or the very idea of rights itself may be just another legal technicality, like the definition of a riot, subject to the whims of those in power.

 

Barnholden himself points out that "a job is the only guarantee within capitalist society of the basic human rights of food and shelter, and there is no right to that". But he also describes a paycheque as an element of coercion. Employment under a manager is exploitive and oppressive, but it’s the only way to achieve certain basic necessities of life, which as human beings we supposedly have a right to access. But we have no right to employment (which is also "wage slavery") and so our most basic rights become meaningless."

Barnholden gets to the root of why economic coercion under a capitalist system can easily turn into outright slavery, enforced by the corporatist state. There is absolutely no reason why the Riot Act in its most subjective form cannot once again be adopted by the U.S. and other Western nations as an additional means to threaten an increasingly distrustful population with incarceration, and to carry out that threat when necessary. In fact, current trends suggest this is exactly what will happen.

The protections afforded U.S citizens in their Constitution against arbitrary oppression by the federal government have been undermined in just about every way possible since 9/11. That is indeed a scary reversal from the post-Civil War era, because it means that state and local governments are helpless to protect their own citizens from federal encroachment. This is especially true at a time when state governments are also wading deep in pools of stale debt, and must sell out their citizens to get temporary financial aid, which first makes its way into political pockets and then straight to the major banks.

The indefinite detentions of the West in modern times began under the Authorization of the Use of Military Force (AUMF), enacted before the invasion of Afghanistan, but now the NDAA has put Congress’ official stamp of approval on the very broad interpretation that was afforded the AUMF by the Bush Administration. The federal courts (including the Supreme Court) have been extremely reluctant to challenge any of these unconstitutional executive powers, and indeed have sanctioned them in many cases.

With that legal framework for the federal and state executive branches in mind, it’s not hard to see how people could eventually be forced into peonage contracts by their private creditors or third party debt collectors. The truth is that both traditional contract law concepts such as "fraud/misrepresentation", "economic/physical duress", "unconscionability", etc., which sought to protect disadvantaged parties from exploitation, and Constitutional protections against the ex-post revision of private contracts have been thrown into the trash bin of history.

In the final part of this series, we will see how legally enforced contracts of debt servitude could become a defining feature of developed world populations in the near future. Indeed, the concept has already been deeply planted across the Western world in very important ways. This will be a means of maintaining a system of debt slavery without literally imprisoning all debtors. However, none of these outcomes are guaranteed to be sustained over time, and so we will also explore why these populations may ultimately be able to shape their own futures, free from the burden of perpetual indebtedness.

National Photo Co. Former Slaves 1916 "Washington, D.C., Convention of former slaves. Annie Parram, age 104; Anna Angales, age 105; Elizabeth Berkeley, 125; Sadie Thompson, 110"

 

It is almost surprising that the concept of slavery is very foreign to those living in the developed world, especially the U.S., since it was extensively practiced as recently as 70 years ago. What’s more disturbing about this ignorance is the fact that the system of post-Civil War slavery in the U.S. was not so different than the systems of slavery many Americans and Europeans will be experiencing in upcoming years. Indeed, I’m sure many people will probably take offense to such a comparison even being made, as they feel it demeans the atrocious acts committed in the past.

I would argue, however, that we demean history by failing to understand it and learn from it. Many people refer to debt slavery when referencing current policies of the West, especially in Greece right now where the concept has become very real, but they perhaps still under-estimate how bad it can get. These systems of slavery are primarily borne out of deeply-rooted economic structures which foster high levels of dependency, greed and malice by those with unchecked levels of political power. In the late 19th and early 20th centuries, these powerful groups consisted of wealthy Southern agricultural and industrial elites.

In his book “Slavery By Another Name” [documentary here], Douglas A. Blackmon documents how very few of the 4 million slaves that existed at the end of the Civil War were actually allowed to realize their freedom until decades later. As the white middle class of the South grew from 1870-1950 (with the exception of some years encompassing the Great Depression), due in no small part to the success of Southern industry, the blacks were kept in their chains through various mechanisms, such as convict leasing and debt peonage, over and above the outright discrimination and violence that they also suffered.

The Southern convict leasing systems were a means of extending slavery for African Americans well past the Civil War, Emancipation Proclamation and the 13th and 14th amendments. Southern laws were crafted to guarantee that the now “free” African Americans would be incarcerated at much higher rates than whites. Blacks were picked up, hauled off and locked up for ridiculous crimes such as “vagrancy” (being homless or unemployed), loitering in public, speaking loudly in the company of white women or selling farm products after dark, to name only a few.

Once these people were matriculated into the prison system, they had effectively become slave laborers again. The state allowed convicts to be leased out to private corporations for little more than a pittance - convict laborers were rented out at monthly rates that represented a 50-80% discount over the wages paid to free laborers. They were forced to work in some of the most dangerous environments at the time, laying railroad and mining coal, and a significant percentage developed severe illness/injuries and died in the course of such work.

It is estimated that at least 9000 convict workers were murdered or died of “natural causes” over a few decades under this system alone. As one historian described it, the system was “brutal in a social sense, but fiendishly rational in an economical sense”. That is really the crux of the matter – the Southern plantation economy, as well as newly developing transport industries, was very dependent on extremely low-cost labor, in both an economic and psychological sense. Convict leasing proved to be even more profitable than slavery in many cases, since there was really no need to keep the workers healthy and alive for very long.

Many African Americans were also placed into peonage or “debt servitude”, despite the fact that the federal government made it illegal after the accession of New Mexico into the U.S and the Civil War. These blacks were typically accused of falsely owing money or trivial sums, given sham trials and quickly sold off by the courts into a privatized system of debt slavery. The peonage contracts contained horrifying terms, allowing the employer to trade, confine, whip and beat workers as long as the debt was deemed unpaid, which could practically last forever.

It was established that some of the wealthiest Alabama farmers had their own “justices of the peace” who would fraudulently try and convict blacks on charges of unpaid debts. The federal government launched an investigation into these practices, and an Alabama court convicted a few of the farmers of public bribes and illegal debt peonage. However, they were given minimum sentences and then pardoned by President Theodore Roosevelt shortly after. Despite the investigation and state court ruling, this practiced continued in many Southern states for years after.

Another less explicit form of forced labor was sharecropping, in which the poor black farmers theoretically received a percentage of the profits from sale of a certain crop grown by them. However, these workers were forced to take out relatively large loans just to meet daily expenses and these loans sometimes carried interest rates upwards of 50% or 60%. At the end of day, many of these sharecroppers were treated just like slaves and received very little compensation for their work, besides the basic necessities of life.

It is probably quite obvious to most readers how all of these mechanisms of forced labor and debt slavery are still being practiced today and are only getting worse. The prison-industrial complex in the U.S. has become more extensive than ever, as the list of petty crimes for which people are incarcerated has grown longer (but still does not include corporate/banking fraud or political corruption at the highest levels). There are, of course, many serious offenders in the system, but the point is that it is becoming ever-easier for our modern “slavemasters” to blur the line.

 

 

Foremost among the petty punishment is for drug use and addiction, which, as Dr. Gabor Mate has insightfully explained (h/t El Gallinazo), are conditions that primarily develop from environmental influences at an early age (as opposed to genetics). The socioeconomic structures and growing wealth inequality embedded in our society, especially at this time of economic depression, places enormous amounts of stress on its poorest members and can literally re-wire their brains in ways that eventually lead them down a path of self-defeating drug addiction and associated behaviors.

U.S. Department of Justice – Prisoners in 2010

 

In 2009, the most recent data available, 53% of state prison inmates were serving time for violent offenses, 19% for property, 18% for drug, and 9% for public order or other offenses.

 

About half (51%) of federal inmates in 2010 were serving time for drug offenses, 35% for public-order offenses (largely weapons and immigration), and less than 10% each for violent and property offenses.

Instead of working to change our fundamental economic structures and mitigate the stress triggers, our society has sought to “punish” and “rehabilitate” these people by placing them in environments of unprecedented fear and stress, such as prison. Given the amount of money and resources poured into the “war on drugs” in the U.S. over decades, there is never any shortage of people that can be easily sucked into this prison complex and then become a part of an enslaved labor force. Maintaining prisons and their populations has become very costly to taxpayers, but that’s the whole point.

The growing and increasingly outsourced U.S. prison workforce is frankly a wet dream for private corporations, just like the convict leasing system was for Southern corporate elites. They have already been stripped of almost all their freedoms through the system of incarceration, and can be forced to work for a very low wages in poor working conditions, under very strict levels of order and discipline. This pool of enslaved labor exploded since the early 1970s, as shown above, and therefore has already been thoroughly exploited by private corporations for many years.

 

 

On top of that, the entire business of building and running both state and federal prisons has been in the process of being outsourced to private corporations as governments come under fiscal pressure. These private interests now have even more incentive to help state and federal governments maintain the currently elevated number of prisoners. In recent years, the annual percentage increase in prisoners has dropped off, but that’s a “problem” which can be easily solved by the powers that be. In addition to inevitable increases in crime rates associated with economic depression, the list of jailable offenses can simply be expanded along with their associated sentences, like they were for blacks after "Reconstruction".

Right now, we have millions of people up to their eyeballs in housing and consumer debts, paying upwards of 20% interest on their credit cards and “payday loans”. It is an entrenched system that forces people to work longer hours for fewer benefits and wages over time. But, even as such, the titans of industry and owners of concentrated financial wealth are finding it difficult to squeeze enough blood from the stones. So what’s to stop the corporate elites and their political/judicial flacks from manufacturing debts out of thin air and exacting excessive wealth/punishment from those with debts owed?

In the follow up to this piece, we will look at the other ways in which the era of global indebtedness today has come to resemble that of the post-Civil War enslavement of African-Americans, except at a much larger scale. Is it really so unimaginable that an average lower or middle class American family, of all different races (although the racially-divided inequality of the past is still with us in many real ways), could find themselves in literal contracts of debt peonage, despite the technical “illegality” of such contracts at this time? What is the likelihood that laws will be re-written and/or ignored and how easy is it for the line between financial harassment/abuse and physical enslavement to simply disappear?

Detroit Publishing Co. Congress 1908 "South corridor, Library of Congress, Washington, D.C."

It’s hard to miss the irony in the fact that perhaps the biggest stumbling block to the status quo financial elites in the Western world, who are attempting to kick the can a bit farther down the road, aside from the sheer impossibility of the underlying math, is democratic elections. 2012 may very well be the year where decades of political theater for the benefit of large corporations and financial consumers from sea to shining sea come back with a vengeance to bite the status quo politicians in the ass.

And let’s be clear, it is the run-up to elections and the accompanying theatrical drama that will prove to be the most difficult for the status quo, rather than the actual outcomes of these elections. There is little doubt that almost all of the politicians will end up singing the exact same tune once they are actually in office. The real problem for the perennial can-kickers is that they simply do not have enough time to wait around for the elections to finish and the winners to take office.

First and foremost, we have the elections in Greece to replace the unelected, technocratic government that was force-fed to its people late last year. Due to the increasingly large and vehement public opposition to bailouts for the banks and austerity for the poor, politicians in the "opposition" parties must be very careful not to align themselves too much with the Troika and it’s puppet PASOK party (of which former Prime Minister Georgios Papandreou was a member).

That’s why we see the leader of the New Democracy party, Antonin Samaras, who has his eyes fixated on the position of Prime Minister (I’m not really sure why anyone wants to be the leader of Greece anymore), continuously flounder and backtrack on what exactly he will agree to in the latest austerity package that all of the bailout money has been conditioned on. Last year, Samaras refused to sign any written commitment to the terms of the austerity package, which has since expanded, before finally giving in.

That was all just a prelude to the main show which is taking place now. Samaras has once again "pledged" in writing to implement the Troika’s austerity program, but is simultaneously saying that the program may have to be adjusted once he is in office, since it does not do enough to promote growth (no kidding!). Helena Smith reports on what she was told by a top adviser to Samaras for The Guardian:

Guardian Live Blog

 

"The letter has just gone. We have no problem expressing committment to a stabilisation progam. We are all for eliminating the deficit, controlling the debt and going on with the privatisation program things that right from the beginning we proposed.

 

It [the letter] makes very clear that we have full respect for the long-term objectives, targets and key policies of the programme.

 

We also said we should modify the plan to allow for prompt [economic] recovery. We don't want to make recovery a top priority but we insist that it becomes an additional priority, that it be be applied in tandem with other policies to allow the economy to breath. Is this such an irrational, stubborn view when the [rescue] plan to date clearly hasn't worked?"

 

It's not because the objectives are wrong. From the beginning we agreed with them. But there is a missing ingredient.

 

Even if it was perfectly implemented the numbers didn't add up. We are not saying that we are against austerity but we have to change the mix and allow for recovery.

 

We are feeling a little embarassed that again and again they want us to show our committment to the plan. When we say prioritize recovery we mean we want to discuss it with them, not do anything unilaterally. Even if they allowed us to do whatever we wanted to do we would still stick to the programme."

How about those statements for floundering and backtracking?? Now that Germany, Finland and the Netherlands are kicking around the idea of delaying Greece’s bailout money until after the elections, Samaras will have to put on an even bigger show about how he will protect the interests of Greek workers and pensioners against the abrasive Eurocrats, and perhaps even promise not to sign off on the current plan. Otherwise, everyone will just assume he is going to do exactly what the Troika requires of him once he gets in office, like the PASOK party he is running against, which is quite a safe assumption.

Secondly, there are elections in France and incumbent President Nicolas Sarkozy has been steadily dropping in the polls against Francois Hollande of the Socialist Party. As of early February 2012, Hollande is almost running at his all-time high of 60% against Sarkozy. If you thought Samaras was being a thorn in the side of the pan-European austerity hawks, then take a look at what Hollande has been saying. Steven Erlanger for the New York Times reports:

French Candidate Assails Plan for Greece

 

"The front-runner for the French presidency, the Socialist candidate François Hollande, criticized European policy on Greece on Monday, saying that mandatory austerity measures were too severe and would never produce the desired results because "everyone knows" that "there is no rebound in growth in Europe and in Greece."

 

Mr. Hollande’s remarks, one day after the Greek Parliament adopted austerity measures demanded by the European Union and the International Monetary Fund, while violent protests left many buildings in Athens in flames, offered a critical assessment of European and Greek leaders’ handling of the crisis. The Greek government, he said, would "have a short life," while the austerity plan forced on Greece amounted to a "purge."

 

The French presidential race is heating up with President Nicolas Sarkozy expected to make his candidacy for re-election official this week. Mr. Sarkozy is still running behind Mr. Hollande in the opinion polls for both the first round of voting on April 22 and in a runoff on May 6. In a luncheon interview with a group of foreign journalists here, Mr. Hollande was pleasant and expansive, but remained vague on the details of his programs."

Right, Politics 101 - keep all your plans and policies for office vague and uncertain, but stay sharply critical of the current administration. Yet, that’s exactly what the markets can’t continue to handle right now – vagueness and uncertainty about the future of fiscal and monetary policy. The French sovereign bond market has so far remained relatively quiet throughout the whole crisis, except for a brief spike upwards in the 10-year yield late last year. If all of Sarkozy’s repeated promises of implementing domestic austerity come into question, though, France's credit situation could change very fast, especially since it has already been downgraded from AAA by S&P and put on “negative outlook” by Moody’s.

We also have a Spanish regional election in Andalucía on March 25, which is a bit more trivial than those above, but it still has the potential to create some major disruption in the Spanish bond market over the next month. Spain has been one of the worst hit economies during the financial crisis, with its unemployment rate reaching 23% at the end of 2011, and it has so far failed to offer the Troika any "credible" austerity plan for reducing its budget deficit. Angela Benoit reports for Bloomberg:

Spain Risks Deficit Spiral as Election Postpones Budget Cuts: Euro Credit

 

"Spain’s month-old government may postpone deeper budget cuts until after a regional election in March, adding to the risk the nation misses its deficit goal for the second year.

 

The ruling People’s Party, led by Prime Minister Mariano Rajoy, will contest an election in the southern region of Andalusia to end 30 years of Socialist rule. Spain’s 10-year bond yields have risen 10 basis points to 5.5 percent since the PP government took over on Dec. 21, increasing the rate to 359 basis points more than German bunds of similar maturity.

 

"Rajoy doesn’t want to get burnt before the Andalusian election," Antonio Barroso, an analyst at Eurasia and a former Spanish government pollster, said in a telephone interview. "They’re so crucial for the PP that it won’t take any kind of measure that would undermine its ratings in the region."

 

Rajoy needs to slice the equivalent of 3.6 percent of gross domestic product off the budget deficit this year to meet a European Union target, just as the economy may be entering its second recession in two years. Postponing steps until after the March 25 election risks undermining confidence in Spain’s ability to meet its goal, which Fitch Ratings already has "doubts" the country will reach.

 

"Rajoy has yet to explain how he will reduce the deficit when the economy is shrinking," said Georg Grodzki, global head of credit research at London-based Legal & General Investment Management, which oversees about $515 billion. "I don’t think Spain can afford to wait for more than two months at the most."

There's obviously nothing Rajoy can do to achieve a "sustainable" budget deficit in Spain while the economy contracts, and implemented austerity will only make the latter worse, but he also can’t afford to not offer up any bogus policy promises. The regional election is now getting in the way of him doing so, though, because the Spanish people are simply against any Greek-style "structural reforms" (they are not senseless and can see what has happened over there). Rajoy realizes such opposition exists, and will therefore hold off on submitting a budget until after the election. It’s entirely unclear whether the credit markets will hold off on pounding Spanish bonds into the ground, though.

Last, but certainly not least, we have the 2012 Congressional and Presidential elections in the U.S. I have suggested before that the Obama Administration, in its consistent attempts to present a rosy economic story before November 2, may have effectively killed the capacity of the Fed to "print money" through QE3 asset purchases [Who Killed the Money Printer?]. That in and of itself would be a HUGE blow to the status quo elites who are banking on the Fed to step in with at least a trillion dollars or so in easing to keep the markets happy.

But the electioneering syndrome certainly doesn’t stop there. We also have the Republican Presidential front-runners and those up for re-election in the Senate who will harshly criticize and block any and all attempts of Obama to launch any significant stimulus measures or help bail out Europe through additional contributions to the IMF. Since the Republicans control the House of Representatives, these full frontal blocks will not be hard to carry out. For example, The Hill reports on the opposition to Obama’s latest mortgage refinancing plan.

White House to push housing plan despite Republican opposition

 

"The White House has recently promised major steps to boost the housing market and help struggling homeowners, but bruising fights with Congress loom over major pieces of the plan.

 

The housing market is widely seen in Washington as still struggling in the wake of the subprime mortgage crisis, and weighing down what would be a more robust economic recovery.

 

In recent days, the White House has made a concerted effort to address the housing sector, rolling out new plans to help homeowners avoid foreclosure and boost the housing sector.

 

But while the administration can nibble around the edges and implement changes, it needs Congress and regulators to get on board with any major initiatives, and this presents significant challenges."

There are, of course, many other elections occurring around the world, but these are the "democratic" ones that could be the most disruptive to maintaining the status quo, hopium-filled market environment over upcoming months. And, as mentioned earlier, the political theater of these elections is by no means the only thing that could throw a spanner into the works. Here’s another obvious one – all of the non-existent capital that was promised to backstop the Euro periphery through the IMF, EFSF, private bondholder "haircuts", etc., doesn’t materialize! All in all, 2012 should be a very disturbing year for the extenders and the pretenders alike.

Detroit Publishing Co. Curb Market 1905 "New York City, Broad Street exchange and curb brokers"

Ilargi: In a nice coincidence, while Nicole Foss (Stoneleigh) wrote about decentralization a few days ago in The Storm Surge of Decentralization, today Ashvin Pandurangi, independently from Nicole, also focuses on that theme, albeit from a completely different angle.

Perhaps even from the 180 degree opposite angle: it's precisely because the 1% push so hard for centralization that it's crucial for the 99% to push back and decentralize. And it's precisely becauseour economic models exist only by the grace of growth unchecked that we need to get out and take a step back, or that growth will surely eat us alive.

It's exactly like Arthur Miller's Willy Loman, as quoted by Ashvin, says: "After all the highways, and the trains, and the appointments, and the years, you end up worth more dead than alive".

That's what societies founded on perpetual growth and its inevitable companion, centralization, end up doing to 99% of their citizens: they degrade and pervert their dignity, their lives, and their value. In that sense, decentralization marks the beginning of a return to our true human potential, since it restores the values and dignity that make our lives worth living.

Unfortunately, today most of the 99% will not recognize this, and if they did it would scare them senseless, so they help push the growth paradigm forward even as it's gnawing at their bones. Life as a cog in a machine is the only life they've ever known. What else could there be? When you're told a hundred times a day that you live in the land of the free, what's not to believe?

It's high time we begin to understand to what extent the interests of the politicians and bankers and CEOs that we allow to make our decisions for us (read: against us), differ from our own. But since our education systems and media have denied the very existence of any such difference all of our lives, this understanding will be very hard to come by for 99% of the 99%.

 

"After all the highways, and the trains, and the appointments, and the years, you end up worth more dead than alive." -Arthur Miller, Death of a Salesman

Ashvin Pandurangi: The word of the last few centuries is centralize. That's what "institutions" do, whether they are technically financial, political, educational, "corrective", religious or medical; private or public. Those labels are largely irrelevant when you want to understand the fundamental nature of an institution. They are simply structured hierarchies of distributed power that strive to grow larger and more influential with each passing day.

Perhaps they are trying to influence the outcome of an election, the direction of foreign policy, the prices of a market, the focus of scientific research or the psychology of society's youth, but, rest assured, they are trying very hard to influence something. Some institutions are much more influential than others, and typically these are the most self-serving.

These institutions are also inherently self-limiting structures; fractal constructs that are self-similar and limiting at every scale, right up to that of our global economy and civilization. They never freely compete with each other to reach some generally productive equilibrium, but rather coerce their respective sectors to become more and more dependent on their functions over time.

By exercising more power and influence in a given field, they crowd out both their own opportunities for further expansion and the opportunity of other institutions to enter the sector and grow. The world's "too big to fail" financial institutions have clearly demonstrated how a few giant players can grow so large to threaten the collapse of the entire global economy when they can no longer grow.

The current crises of capitalism also demonstrate a rapidly progressing, yet age old trend which reveals the strategy of almost all of society's "industries" and their respective institutions - boundless aggregation. One of the major pieces of propaganda in today's financial world is that increasing mergers & acquisitions ("M&A") activity is a sign of growth and health in the economy.

It is, in reality, a sign of desperation and a harbinger of decreased resilience (a.k.a. "impending doom"), and that becomes quite clear when we consider the type of M&A activity that has been occurring over the last few years. Relatively large companies are suddenly finding themselves in a position of pure desperation, where they must either combine with other companies through some legal process or die.

I recently met a guy who was finishing his second year in Wharton Business School at the University of Pennsylvania, and had an internship position with an unnamed investment banking firm. He told me that his responsibilities at the firm were related to conducting "fairness opinions" for corporate clients that were involved in merger deals and wanted to insulate themselves from shareholder liability (if the bankersays it’s a fair deal, then it must be).

He also told me that M&A activity had unsurprisingly slowed down immensely since the onset of the "recession", in terms of total valuation of deals, but that it was markedly off its lows in 2009 and there were still many companies pursuing deals because they simply have no other options to remain viable. Many of these deals are increasingly conducted at the international scale, since domestic markets have already been picked clean to the bone.

These are mid-sized companies in manufacturing, IT, telecommunications, retail or services with a depressed consumer base, relatively high debt to equity ratios and very little ability to access the credit markets and obtain affordable financing; the institutions that have struggled for years to become "successful" business operations, but are now nothing more than basement bargains for much larger institutions.

They are the last remaining dust particles of competition within those industries, waiting to be vacuumed up as soon as the slightest window of opportunity presents itself. These opportunities are pervasive in the current volatile environment, where share prices of public companies are frequently pummeled down in tandem and the markets remain in an indefinite state of uncertainty due to opaque asset valuations and government policy.

As a targeted company's share price continuously comes under pressure, it becomes more vulnerable to "hostile takeovers", since it is cheaper and the larger acquiring company holds significantly more leverage, literally and figuratively, with the company's shareholders (which typically include its executives and directors). The latter must hastily decide whether to remain independent and hope for a miraculous recovery, or give in to a proposed merger.

As soon as the deal is announced and before it is even finalized, share prices could stabilize and increase on expectations of "synergies" from centralization (a.k.a. "a temporary bailout"), but only afterthe small-time, passive investors have already jumped ship. Indeed, it is no coincidence that U.S. M&A activity picked up in 2009-10, right in time for the Fed's QE asset purchases and the stock market rally. Companies who have remained off of public exchanges are by no means immune to this scourge of centralization, either.

That fact has become especially true in recent years, when "private equity groups" re-surged as a popular and relatively discreet vehicle for institutional investors (such as pension funds) and extremely wealthy individuals to conduct leveraged buyouts of various companies around the world. Ironically, the private "equity" group typically uses substantially less than 50% of investor equity in the buyout, and finances most of the deal through debt.

Dan Primack for CNNMoney reported on M&A trends in early 2011.

Report: 2011 M&A gaining on 2007 record-breaker "The 2011 total represents a 58% increase over the same period in 2008, inclusive of a 52% increase in private equity-sponsored transactions. About half of the deal volume is for U.S. targets (up 36%) and around one-quarter is for European targets (up more than 100%), while both emerging market and cross-border deals experienced declines.

Energy and financials were the leading sectors, although materials experienced the largest year-over-year growth (see chart). Financials were sparked by the $59 billion restructuring for AIG -- a deal whose inclusion here is questionable -- while energy got a boost from Duke Energy agreeing to buy Progress Energy for $26 billion. Those are the first and third-largest so far in 2011, sandwiched around AT&T buying T-Mobile for $39 billion.

Graph: Fortune; Source: Thomson Reuters On the private equity side, the largest deal is Blackstone Group's (BX) agreement to acquire the U.S. shopping mall assets of Australia's CentroProperties for $9.4 billion. It's followed by Apax Partners buying Smiths Medical for nearly $3.9 billion and Clayton Dubilier & Rice taking Emergency Medical Services private for $2.9 billion.

In a separate report, S&P Leveraged Commentary & Data reports that leverage multiples for large deals have climbed half a turn to 5.2x -- lower than the heights of 2007, but besting 2008, 2009 or 2010.

Since private equity funds are illiquid investment vehicles that require long-term commitments, much of the capital invested during the boom of the mid-2000s is still in the process of being deployed, despite the horrendous macro-economic situation. Small to mid-sized companies can neither run nor hide from the slithering tentacles of leveraged capital seeking returns, which have only increased in length since 2010.

It should be pointed out, though, that the massive $39 billion deal between AT&T and T-Mobile has recently fallen apart, costing the former $4 billion simply to walk away from the deal. Even the highly-conflicted Federal Communications Commission and Department of Justice couldn’t ignore how damaging this monopolistic merger activity would be to the telecommunications industry, and therefore they decided to block the deal. [1]. That’s the official story, anyway.

Now that we have reached the end of 2011 and the European sovereign debt crisis has reached a crescendo from which there is no turning back, M&A volumes are once again being pummeled down as they were in 2008. Once again, though, we are talking about total valuation of deals and not necessarily the number of mergers and acquisitions that will be taking place in 2012.

Helen Thomas and Anousha Sakoui of the Financial Times report on the opportunities for further centralization of corporate assets:

Collapse in M&A Amid Debt Turbulence "Fourth-quarter M&A volumes fell 32 percent to $375.3 billion from the previous three months, led by a 41 per cent decline in Europe. The drop, combined with a pullback in equity issuance amid turbulent markets, contributed to an 8 per cent fall in investment banking fees to $72.6bn for 2011, against 2010.

In Europe, fees totalled only $2.57 billion across all products, the worst quarter since records began at data-provider Thomson Reuters in 2000. "Volumes in equity and debt capital markets and M&A in 2012 are likely to be challenged, but with a crisis comes opportunity," said Manuel Falco, co-head of European investment banking at Citigroup.

"There will be huge opportunities in the public sector to acquire state-owned assets, and companies will need to issue equity [for] defensive [purposes]. The crisis presents the best buying opportunity for acquiring a company in Europe."

Should we be surprised that the wholesale destruction of European economies is described as presenting the "best buying opportunities" in history? Perhaps we should call them the "best opportunities for institutional cannibalism in all of history". This centralization process does not only take the form of "voluntary" mergers, especially in present times, but more often results from bankruptcy filings that force companies to liquidate or restructure their assets.

There have been quite a few examples of this dynamic in the world of high-stakes international finance over recent years, and there are many more to come. While the number of actual US "bank failures" in 2011 reached a 3-year low of 90, perhaps due in part to the pickup in financial merger activity noted above, the number of "problem banks" listed by the FDIC has remained pretty much constant over this same time period.

The largest, most recent victim of the global debt crisis was MF Global, a large broker-dealer, which was bankrupted and is in the process of being liquidated. Many of MF Global’s European sovereign debt assets were already sold off to investors such as George Soros and JP Morgan at huge discounts (5%) to fair market value. [2]. There are also claims that MF Global fraudulently filed Chapter 7 as a securities broker, rather than a commodities broker, to give major creditors access to the company’s cash before its clients.

So as the lower and upper "middle class" citizenry of the developed world are being rapidly digested in the acidic bowels of financial capitalism, the "big, yet not quite big enough" institutions are systematically having their "assets" aggregated on the books of a few supranationalgiants at not only cheap prices, but through illegal transfers and illegally discounted prices. As the weak wither and die, the strong draw lots to see who among them will be devoured first (JPM and Goldman always draw the biggest straw).

Whether it's Bear Stearns and Lehman handed over to Barclays and JP Morgan for a pittance, a large telecommunications provider targeted by AT&T, a few executive agencies rolled up into the Federal Reserve via Dodd-Frank or MF Global’s assets auctioned off at discounts to Soros and JPM, there is very little choice in the matter for either side of the deal. Either you submit to the "mercy" of centralization, or you are shoved out of the "market" and lose every speck of institutional value you had left.

Make no mistake, these are not rational economic actors acting in the best interests of their stakeholders and maximizing long-term institutional value, but desperate, irrational and short-sighted actors coerced into deals for a quick payoff. The low-level employees and mid-level managers of the acquired institutions usually find themselves joining a line in the local unemployment office or perhaps attending a "networking seminar", designed to create the illusion that they remain important to the system.

Meanwhile, there are millions of new, starry-eyed faces that have been spewed out of various "educational" institutions, wading tens of thousands deep in debt, who are now "willing" to work longer hours for much less salary and fewer benefits. Your degree, work experience and interpersonal skills mean next to nothing, because there is simply no more room for your specialized "credentials" in the institutional system.

As the unsurprisingly misleading chart from the BLS shows below, "mass layoff events" (at least 50 initial claims for UI filed against an institution in a 5-week period) have hovered around 1500/month for the last two years. [3]. Initial unemployment claims are generally revised upwards after initial publication and still remain well above what is necessary to actually improve the unemployment situation. Expect these mass layoffs to only get worse in 2012.

As noted above, much of this shake-up is occurring in the financial industry right now, where large banks are shedding assets like skin cells to raise capital, and of course this process starts with the only asset that can’t afford to be shed, their low to mid-level employees. The graph constructed below only captures those banks which have announced mass layoffs over the next year or so, and both the number of banks and number of planned layoffs are sure to increase as the year progresses. It is also important to remember many of these banks already conducted mass layoffs in the shake-ups and restructurings of 2008-09.

The only thing that matters now is how much of an institutional slave you can force yourself to be, which means lower wages for more hours and no benefits; unless, of course, you can count yourself among the entrenched class of the top 1-5%. These corporate directors, high-level officers and government officials, who bled their respective institutions dry, will typically secure positions in an acquiring institution. That, or they will secure a similar position at another large institution somewhere in our global society, only a private jet ride and a gated complex away.

At the very least, they can retire with a healthy severance package and/or pension, start up a "non-profit" organization and invariably use it as a front for a corporate interest lobby. Most of the small and mid-sized clients/customers in these industries are also squeezed like the small-fry employees, because they are not benefiting from "economies of scale", but instead are paying for the privilege to access the centralized market. Nowhere is this fact more evident than in the financial industry, where individual and small business debtors are charged ever-more interest and have to put up ever-more collateral to obtain credit and/or rollover obligations.

While the effect of the institutional squeeze is to generally depress wages and asset/consumer prices, the effect of that depression is to eliminate choices and make everything much less affordable. Meanwhile, the unfortunate (and relatively large) clients of failing institutions such as MF Global have their funds outright stolen from them and transferred to large institutional creditors who were engaged in "repo" lending and derivative trades with the now bankrupt entity.

Welcome to the world of exponential centralization, where 99% of the population reeks of desperation and the other 1% personifies destruction in the form of "synergistic" acquisitions. The latter will inject a few more drops of lifeblood into the heart of ponzi-aggregation capitalism, but it too is rapidly losing its ability to create the illusion of economic stability and growth. That driving force of capitalism, capital, has become much too scarce for the centralization ponzi to continue outside of direct totalitarian force.

The largest institutions are clearly the least flexible to "new and unexpected" conditions that will arise, and therefore are the most acutely vulnerable to "black swans" and systemic shocks in the near-term. When, not if, some politician, bureaucrat or banker takes one wrong step on the tightropes stretching across every line of latitude from the North to South Pole, look out below. Despite what we are told, nothing material of man is immortal and we only get one chance to survive this world. Our global institutions already blew theirs many years ago, and most are now worth much more dead than alive.

National Photo Co. Bond Vault 1914 "Treasury Department, Office of Comptroller of Currency -- bond vault. Contains bonds to the value of $900 million securing government deposits and postal savings fund"

 

I’m not a technical analyst or a fundamental analyst or any other type of equity market analyst. What I am is just a guy who likes to think he can spot completely nonsensical propaganda when he reads or hears it. You know, the type of non-stop propaganda that attempts to manage perceptions/expectations and convince "investors" that, while things are obviously very bad in the real economy, everything is still just hunky dory in the wonderful world of equities. Case In Point Some mainstream market analysts chimed in after the serial S&P ratings downgrades of nine Eurozone countries, and specifically the one-notch downgrade of France from AAA to AA+ (ratings outlook still negative), to say that the market had already "priced them in" and therefore they are really no big deal. S&P had put all of these countries on negative watch back in December before the latest and unsurprisingly innocuous EU Summit, so the downgrades were no surprise. Here are just two examples of a very pervasive and perverse logic, presented by The Telegraph:

S&P cuts ratings of nine eurozone countries: reaction Fabrice Seiman, head of Lutetia Capital, said: "S&P is absolutely right. France is paying the price of 30 years of irresponsibility in public finances. French politicians on the right and on the left fell short of the job by not taking measures to reduce  spending." I think this is already priced in. There should not be any sizable reaction, but there could be a technical reaction on the Franco-German spread. It should be limited to the long-term and if there is a reduction in spending." Bill O'Grady, chief market strategist at Confluence Investment Management, said: "If France had been downgraded more than one level it would have precipitated a crisis. This is not good but it was anticipated, baked in. For oil it is probably a neutral event. If it raises concerns about a worsening economic environment it would be bearish."

Ashvin: That logic does sound appealing on the surface and many others like to parrot it, but the first question to pop into my mind was this – how can the market "price in" very significant developments in Euro sovereign credit markets by steadily increasing in valuation since they became aware those developments would occur?? Since the S&P put a bunch of EZ countries on negative watch on December 5, 2011 and the EU Summit on December 9, the S&P500 has risen almost 6%.

 

 

That’s a boat load of downgrades the market appears to have priced in over the last month while very little "positive" news has come out of Europe. Now I’m confident that the initial reaction to my question above would be, "that’s a really simple and stupid question to ask!". Fortunately, there are several great analysts out there who have reached similar conclusions about these equity markets, which have allegedly "priced in" everything under the Sun, and have provided us with slightly more nuanced arguments than my own. The U.S. Dollar (and Treasuries) has been increasing in value alongside U.S. equities, so the pundits should find it very difficult to explain the upwards "pricing in" market action of the last month by saying it is a nominal increase of shares priced in dollars. What we have is a very significant divergence between the dollar index and equities, as Charles Hugh Smith outlines in his piece, A Useful Fiction: Everybody Loves a Melt-Up Stock Market, and one that must close in the near future. The following charts of the dollar index ($DXY) and 5-year Treasuries are from M3 Financial Analysis:

 

 

 

The truth is that the very notion of the market "pricing in" events as the investor collective becomes aware of them is flawed. In the comprehensive TAE classic of 2010, Fractal Adaptive Cycles in Natural and Human Systems, Nicole Foss delves into Robert Prechter's theory of "Socionomics" (among other things) and how it can explain market valuations as a function of endogenous factors, such as the collective mood of investors, rather than exogenous events relayed by "the news".

Bob Prechter's socionomics model combines Elliott's observed fractal patterns with an understanding of human herding behaviour, comprising a comprehensive challenge to prevailing notions such as the Efficient Market Hypothesis by reversing causation and recognizing the role of emotional/irrational behaviour as the prime market driver. While the real economy demonstrates negative feedback loops, finance is thoroughly grounded in positive feedback.

Ashvin: Mish Shedlock also touched on this concept in a post earlier this week. He illustrated that, at best, the market should be viewed as a contrarian indicator for future economic trends due to its function as a gauge of extreme sentiments, and, at worst, it shouldn't be viewed as an indicator of anything at all.  

Cherry Picking Timeframes on Alleged Leading Indicators; Big Change In LEI on January 26 "The stock market is not a leading indicator of the economy. Rather, the stock market is a coincident indicator of sentiment towards equities. ... Far from being a leading indicator, on an absolute basis the S&P has a perfect track record of peaking right before or just as a recession starts. This is just as one might expect from a gauge of equity sentiment which tends to peak right before a downturn in the economy (with everyone extrapolating good times forever into the future).     ... On a percentage change basis, the S&P 500 is not leading, not lagging, and not coincident. Instead it is completely useless mush."  

 

Ashvin: It's not just the "fringe bloggers" drawing these conclusions about the market, but also such "reputable" financial institutions as UBS. Granted, the well-intentioned bankers over there also point out that the French downgrade, among others, was expected and shouldn't affect near-term credit spreads too much. Instead, they choose to focus on the effects it will have on the state of realpolitik in Europe’s core, and how that is certainly not something which is "priced in" at all. Indeed, only market shills and fools can even pretend to separate the two (finance and politics).

 

UBS Explains Why AAA-Loss Is Actually Relevant

"France has not only lost its AAA status. Critically, France has lost AAA status at a time when Germany has not. France also retains a negative outlook against a stable outlook for Germany, compounding the distinction. The relative decline of France’s credit rating is something that has potential political implications. There are parallels here to the relative positions of the UK and the US in 1949, in the wake of sterling’s devaluation against the dollar. The devaluation was simply a confirmation of economic reality, but the visible confirmation of that shift in relative economic reality served as a defining moment in the shift of the bilateral relationship in political terms. Since the foundation of the Coal and Steel Community in 1951, the history of (continental) European politics has been essentially a story of France and Germany holding each other in check. Indeed, this was the explicit aim of the ECSC’s founders. With the downgrading of France relative to Germany, there is now a de jure as well as a de facto inequality between the two states. The ability of France to act as a counterbalance to Germany in economic decision-making has been compromised. In the wake of the downgrade of the EFSF, it is clear that the actions of S&P have elevated the role of Germany (and perhaps, to a lesser degree, the Netherlands) in any collective economic decisions within the Euro area. Any economic decision that requires money to be spent will require wholehearted German endorsement if rating agency determined credit credibility is to be maintained. The bargaining power of Germany in the economic councils of Europe has been correspondingly increased."

 

Ashvin: So if the equity markets are "pricing in" anything, it's the pure hope that all of these downgrades of countries, banks and corporations will continue to be glossed over by bond markets, that political/economic imbalances in Europe haven't been exacerbated, that the Greek government and its creditors aren't helplessly struggling to reach a "voluntary" debt reduction deal before a technical default in March becomes inevitable, that China/India aren't facing "hard landings" and that the U.S./U.K. economies will not be dragged down by their own housing markets, corporate [lack of] earnings, unemployment trends or any of the above. Some people will tell you that the only thing the markets need to keep their manic phase intact is the inevitable QE money printing that the Fed will officially announce, which has conveniently been "just around the corner" for almost a year now. Despite those consistent predictions of QE3, I made clear that I didn’t expect the Fed to relent in 2011, and many of the same financial and political reasons underlying that expectation still stand. The primary reasons being the conundrum reflected by the fact that the S&P is still hovering around 1300 (and oil around $100/bbl), which makes the marginal benefits of QE very slim, and the politically volatile situation in the run-up to November’s elections. On the other hand, the financial threats from the Euro crisis and a strong dollar (weak euro) have clearly intensified over the last few months, and the ECB is even more constricted from printing than it has ever been (at least for anything other than sub 3-year sovereign paper through its indirect LTRO, which still doesn’t reflect net cash entering EZ bond markets). Perhaps these developments will finally convince the Fed to "pull the trigger" on QE3, but then many questions still remain – how many trillions are needed to boost "risk appetite" for more than a few weeks and what happens when those trillions are perceived as "not enough"? Like I said at the beginning, I'm not any sort of market analyst, but there do seem to be a whole slew of developments starting to weigh on collective investor sentiment right now, which will only get heavier in the upcoming weeks and months. No one can tell you that any of these negative and ongoing developments herald an imminent market crash or how exactly they will impact shares. What I can say with confidence, though, is that none of them are insignificant bumps in the road. They certainly did not "remove any uncertainty" from the markets and they have in no meaningful way been "priced in" by these markets either.