Posts Tagged ‘money multiplier’

Some interesting articles this morning…

January 28, 2010

… but not necessarily for what they appear to be about.

Let’s start with Bloomberg and Stiglitz:

This is an ambiguous article that deals with the economics of happiness. Stiglitz sets off with this comment: “Bankers created “negative value” with innovations such as mortgages that homeowners couldn’t afford, said Nobel laureate Joseph E. Stiglitz, who is speaking today at the World Economic Forum in Davos, Switzerland, on the economics of happiness.

Setting aside for the moment that the article is about the economics of happiness in an attempt at finding a better way of gauging the wealth and well being of a country, what strikes me as typical is the fact that even Stiglitz, Nobel Laureate that he is, perpetuates the perception that the problem that has befallen us was due to bad mortgages. Glaringly absent in Stiglitz’s comments now or in the past, is any indication as to why the banks should have been allowed and even encouraged to do what they did; and, by the way, banks are still now aggressively encouraged to do more of the same. My peeve with the whole charade is the unwillingness to have a proper discussion on the utility and desirability of a fiat monetary system. Because if banks did what they did, it is only because the presumed guardians of the system allowed them to do so despite the various laws that, if applied, would have clearly and immediately put a stop to such aberrant (criminal?) practices.

But then, Stiglitz goes on and at least partly redeems himself when he says:

Stiglitz, who advocates a broader measure of gross domestic product that takes social well-being into account, studied the issue last year for French President Nicolas Sarkozy, who has said that relying on GDP to gauge the state of an economy helped trigger the financial crisis.

Right there, Stiglitz actually hits the nail on the head. As I have already written in previous posts, the GDP figure is at the heart of most social, economic and financial metrics. But GDP is a flawed figure and, by itself, says nothing of the direction or the quality of development. As a flawed figure, GDP becomes the proverbial end that justifies the means. Specifically, since GDP is the begin all and end all of politics and economics, the natural tendency of government officials is to boost GDP by any means possible. Hence the appeal of a fiat monetary system which allows government to push credit and money creation in excess of GDP progression. The rationale for doing that is that by stimulating credit and money creation government can induce inflation, thus a rise in prices thus a rise in GDP.

That right there is the elephant in the room that few can intellectually countenance and, of those that can, fewer still are willing or ready to discuss. Because I assure you there are some officials that understand that.

Moving on from Stiglitz, Mr. Sarkozy of France too has a beef and it happens to be globalization.

Once again, Mr. Sarkozy’s peeve is justified but fails to address the reasons why globalization came about. Anyone that in talking about globalization does not mention that it is the logical ramification of the use of fiat money, is wide of the mark.

Fiat money has a logic. Fiat money is predicated on the expansion of credit and money supply. If that were not the case, then we could make do with either a fixed amount of money or with a value based monetary system. It is as simple as that. No need for arcane mathematical formulas. The choice of a monetary system is deliberate even if it is unilateral thus not submitted to the people for ratification. As a deliberate choice, fiat money implies two things: first, fiat money must not contemplate intrinsic value – second, fiat money can only exist in an inflationary environment.

The above being so, then it is clear that globalization is an inherent and inevitable consequence of a fiat monetary system. Few will remember for example that in the 1960s, the United States were exactly in the same jam we find ourselves in today globally. That’s right. In the 60s, the USA were confronting bankruptcy brought about by profligate spending that pushed credit and money creation far in excess of GDP since 1913. (Just a related observation here to note that the causes of the first inflationary crisis of 1929 were never really tackled. What happened instead is that as a consequence of WWII nobody anywhere had any industrial capacity left standing so that the USA were finally able to utilize their excess capacity to supply the rest of the world). Curiously enough,  in the late 1960s events were precipitated by none other than France who, smelling smoke in the wind, asked to redeem their US$ currency reserves for the gold they thought they were entitled to.

Surprise!! The gold wasn’t there. At least not enough of it because if the USA acquiesced to redeemed France’s foreign currency reserves, then everyone else would have wanted to redeem their reserves too and at that point, obviously, there wasn’t enough gold anywhere in the world to satisfy sovereign demand.


Abrogate Bretton Woods.

The USA gathered the leaders of the then developed world and essentially made them an offer they could not refuse. I mean; heck! The gold wasn’t there anyway so they had nothing to lose by at least listening to what the USA had to say.

The deal the USA put to the Europeans was to adopt a new monetary system based on the US$ as reserve currency.

To the question: “Why should we do that?”

The answer was twofold. The first part of the answer is what counted and what ultimately would have clinched the deal anyway; that is, the USA told the Europeans that by adopting the US$ as reserve currency they could themselves go on a fiat monetary system, hence they could print as much money as they pleased. The shrewd politicians that the European heads of states were, they needed no other reason to go along with the scam. The second part of the answer and which was then and still is today a moot point is that if the Europeans did not go along with the scam, the USA would have annihilated them (WWII was still rather fresh in Europeans’ minds and the Russian bogey man was looming large). A hard sell it was not.

And so it was that the US$ got a new lease on life. Essentially, inflation had saturated the US market hence the looming bankruptcy. By assimilating new markets, US$ inflation could now be pushed into a whole bunch of new currencies.

Incidentally, the introduction of the Euro served the same purpose. In one fell swoop, European currencies were devalued by anywhere between 20 and 50% thus boosting inflation.

Globalization is just more of the same. New markets to expand inflation into. Hence the US$ is today the official reserve currency of all countries and, thanks to the magic of “floating exchange rates”, inflation is guaranteed.

The problem of course is that inflation is a dynamic that is exponential in character and conforms to the law of diminishing returns. It could not be otherwise. If that were not the case, then there would be a direct correlation between the amount of credit and money creation and GDP progression. But as shown here, that is clearly not the case.

Moving on.

Here is an interesting blog post that puts forth an interesting observation. Essentially, our nations have surrendered sovereignty to the financial elite.

Fact is, the United States of America had no one in power to stop the Fed. The Fed did what it wanted to do. No one was a there to protect the taxpayer. America abdicated sovereignty. The country was actually too weak to fight the banks.

Though astute the observation is, once again the author cannot or does not want to make the connection with fiat money.

Fiat money has a logic. Fiat money must follow a cycle. Inherent in fiat monetary logic are a number of ramifications and outcomes. Chief amongst the ramifications of fiat money is that each additional unit of currency created has a diminishing effect on the overall economy thus a diminishing effect on GDP. The diminishing effect of fiat money is illustrated by what is known as the “Money Multiplier”. This is what the multiplier looks like:

Graph: M1 Money Multiplier

Now, here is the interesting part of this graph. Let’s zoom in on the period of time going from 2000 to present day:

FRED Graph
Now look at this:
FRED Graph
Since hockey stick shaped graphs seem to be the topic du jour albeit in different discussions, how’s that for a hockey stick?
The hockey stick shape representing the acceleration of debt at government level (not included in this graph is corporate and household debt which must be added for full effect) is matched by a multiplier that literally sank like a lead balloon.
That, dear reader, in my opinion represents the limit of the “beneficial” effect of a fiat monetary system. That, in my opinion, is the end of the inflationary cycle and the end of what can be done to keep GDP on an expansionary trajectory. That, in my opinion, is the end of this iteration of this monetary system. As a by the by, there have been so far 3 iterations to this monetary system: 1913 – 1929, 1929 – 1970, 1970 – today. The first iteration was saved by WWII, the second iteration was saved by bringing in new markets and currencies in on the US$ fiat monetary system. How will we solve this iteration of the monetary system…??? (For those of you that are mumbling that a new reserve currency will solve our problems you get a goose egg. A new currency will buy us some time; think Euro. Ultimately, the problem remains excess debt, excess industrial capacity, overbearing government and insufficient revenue to service debt.)
But more importantly, if any of my contentions as outlined above are true, that is the reason our “leaders” are about to throw us into a conflict of global proportions.
But let me be clear about something here. Most of you reading this post have been indoctrinated by the facile cliche that wars are profitable. As a matter of fact, wars are profitable. Not only are wars profitable, but they also keep research and development alive and a large number of military applications then make their way into civilian life too. So limited back water wars are inevitable if for no other reason that when you build weapons you cannot stock them unused forever.
But this next war is not going to be an inventory management war. This next war has a well defined economic and social focus. This next war serves to reset the fiat monetary system and create the conditions that allow us to re-start inflation. This next war will be a world war complete with civilians called up and packed off to the front and energy and food rationing at home. This next war must deal with one of the inevitable outcomes of fiat money; this next war needs to address industrial and infrastructure overcapacity.
Since I can virtually guarantee that no main stream politician today could contemplate any other monetary system than fiat, then the present system must be reset. Thus a world war is inevitable.
Got bullion?
PS – The war is inevitable and must involve civilians packed-off to the front for the simple reason that currency seems to have lost its multiplier role. If that is true, it means that unemployment will increase significantly. The trouble is that if the currency no longer has a multiplier effect on the overall economy, then revenues will necessarily dwindle at individual and corporate level thus at government level. As revenues dwindle, government must curtail public spending. And that’s the flash point. Rising unemployment must now confront lower social expenditure if not discontinuation of certain social services. Thus, unless someone somewhere can find a way to restore to the currency its multiplying powers as contemplated by Keynesian economics (the prevalent economic model of the past century), then we are looking at horrendous levels of unemployment (by taking the broadest measure in the US, unemployment is already well in the 20% according to labor statistics measure U6 as opposed to U3 which is the figure government uses for its official calculations). Thus it looks to me that the next war not only has to address infrastructure and industrial overcapacity but also a pernicious problem of unemployment because the unemployed poor have a nasty but historic tradition of rising up against the power elites and hang them.

I was at a dinner last night… (climate change)

December 26, 2009

I’m not much of a socialite and only go out occasionally. A dear friend invited me to Christmas dinner and I decided to go knowing that the company would not be your run of the mill crowd. True to form, guests were and eclectic group of people with unusual backgrounds. All were well read and all were recognized and prominent exponents of their professions in their chosen fields of activity and all had fascinating life experiences to share making for rewarding conversation.

Anxious to throw the cat amongst the pigeons, the point at which we were well into our dinners, in a moment when the conversation seemed to taper off, I suddenly asked whom amongst them had bought the Global Warming rhetoric.

Though the company was exceptionally friendly and willing to engage in polite arguments, the wicked use of the word “bought” in asking my question had the predictable effect to light up all their intellectual warning lights. You could almost hear the blood rushing up from the main area of activity at that moment (the stomach) en route to the brain as the little guys manning their respective cerebral control rooms suddenly stirred from their festivity induced lull to make a panicked appeal for fuel to counter a situation that may require prodigious amounts of arguing power.

And so it was that passions were aroused. Because GW is now more of an emotional issue than a rational and objective one.

All could agree that climate had changed. Firs- hand accounts of depleted fish stocks, damaged coral reefs and changed weather patterns came forth thick and fast.

Finally, someone offered the timeless and misguided argument that sets forth that regardless of whether GW is true or not, we have nothing to lose by implementing legislation aimed at reducing noxious gases.

The company being polite, guests felt the conversation may take a turn for the worst so it was allowed to tail off.

So here is the moral of the story from my point of view.

The final argument reminded me of that annoying email that used to circulate persistently some years ago that was purportedly sent by Bill Gates. The email stated that Microsoft was conducting a secret experiment and that Bill Gates himself would give US$5000 to anyone that would forward the email to all their contact list. Most recipients of the email duly forwarded it to friends and colleagues attaching a message that said: “You never know. It might be true. Anyway we have nothing to lose by forwarding it”.

Of course we all had something to lose by anyone forwarding what was clearly and blatantly a scam to collect email addresses that went to enrich the databases of spammers and hackers. All hackers wanted, was a juicy address of someone in a bank or in a ministry or a credit card company in order to try to plant trojans and viruses.

Similarly with Climate Change, we stand to lose a great deal by allowing ourselves to be roped in by a doctrine that appeals to our sense of moral rectitude but does not stand up to rationalization, just because it is perceived that, anyway, we have nothing to lose by going along with it.

Of course we want clean air, clean cities, clean seas and prosperous forests and coral reefs. It would be nice. But in order to achieve that, we must put the horse before the cart. CC legislation does not even contemplate a horse. It is purely a gravy cart meant to be pushed by you and me.

If you follow this blog, you know my pet peeve is inflation. Rather, my pet peeve is the arbitrary imposition of an unchecked fiat monetary system that leads necessarily and inevitably to an accelerating inflationary dynamic.

Most people have no idea what fiat money is. Most people therefore cannot make the necessary connections that would allow them to realize that CC is a boondoggle. And as boondoggles go, this one is a biggie.

But before we get into that, lets explore a few of the inconsistencies in the CC doctrine. First and foremost, it is established fact that climate changes. It has always been so and there is absolutely no reason why it should not be so now. The fact that man should think that his actions have any bearing on climate is reminiscent of the Geocentrism that prevailed during the dark ages; man is the center of the universe and everything revolves around us. The mere thought that man could alter climate is equivalent to saying that we are capable of altering tides (King Canute anyone?) or, more appropriately, the trajectory of earth in space.

Then there are the laws of thermodynamics one of which states that nothing is created and nothing is destroyed but everything is transformed. So, we know that, for example, oceans are great sinks of CO2 and that during warming they release the gas and that they absorb it during cooling. What we don’t know is whether the oceans are releasing CO2 because the climate is warming or whether the climate is warming because the oceans are releasing CO2. Classic chicken and egg situation.

Then there is CO2. As far as I know, CO2 is plant food. Plants feed on CO2 so technically, more CO2 should be a bonanza for our forests and jungles… and our gardens.

Then there is the fact that from a millenarian point of view, there is nothing particularly unusual going on with current temperatures or with the depletion of glaciers in certain places and their extension in other places. For more information on these subjects you can look up “Debunking AGW” on this blog. Here is also another piece of interesting research:

Then there is the fact that the single greatest contributor of noxious gases to the atmosphere is the agricultural sector and, in particular, the live stock sector with its ancillary activities. This is actually very important to keep in mind for the purposes of this essay.

Now, in order to understand where I am coming from, you must understand the logic of fiat money and you should read the introduction under “Aims and rationale” on this blog. It is lengthy and probably lacking but should be a good primer for further reading. In the meantime, here is a crash course.

By deliberately and arbitrarily imposing a fiat monetary system, government makes the implicit choice to push inflation faster than underlying economic activity. Inflation is a dynamic that is exponential in nature thus it is limited mathematically. As an exponential dynamic, inflation gradually leads to commercial and industrial overcapacity thus it compresses in time the production and consumption cycles thus it boosts GDP nominally (but not necessarily intrinsically). But accelerating inflation fosters accelerating consumption thus the depletion of natural resources (i.e. agriculture and fish stocks) thus leading to aberrations in the economy and politics (subsidies and protection of industries). As an exponential dynamic, it follows that inflation is limited mathematically thus as the “beneficial” effects of inflation tail off (GDP boosting), government has a vested interest in maintaining a positive inflationary trajectory by any means possible. Thus the arbitrary use of fiat money must inevitably and necessarily lead to government becoming the largest actor in the economy.

As the largest actor in the economy, it follows that government has a vested interest in maintaining a positive inflationary trajectory regardless of any moral or fiduciary obligations as may be held as self evident. That is, once past the peak of the perceived “beneficial” effects of inflation, inflation becomes vital to the existence of government therefore it becomes a goal unto itself.

The logic of a fiat monetary system dictates that in order to survive, the system must systematically assimilate new markets and new currencies: i.e. abrogation of Bretton Woods in 1971 and adoption of the US$ as reserve currency, creation of the Euro, globalization. The other necessary precondition of fiat money is the total disregard for intrinsic value. Thus today globally we finally have a USDollar based, floating exchange rate, monetary system.

The rationale of Climate Change legislation therefore, inscribes itself in the fiat monetary logic. That is; at a time when the traditional tools used by government to induce inflation are failing, it becomes necessary to push through to even greater lengths the amalgamation of executive power by simultaneously dismantling layers of democratic mechanisms deemed to hinder the pursuit of what is perceived as legitimate raison d’etat (i.e. Lisbon Treaty and Patriot Acts). At the same time, due to a perception that historic strategies have served well to induce inflation, Climate Change is proposed as a way to impose still more layers of payments and disbursements aimed at boosting the velocity of circulation of the currency. That is because, as is evident in the graph below, despite the gargantuan sums that Western governments have shoveled into the economy in the past 18 months, the new currency has lost its traditional multiplier effect as contemplated by Keynesian theory:

I am all for a clean environment and I would be a ferocious enforcer of legislation that is already existing in order to throw the book at anyone that, willingly or by negligence, pollutes the environment. But from there to supporting what is blatantly Fascist legislation that steam-rolls a bunch of democratic mechanisms in a wasteful and self serving attempt at the perpetuation and enlargement of government… then, no, I am not game.

Now that you have an initial grasp of our monetary system, I leave you with a last thought:

Knowing what the characteristics of inflation are, does it not seem contradictory that government should at once plead for the environment whilst simultaneously trying to kick start the inflationary dynamic to levels approximating the average of the last ten years?

If anyone should really want to do anything about the environment and the devastation of our resources, we should be looking at taking our governments to task on the monetary system. Excess consumption is not good for the environment. The monetary system is the one single construct we should revise.

Why inflation leads to concentration of profits in the finance sector

November 8, 2009

Democracy is the rule by the will of the majority. One of the characteristics of democracies is the decentralization of power so that the power of each entity can be checked and scrutinized by other entities thus no one entity can act unilaterally and independently.

The monetary system however, falls outside the democratic process and is imposed by government.This fact in and of itself is already an aberration as politicians are not at all well versed in economic theories and applications and, even if they were, political considerations would always trump economic considerations. Politicians are politicians because they want to lead a group of people. Therefore, politicians must inherently and by necessity be ideologues manipulators of information. They have no idea of the how and why the economy works or doesn’t work as the case may be and, if they did, populism would overcome any other consideration under penalty of losing the power to lead. The only thing politicians know is that they need money. Lots of it.

Also, not only does government retain the right to impose a monetary system but it also retains the right to manipulate interest rates.

In the West, in a gambit to keep up the appearance of satisfying democratic principles, governments have bestowed the authority to set interest rates and create the currency to an ostensibly independent “authority” that in the USA is the Federal Reserve.

Since 1913 in the USA and then in Europe from 1971 and then gradually around the world, governments have imposed on their societies a “fiat” monetary system.

Fiat money is a construct that has little grounding in reality. Unlike value based money, the creation of a given quantity of fiat money is a deliberate act. One would assume (hope) that this deliberate act would be grounded in economic conditions. However, empirical evidence shows that not to be the case.

Thus the combination of fiat money and democracy can only result in an accelerating inflationary trjectory leading to a final inflationary blow-off phase followed by deflation.

Inflation is not an equitable dynamic. At the outset, the result of inflationary policies will show up fairly evenly across sectors leading to gains in asset prices and wages for all. But as the inflationary dynamic progresses, inflation shows up more in some sectors than in others creating bubbles that eventually burst (tech bubble, housing, currencies…). In a fiat monetary context the usual remedy for a bursting bubble is to create more money (liquidity) thus pushing even greater degrees of inflation into the system.

As the inflationary dynamic develops and as bubbles burst along the way, inflation progressively shows up in fewer and fewer sectors until towards the end of the dynamic all nominal gains are concentrated exclusively in the financial sector.

You may wonder why.

Fiat money is a dynamic that is exponential in nature thus limited mathematically. The entity that benefits the most from inflation is the entity that receives the money first. Every subsequent user of the money benefits less and less from the use of fiat money. This is because every additional Dollar bill created devalues all previously created money.

In the USA, the Federal Reserve creates the bills and loans them the the Treasury. That’s right. The money is loaned at interest. Thus, the very instant that a Dollar bill crosses the threshold of the Federal Reserve on its way to the Treasury, it is devalued by and amount equal to the interest rate the Fed charges.

Thus, if someone rustled up all the money in circulation and returned it to the Fed, he/she would still be in debt to the Fed by an amount equal to the interest outstanding on the money that has been repaid….

…. can you spot the absurdity… ???

If we return all the money in circulation, we would still be in debt to the fabricator of the currency. However, having now returned all the money, there would be no money left in circulation with which to pay the interest owed…

This is where you would have to sell yourself to the fabricator of the currency and you better hope he’ll have you…

– If the American people (or any other people) ever allow the banks to control the issuance of their currency, first by inflation, and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property, until their children wake up homeless on the continent their fathers conquered. The issuing power of money should be taken from banks and restored to Congress and the people to whom it belongs. I sincerely believe that the banking institutions having the issuing power of money are more dangerous to liberty than standing armies.
(Thomas Jefferson)

– Permit me to issue and control the money of a nation, and I care not who makes its laws. (Mayer Amschel Rothschild)


Therefore, towards the end of the inflationary dynamic, all nominal gains are concentrated in the financial sector because it is the entity closest to the fabricator of the currency. Naturally not all in the financial sector profit equally, thus you have your Lehmans and your Washington Mutual sacrificials for example.








Something even uglier this way cometh… (government employment)

November 2, 2009

You’ve heard me screech that as the inflationary time line progresses government becomes progressively a larger actor in the economy. You’ve heard me wail that at the end of the inflationary dynamic, tax revenue dwindles forcing government to curtail public spending. You’ve heard me lament that as unemployment rises but social expenditure is curtailed, we would reach a flash-point making civil disorder very likely … and you’ve heard me howl that persistent and widespread civil disorder will be further fueled by rising scandals implicating politicians and the power elite leading eventually to the fall of governments across the West…. but that before that would happen, Western governments will engineer a war of global proportions….

Now read this courtesy of the team at Financial Sense (hat tip to Jasper on the VOY forum):

Significant excerpts:

As the chart shows us, the current year over year rate of [government payroll] contraction has no equal until we reach back to 1982

Although this may not be common knowledge, the bulk of government employees are found at the State and local levels of government. In fact, Federal government employment only accounts for 12.6% of total aggregate government employment as of September 2009-month end. That’s pocket change compared to State and local levels of employment. And of course the current cycle irony is that it’s the State and local governments that are hurting big time under the duress of not only infrastructure, maintenance and support, but pension issues, loss of Federal support payments, etc.

And then, this pearl with an accompanying chart

As of now, unfortunately for the US economy as a whole, government employees outnumber US manufacturing sector employees literally just shy of two to one. Now is the rhythm of government payrolls important enough for you?

This is a pearl because Western economies are largely service based economies. As I never tire to ask, in an economy that is 80% consumption, how much real wealth is being generated?

Essentially, when credit creation outpaces GDP progression by a wide margin (remember that even without considering corporate debt, household and government debt combined since 1980 has expanded 1200%  but GDP has only expanded by 100%) how much intrinsic value is there left in the economy to sustain those people that are losing their jobs?

This is not a question borne of idle curiosity. This is a question the answer to which is vital to understanding why I think we will be thrown into a world war by our “leaders”.

The research published recently indicates that we have entered and are fairly well into a deflationary cycle. I understand that opinions may diverge on whether we have or we haven’t and that’s fine.

However, what I feel is imperative is that all proponents of one type of “flation” or the other sit together and thrash out a hypothetical scenario of what would happen in case the “de” flationists should be right. Only once the perils and dangers of a deflationary outcome are identified and understood can we sit down with unions and economic actors and put forward a coherent argument as to what should be done at personal, household, corporate, union and government level in order to mitigate the repercussions of deflation.

But, for as long as government is hell bent on denying reality, then a world war is pretty much dialed-in.

When I say world war I don’t mean a war as we’ve had for the past forty years in remote backwaters against tin pot governments run exclusively by the armed forces without any sacrifice of the civilian population in the West. I mean a real war where the human and material resources of the West along with Western civilian industry will be marshaled and employed towards the war effort complete with rationing of food and electricity. That sort of war.

Even more proof the secular inflationary cycle has ended…

November 1, 2009

Via the team at Zero Hedge

Read the entire post and look at the graphs. This is just more proof that traditional monetary policy has lost traction and that government is “pushing on” the proverbial “string”.

Important excerpts:

It should be no surprise to anyone that household debt outstanding fell again in 2Q (the latest Fed Flow of Funds data), making this now three quarters in a row of household net debt contraction.  The important character fingerprint in the 2Q period being that debt contraction at the household level accelerated. […] Household sector credit contraction is a first in post War history (emphasis added).


If households are paying debt down, then something has to be given up for that balance sheet reconciliation decision.  And the give up is consumption.  Although you may not realize this, and this is clearly one of the key reasons why the long tenured Street truism suggests no one bet against the US consumer, personal consumption in nominal dollars has actually increased during each and every recession of the last six decades (at least).  Each and every recession until the present, that is. […]  Lastly, we believe it’s also important perspective to remember that in our current circumstances, households have been treated to some of the lowest interest rates of a lifetime and consumer product price weakness has been pronounced.  Yet still zip in terms of consumption gains 19 months into official recession territory.


All I can say, is that you should be accumulating gold and silver bullion.


Example of moral implications of fiat money and the inflationary dynamic

November 1, 2009

Mike Shedlock on the deliberate government policy to keep people in debt.

Following the publication of an insightful and lengthy piece of research, Mike Shedlock distills the information to highlight what is essentially further proof that government is not acting in the interest of the public.

Below is an excerpt from a typical piece of institutional “advice” (abetted by government) aimed at preventing or at least reducing the number of homeowners walking away from what is effectively a desperate financial situation.

“Losing your home can be the worst and most devastating event to you personally, and your credit history. This is a scenario that you don’t want to occur if you can avoid it! Not only will you lose the comfort of your home and your investment, but a Foreclosure will stay pending on your credit history for as long as 10 years. This will jeopardize your ability to qualify for any future home loan purchases, it may affect your ability to access loans for car purchase and other needed purchases, and loan costs are likely to be higher both in fees and interest paid.”

In an unchecked fiat monetary system, the end of the inflationary trajectory inevitably and necessarily brings about big government – -.

Big government is inherently wasteful because as the inflationary trajectory progresses, inflation (expanding credit and money supply) becomes a goal unto itself thus consuming progressively more government resources to maintain the trajectory.

Once inflation becomes the do-or-die of the existence of government, the state has a vested interest in maintaining the nominal value of debt outstanding. Defaulting on a mortgage is the equivalent of deleveraging which is to say that the outstanding debt volume will be reduced thus putting a dent in the quantity of inflation outstanding.

Contracting inflation = contracting government

Absence of inflation = government bankruptcy i.e. = death of government

Of course, there is absolutely nothing morally wrong in walking away from a mortgage. A mortgage is not money you have borrowed from a friend as a favor at zero interest. A mortgage is not a favor a bank is doing you.


If you bought a Rolls Royce and then realized you could not afford the gasoline consumption or the maintenance on the vehicle, would you not sell it? If you were unable to sell it, you’d give it back to the bank. Would you feel guilty? Sorry maybe, but would you feel guilty?

If you had a fleet of 100 trucks and then business conditions turned down so that you would only need 50 trucks to operate in the new environment, would you not sell half the fleet to maintain profitability? If you were unable to sell the trucks, would you not hand them over to the bank that guaranteed loaned you the money to purchase those trucks? And if cutting your fleet in half didn’t help and you had to go into receivership, would you feel guilty?

A household is not different than a commercial company. A household must be able to make a profit to survive. THERE IS NOTHING MORALLY WRONG IN WALKING AWAY FROM A MORTGAGE. A MORTGAGE IS A FINANCIAL TRANSACTION. The mortgage is guaranteed by the property itself and/or collateral. You walk away and the banks keeps the house. No problem with that.

If the banks however made a mistake in assessing the value of the home when it first extended a loan to you, that was the mistake of the bank. It is their job to assess collateral properly. If they bungle things up, the bank might go into receivership and they will be taken over by another stronger bank.

It is an established fact today that our respective governments have abandoned any pretense of morality. Why should people feel guilty by making a financial decision to ensure their own survival?

Accumulate gold and silver bullion

Something nasty this way cometh…. (gold)

October 31, 2009

The reason I keep yapping about gold is two fold. An unchecked fiat monetary system within a democratic environment, must inherently and by necessity lead to an inflationary blow-off phase (2003/2007) accompanied by the total debasement of the currency. This is not an opinion. If you doubt this assertion, then take a gander at the header gracing the pages of this blog. The other reason is that in an environment of floating exchange rates where despite unimaginably low yields credit creation is contracting and currencies are deliberately devalued, nothing other than gold and/or silver can help to preserve wealth.

That is because a fiat monetary system can only survive in a context of relative values, high monetary velocity and low savings. The inescapable outcome is that financial value progressively runs away from intrinsic value and nominal profits are progressively concentrated in fewer and fewer sectors till they are concentrated in the financial industry only.

Since whether our “authorities” like it or not, gold is a rare commodity and, as such, it is nobody else’s debt, gold still plays a role in state finances. However, the fiat logic dictates that gold should be devalued by any means possible or, at least, not accounted at its true value. Thus as the fiat monetary logic develops, the authorities have a vested interest in avoiding any reference to gold and certainly have an interest in discouraging the public from demanding physical gold in exchange for currency because this is tantamount to saving thus lowering the velocity of money.

Accumulating gold in an environment of low yields and cratering credit creation is the only thing that can be done to preserve wealth. Accumulating gold is direct action to signify a loss of confidence in the monetary system, the policies and the instigators of the policies.

Muni market (or how the stock market affects your life even if you think you are not invested in it)

October 29, 2009

This pearl dug out by the team at Zero Hedge ties in with a number of themes I’ve been writing about. Most notably, it shows the dynamic of how local state finances are run. It is only  a skip and a jump to deduce how your life is affected by the stock market even though you personally may not be an investor in stocks or bonds. This is what “A primer on how the stock market affects your life” is about.

Anyway, this report makes for some enlightening, if terrifying, reading.

Backdoor taxes hit Americans with public financing in the dark

October 26, 2009

This article highlights information that is much too important to show excerpts for. I warmly suggest you read the whole thing because it will give you an idea of the scope, breadth and depth of this debacle. I will reproduce the full text of the article and intersperse my comments in brackets prefixed by “GR” in Italics.

Oct. 26 (Bloomberg) — Salvatore Calvanese, the treasurer of Springfield, Massachusetts, for four years, had a ready defense for why he risked $14 million of taxpayer money on collateralized-debt obligations laden with subprime mortgages in 2007.

He didn’t know what he was buying, he says, and trusted the financial professionals who sold them and told him they were safe.

“I thought they were money markets that were just paying more,” Calvanese said in an interview. “Nobody ever used the term ‘CDO,’ and I am not sure I would have known what that was anyway.” (GR: This, I remind you, from a “Treasurer”; a County Treasurer to boot. These are the type of people that are in charge of public funds)

Such financial mistakes, often enabled by public officials’ lack of disclosure and accountability for almost 90 percent of government financings in the $2.8 trillion municipal bond market, are costing U.S. taxpayers as much as $6 billion a year, according to data compiled by Bloomberg in more than a dozen states.

The money lost to taxpayers — when the worst recession since the Great Depression is forcing local governments to cut university funding, delay paying bills and raise taxes — is enough to buy health care for everybody in Minneapolis; Orlando, Florida; and Grand Rapids, Michigan, according to figures from the U.S. Census Bureau and the U.S. Department of Health and Human Services.

Florida county commissioners sent deals to their favorite banks in an arrangement that led to criminal convictions. Pennsylvania school board members lost $4 million on an interest-rate swap agreement they didn’t understand in the unregulated $300 billion market for municipal derivatives.

Trouble With Swaps

Local agencies in Indianapolis, Philadelphia, Miami and Oakland, California, spent $331 million to end interest-rate swaps with banks including JPMorgan Chase & Co. of New York and Charlotte, North Carolina-based Bank of America Corp. during the past 18 months. The swaps, agreements to exchange periodic interest payments with banks or insurers, were intended to save borrowing costs. Payments increased instead.

New Jersey taxpayers are sending almost $1 million a month to a partnership run by Goldman Sachs Group Inc. for protection against rising interest costs on bonds the state redeemed more than a year ago, Bloomberg News reported Friday.

The interest-rate swap agreement, which the state entered in 2003 under former Governor James E. McGreevey, remained in place even after the state Transportation Trust Fund Authority replaced $345 million in auction-rate bonds that had fluctuating yields with fixed-rate securities last year.

Harvard Pays

Now, the 3.6 percent the trust fund is paying on the swap has pushed the cost on the original debt to 7.8 percent, the most the authority has paid since it was formed in 1985, according to records on its Web site. Canceling the swap before 2011 would require the state to pay an estimated $37.6 million fee, according to state records.

Even Harvard University, whose endowment of $26 billion makes it the world’s richest academic institution, fell for Wall Street’s financing in the dark: The Cambridge, Massachusetts- based university paid $497.6 million to investment banks during the year ended June 30 to cancel $1.1 billion of swaps. (GR: This from Harvard… that sacrosanct temple of knowledge)

The public needs more transparency in municipal debt transactions, said Elizabeth Warren, chairwoman of the Congressional Oversight Panel for the Troubled Asset Relief Program. Proposed reforms, such as an oversight agency for consumer finance, could help spur improvements, she said in an interview this month.

‘Worldview Change’

“We need a worldview change about transparency, and that includes municipal finance,” said Warren, a professor of bankruptcy law at Harvard Law School.

The public paid extra costs for borrowing with tax-exempt bonds because local governments resist providing investors the same level of disclosure as corporate borrowers, which file quarterly reports.

Municipalities typically file financial statements only once a year. Detroit, the largest U.S. city with a less-than- investment-grade credit rating, released its annual report for fiscal 2007 in March, more than 18 months later.

State and local governments that share more financial information than the minimum required pay yields as much as 0.20 percentage points lower than others, said Lisa Fairchild, professor and chairman of the finance department at Baltimore’s Loyola University Maryland, who produced a 1998 study on disclosure.

Applied across the tax-exempt bond market, that’s $5.6 billion a year, enough to buy more than 12,000 $465,608 pumper- tender fire trucks. That’s more than one truck for every county in the U.S. The rest could form a parade 50 miles (80 kilometers) long.

Build America Bonds

State and local governments that sold $43.8 billion of taxable Build America Bonds this year will pay $385 million a year more in interest than similarly rated corporate borrowers, based on data compiled by Bloomberg.

The bonds, for which the federal government subsidizes 35 percent of interest costs, pay an average yield that’s 0.8 percentage points more, relative to benchmark rates, than yields for corporate securities with the same credit ratings, the data show.

As a result, it costs New Jersey road authorities, Georgia sewer districts and other agencies more to borrow, even though they, unlike corporations, can raise fees or taxes to make up for deficits. Corporations are at least 90 times more likely to default than local governments, according to Moody’s Investors Service.

Discounted to their present value, those additional payments by municipal borrowers add up to $6.1 billion over the life of the debt.

‘It’s Horrendous’

“I think it’s horrendous, but it’s very hard to get anybody to pay much attention to it,” said Stanley Langbein, a law professor at the University of Miami and a former tax counsel at the U.S. Treasury in Washington.

Underwriters — banks or securities firms that guarantee the purchase of debt issuers’ bonds — have an interest in keeping prices low, and yields high, because it means higher returns for them and the first investors, Langbein said.

Many Build America bonds traded at higher prices immediately after agencies sold them, a sign that taxpayers lost, he said.

The Government Finance Officers Association, a professional group based in Chicago, warns municipalities of “competing objectives” in their relationships with underwriters. Many don’t heed that warning, said Christopher “Kit” Taylor, who was the top regulator of the municipal bond market from 1978 to 2007.

‘Stockholm Syndrome’

“They’re suffering from Stockholm syndrome,” he said, referring to the psychological phenomenon in which hostages begin to identify with and grow sympathetic to their captors. “They are being held hostage by their investment bank.”

Public officials shunned competitive bids for more than 85 percent of the $308.9 billion in new tax-exempt bond sales in the first nine months of this year, according to data compiled by Bloomberg. That’s up from 17 percent in 1970 and 68 percent in 1982, according to the Government Accountability Office.

Most borrowing costs that state and local taxpayers incur are set in private negotiations. Finance professionals say no- bid sales allow them to market debt to particular investors, helping issuers find demand when credit markets are tight.

The method boosts interest rates by as much as 0.06 percentage point, according to several academic studies reviewed by the GAO.

Excess Fees

Palm Beach County, Florida, paid $880,000 in excess bank fees and as much as $1.3 million a year in unnecessary interest because its commissioners sold bonds without bids, according to a county report in April.

Each commissioner nominated his or her favorite bank and work was parceled out on a rotating basis, the report showed. That allowed former commissioner Mary McCarty to steer more than $600 million in debt issues to banks that employed her husband, Kevin McCarty, according to federal charges that led to guilty pleas from both this year.

After the McCartys were charged, the county adopted a policy stating a preference for competitive bond sales. When bonds are sold by negotiation, a financing committee will circulate a request for proposals, evaluate them and then recommend an underwriter to commissioners, said Liz Bloeser, Palm Beach’s budget director.

No Bids

Beaver County, Pennsylvania, commissioners haven’t taken bids for bond underwriters since 1986, county records show. After relying on the same firm for more than two decades, they paid as much as $2.8 million more than they had to on a bond sale in January, based on trading records from the Municipal Securities Rulemaking Board, which oversees the tax-exempt bond market.

Using the same underwriter repeatedly for negotiated sales increases borrowing costs each time, according to a study published in the Winter 2008 edition of the Municipal Finance Journal. The study found that if an issuer had used the same bank twice before, its borrowing cost on $100 million of 10- year bonds increased by more than $1 million over the life of the debt.

Other financial mistakes can be difficult to quantify. Taylor, who studied government finances for 30 years as the executive director of the MSRB, said as many as five out of 10 local governments “aren’t getting the best deal by a long shot” on their investments.

Overpaid for Securities

Apache County, Arizona, overpaid its broker almost $500,000 for U.S. government securities, county records show. A price check would have caught the problem. The county has no record that it ever did one.

Many local officials are unprepared for Wall Street’s sales pitches, said Mary Christine Jackman, Maryland’s director of investments in Annapolis.

“When you combine people who are less sophisticated with people who can sell as those on Wall Street usually can, you end up with a very big problem,” she said. Jackman tries to offer basic training and advice to small municipalities, she said.

There are more than 89,000 cities, counties, school districts and other municipal authorities in the U.S., according to data from the Census Bureau. Each year, about 5,000 people attend training sponsored by the Government Finance Officers Association, which has 18,000 members, said Jeff Esser, the group’s executive director.

‘Doing Nothing’

The GFOA has never tried to make a comprehensive tally of its members’ educational attainment or professional backgrounds, he said. He added that during his 30 years with the organization, he has seen “a significant increase” in members’ education, training and professionalism.

Supervisors in Mohave County, Arizona, took issue with the professionalism of its treasurer, Lee Fabrizio, during an investigation last year in which employees reported that he played a lot of golf and was rarely in the office.

“It’s nice to get this paycheck for doing nothing,” Fabrizio told employees once, according to the July 2008 report by the county manager.

Fabrizio, who received a $56,500 annual salary, said he doesn’t remember making that statement and was in the office every day. He said he played nine holes of golf a day for two hours at lunchtime.

An employee’s grievance sparked the investigation and ultimately a state audit, which reported Aug. 28 that the treasurer bought corporate bonds with no evidence of competitive bidding, didn’t vet brokers’ backgrounds and continued to value a $5 million Lehman Brothers Holdings Inc. bond at full cost even after the firm’s Sept. 15, 2008, bankruptcy.

Not an Expert

The Lehman bond was purchased in late 2007, when the treasurer put $50 million, about 25 percent of the county portfolio, into 11 corporate bonds, 10 of them in financial firms including Lehman and Bear Stearns Cos.

“Even if it was a bad investment, I wouldn’t have known the difference; I’m not an investment expert,” Fabrizio said, adding that he relied on his hired deputy for those decisions. The deputy e-mailed competing brokers and had them fill out questionnaires, he said.

The county never sanctioned him, and he was voted out of office last year.

The Lehman loss cost the 7,000-student district in Kingman, Arizona, the county seat, almost $1 million, according to Wanda Hubbard, the schools’ finance director. The real losers are taxpayers, who will be levied more as a result, she said. The owner of a $250,000 house in the district may pay $25 extra this year, Hubbard estimated.

‘Back-Door Tax’

“It was kind of a back-door tax increase,” she said.

Officials are up against increasingly sophisticated financial products, including interest-rate swaps and so-called swaptions. A swaption grants the owner the option to force a particular party into a swap.

The Butler Area School District in western Pennsylvania paid JPMorgan $5.2 million last year to cancel such a pact. The payment was about seven times more than the district had received under the contract. Statewide, 55 Pennsylvania school districts have paid counterparties to exit interest-rate swaps since 2003, according to state records.

Some officials now say they didn’t understand the deals.

“The financial guys would come in with a lot of stuff that nobody at the district understood,” Penelope Kingman, a former member of the Butler school board who voted against the deal, told Bloomberg News last year. “Local governments are entering into these without fully understanding what they are doing.”

Market Has Grown

While such contracts aren’t traded on regulated exchanges, the market for municipal derivatives has grown to as much as $300 billion annually, the MSRB says. Derivatives are a category of contracts whose value is tied to assets including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

One type of derivative, the interest-rate swap, helped put Jefferson County, Alabama, on the brink of bankruptcy.

The county refinanced $3 billion of sewer debt in no-bid deals earlier this decade, issuing variable-rate bonds that were hedged with swaps. The plan backfired last year as the global credit crisis took hold. Interest payments due on the bonds more than tripled to 10 percent, while the swap income decreased.

Last week, the former president of the county commission, Larry P. Langford, went on trial in federal court in Tuscaloosa. Langford, now the mayor of Birmingham, pleaded not guilty in December to charges including bribery, conspiracy and filing false income tax returns.

‘Political Witch Hunt’

Prosecutors say he took cash, clothes and Rolex watches from a banker who received $7.1 million in fees on debt sales in 2003 and 2004. Langford has called the case “a political witch hunt.”

The Justice Department and the Securities and Exchange Commission are investigating whether Wall Street banks conspired with some brokers to rig bids and fix prices for municipal derivatives. The probe centers on interest-rate swaps and on investments that cities, states and schools buy with bond proceeds, according to subpoenas received by agencies in Alabama, Illinois, Pennsylvania and New Mexico.

While many municipalities turn to professional consultants for guidance on derivatives, the MSRB reported in April that 73 percent of financial advisers who participated in the municipal bond market in 2008 weren’t subject to the board’s rules because they weren’t registered securities dealers.

Legislation Considered

Congress is considering legislation to regulate the financial advisers. Still, there are other gaps.

Federal law exempts the municipal market from rules regarding disclosure and enforcement that apply to companies. And transactions between broker-dealers and municipalities are rarely scrutinized by the self-regulatory agencies that banks and securities firms use to police themselves, including the Financial Industry Regulatory Authority, said Taylor, the former MSRB chief.

Finra and other regulators presume that institutional clients are sophisticated enough to look after themselves, he said.

“Typically, what happens is, nobody looks,” he said. “Finra doesn’t look, the firm doesn’t look, the city council doesn’t look and the populace, the taxpaying populace, has no idea any of this is going on.” (GR: This is a typical case of people doing something just because everyone else is doing it regardless of whether they understand what they are doing or not)

Nancy Condon, a spokeswoman for Finra, declined to comment. The Strategic Programs Group of the authority’s enforcement department in May sent letters to dealers seeking information about interest-rate swaps, structured notes and other products they may have sold.

Enforcement Questions

Taylor questioned why the information-gathering hasn’t led to anything further.

“Finra wants the world to think it is doing something for investors and the good of the markets without actually bringing any enforcement actions or adopting any rulemaking,” he said.

In Orange County, the home of both Disneyland and the largest municipal bankruptcy in U.S. history, officials echoed the mistakes of 15 years ago by investing in another Wall Street innovation.

Robert Citron, who was county treasurer leading up to the 1994 bankruptcy, bought structured notes that paid off when short-term interest rates were lower than medium-term rates, and increased his gamble with funds from issuing new debt. The county lost $1.6 billion when interest rates rose.

Cost of Insolvency

Payments from the resulting insolvency still cost more than $80 million annually, about 1.5 percent of the county’s proposed fiscal 2010 budget.

County supervisors responded by creating an oversight committee to monitor the treasurer and banning investments in derivatives and the use of leverage to amplify returns.

Under John Moorlach, the accountant who exposed the bad bets and succeeded Citron as treasurer, the county later invested in structured investment vehicles, or SIVs. Banks set up the pools of loans to shift risk from their own balance sheets. They borrowed money at short-term rates to finance longer-term investments such as British credit-card receivables or home mortgages.

Moorlach said he got into SIVs, which often yielded more than the county’s other investments, after a ratings officer from Fitch Ratings told him that such exotic instruments were becoming more mainstream. (GR: The ratings agencies have been shown to be partial and bought for since many years. And yet, no government authority bothered to dismantle any of them. Quite the contrary, they sponsored and rewarded rating agencies for volume of business)

By 2007, one year after Moorlach won election to the county’s board of supervisors and was succeeded as treasurer by Chriss Street, the investments in SIVs totaled more than $800 million. They made up 14 percent of a county investment pool that manages money for the county, schools and local agencies.

‘Weren’t Paying Attention’

The county sold one SIV at $6.4 million below par last year and so far has recovered about $30 million of the $80 million it invested in Whistlejacket Capital LLC, created by London-based bank Standard Chartered Plc. Whistlejacket, which listed Citigroup Inc. debt and U.K. home loans among its assets, went into receivership last year.

“Despite the oversight, despite the audits, they weren’t paying attention — and should have been,” said Terry Fleskes, a member of an independent panel that chastised the treasurer and county auditor in June for allowing more investments in complex financial products. Fleskes is a former controller at a unit of San Diego-based Sempra Energy.

“The lessons of the past have been forgotten,” the Orange County Grand Jury said in its report. The group, which doesn’t have the authority to compel changes, serves as a kind of ombudsman to examine county policies.

‘Best Stuff Around’

The structured vehicles were difficult to evaluate, Moorlach said. He relied on rating companies, which “were treating it like it was the best stuff around.”

“I think the rating agencies have a lot of explaining to do because of the overreliance by hardworking municipal treasurers,” he said. (GR: Rating agencies can be blamed for what were clearly partial and paid-for opinions on the safety of various investment instruments. However, this fact does not detract from the fact that a Treasurer should know what he is getting himself into. This is what fiduciary duty is all about. One thing is a bank clerk peddling investments to an individual consumer whom may not necessarily know better and would fully rely on the rating agency’s advice. An entirely different thing is when a “treasurer” too relies blindly on the agency advice especially considering that even a cursory look at their prospectus would highlight potential conflicts of interest.)

A Fitch spokesman, Kevin Duignan, declined to comment. (GR: No kidding! I wonder why.)

“It’s easy to point the finger at others,” said Bart Hildreth, dean of the Andrew Young School of Policy Studies at Georgia State University in Atlanta and a former finance director of Akron, Ohio. “The rating agency didn’t authorize the allocation of the money.”

Orange County auditor David Sundstrom said the amount at risk in SIVs was nothing like the leveraged wagers made by Citron.

“The controls compared to pre-bankruptcy are incredibly strong,” he said.

Out of SIVs

The county has exited all of its SIV investments except Whistlejacket, in which it has notes in a restructured successor that’s being liquidated. Taking into account interest earned, the county hasn’t lost on the SIVs, said Deputy Treasurer Keith Rodenhuis. Interest totaled $58.6 million, with $50.2 million in capital still outstanding in the Whistlejacket successor. County officials expect to get that money back in time, he said.

While Moorlach said Orange County did what it could, sending an analyst to London to investigate one SIV and examining financial reports, the investments may have been a mistake.

“If something’s taking up so much of your time, maybe it ain’t worth it,” he said in his Santa Ana, California, office, overlooking a courtyard where volunteers from local churches serve hot dinners and distribute essentials like socks and toilet paper to a 40-deep line of needy people.

King County, Washington, the home of Seattle, has recovered less than half of $207 million that it put into four failed SIVs. It sued rating companies in federal court this month, saying it was misled by their assessments.

No Clue

“There’s a basic rule of finance: Don’t get into anything you don’t understand,” said Michael Granof, an accounting professor at the University of Texas in Austin. “Many municipalities had no clue as to what they were buying.”

Apache County, Arizona, an area the size of Maryland where 70,000 people live among vast mesas dotted with shrubs, stuck to safe investments, such as U.S. Treasury securities and federal agency bonds. It just didn’t know how to value them.

County treasurer Katherine Arviso, a school administrator on the Navajo reservation for 40 years until she won election in 2004, said she arrived to find investment records packed away in boxes.

“I had to put the whole office back together,” she said.

Then came an August 2005 letter from Piper Jaffray Cos.’sBradley Winges, the head of sales and trading for the Minneapolis-based firm’s public finance group. He wrote that the firm had reviewed trades in the county’s account and found unacceptable commissions. The firm credited $247,060.79 to the county’s account.

Eventual Refund

Piper Jaffray eventually refunded $472,060.79, according to a settlement obtained by Bloomberg News under the state public records act. That’s more than double the $194,870 that the county, one of the poorest in the U.S., spent on immunization, teen pregnancy prevention and home health care last year. Apache County’s per capita income was $8,986 in the 2000 U.S. Census, less than half the U.S. figure, $21,587.

Three days after sending the letter, the firm fired broker Eric Ely, according to Finra records. Ely didn’t return telephone messages or respond to an e-mail seeking comment for this story.

From Oct. 20, 2003, to June 29, 2005, Ely executed 103 trades for Apache County, buying and selling bonds, according to a subsequent investigation conducted by Edward “Buzz” France, a former deputy county attorney.

Estimated Commissions

In a presentation to county supervisors, France estimated that Piper Jaffray earned commissions of just over $1 million on $158.6 million in principal, an average rate of 0.638 percent. Investment bankers told France the commissions should have been no more than 0.3 percent.

“Our clients’ interests come first,” Piper Jaffray said in a statement. “Four years ago, we discovered a situation in which we believed one employee had run counter to this guiding principle, and we proactively and quickly worked to rectify any client impact, and terminated the employee.”

There was no need for so many trades if the goal was steady, reliable returns, said Charles Anderson, the former manager of field operations for the tax-exempt bond division of the Internal Revenue Service.

A reasonable commission for the $158 million of securities that Apache County purchased would have been $50,000 to $100,000, said Thomas Tucci, head of U.S. government bond trading at RBC Capital Markets Corp. in New York, one of 18 firms that trade directly with the Federal Reserve.

Not Unusual

Basic financial mistakes trip up many local governments, said Kevin Camberg, a partner with Fester & Chapman P.C., a Phoenix accounting firm that has checked the books of Apache County and others in Arizona for the state auditor.

“It’s not as unusual as it should be,” he said.

France, the county investigator, never determined how Piper Jaffray was chosen to handle Apache County’s investment fund. The treasurer at the time, Betty Montoya, declined to comment on the selection process for this story.

Had the county checked Ely’s licensing history with Finra, which oversees almost 4,800 brokerage firms, it would have found previous allegations of infractions. Since 2002, investors have been able to access BrokerCheck reports of disciplinary histories online, said Condon, the Finra spokeswoman.

Ely paid $80,000 toward a $260,000 settlement of a customer’s 1989 complaint of “unauthorized and unsuitable transactions,” according to Finra records. Ely worked for Merrill Lynch & Co. from 1983 to 1990, the records show.

Settlement in Wyoming

In 2002, Piper Jaffray reached a $42,500 settlement of a customer’s allegations that Ely had purchased and sold securities contrary to Wyoming state law or local investment policy, the records show.

Ely, now affiliated with Public Asset Management Group in Greenwood Village, Colorado, and First Financial Equity Corp. in Scottsdale, Arizona, continued seeking business with small local governments. The broker gave a speech called Investment Management Alternatives for the School at a meeting of the Montana Association of School Business Officials in June 2008.

“He said he was interested in all the smaller players,” said Dustin Zuffelato, who attended as business manager of the 2,400-student Columbia Falls School District Six in Flathead County, Montana.

Zuffelato recommended that his school board consider investing about $8 million with Ely. The board declined, citing the logistical hurdles of switching investments from a pool managed by the county treasurer, he said. Zuffelato said he didn’t check for complaints against the broker first.

Investing 101

In June, the broker appeared again at the Montana schools conference, this time teaching a class called Investing 101.

In Springfield, Calvanese, the former city treasurer, said brokers told him he was investing in money-market funds.

City officials could have learned that they were really buying securities that bundle various issuers’ bonds or loans, or both, if they had insisted on seeing disclosure documents about the securities. Calvanese said in an interview that he rarely looked at such documents, which outline risks.

Calvanese was fired after the CDO investment came to light. He has filed suit challenging his dismissal.

Springfield officials and the Massachusetts attorney general argued that the city was misled by its brokers from Merrill Lynch, who sold it financial instruments that violated a state restriction on public investments. Calvanese said the brokers assured him the transaction complied with state law.

Merrill Lynch, now owned by Bank of America, returned the $14 million the city had invested, and agreed to pay an additional $300,000 in July.

A $75,000 portion of that money was set aside for educating municipal officials on investment management.

To contact the reporters on this story: Peter Robison in Seattle at; Pat Wechsler in New York at; Martin Braun in New York at

GR: The moral of the story is that for as long as things are going in one direction, nobody can be bothered to go and look at the detail. Those that do are considered party poopers and those that opt out of what everyone else is doing are routinely blamed for substandard performance and may even lose their jobs. On the other hand when public finances are being squandered and pillaged at the highest echelons of government, how can lower ranking administrations officials be blamed for doing what their bosses are doing? Acting on principle and moral standing will very easily make your life impossible during the blow off phase of the inflationary dynamic.

Detroit house auction flops for urban wasteland

October 26, 2009

County tax revenue is on the ropes and about to hit the mat. Make no mistake. The only difference between a County and the Federal State is that the latter can, for a time, maintain the illusion of solvency by borrowing more. However, it is now abundantly clear that the Federal Government can now only buy government debt from itself. This is what monetization is all about.

A fiat monetary system of floating exchange rates, depends on each sovereign country member of the system buying another country’s debt. If you are able to visualize the absurdity of this system in the first place, then the reasons that will signal the system’s demise should be clear too.

Governments purchasing their own debt rather that the debt of other countries is a clear sign that the system has broken down.

A breakdown in the tax revenue flow at city, municipal, county and state level guarantees that there is a breakdown in tax revenue at federal state too. The fact that governments today are monetizing their own debt guarantees that the fiat monetary system has broken down.

As social costs rise and as social expenditure must by necessity be curtailed, civil unrest will rise. As civil unrest rises, governments will fall.

No western politician is about to relinquish power. Before civil unrest will get out of hand, we’ll have us a world war.

After five hours of calling out a drumbeat of “no bid” for properties listed in an auction book as thick as a city phone directory, the energy of the county auctioneer began to flag. OK,” he said. “We only have 300 more pages to go.” […] “Despite a minimum bid of $500, less than a fifth of the Detroit land was sold after four days. The county had no estimate of how much was raised by the auction, a second attempt to sell property that had failed to find buyers for the full amount of back taxes in September.”