The Financial System Doesn’t Just Enable Theft, It Is Theft

Under reported inflation, 0% interest rates and quantitative easing are tools used to reduce the purchasing power of people like me or you. We accept inflation without questioning the financial system that kindly gives us rising living costs. Inflation is theft and logically criminal but obfuscation is the name of the game.

“One of the indispensable prerequisites of a mastery of economics is a perfect knowledge of history, the history of ideas and of civilization … To know one field well, one must also know other fields.” Ludwig von Mises

In the past 300 or so years there have been over 700 fiat currencies with an average life span of 26 years, the longest being 50 years. The world, since 1971 has operated on a fiat currency and the cracks are showing for all to see. Only today we had the US readjusting GDP growth for the past 84 years to take into account R&D spending, which was the equivalent of adding the output of Belgium to the yearly figures. R@D spending was already taken into account but when your back is against the wall, why not re-write history.

Courtesy of Charles Hugh Smith of Two Minds.com:

It is painfully self-evident that our financial system doesn’t just enable theft, it is theft by nature and design. If you doubt this, please follow along.

Inflation is theft, but we accept inflation because we’ve been persuaded it benefits us. Here’s the basic story: our financial system creates new credit money (i.e. debt) in quantities that are only limited by the appetites of borrowers and the value of assets they buy with freshly borrowed money.

If this expansion of credit money exceeds the actual growth rate of the real economy, inflation results.

Since our economy is ultimately based on expanding debt in every sector (government, corporations, households), inflation is a good thing because it enables borrowers to pay back old debt with cheaper money.

For example, if J.Q. Citizen makes $50,000 a year and owes $50,000 on his fixed-rate mortgage, what happens if inflation jumps 100%? Assuming J.Q.’s wages rise along with prices, his earnings jump to $100,000 while mortgage remains at $50,000. Though prices of everything else have also doubled, the debt remains fixed, making it much easier for J.Q. to service the mortgage. Before inflation, it might have taken ten days of earnings to make enough money to pay the mortgage payment; after inflation, it only takes five days’ wages to make the payment.

This apparent benefit evaporates if wages do not rise along with the price of goods and services. If earned income stagnates during inflation, the purchasing power of wages declines. If it took two days’ earning to pay for groceries and gasoline before inflation, now it takes three days’ wages. The wage earner is measurably poorer thanks to inflation. How much poorer? Take a look: (chart by Doug Short)

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Using the governments’ flawed consumer price index (CPI), household income has declined over 7%. But this understates inflation in a number of ways; as several readers pointed out after reading What’s up with inflation?? (July 25, 2013), such calculations of inflation do not track the reduction in package contents that mask the fact that our dollars are purchasing less goods even though the package remains unchanged: the cereal box is the same size as last year but the quantity of corn flakes has declined.

There are other reasons to be skeptical of official measures of inflation. As I note in the above link, how can healthcare be 18% of the GDP but only 7% in the CPI’s weighting scheme?
The obvious fact is that inflation is stealing purchasing power from every household with earned income, for the simple reason that wages are not rising in tandem with prices.

In 19th century Britain, the price of bread remained stable for most of the century: the price of a loaf of bread in 1890 was the same as it was in 1850. Any increase in wages in a no-inflation environment means the wage earner’s purchasing power has increased. In an inflationary financial system, as earned income stagnates, everyone without access to credit and leverage loses purchasing power, i.e. becomes poorer.

The advent of unlimited credit and leverage enabled new and less overt forms of expropriation, otherwise known as theft.

Let’s say that two traders enter a great trading fair seeking to buy goods to sell elsewhere for a fat profit. That is, after all, the purpose of the capitalist fair: to enable buyers and sellers to mutually profit.

One trader uses the time-honored method of letters of credit: he buys and sells during the fair by exchanging letters of credit which are settled at the end of the fair via payment of balances due with gold or silver.

Ultimately, the trader’s purchases are limited by the amount of silver/gold (i.e. real money) he possesses.

Trader #2 has access to leveraged credit, meaning that he has borrowed 100 units of gold with a mere 10 units of gold and the promise of paying interest on the borrowed 90 units.

This trader can buy 10 times more goods than Trader #1, and thus reap 10 times more profit. After paying 10% in interest, Trader #2 reaps 9 times more profit based on the credit-funded expansion of his claim on resources.

The issuance of paper money is an even more astonishing shortcut claim on real-world resources. Trader #3 brings a printing press to the fair and prints off “money” which is a claim on resources. The paper is intrinsically worthless, but if sellers at the fair accept its claimed value, then they exchange real resources for this claim of value.

Needless to say, those with access to leveraged credit and the issuance of fiat money have the power to make claims on resources without actually having produced anything of value or earned tangible forms of wealth.

Those with political power and wealth naturally have monopolies on the issuance of credit and paper money, as these enable the acquisition of real wealth without actually having to produce or earn the wealth.

This system is intrinsically unstable, as the financial claims of credit and fiat money on limited real-world resources and wealth eventually exceed real-world resources, and the system of claims collapses in a heap. Though this end-state can easily be predicted, the actual moment of collapse is not predictable, as those holding power have a vast menu of ways to mask their expropriation and keep the game going.

For example, quantitative easing (QE), which is ultimately the issuance of unlimited credit and leverage to the chosen few at the top of the heap of financial thievery: Are We Investing or Are We Just Dodging Thieves? (July 29, 2013).

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” Ernest Hemingway, The Next War

Things are falling apart–that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Backwardation, negative GOFO and the Gold Price

A great beginners guide from Jan Skoyles on how the gold market works….

Confused by talk of gold backwardation, the gold lease rate, GOFO and what it all means for gold prices? We provide a beginner’s guide…

The term ‘backwardation’ has suddenly popped up in the mainstream financial media and is being touted as the signal that the price of gold is on its way back up.

What does backwardation even mean?

It means that the spot price rose above the nearest future contract.

Last Friday Reuters reported that ‘Gold went into backwardation in comparison to the three-month futures contract in early January,’

And?

Well it doesn’t stop there, it’s no longer about the nearest future contract but this is likely to stretch out to longer-dated maturities. As Reuters explained this may be ‘cause for alarm’.

This dislocation between the spot and the futures price suggests that physical delivery is vastly outweighing supply.

As Reuters reports this has increased concerns that ‘in the market the change may not be a momentary blip and participants may have become overleveraged.’

If it happened in January why are they only just reporting it now?

This has been going on even longer than that, in April Professor Antal Fekete warned that ‘gold futures markets may have been flirting with backwardation for a year or so.’

When ‘officialdom’ realised this, he writes, then they ‘were forced to act.’ Hence why, on the 12th and 15th April, the gold price was taken down. Bernanke was concerned about a permanent state of gold backwardation.

However, the mainstream are only just picking up on this because GOFO is negative. The appearance of a negative GOFO rate confirms what backwardation has suggested for some time – that there is a severe physical shortage.

What is GOFO?

In its simplest terms the Gold Offered Forward Rate is a daily LBMA published rate used as the cost of leasing gold, when you use the gold as collateral in order to borrow dollars, it is the rate used for gold/US dollar swap transactions.

Many gold bugs associate negative GOFO with backwardation, when the spot price fetches a higher price than the nearest futures contract. Sandeep Jaitly writes ‘it seems there is unparalleled demand to exchange dollars for physical bullion- so much so that the availability of bullion to settle bullion obligations – whatever their nature is dwindling.’

For the gold bugs, this is when there is a shortage of physical gold, this physical gold is superior to paper gold in the futures markets.

According to Iza Kaminska, ‘objective’ gold analysts merely see the backwardation of gold and the negative GOFO are more likely to be a factor of changing money market interest rates or inflation rates.

Why are they concerned about backwardation?

Because it means individuals want to get their hands on physical gold now, which it turns out isn’t so easy to arrange. Therefore, ‘officialdom’ need to scare out any physical they can in order to meet demand elsewhere.

They hope that by pushing down the gold price as far as they possibly can, gold will appear unattractive.

Of course, the opposite has happened. In China, for one example they still cannot get enough gold through the exchanges and out for delivery quick enough.

The acceleration in backwardation alongside prolonged soaring gold borrowing costs suggests that the disconnect between paper and physical gold is about to get even greater.

Physical gold shortage?

As our very own Ned Naylor Leyland reported earlier last week, this widening of the backwardation ‘indicates that the physical market has tightened up substantially.’

As we have written in the past, much of the gold market is highly leveraged, Naylor-Leyland explains that ‘what we are seeing now is that the absolutely inevitable ‘run’ on the 100:1 leveraged banking system is truly underway.’

Is it bad news that GOFO is negative?

When it is negative it means you will receive more interest when you lease your gold than your dollars, i.e. there is more interest to borrow gold and use dollars as collateral. Gold is perceived as having more value as something to hold, than dollars do.

Early this month, the GOFO rate was negative for up to three months, as you will have read repeatedly, the last time this happened was in November 2008.

What does it mean for gold if it’s negative?

Primarily it means that gold leased out today is worth more than the gold delivered at the end of the three months.

As we explained above, the negative GOFO rate means someone wants to get their hands on gold. The further ahead the negative GOFO rate reaches the larger the shortage of gold in the delivery that needs to be made.

There is speculation that the elevated high levels of demand we’re seeing in Asia has emptied the London Market.

Many also see the negative GOFO rate as a sign that the bottom of gold will soon be a thing of the past, with soaring gold prices to come

Not for those who own physical gold

Negative GOFO and gold futures in backwardation is finally evidence that there is a distinct flight into physical gold.

According to SocGen, the biggest gold backwardation since the start of the millennium prompted a ‘corrective rally’ but the general sentiment on gold is bearish as there is no physical gold supply shortage to worry about.

SocGen’s Robin Bhar attributes the cause of backwardation to a possible range of factors from an overcommitted bullion bank to miners’ hedging strategies.

I think we can safely say that GOFO and long term backwardation suggest there may be an error in their analysis.

What does this mean for the gold price?

The November 2008 negative GOFO rate happened around the same time a bottom in gold came to an end. What proceeded was a doubling of the gold price and it reaching nearly $2,000.

Once again we see negative GOFO just as gold returns from a price collapse. This time it has remained negative for longer, suggesting that the problem with deliverable bullion is this time even greater.

What will this mean going forward?

Given the negative GOFO rate shows stress on the London market when it comes to deliverable bullion, and warehouse stocks in the COMEX futures markets continue to decline, we suspect what lays ahead is a perfect storm for the gold price.

We believe it shows there is a distinct lack of confidence in the paper money system. No longer to investors want to hold paper promises (whether for gold or currencies) instead they prefer to hold real, physical gold and silver.

So, rather than worry about a gold price that is yet to return to $1,920, instead see this as a warning signal that the relationship between spot and future price, physical and paper is growing tired. Hold onto physical gold and ignore the price until it matters.

The Birth of a Police State: UK Police to be Granted Sweeping New Powers

The Police State is here to stay unless the British public wake up, demand their rights back and an end to this tyrannical behaviour. It may take a revolution but with the impending financial crisis, this reduction in rights is a major concern when we all start to take to the streets.

Scriptonite Daily

PS4 

The UK Government is about to pass legislation which will make any behaviour perceived to potentially ‘cause nuisance or annoyance’ a criminal offence. The Anti-Social Behaviour, Crime and Policing Bill also grants local authorities, police and even private security firms sweeping powers to bar citizens from assembling lawfully in public spaces.  Those who refuse orders under the new rules will face arrest, fines and even prison time.

The Ever Increasing Powers

 PS5

Since the Crime and Disorder Act 1998, which introduced Anti-Social Behaviour Orders (ASBOs) the government has invented and legislated for a litany of such orders covering everything from dog poo to drug addiction, including but not limited to: Control Orders; Terrorism Prevention and Investigation Measures Orders; Intervention Orders; Crack House Closure Orders; Premise Closure Orders; Brothel Closure Orders; Gang Related Violence Injunctions; Designated Public Place Orders; Special…

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JP Morgan leaves Physical Commodity Markets

JP Morgan is waiving goodbye to physical commodity trading and at quite a fortuitous time with physical gold holdings at record lows. The recent Congress meeting into whether banks should be in the warehousing business, may have also prompted their decision. I postulate that the banksters are getting out before the fraud is unveiled, when gold contracts are unable to be settled with physical delivery, then we’ll have fireworks when 100 people have claims to 1 bar.

New York, July 26, 2013 – JPMorgan Chase & Co. (NYSE: JPM) announced today that it has concluded an internal review and is pursuing strategic alternatives for its physical commodities business, including its remaining holdings of commodities assets and its physical trading operations.

To maximize value, the firm will explore a full range of options over time including, but not limited to: a sale, spin off or strategic partnership of its physical commodities business. During the process, the firm will continue to run its physical commodities business as a going concern and fully support ongoing client activities.

J.P. Morgan has built a leading commodities franchise in recent years, achieving a top-ranked revenue position. The business has been consistently named as a top client business in Greenwich Associates’ annual client surveys and was recently named Derivatives House of the Year by Energy Risk magazine.

Following the internal review, J.P. Morgan has also reaffirmed that it will remain fully committed to its traditional banking activities in the commodity markets, including financial derivatives and the vaulting and trading of precious metals. The firm will continue to make markets, provide liquidity and offer advice to global companies and institutions that have, for years, relied on J.P. Morgan’s global risk management expertise.

I feel warm inside knowing that JPM are returning back to traditional banking activities such as shadow banking, laundering drug money, embezzling, funding wars, mass fraud through derivatives and futures, market manipulation and destroying the economy one day at a time.

The Great Stock Rotation

Much has been made of the inflows into US equity markets in the last few weeks with the heralding of The Great Rotation that will lift us to Dow 36,000 and beyond. The only problem with this rather wonderful meme-du-jour (being the only thing left in the asset-gatherer’s armor since bottom-up and top-down fundamentals are nothing but collapsing near-term, hockey-stick mid-term flights of fantasy) is that, as BofAML notes, institutional investors have never (that’s a long time) sold as much stock as they have in the last 4 weeks – as retail has been piling in.

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On a four-week average basis, net sales by the Institutional clients group are the largest in our data history (since 2008). Private clients have been net buyers of US stocks on a four-week average basis since early June. Private clients’ net buying streak is currently their longest since late 2011.

So it would appear the ‘real’ great rotation is passing the hot-potato of liquidity-driven stocks from the ‘smart’ money to the ‘dumb’ money once again.

US And Russia Simultaneously Announce Intent To Arm Opposing Sides In Syria

My heart goes out to the Syrian people, the proxy war is on. 500 Al Qaeda prisoners escaped from Iraq just in time for when the US weapons arrive. I honestly can’t understand how the people of the US, EU and UK accept our governments backing of the supposed enemy. It is rank hypocrisy from all levels but I sense a change of opinion building slowly in these nations. I reiterate, my heart goes out to the innocent men, woman, children and families who are left picking up the pieces of a very broken nation. A pawn in a global game for energy, banking and global power but there is hope.

July the 23rd, market fixing and JP Morgan

It comes as no surprise that JP Morgan, after getting into the commodities and warehousing racket, amongst many many others is being accused of being involved in outright fraud, again! I’ll let Bloomberg explain…

When the Federal Reserve gave JPMorgan (JPM) Chase & Co. approval in 2005 for hands-on involvement in commodity markets, it prohibited the bank from expanding into the storage business because of the risk. Five years later, JPMorgan bought one of the world’s biggest metal warehouse companies.

While the Fed has never explained why it let that happen, the central bank announced July 19 that it’s reviewing a 2003 precedent that let deposit-taking banks trade physical commodities. Reversing that policy would mark the Fed’s biggest ejection of banks from a market since Congress lifted the Depression-era law against them running securities firms in 1999.

“The Federal Reserve regularly monitors the commodity activities of supervised firms and is reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies,” said Barbara Hagenbaugh, a Fed spokeswoman. She declined to elaborate.

“When Wall Street banks control the supply of both commodities and financial products, there’s a potential for anti-competitive behavior and manipulation,” Brown said in an e-mailed statement. Goldman Sachs, Morgan Stanley and JPMorgan are the biggest Wall Street players in physical commodities.

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Of course, when one is a monopoly the revenues follow easily and flow like champers at a bankers part-ay. The trick, of course, is to keep Congress very much unaware of said monopoly and let the fraud continue.

The 10 largest banks generated about $6 billion in revenue from commodities, including dealings in physical materials as well as related financial products, according to a Feb. 15 report from analytics company Coalition. Goldman Sachs ranked No. 1, followed by JPMorgan.

While banks generally don’t specify their earnings from physical materials, Goldman Sachs wrote in a quarterly financial report that it held $7.7 billion of commodities at fair value as of March 31. Morgan Stanley had $6.7 billion.

On June 27, four Democratic members of Congress wrote a letter asking Fed Chairman Ben S. Bernanke, among other things, how Fed examiners would account for possible bank runs caused by a bank-owned tanker spilling oil, and how the Fed would resolve a systemically important financial institution’s commodities activities if it were to collapse.

It’s good to hear that these questions are finally being asked by the US Congress but I have a question. Why has it taken so long for the illustrious leaders of America to figure out that a company, such as JPM or Goldman Sachs, have used monopolistic behaviour to control the majority of commodity markets, control the price and make vast sums of money from driving prices up? This effects billions of people and is not a free market capitalist system, it is so far from it. So why has it taken so long? It wouldn’t have anything to do with the banks being massive contributors to all political parties and employing armies of lobbyists now would it? I’m getting too cynical in my old age. Just a quick point, the Fed works purely to benefit America’s banks and to provide them with whatever top-line amenities they need and are confident they can pass by under the noses of dumb congressmen paid off and as guilty in said corruption.

Now, “it is virtually impossible to glean even a broad overall picture of Goldman Sachs’s, Morgan Stanley’s, or JPMorgan’s physical commodities and energy activities from their public filings with the Securities and Exchange Commission and federal bank regulators,” Saule T. Omarova, a University of North Carolina-Chapel Hill law professor, wrote in a November 2012 academic paper, “Merchants of Wall Street: Banking, Commerce and Commodities.”

The added complexity makes the financial system less stable and more difficult to supervise, she said in an interview.

“It stretches regulatory capacity beyond its limits,” said Omarova, who is slated to be a witness at the Senate hearing. “No regulator in the financial world can realistically, effectively manage all the risks of an enterprise of financial activities, but also the marketing of gas, oil, electricity and metals. How can one banking regulator develop the expertise to know what’s going on?”

Now here is the clincher…..

In February 2010, Goldman Sachs bought Romulus, Michigan-based Metro International Trade Services LLC, which as of July 11 operates 34 out of 39 storage facilities licensed by the London Metal Exchange in the Detroit area, according to LME data. Since then, aluminum stockpiles in Detroit-area warehouses surged 66 percent and now account for 80 percent of U.S. aluminum inventory monitored by the LME and 27 percent of total LME aluminum stockpiles, exchange data from July 18 show.

Traders employed by the bank can steer metal owned by others into Metro facilities, creating a stockpile, said Robert Bernstein, an attorney with Eaton & Van Winkle LLC in New York. He represents consumers who have complained to the LME about what they call artificial shortages of the metal.

“The warehouse companies, which store both LME and non-LME metals, do not own metal in their facilities, but merely store it on behalf of the ultimate owners,” said DuVally, the Goldman Sachs spokesman. “In fact, LME warehouses are actually prohibited from trading all LME products.”

Goldman Sachs, doing gods work and humanity a favor and not like when it was shorting RMBS, when Goldman was merely “making markets.” In the meantime, aluminum prices.

Buyers have to pay premiums over the LME benchmark prices even with a glut of aluminum being produced. Premiums in the U.S. surged to a record 12 cents to 13 cents a pound in June, almost doubling from 6.5 cents in summer 2010, according to the most recent data available from Austin, Texas-based researcher Harbor Intelligence. Warehouses are creating logjams, said Chris Thorne, a Beer Institute spokesman.

In conclusion and just like the repeal of Glass Steagall allowed banks to mix deposit collecting and risk-taking divisions, so did the Fed’s landmark 2003 decision which allowed banks to intermingle financial and physical commodities. While the US government and the public seem largely ignorant and without a care that they end up overpaying billions more to Goldman’s and JPM’s employees which in turn goes on more coke and hookers. Bare in mind that one country where commodities are exceptionally fragmented in their use as both a financial and physical commodity is China. Their growth and figures are questionable but messing with China is a dangerous game to play. Goldman, JPM and BlackRock are brave and have a plan, they have amassed 80% of the world’s copper “on behalf of investors” for non-profit reasons. Looking forward to this was one playing out with all of China’s gold.