Hong Kong is Doomed for its Anti-Keynesian Model: Budget Surplus, Leaving Cash to the Public by Lowering Taxes

Sovereign Man’s prolific Simon Black explains why Hong Kong is doomed—in the eyes of the Keynesian consensus! (bold mine)

The government committee was clear—if nothing was to be done, the government’s finances would be doomed in as little as seven years.

The Finance Secretary had some tough decisions to make. Raising more revenue for the government over the next few years is crucial.

He was also being targeted and mocked because his ministry’s predictions for economic performance and taxes raised have been consistently wrong every year since 2007.

This is common for government agencies in pretty much every country, but Hong Kong is possibly the worst—they continually underestimate the numbers.

The government will finish the fiscal year ending next month, for example, with a surplus of at least HK$60 billion (probably more, given how horrible they are at forecasting), which is six times more than the finance ministry projected. 

A surplus! Who does that anymore??

Couldn’t they find something else to spend money on? Armored vehicles and combat gear for the police (they did face a massive uprising just a few months ago after all)? Welfare? Crony subsidies? Drones? New government committees and agencies? Surveillance?

At least build a bridge, dammit! What are you going to do with all that extra money now??

I’ll tell you what they’re going to do. The Hong Kong government is so foolish that they’ll… I’m utterly disgusted saying this… they’ll -gulp- give it back to the people…

They’ll institute measures like a salary tax rebate of about HK$10,000, a waiver on property rates, and a PERMANENT increase in the tax allowance for parents from HK$70,000 to HK$80,000 per child—which is a second increase in child tax allowance in three years already!

One of the officials said: “There is a need to stimulate the city’s domestic consumption by introducing measures to leave more cash in the hands of the public.”

What are you talking about, man? Everyone knows that you stimulate the economy by increasing government spending, not reducing it and just leaving the people to decide what they’re going to spend it on. It’s insane.

Reducing already low taxes because you’re running budget surpluses? And you’re only taxing people and companies on the money they earn within Hong Kong? Really? You’ve got much to learn…

Even though following this practice has transformed the once barren island at the mouth of the Pearl River Delta into a global financial and trading center with one of the highest standards of living in the world, this clearly unsustainable bubble of a free market economy, minimal government, and fiscal prudence is bound to end in disaster.

Geopolitical Risk Theater Links: Brazil Eludes NSA, China’s Newest Foreign Policy, the Ulfkotte-effect, Gorbachev warns Europe and More…

1 Distrust on US interventionism growing?: Brazil builds its own fiber optic network to avoid the NSA. Sovereign Man November 11, 2014

Writes Simon Black:

This past week Brazil announced that it will be building a 3,500-mile fiber-optic cable to Portugal in order to avoid the grip of the NSA.

What’s more, they announced that not a penny of the $185 million expected to be spent on the project will go to American firms, simply because they don’t want to take any chances that the US government will tap the system.

It’s incredible how far now individuals, corporations, and even governments are willing to go to protect themselves from the government of the Land of the Free.

The German government, especially upset by the discovery of US spying within its borders, has come up with a range of unique methods to block out prying ears.

They have even gone so far as to play classical music loudly over official meetings so as to obfuscate the conversation for any outside listeners.

They’ve also seriously contemplated the idea of returning back to typewriters to eliminate the possibilities of computer surveillance.

More practically, the government of Brazil has banned the use of Microsoft technologies in all government offices, something that was also done in China earlier this year.

The Red, White, and Blue Scare has now replaced the Red Scare of the Cold War era. And it comes at serious cost.

2 As I have been saying here, anti corruption campaings have usually been euphemism for or disguise on political persecution: U.S. Reports Signs of Division within Beijing Leadership Freebeacon.com November 11, 2014

Signs of a serious division within the ruling Communist Party of China are emerging over a crackdown on corruption led by current leader Xi Jinping, according to a recent U.S. intelligence report on the division.

The political rift is being linked to a nationwide anti-corruption drive launched by Chinese President Xi Jinping, and to differences among top leaders over the purge of several of China’s most senior leaders who held posts at senior Party levels that in the past were immune to such crackdowns.

Corruption in China—bribery, graft, and abuse of power—remains a key feature of the reform communist system in place since the 1980s.

The recent unclassified intelligence report circulated within the U.S. government disclosed that the leadership rift is linked to the case against Zhou Yongkang, a former member of the Politburo Standing Committee, the seven-person collective dictatorship that rules China.

3 The military industrial complex and the neocon Republicans will surely disrupt: US, China Hope To Avert "Military Confrontation" Zero Hedge.com November 11, 2014 

4 PhotoOp or lasting peace? China's Xi, Japan's Abe hold landmark meeting Reuters.com November 10, 2014

5 China’s new strategy: TRADE and INVESTMENTs Xi Dangles $1.25 Trillion as China Counters U.S. 'Pivot' to Asia Bloomberg.com November 10, 2014

Speaking to executives at a CEO gathering in Beijing, Xi outlined how much the world stands to gain from a rising China. He said outbound investment will total $1.25 trillion over the next 10 years, 500 million Chinese tourists will go abroad, and the government will spend $40 billion to revive the ancient Silk Road trade route between Asia and Europe.

6 Bastiat’s law: If goods don’t cross borders, armies will. Has Asia’s peace pact with China been sealed? Yahoo.com China wins support for Asia-Pacific trade proposal November 12, 2014 

7 Could the Chinese government be a closet fan of former US president Theodore Roosevelt whose foreign policy was based on “speak softly, and carry a big stick”? : China Shows Off New Stealth Fighter to U.S. Military Bloomberg.com November 12, 2014

8 More signs of Big Stick foreign policies: Researchers Detail a Spike in NATO-Russia Close Calls New York Times November 10, 2014.

9 As China extends peace, US-Russia spat continues In China, Obama spars with Putin on Ukraine Politico.com November 11, 2014

10 One of the most politically influential think tank the Council of Foreign Relations showcases The Russian Military November 11, 2014

11 Ukraine violence flares as ceasefire collapses CNN.com November 11, 2014. Related Ukraine Digs In to Keep Donetsk Airport From Rebels Wall Street Journal November 11, 2014

12 Fact or Propaganda? Thousands of Putin’s Troops Now in Ukraine, Analysts Say Daily Beast November 11, 2014

13 Injured after airstrike Fate of ISIS leader still unknown CBSNews.com November 11, 2014

14 Fact or Spin? : ISIS Boot Camp Syria: Children as Young as 10 Forced to Behead Syrian Soldiers International Business Times India November 12, 2014

15 More Signs of expansionary US imperialism? US Sponsored “Regime Change” in Burkina Faso? Coup Leader Trained by Pentagon  Lt. Col. Yocouba Isaac Zida follows pattern of other military officers who enter politics Global Research November 11, 2014

16 Mainstream media being dumped for being bought by the CIA? News Report from Russia Insider Lew Rockwell.com November 11, 2014

An excerpt from former assistant secretary of US treasury and former associate editor of the Wall Street Journal Paul Craig Roberts

Germans Abandon Major News Sites in Anger Over Slanted Russia CoverageTriggered by reader disaffection, internet traffic has collapsed for half a dozen major German media websites

What’s going on in the German media is huge. It is one of the most popular subjects on our site.  The US and UK media have been hugely biased in their coverage of Russia, but German media has been far, far, worse, to the point which strains credulity.

Now it turns out that part of the reason is CIA fiddling with German media outlets.  Coming on the heels of the Snowden revelations, this has Germans seriously ticked-off.  Here’s the latest revelation from our correspondent in Germany.

They call it the Ulfkotte-effect. And it’s beginning to resemble an avalanche.

17 Former Soviet Union leader Mikhail Gorbachev warns on Europe: Europe may become irrelevant due to short-sighted policies – Gorbachev RT.com November 8, 2014

Deposit Confiscation via Negative Interest Rates: German Bank Sets Trend

When Keynes wrote then that “Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some", confiscation via inflation then has been imposed tacitly or "secretly and unobserved".

Not anymore. Government’s confiscation has become an upfront policy tool. [isn't it a wonder, considering record stocks, isn't today supposedly a boom, but why have policymakers been panicking?]

Prior to the last month’s QE, the ECB launched their negative deposit rates last June. Well ECB’s policies have now been transmitted to the banking system. Last November 1, a German bank embarked on imposing negative rates on consumer deposits.

From Sovereign Man’s Simon Black

On November 1st, the first European bank has passed along these negative interest rates to its retail customers.

So if you maintain a balance of more than 500,000 euros at Deutsche Skatbank of Germany, you now have the privilege of paying 0.25% per year… to the bank.

We’ve already seen this at the institutional level: commercial banks in Europe are paying the ECB negative interest on certain balances.

And large investors are paying European governments negative interest on certain bonds.

Now we’re seeing this effect bleed over into retail banking.

It’s starting with higher net worth individuals (the average guy doesn’t have half a million euros laying around in the bank). But the trend here is pretty clear– financial repression is coming soon to a bank near you.

It almost seems like an episode from the Twilight Zone… or some bizarre parallel universe. That’s the investment environment we’re in now.

Bottom line: if you’re responsible with your money and set some aside for the future, you will be penalized. If you blow your savings and go into debt, you will be rewarded.

If we ask the question “cui bono”, the answer is pretty obvious: heavily indebted governments benefit substantially from zero (or negative) rates.

Case in point: the British government just announced that they would pay down some of their debt that they racked up nine decades ago.

In 1927, then Chancellor of the Exchequer Winston Churchill issued a series of bonds to consolidate and refinance much of the debt that Britain had racked up from World War I and before.

This debt is still outstanding to this day. And the British government is just starting to pay it down– about $350 million worth.

Think about it– $350 million was a lot of money in 1927. Thanks to decades of inflation, it’s practically a rounding error on government balance sheets today.

This is why they’re all so desperate to create inflation… and why they’ll stop at nothing to make it happen. (It remains to be seen whether they’ll be successful, but they are willing to go down swinging…)

What’s even more extraordinary is how they’re trying to convince everyone why inflation is necessary… and why negative rates are a good thing.

On the ECB’s own website, they say that negative interest rates will “benefit savers in the end because they support growth and thus create a climate in which interest rates can gradually return to higher levels.”

I’m not sure a more intellectually dishonest statement could be made; they’re essentially telling people that the path to prosperity is paved in debt and consumption, as opposed to savings and production.

These people either have no idea how economies grow and prosper, they’re outright liars, or they’re completely delusional.

Negative rates will serve as a precursor to the widespread adaption of deposit confiscation via haircuts or wealth taxes especially when the global crisis emerges. 

Yet the desperate desire by governments to "create inflation" means only to survive or maintain the status quo for the political establishment (troika welfare-warfare state, politically connected too big to fail banks and central banking) charged to their respective citizens by inflating debt away. 

All those supposed growth thing are no more than propaganda smokescreens. This means that the promotion of wanton consumption financed by destroying savings through indiscriminate debt acquisition represents a fundamental recipe towards depression as resources continue to be misallocated. 

Thus the thrust by governments to generate inflation is to balloon systemic risk on overleveraged systems.

Nonetheless, the article above reveals of signs of desperation by governments to confiscate resources in the facade of debt financed consumption that should allegedly serve as elixir to real economic activities. 

As the great Austrian economist, Ludwig von Mises presciently warned,

Credit expansion is the governments' foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous…

It is a fact that today measures aimed at lowering the rate of interest are generally considered highly desirable and that credit expansion is viewed as the efficacious means for the attainment of this end. It is this prepossession that impels all governments to fight the gold standard. All political parties and all pressure groups are firmly committed to an easy money policy.

Unfortunately politically incited quasi booms always morphs into an economic bust, again the great Mises

But the boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances.

How we live in very interesting times

Gold’s Store of Value Seen from Leonardo da Vinci’s Salary

Writes Sovereign Man’s Simon Black

Among the masterpieces of the Italian Renaissance, Leonardo da Vinci’s “La Scapigliata” stands out distinctly from the rest.

The unfinished painting is of a common woman with disheveled hair. It’s remarkable particularly for depicting not the exceptional, but the real.

Part of da Vinci’s genius was the way he was able to capture life—genuine, unaffected reality, often intense detail. His notebooks reflect the same.

Leonardo, in fact, passed on to posterity great details of his finances. We know, for example, that around the time he painted La Scapigliata in the early 1500s, the great master was living in Milan and earning a salary directly from the king.

Leonardo’s journals state that in a ten-month period, he was paid a total of 240 scudi and 200 florins from the king.

The Italian gold scodo at the time was 3.42 grams of gold, and the florin was 3.54 grams. As of today’s gold price, that adds up to an annualized salary of $72,153.24.

Bear in mind, this was Leonardo’s ‘take home pay’ as there was no income tax, meaning his gross salary in today’s world would be just over $100,000 to account for income tax and FICA.

If we were to extend this analogy even further, given that Leonardo was on the government payroll back then as an artist/engineer, we can look up the US government employee pay scale today.

Da Vinci was an accomplished professional to say the least. His age, experience, and job title in the early 1500s would make him the equivalent of a GS-13 rank today (based on current US government pay scale).

And today’s salary for a GS-13 government worker? You guessed it. Right around $100,000.

It’s incredible how effective precious metals are as a long-term store of value. Even going back over 500 years, we can match up Leonardo da Vinci’s salary as being similar to what he might receive today.

Imagine for a moment that time travel were possible, and Leonardo could transport himself to today’s time—he would still be able to spend those coins. Or at least trade them for currency at the same purchasing power.

Now that is a store of a value. This is the real stuff.

The US dollar’s (inflation taxed) purchasing power since the FED’s inception (from visual.ly).

Why US banks are Vulnerable

Explains Simon Black of the Sovereign Man (bold original)

What banks are stockpiling these days are US government bonds, and they’re not doing this casually, they’re going nuts for them.

In just the last month alone American banks increased their holdings of US treasuries by $54 billion, to a record $1.99 trillion.

Citigroup, for example, held $103.8 billion worth of bonds at the end of June, up 19% from the end of last year.

This is like preparing for an earthquake by running out and buying whole new sets of porcelain dishes and glass vases.

All it’s going to do is make things more dangerous, and even if you somehow make it through the disaster, you have a million more shards to clean up.

With government bonds you are guaranteed to lose both in the short-term and the long-term. Bonds keep you consistently behind inflation (even the deceptively named TIPS—Treasury Inflation Protected Securities), so the value of your savings is slowly being chipped away.

But that’s nothing compared to the long-term threats of the US government not being able to repay the loans.

Facing $127 trillion in unfunded liabilities – which is nearly double 2012’s total global output – and with no inclination to reduce those numbers at all, at this point disaster for the US is entirely unavoidable.

Never before in history has a government stretched itself so thin and accumulated anywhere close to this amount of debt.

So when the day comes, it won’t be a minor rumble. It will be completely off the Richter scale.

These facts about the US government are in no way secret. Every bank out there knows it, yet they keep piling in.

Chart from Zero Hedge

Simon Black: Atlas Shrugged Goes Real Time

From the Sovereign Man’s prolific Simon Black (bold original)

“John Galt is Prometheus who changed his mind. After centuries of being torn by vultures in payment for having brought to men the fire of the gods, he broke his chains—and he withdrew his fire—until the day when men withdraw their vultures.”

Sick of the overbearing regulation, taxation, and entitlement mentality in society—in the book Atlas Shrugged, John Galt went to one entrepreneur after another to convince them that they just didn’t need to put up with it anymore.

They didn’t need to keep propping up a system that was trying to destroy them. Where’s the point in continuing to feed a parasitic system?

So one by one, these innovators and producers simply closed up shop, deciding to just “shrug” and abandon what they were providing thanklessly to the looters.

Today many companies are doing the same. They may not be abandoning their businesses altogether, but they are moving them out of the hands of the parasites by moving their tax bases abroad.

In Ayn Rand’s book, the Economic Planning Bureau dealt with this by legislating that no businesses could leave: “[a]ll the manufacturing establishments of the country, of any size and nature, were forbidden to move from their present locations, except when granted a special permission to do so.”

In real life today, we have a string of policies being proposed to similarly discourage companies from leaving, or failing that, to try to claw as much money as possible from them first.

First, take the H.R. 5278: No Federal Contracts for Corporate Deserters Act, which bars federal contracts for American companies that have gone overseas for tax purposes.

Then take the H.R. 5549: Pay What You Owe Before You Go Act, which seeks the seizure of unrepatriated corporate revenue.

Even the language used by these bill’s supporters is eerily similar to the novel, as politicians call for corporations to pay their “fair share” and bemoan that Americans have to “pick up the tax burden inverted companies shrug off.”

At the time, Rand might have thought that she was writing about an extreme, fictional society. But it seems that the Land of the Free is eager to exceed even her worst expectations.

When she wrote about the “Economic Emergency Law”, which forbade any discrimination “for any reason whatever against any person in any matter involving his livelihood”, she was likely thinking about criteria such as race, gender, and age.

She might have even considered they would try to prevent employers from making judgments based on a person’s ability, though I’m sure she would not have even imagined what politicians have actually come up with in the US.

Try the S. 1972/ H.R. 3972: Fair Employment Opportunity Act that proposed to prohibit discrimination according to a person’s history of unemployment.

Or even worse, the S. 1837: Equal Employment for All Act that would have prohibited employers from even looking at prospective employee’s credit ratings.

The literary similarities don’t just stop with corporations either. Compare the fictional Project Soybean, designed to “recondition” people’s dietary habits to the actual H.R. 4904: Vegetables Are Really Important Eating Tools for You (VARIETY).

Tell me, which one sounds more ludicrous to you?

With each new piece of legislation being proposed in the Land of the Free, Atlas Shrugged seems to be ever more prophetic.

While even the most terrifying elements of the book are coming true, so are the reactions.

People and companies are leaving, refusing the put up with the looting of their efforts any longer.

How Prostitution, Drug Dealing and Smuggling Bolsters Europe’s Economy

Recently I wrote on how governments desperately try to pump economic G-R-O-W-T-H by massaging statistics: (bold original)

In Italy, sagging economic growth has impelled the government to include the illegal drug sales, smuggling and prostitution in the gross domestic product calculation in order to buoy the statistical economy in May 2014. How does one get to compute “illegal” into GDP? Beats me. The United Kingdom also followed to include the sex and drug industry also in their GDP late May 2014.

Sovereign Man’s Simon Black explains the new accounting methods used by some governments to compute for the “illegal” activities in the markets as part of G-R-O-W-T-H: (bold mine)

For example, to figure out how prostitution contributed to the country’s economy, Spain’s national statistics agency counted the number of “known prostitutes” working in the country and consulted sex clubs to calculate how much they earned.

Known prostitutes? Do they have a Facebook group?

And how about if these “known prostitutes” move around the borderless Schengen area? Their contribution to GDP is probably counted several times then.

So, using these scientific methods Spain’s statistics agency announced that illicit activities accounted for 0.87% of GDP.

(Perhaps this is one of the reasons why a whopping 547,890 people left Spain last year, most of them to Latin America, according to the national statistics agency.)

This compares similarly to the UK where Britons, according to its own statistics agency, spent 12.3 billion pounds on drugs and prostitutes in 2013, or 0.79% of GDP.

That’s more than they spent on beer and wine, which only amounted to 11 billion pounds.

And you probably thought Britons were heavy drinkers. Turns out they enjoy hookers and blow even more.

On the more uptight and conservative spectrum of Europeans, Slovenian households spent 200 million euros last year on prostitutes and drugs, or 0.33% of Slovenia’s GDP.

Curiously enough, Slovenia’s Finance Minister just announced today that the country’s budget deficit will be 200 million euros higher than previously thought. Coincidence? I don’t think so.

On the more libertine extreme, in Germany estimates suggest that prostitution and drugs amounted to as much as $91 billion in 2013—or an incredible 2.5% of the total economy.

This is the sign of the times. Governments are so desperate to maintain the illusion of growth that they’re turning to desperate, comical measures.

Across the entire continent, Eurostat estimates that gross EU GDP is larger by 2.4% if all illegal activities (not just prostitution and drugs) are accounted for.

Funny thing, they also report that total real GDP growth in 2013 (the year they started counting illegal activities) was just 0.1%.

In other words, illegal activities are now the difference between economic growth and economic recession in Europe.

As Mark Twain quoted 19th century British Prime Minister Benjamin Disraeli "There are three kinds of lies: lies, damned lies, and statistics."

Don’t worry be happy. For the statistics worshiping consensus, stocks backed by G-R-O-W-T-H have been predestined to rise forever!!!!

Simon Black: Some of the dumbest taxes throughout history

From the ever eloquent Simon Black at the Sovereign Man:

In the days of ancient Rome, it was tradition for the upper class to liberate their slaves after a set number of years.

The Roman government, however, looked at this as an opportunity to generate revenue, and they taxed the newly freed slave on his freedom.

I can’t imagine anything more repulsive than paying tax on freedom. But they gave it a pretty good try–

In 1696, the English government under William III (William of Orange) passed a new law requiring subjects to pay a tax based on the number of windows in their homes.

Not willing to pay such a ridiculous tax on something as basic as sunlight, many Englishmen simply reduced the number of windows in their homes.

There was less light… and less ventilation… which ultimately became a public health problem.

To follow that up, England introduced a tax on candles in 1789. Making your own candles was outlawed unless you first obtained a license and paid tax on your own homemade candles.

As you could imagine, most people just did without.

Coupled with the window tax, this was a very dark time for England. And it took until the mid 19th century for the government to realize its stupidity and repeal the taxes.

But if that sounds excessive, consider the Johnstown Flood Tax.

In 1936, the town of Johnstown, Pennsylvania was devastated by nasty flood, and in its efforts to ‘do something,’ the state assembly imposed an emergency, ‘temporary’ tax of 10% on all alcohol sold in the state.

This ‘temporary’ tax remained in place for nearly three decades, at which point it was raised to 15% in 1963, and again to 18% in 1968.

The ‘temporary’ tax still exists today, proving once again that there’s nothing more permanent than a temporary government measure.

Read the rest here

For as long people’s lives are politicized there will be “dumbest taxes or legal mandates”. That’s because populist politics have always been directed at addressing the symptom rather than the disease.

I am sure there are examples in the Philippines.

Lessons from the Dotcom Bubble

I’ve repeatedly been saying here that the obverse side of every mania is a crash.

Sovereign Man’s Simon Black shares the lessons of the dot.com mania-crash cycle and their relevance today. (bold mine)

If someone mentions the Dotcom Bubble, Pets.com is easily the first thing to come to mind.

The online pet product store failed hard and it failed fast. In just 268 days, the company went from IPO to liquidation, managing to lose $300 million in the process.

Yet it had looked good to investors, at least for a while.

Pets.com spent exorbitant amounts of money on advertising; its sock-puppet mascot was the 90s equivalent of a viral phenomenon.

But while the company spent hand over fist on advertising, Pets.com’s was losing money on every sale because they priced their inventory at BELOW cost. Duh.

Pets.com went public on the NASDAQ in February 2000 (right as the bubble burst) at $11 per share.

The stock peaked at $14, valuing the company at over $300 million. Not bad for a company whose business model virtually assured they would lose money.

But reality set in just nine months later. The company’s stock fell over 99%, and management announced they would liquidate.

Now… we could criticize Pets.com management all day long for a ridiculous business model. But bear in mind, investors bought the story.

People believed that profits didn’t matter. And back then it was typical for loss-making companies to be valued at hundreds of millions of dollars.

Have things really changed since then?

Facebook bought revenueless Instagram for $1 billion in 2012. Snapchat, the revenueless sexting app, is now valued at $10 billion.

There are so many examples like this. And like 1999, no one seems to care.

Silicon Valley investors keep writing huge checks. “Likes” are the new valuation metric. Not profits.

Several top Silicon Valley insiders are now hoisting the red flag saying enough is enough.

Bill Gurley, one of the most successful venture capitalists in the world, told the Wall Street Journal last week that “Silicon Valley as a whole . . . is taking on an excessive amount of risk right now. Unprecedented since ’99.”

Fred Wilson of Union Square Ventures echoed this sentiment on his blog, railing against the widely accepted model that it’s acceptable for companies to be “[b]urning cash. Losing money. Emphasis on the losing.”

George Zachary of Charles River Ventures wrote, “It reminds me of 2000, when investment capital was flooding into startups and flooded a lot of marginal companies. If 2000 was a bubble factor of 10, we are at an 8 to 9 in my opinion right now.”

As with all bubbles, it all comes down to there being too much money in the system.

Capital is far too cheap, and that pushes people into making risky and foolish decisions.

When you’re guaranteed to lose money on a tax-adjusted, inflation-adjusted basis by holding your savings in a bank account, almost anything else looks like a better alternative.

That’s why stocks keep pushing higher, why junk bonds yield a pitiful 5%, and why bankrupt governments can borrow at 0%.

Jared Flieser of Matrix Partners in Palo Alto summed it up when he told the Wall Street Journal, “You can’t afford to sit on the bench.”

In other words, money managers view NOT investing as losing, even if investing means taking huge risks.

It’s an abominable position to be in. If you do nothing, you lose. If you do anything, you take on huge risks.

This, of course, is thanks to a monetary system in which a tiny central banking elite conjures trillions of dollars out of thin air in its sole discretion.

History tells us that this party eventually stops, creating all sorts of unpleasant financial carnage. This has happened so many times before, and it would be arrogant to presume that this time is any different.

But it begs the question: what does one do? Is it worth trying to ride the bubble and try to get out before it all collapses?

Read the rest here

In a manic phase, unfortunately neither profits nor history matters at all.

During the dotcom bubble, monetization of “eyeballs” rationalized overvalued and mispriced stocks.

The modern day equivalent has been to concoct the “likes” business model. Both have been predicated on illusionary profits from perceived network effects. So they end up with fantastic valuations like the above.

In the Philippines, the justification has been about G-R-O-W-T-H (from the Ponzi growth model).

In reality the common denominator of every mania has been about the delusional “this time is different”.

The Mania phase I previously described:

Manias, which operate around the principle of the “greater fool”, signify a self-reinforcing process.

Rising prices induce more punts which lead to even higher prices as the momentum escalates. Suckers draw in more patsies into a mindless wild and frenetic chase to scalp for marginal “yields” and or from the psychological fear of missing out and or from peer pressures all predicated on the belief of the eternity of a risk-free one way trade. The intensifying hysteria will continue to be egged on by the beneficiaries from such invisible political redistribution both in public and private sectors, supported by bubble ‘expert’ apologists and media cronies.

Therefore, recklessness will compound on the accrued recklessness. Again this isn’t just a problem of overvaluations (from which the BSP’s perspective has been anchored) which merely is a symptom, instead this represents deepening signs of intensive misallocations of capital expressed through the massive contortion of prices and the disproportionate distribution of resources on a few sectors at the expense of the others that which has mostly been financed by debt accumulation, thereby elevating risks of financial instability or an economic meltdown. The BSP’s increasing use of communications with sanitized “alarm bells” signify on such emerging risks

And like typical Ponzi schemes, the manic process goes on until the ‘greater fools’ run out, or that every possible ‘fool’ has already been “IN” (crowded trade), or that borrowing costs has reached intolerable limits to expose on foolhardy speculative activities

Don't you see? Stocks can only rise FOREVER!

Quote of the Day: There’s an invisible wall going up around us

This time, the 18-year-old victim’s name was Michael Brown, an unarmed hospital worker, who was gunned down by police on the streets of Ferguson, Missouri.

After both young casualties, people were incited to protest in anger against the brutality of the state, and in both cases, the people had tear gas rained down upon them.

Who could possibly still believe that the police are there to protect and serve the people?

No matter the justifications they came up with, it’s was suddenly clear that the Wall was built to keep people in, not to keep others out.

Just the same, the police today are not there to keep you safe from criminals, but to keep the biggest criminals—the politicians—safe from you.

Though on the surface the current protests in Ferguson are about race, they reveal a much deeper truth about the situation. As they protest, the people are following their instincts, and their instincts are telling them not to trust the state.

We’re seeing people’s trust in the state beginning to crumble, not just with police, but with one government agency after another. More and more people are waking up to the fact that none of these institutions are really there to protect them.

The NSA says it’s there to keep you safe from terrorists, but in reality they’re spying on you to protect their power over the populace.

The Fed says it’s there to make the economy more stable, but they intentionally fuel economic volatility in ways that benefit their friends.

The FDA says it’s there to protect people from unsafe foods, but their regulations and endorsements of certain ingredients actually make your food more dangerous.

There’s an invisible wall going up around us, everywhere in Western civilization. People are starting to realize it and that’s why there’s so much anger. But rather than getting angry or emotional, it’s time to get ready.

This is from the Simon Black at his Sovereign Man website

The Only Thing Constant is Change: Money Edition

Sovereign Man’s Simon Black gives a terse but incisive account of the evolution of money in the perspective of  reserve currency and its lessons.

For hundreds of years the Byzantine Empire coined the most popular reserve currency in the history of the world.

Merchants all over Europe, the Mediterranean, the Middle East, and further, used it in trade for centuries.

It was called the solidus, and was introduced by Constantine I in 312 AD.

The solidus held steady at 4.5 grams of 24-carat gold for nearly seven centuries. Hence its Latin name – ‘solid’. The durability of its purity is nearly unprecedented in the history of money.

Its weight, dimensions and purity remained constant until the 10th century when the government began to debase it.

The debasement was gradual at first, then accelerated rapidly.

In a matter of decades its gold content was reduced to almost zero as the Byzantine Empire was scrambling for cash to finance its numerous wars.

Consequently, Emperor Alexios I Komenos drastically overhauled the Byzantine coinage system in 1092 and introduced a new gold coin, the hyperpyron.

It too was soon subject to gradual debasement. And by the mid 1200s the hyperpyron’s gold content fell drastically again.

As the saying goes, fool me once, shame on you. Fool me twice, shame on me.

The rest of Europe had seen this movie before. And when they saw the gold content in the hyperpyron fall, they quickly lost confidence.

By that time, the Byzantine Empire was weak—a shadow of its former power.

Meanwhile, several small kingdoms in Italy were rising in prosperity, especially Florence, Genoa, and Venice.

The Florentines and the Genoese took up the task and minted a new gold coin called the florin, which at 3.5 grams of pure gold was the most wildly circulated trade currency in Europe and around the Mediterranean for a while.

The Venetian ducat gained wide international acceptance in the 1400s. The ducat contained 99.47% of fine gold—the highest metallurgical purity possible at the time.

As the Venetian merchants traveled far and wide the ducat became an internationally accepted trade currency throughout the world.

Even though he didn’t live in Venice, for example, Leonardo da Vinci was paid by the King of France in Venetian ducats—exactly 400 ducats per year, which in today’s dollars equals to roughly $56,000 (and he didn’t pay any tax…)

The ducat was ultimately supplanted by the Spanish dollar (real de a ocho, or Pieces of Eight) with the onset of the Age of Exploration.

Pieces of Eight became so widespread in international trade that they were legal tender in the United States until the mid 19th century.

The clear lesson here is that this stuff changes.

It’s common for the world’s most powerful country to issue a currency that becomes adopted around the world as the standard for international trade.

But whenever that country reaches a point of epic, terminal decline, and especially when it rapidly debases its currency, the rest of the world seeks an alternative.

The US has been enjoying this special privilege for decades now.

With the way the US government has been imposing imperial policies from geopolitics to trade and even to finance, which has recently sown the seeds of global factionalism, the US dollar’s reserve currency status is clearly in jeopardy. Compounding on this has been the Fed's bubble blowing that has been embraced as standard by today’s central banks. Such bubble policies have raised the specter of instability and crisis across the globe.

As the great Ron Paul recently wrote:

US policymakers fail to realize that the United States is not the global hegemon it was after World War II. They fail to understand that their overbearing actions toward other countries, even those considered friends, have severely eroded any good will that might previously have existed. And they fail to appreciate that more than 70 years of devaluing the dollar has put the rest of the world on edge. There is a reason the euro was created, a reason that China is moving to internationalize its currency, and a reason that other countries around the world seek to negotiate monetary and trade compacts. The rest of the world is tired of subsidizing the United States government's enormous debts, and tired of producing and exporting trillions of dollars of goods to the US, only to receive increasingly worthless dollars in return.

The US government has always relied on the cooperation of other countries to maintain the dollar's preeminent position. But international patience is wearing thin, especially as the carrot-and-stick approach of recent decades has become all stick and no carrot. If President Obama and his successors continue with their heavy-handed approach of levying sanctions against every country that does something US policymakers don’t like, it will only lead to more countries shunning the dollar and accelerating the dollar's slide into irrelevance.

Simon Black: The US Dollar is Going Down

Sovereign Man’s Simon Black predicts (bold mine)

So the government of Switzerland recently signed a bilateral currency swap agreement with China, enabling the two countries to buy and sell up to 150 billion RMB or 21 billion Swiss Francs of each other’s currencies.

Switzerland is just the latest to join the queue, as nearly 25 other central banks already signed similar agreements with China.

Every few weeks, and with increasing frequency, we’re hearing news of the next country that is accepting China’s future financial primacy.

There’s no denying that both sovereign nations and market participants are accepting the validity of the RMB as a major trade currency. This is no longer an anomaly, but part of an obvious trend.

To be fair, it’s not that the RMB is a shoe-in for the next global reserve currency—because the country and its currency undoubtedly both have problems.

What’s really being revealed with these latest developments is relative confidence.

It may not be clear whether or not the RMB will make it to the top, but what is clear to everyone is that the USD is going down.

Here we see ambitious countries like the UK and Switzerland proactively trying to adapt to and take advantage of the changing financial climate.

The sole tactic of the US government, on the other hand, is to lash out at countries which make them feel threatened.

They rally the whole world against Russia for acts of war. They blast China as a currency manipulator.

And all of this as if the US wasn’t dropping bombs by remote control drone… or heavily manipulating its own currency.

This has accomplished nothing other than to demonstrate just how weak and insecure the former financial superpower has become.

Continuing to believe that the dollar is going to maintain its global reserve status is now not only foolish, but financially hazardous. To countries, businesses and individuals.

Those that accept these changes and try to get out in front of this trend will do incredibly well. They are the ones who will survive intact when the financial system resets.

Those who ignore the trend do so at their own peril.

I would add that aside from US balance sheet problems and the Fed policies inflating of the mother of all bubbles, financial imperialism via intrusive laws like FACTA and possibly Dodd Frank and brinkmanship foreignimperialist policies as (noted by Mr. Black) that has prompted for geopolitical factionalism which has only given rise of protectionism risks and of a World War as previously discussed are negatives for the US dollar overtime.

Quote of the day: The Employee Ownership Bank Act is Textbook Socialism

Unfortunately this is no longer fiction. Because in the Land of the Free, the United States Congress is striving to make Atlas Shrugged a reality.

Their latest brainchild is to set up a new government bank, stuff it full of taxpayer funds, and loan the money to American workers for the exclusive purpose to help them form collectives and buy the companies they work for.

It’s called the United States Employee Ownership Bank Act.

And, straight from the bill, they aim to provide “loan guarantees, direct loans, and technical assistance to employees to buy their own companies. . .”

The goal of this legislation, curiously, is to “preserve and increase employment in the United States” which is still problematic six years after the global financial crisis.

Since September 2008, the US government has increased its debt level over 50% to $17.6 trillion.

The US Federal Reserve has increased its balance sheet four-fold, conjuring $3.5 trillion out of thin air.

All of this was supposed to create jobs. And with each of these being a failed policy, Congress is now descending into outright socialism.

To be fair, people throw around the word socialism a lot. They’ll say “Obama’s a socialist” or something like that. Often it’s taken to exaggeration.

But this legislation– the government effectively sponsoring the communal takeover of private business– is textbook socialism: private property and the means of production owned by the community.

Socialist Yugoslavia actually tried the exact same thing: worker-owned cooperatives. And the consequent failure was absolutely epic.

But politicians never let pesky things like truth get in the way of a bad idea.

It’s time to wake up smell the reality. This isn’t about panic. It isn’t about doom and gloom. It’s about facts, not fear.

Any rational, thinking person has to look at this and ask a simple question: where is this trend headed?

The evidence is pretty clear. And more and more people are starting to realize it.

People all over the world are thinking: “This is not the country I grew up in. And I don’t like the trend.”

It’s unfolding right in front of our very eyes for anyone with the intellectual courage to pay attention.

This is from investor Simon Black of the SovereignMan.com

Paper Money: 353 Years of Wanton Destruction of People's Purchasing Power

Sovereign Man's Simon Black on the 353th birthday of paper money and the unlearned lessons from the past:

If you ever find yourself vacationing in the western Pacific, I highly recommend swinging by Yap Island, home of one of the most bizarre forms of money in history.

Over a thousand years ago, natives would mine enormous chunks of limestone and carve them into gigantic circular discs. 

I’m talking REALLY big… a typical disc would be 5 to 10 feet in diameter, over a foot thick, and weigh several tons. 

They called them ‘Rai Stones’, and they were actually used as currency. Curiously, an indiviaul rai would be valued not based on its weight or size, but based on its story. 

If many people had been killed transporting it, or if the stone had once belonged to a famous warrior, the rai would be worth more. So it was a bit of a collectible as well as a form of money. 

Needless to say, the sheer size of these stones meant that they wouldn’t be moved very often. Everyone on the island just sort of knew who owned each rai, like a primative form of Bitcoin’s blockchain. 

The polar opposite of this is the paper money system, something that has its origins in the Han Dynasty over 2,000 years ago. 

It wasn’t quite paper, but the ancient Chinese experimented with leather-skinned money as early as the second century BC. 

The idea died for over a thousand years in favor of (mostly) gold and silver. But it popped up again in the Middle Ages where Chinese merchants used short-term credit notes rather than haul around heavy coins. 

When the Mongols basically took over the entire planet, they adopted this idea, much to the astonishment of their European visitors. Marco Polo writes of this in his diary with total incredulity:

“The Great Kaan causeth the bark of trees, made into something like paper, to pass for money all over his country. . . And nobody, however important he may think himself, dares to refuse them on pain of death.” 

But it wasn’t until 1661 that the first modern paper money was born. 

Johan Wittmacher was a Latvian merchant of Dutch descent who had a burning idea he wanted to try; he just needed a willing country. 

Wittmacher moved to Sweden and tried several times to obtain a banking license. Finally, after promising a 50% profit share to King Charles X Gustav, his license for Stockholms Banco was approved in 1657. 

On July 16, 1661, his bank became the first in history to issue paper banknotes– Kreditivsedlar. 

These Kreditivsedlar solved a huge problem for Wittmacher. All the gold deposits he was holding on behalf of bank customers were primarily short-term. Customers would frequently withdraw coin, so he needed to keep inventory handy. 

On the other hand, he wanted to increase profits by loaning out his customers’ gold. Problem was, most of the loans were longer term. 

Wittmacher’s dilemma was satisfying his customers’ short-term withdrawals while still making long-term loans. The solution was paper. 

When a customer would make a withdrawal, Wittmacher gave them paper notes as claims on the gold he was holding. 

The customer could use the notes to pay for goods and services, and Wittmacher got to keep the gold and make more loans. 

In time, the notes became a popular medium of exchange, accepted everywhere just like gold. People would pass them around as money, only occasionally showing up to the bank to redeem them for gold.

Naturally it didn’t take long for Wittmacher to start committing fraud. Before long he’d issued more notes than he had gold in his vault. And he was making more loans than the bank could afford. 

After only seven years, the bank collapsed. But the idea of paper notes lived on to infect the evolution of money ever since.

Read the rest here 

Aldous Huxley was spot on when he wrote:

That men do not learn very much from the lessons of history is the most important of all the lessons that history has to teach.