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The Smog of Fraud


Off the keyboard of James Howard Kunstler

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MoneyHole
Originally Published on Clusterfuck Nation  January 20, 2014
Discuss this article here at the Diner Forum.

 

     Team Obama pulled a cute one last week nominating Blythe Masters, JP Morgan’s commodity chief, to an advisory committee of the Commodity Futures Trading Commission (CFTC) which supposedly regulates activities on the paper trades in corn, pork bellies, cocoa, coffee, wheat, corn — oh, and gold, too, by the way, in which JP Morgan has been suspected of massive gold (and silver) market manipulations and other misconduct lately. That would include the 2011 MF Global Fiasco in which nearly a billion dollars from “segregated” customer accounts somehow ended up parked over at JP Morgan as a result of bad derivative bets on tanking Eurozone bonds. MF Global, primarily a commodities trading brokerage, was liquidated in 2011. The CFTC never issued referrals for prosecution to the Department of Justice in the matter and, of course, MF Global’s notorious CEO, Jon Corzine remains at large, enjoying caramel flan lattes in the Hamptons to this day. Such are the Teflon transactions of the Obama years: nothing sticks.

    There was such a Twitter storm over Blythe Masters that she withdrew from consideration for the committee before the day was out.

    JP Morgan is one of the specially privileged “primary dealer” banks said to be systemically indispensible to world finance. Supposedly, if one of them is allowed to flop, the whole global matrix of global debt obligations — and, hence, global money — would dissolve in a misty cloud of broken promises. They are primary dealers to their shadow partner, the Federal Reserve, and their main job in that relationship is buying treasury bonds, bills, and notes from the US government and then “selling” them to the Fed (earning commissions on the sales, of course). The Fed, in turn, “lends” billions of dollars at zero interest back to the primary dealers who then park the “borrowed” money in accounts at the Fed at a higher interest rate. This is, of course, money for nothing, and even small interest rate differentials add up to tidy profits when the volumes on deposit are so massive.

     This “carry trade” was started because the primary dealer banks were functionally insolvent after 2008 and needed to build “reserves” up to some level that would putatively render them sound. But that was a sketchy concept anyway since accounting standards had been officially abandoned in 2009 when the Financial Accounting Standards Board (FASB) declared that banks could report the stuff on their books at any value they felt like. In short, the soundness of the biggest banks in the USA could no longer be determined, period. They were beyond accounting as they were beyond the law. At the same time, the banks began the operations of shifting all the janky debt paper, mostly mortgages and derivative instruments (i.e. made-up shit like “CDOs squared”), value unknown, from their vaults to the a vaults of the Federal Reserve, where it resides to this day, rotting away like so much forgotten ground round in the sub-basement of an abandoned warehouse of a bankrupt burger chain.

     All of these nearly incomprehensible shenanigans have been going on because debt all over the world can’t be repaid. The world’s economy, as constructed emergently over the decades, can’t function without repayable debt, which is the essence of “credit” — the fundamental trust implicit in banking. You have “credit” because other persons or parties believe in your ability to repay. After a while, this becomes a mere convention in millions of transactions. What’s happened is that the conventions remain in place but the trust is gone. It’s gone in particular among the parties deemed too big to fail.

     Everybody knows this now and everybody is trying desperately to work around it, led by the Federal Reserve. Trust is gone and credit is going and debt is sitting between a rock and a hard place with its grubby hands pressed together, praying that it will be forgiven, forgotten, or overlooked a little while longer. By the way, the reason trust and credit are gone is because oil is no longer cheap and world economies can’t grow anymore. They can’t afford to run the day-to-day operations of a techno-industrial society. They can only pretend to afford it. The stock markets are mere scorecards for players who can only lie and cheat now to keep the game going. Somewhere beyond all the legerdemain and fraud, however, there remains a real world that is not going away. We just don’t know what it will look like when the smog of fraud clears.

***

James Howard Kunstler is the author of many books including (non-fiction) The Geography of Nowhere, The City in Mind: Notes on the Urban Condition, Home from Nowhere, The Long Emergency, and Too Much Magic: Wishful Thinking, Technology and the Fate of the Nation. His novels include World Made By Hand, The Witch of Hebron, Maggie Darling — A Modern Romance, The Halloween Ball, an Embarrassment of Riches, and many others. He has published three novellas with Water Street Press: Manhattan Gothic, A Christmas Orphan, and The Flight of Mehetabel.

 

 

Timing Is (Not) Everything

Off the keyboard of James Howard Kunstler

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Originally Published on Clusterfuck Nation  December 9, 2013

dollar-and-euro-banknotes_.si

“Federal Reserve officials are closer to winding down their controversial $85 billion-a-month bond-purchase program, possibly as early as December, in the wake of Friday’s encouraging jobs report.”

      That from the much-deservedly maligned John Hilsenrath, widely regarded to be the Federal Reserve’s ventrioloquist dummy over at the Wall Street Journal, as in, from God’s mouth to the jittery multitudes. Of course the jobs number was just another highly seasoned and over-leavened cupcake from the Bureau of Labor Statistic’s magic hedonic oven, so you can be sure that the predicate of that statement is… how to put it delicately…  the latest arrant lie with hypothetical icing on top.

     Everybody knows that the Federal Reserve’s money-pumping operations have become a replacement for what used to be an economy. Therefore, no more money pumping = no more so-called economy. It’s that simple. But it doesn’t mean that the Federal Reserve won’t make a gesture and I wouldn’t be surprised if they try it during the season that Santa Claus hovers over the national consciousness — or what little of that remains when you subtract the methedrine, the Kanye downloads, the fear of an $11,000 bill for an emergency room visit requiring three stitches, and all the other epic distractions of our time.

     The next meeting of the Fed’s Open Market Committee (FOMC), where such things as taper-or-not are considered, is Dec. 17. The Fed has to make some kind of gesture to retain any credibility, so I suspect they’ll go for a symbolic shaving of five or ten billion a month off the current official bond-buying operation number of $85 billion a month (or $1.2 trillion a year). If they don’t do it, no one will ever believe them again. I call it the “head-fake” taper, because it is essentially a false move.

       The catch is that the Fed has more than one back door for vacuuming up all sorts of other miscellaneous financial trash paper securitized by promises already broken, moldy sheet-rock housing, college loans defaulted on, car payments that stopped arriving eighteen months ago, credit cards maxed to oblivion, sovereign foreign economies visibly whirling down the drain, and untold casino bet derivative hedges. Loose talk has it that the Fed is buying up way more dodgy debt than the official number of $85 billion a month. And why not? They bailed out way more than the $700 billion official TARP figure back in 2009 — everything from insolvent European banks to Floridian motels on the REO junk-pile — so nobody should take any particular taper number seriously. They’ll just backfill as necessary.

     But even in a world of seemingly no consequence, things happen. One pretty sure thing is rising interest rates, especially when, at the same time as a head-fake taper, foreigners send a torrent of US Treasury paper back to the redemption window. This paper is what other nations, especially in Asia, have been trading to hose up hard assets, including gold and real estate, around the world, and the traders of last resort — the chumps who took US T bonds for boatloads of copper ore or cocoa pods — now have nowhere else to go. China alone announced very loudly last month that US Treasury debt paper was giving them a migraine and they were done buying anymore of it. Japan is in a financial psychotic delirium scarfing up its own debt paper to infinity. Who’s left out there?  Burkina Faso and the Kyrgystan Cobblers’ Union Pension Fund? The interest rate on the US 10-year bond is close to bumping up on the ominous 3.0 percent level again. Apart from the effect on car and house loans, readers have pointed out to dim-little-me that the real action will be around the interest rate swaps. Last time this happened, in late summer, the too-big-to-fail banks wobbled from their losses on these bets, providing a glimpse into the aperture of a black hole compressive deflation where cascading chains of unmet promises blow financial systems past the event horizon of universal default and paralysis where money stops moving anywhere and people must seriously reevaluate what money actually is.

      I think we’ll see them try the head-fake taper. They must. It will be backstopped by and saturated in statistical lying, and everyone will have trouble parsing the probable effect because the chronic dishonesty loose in this land will have deformed and impaired all metrics of true value. At the heart of whatever remains of this economy is fire, and the officers of the Federal Reserve are playing with it. Pretty soon, we’ll get the un-taper, the final surrender to the crack-up boom that awaits before the western world has to go medieval.

 

 

***

James Howard Kunstler is the author of many books including (non-fiction) The Geography of Nowhere, The City in Mind: Notes on the Urban Condition, Home from Nowhere, The Long Emergency, and Too Much Magic: Wishful Thinking, Technology and the Fate of the Nation. His novels include World Made By Hand, The Witch of Hebron, Maggie Darling — A Modern Romance, The Halloween Ball, an Embarrassment of Riches, and many others. He has published three novellas with Water Street Press: Manhattan Gothic, A Christmas Orphan, and The Flight of Mehetabel.

 

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