US Financials As An Addiction System
by Jim Willie CB June 9, 2004
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The financial nerve centers of the United States, its capital flows, leveraged engineering, risk management, widespread perception, retail promotion, institutional relationships, and public participation, these have degraded to an incredible extent since 1971, the time of the Bretton Woods Divorce. When false money is permitted to behave as real, the consequence has tended to expand both debt and gambling, which results in more frequent booms and busts. Loose claims abound that the largest economy in the world resembles a bubble economy whose engines are powered by inflation and debt, and whose debt dependence has grown out of control. One can make a compelling argument that various elements of the US Economy display clear evidence of an addiction manifestation. Such is too large a claim to defend here, so focus will be given to the financial side of the claim.
An addiction system has been established, one which has been fortified especially over the last ten years. Public participation with mutual funds and pension plans, enthusiastic nationwide acceptance of mortgages and refinances, combined with grand acceleration of professional bond speculation has taken the system to a new level. The pathogenesis is clear to the trained clinical observer. Involvement has yielded to pre-occupation and dependence. The liberal-minded youth from the protest years in the 1970 decade, who craved freedom of lifestyle (sex, drugs, rock & roll) has come of age. The "Me Generation" is in charge of many institutions. The US Financial system will be examined within the context of drug addiction, much like a court appointed psychological evaluator would put Uncle Sam under serious scrutiny for his excessive drinking, irresponsible behavior, compromised physical health, collusion with key friends, deviation from truth, and promotion of himself to others.
First, an argument will be presented to demonstrate the parallels of our financial structures to the gambling casino. Several key addiction components will be analyzed. Their betting vehicles can be easily identified. The breadth of comparison with intoxicating mood altering drugs is somewhat disconcerting. The punch bowl metaphor is commonly used, as is the spiking of that bowl by the Fed. Our banking institutions provide ample supplies of easy money, available in credit, taken as debt. The system depends upon liberal credit terms. Lately, concern abounds as to whether withdrawal will be severe, since the easy money drug must be allowed to wear off. Or will it at all ?!? Accommodation might become a permanent fixture to the financial landscape. Debt and available credit are omnipresent in our economy and in our society. It is my opinion that new innovative credit devices will be offered in coming months, such as reverse mortgages. Progression in the debt addiction continues on many levels.
The gamble represents the dark side of debt abuse. Not all gambles are funded on credit, but most debt represents some form of gamble, directly or implicitly. Margin debt is routinely applied in the stock market. It peaked in March 2000 and then again at a higher level in July 2003 at over $25 billion. An explosion of credit has been directed toward bond speculation and mortgages, in excess of $1 trillion, since the Federal Reserve enacted eleven interest rates cuts. Speculation is rampant in commodity futures markets, especially with bonds, mortgages, and Treasury yield spreads. While small margins are maintained, the remainder is leveraged to control large positions. Corporate debt gets in on the act as well, as they gamble on short-term versus long-term rates with interest rate swaps. A curve ball within economic data is the stubborn trade gap, stubbornly expanded despite a lower USDollar. Consumer spending on foreign made products is largely responsible for the explosion in household debt. Of course, final demand spending can never produce a sustained recovery. A Bavarian fairy tale highlights the absurdity behind the belief that consumption can spearhead a recovery. The character Münchausen attempts to pull himself out of a swamp by his own hair. Not only is the attempt by consumers futile, it is powered by debt. Borrowed blood in the hand pulls the hair!
Second, in an essay to be delivered in the coming weeks, several addiction criteria will be reviewed as justification. Parallels will be touched upon in energy consumption, fatty foods, and sexuality. It is one thing to accuse addiction; it is another to follow through on an indictment and prove the case. Hazelden is recognized as a premier addiction treatment center in Minnesota. Gratitude is expressed for their material used in this essay on addiction dynamics. Its research is cutting edge, such as revelations of the brain chemistry link between alcoholism and heroin addiction. Their diagnosis guidelines set the standard for clinical work. Numerous criteria will be weighed on debt addiction from a clinical viewpoint, in much the same way inpatient admission is examined. The pathogenesis conclusion will be discussed.
THE DEBT ADDICTION SYSTEM
The critical drug is debt, via credit supplied and encouraged by the Federal Reserve. The critical activity is gambling, from a smorgasbord menu of choices. The Fed has abused its chartered responsibility, which is to suppress inflation and promote full employment. By means of economic freedoms, it has left the credit barn door open for lending agencies across our society. In recent years, debt has been extended by institutions outside the Fed's direct control, such as Fanny Mae and the mortgage agencies, credit card suppliers, and bank intermediaries. New home builders have independent sources, often from their profits and corporate bonds. Car makers, large appliance dealers, consumer electronic vendors, they all have accelerated the debt creation process, often with 0% deals. Brokerage accounts extend credit to 50% margins. Real estate mortgage brokers routinely lend at 10-20% margin (down payment), but recently with all the easy credit terms, 5% is not unusual. In a sense, a home mortgage represents a delivered "housing/bond" speculative futures contract, whose value reacts to both property appreciation and changing mortgage rates. It has an initial margin requirement, but no maintenance requirement, since it is not typically callable by the bank. Overburdened households are led to extend debt further. Vendors who have oversold consumer goods are offering ridiculous credit terms at zero percent. An explosion of debt has resulted which may not be contained. The US Economy is intoxicated with debt, as almost 80% of its GDP is now devoted to debt service alone. Debt runs through our every vein.
The monetary drug dealer is the Fed Chairman Greenspan himself. He has become a czar to preside in a questionable manner over the financial sector, its markets, and its lending institutions. Kurt Richebächer has endorsed my label of monetary drug dealer in his work. The Fed Chairman's chartered role was in no way intended to be so prominent. Few question his authority, his integrity, or his competence. In fact, few seem to even understand the cryptic language he speaks. He chairs the board of Fed Governors in a secretive bizarre mysterious enclave which grips far too much power, justifies their actions far too little to Congress, and has damaged our body financial perhaps beyond repair. The debt-dependent crowd craves continued supply of easy money. Bank intermediaries deserve much of the blame. On college campuses, credit cards are issued like library cards. The result after many years is that 23% of all graduates have already declared bankruptcy. This is a travesty and abuse of the system. Metaphors are replete in financial circles. Talk of supplying or removing "the punch bowl" is common, with little apparent regard for its addictive connotations and attendant risk. References to spiking the bowl from which to drink are frequent in editorials. Since its removal is rationally judged to be so potentially destructive, when push comes to shove, the drug dealer will continue to dispense. What used to be necessary grease to facilitate transactions on a temporary basis, and new business creation on a near-term basis, has turned into a bottomless well to enable unchecked demand, and lately to sustain consumption gone amok.
The great enablers of credit are the Asian Central Banks who consistently intervene on behalf of a USDollar rescue, often overnight. Asians generously share their massive trade surpluses in a grand recycling effort. They even sterilize such recycle of funds, so as not to disturb the currency exchange rate and inhibit that export trade. They have operated under the guise of legitimate currency management in their respective lands. Their enabling has kept the cost of capital low, and the price of imported products also low. However, their actions point to a sinister collusion with the Federal Reserve itself. Their monetization efforts have the earmarks of "contract hits" while Americans sleep. With currency stabilization or export trade protection as their stated motives, they have undermined their own well-being. Just as a wife who continues to mix her drunk husband a martini, Asian Central Bankers have weakened their partner, us. They have entered an unholy alliance with the Fed, to the mutual harm of each. The last three years have seen a 30 to 40% increase in debt burden within the US Economy, in large part from household debt. The USGovt continues to deficit spend, financed almost half by the export powerhouses in Asia, who feed that credit. Asians supply about 35% of mortgage agency debt, critical to the housing boom. Unwittingly, our central banking partners have set into motion competing currency wars. Smaller nations have suffered casualties. See Argentina, South Africa, and in past years Thailand. All fiat currency is undermined, debauched, and endangered. Reluctant participants to a knowingly destructive game, the Europeans are the last onboard. They remember the Weimar story all too well. A previous century offered yet another example, where John Law's South Sea investment scheme laid waste to the French financial system. Our arrogance and desire to control nature leads to disaster after disaster.
The most prominent gambling tables are stocks and bonds in the financial markets. Step past these to the back rooms, and one will find options, futures, swaps, spreads, and all manner of exotic gambling vehicles. These games make craps, blackjack, and roulette seem quite tame and boring. New games are being invented every year. Why just last week, a Fanny Mae balance sheet management tool was revealed to me, in the form of a swaption, which is an interest rate swap option. Short-term trades do not qualify as investment in a true sense, but rather gambles. The language even mimics the gambling vernacular, with hedged bets, handicapping on Fed rate decisions, putting money on the table during earnings season, positioning before economic news release, over-unders on jobs reports, and so on. The pyramid of the MGM Grand in Las Vegas has a parallel in the giant $100 trillion derivative pyramid which rests inverted and balanced atop our national financial system. Its shadow casts a dreadful specter over both the markets and the economy. As the financial sector rises in weight as a component to the overall economy, the real economy has diminished. Like a cancer, the credit business and speculative trade with their many financial services have encroached upon the real economy. The real estate boom is powered within this bond machinery. It offers a vital link between the bond market and the Main Street shopping markets. That real portion of the economy actually designs things, builds things, repairs things, and maintains things. A case in point is General Motors, whose profits come from mortgage origination and car loans more than from building cars.
Loan sharks have arrived on the scene, disguised as subprime lenders such as Ditech. By lending 125% of home equity, they set a trap for homeowners which can easily foreclose that home. Even debt consolidation loans can become a trap. Unsecuritized debt in the form of credit cards has been transferred to home equity loans, only to put the home at risk if the coalesced debt is defaulted. In search of lower borrowing costs, countless homes have been put in jeopardy, at risk of foreclosure by banks. These examples of behavior are true to form in a debt addiction system, in a manner which resembles putting family heirloom jewelry in hock at the nearby pawn shop. Bond speculation has become the principal wealth production engine to the economy, whose illicit basis is inflation and whose source of capital comes from the monetary drug dealer and its cooperative partners. The lead role is ultimately the Fed itself, directed by the maestro debt czar. The Fed reacted to the stock market collapse of 2000 with unprecedented rate cuts. Instead of devoting the stimulus subsidies to capital equipment investment, like an incorrigible drunken sailor, the entire nation has blown it on new and bigger cars, new and bigger houses, repeated abuse of stock margin debt, and a massive amount of fresh gambles in the bond speculation casino. My favorite metaphor for this repeated error is expressed as "the dog returned to its own vomit."
Promotion is essential. The street drug pushers are the brokerage houses, whose critical printed advertisement revenue with the press & media assures a favorable message, much like leaflets passed out by the pushers. It is vital both to attract a stream of customers and to keep the current customer base hooked in. Brokerage houses like E-Trade, Ameritrade, and Fidelity often extend offers for 10-50 free trades or $50-100 credits, just as drug pushers hand out free samples. Credit card banks offer 0% balance transfers, along with teaser reduced preliminary rates. Seldom is an objective article or editorial splashed in the Wall Street Journal, Barrons, or the New York Times which casts suspicious light on the indebted system or its enormous dependence upon debt. They go so far as to bash the gold crowd on a regular basis, such as with an April editorial by the Financial Times of London. The story cited large gold sales by European member banks, but no mention that Japan stood on the purchase end. This serves to keep the anti-paper crowd at bay, led by stocks and bonds and currency itself. The Ruling Elite spew constant drivel that stocks are not overvalued, stocks thrive over the long term, now is the right time to buy stocks, mortgage bonds are still a secure investment. Greenspan even promoted adjustable mortgages in April, so that risk can be transferred from banks to households. The drug dealer has his favorite associates. Vast distributions of stock are orchestrated in coordinated fashion. The houses are their agents, and the media provides their forum. The two groups have a suspicious, collusive relationship. They take their cue from the Manhattan Made Men. Journalism has sacrificed objectivity, as an eye is kept on ad revenue.
One would be remiss not to report a final multi-faceted marketing effect. A revolution is underway in the advertisement arena. A clear phenomenon can be easily identified in recent years. Televised sporting events have been sponsored by promoters of beer, trucks, consumer electronics, and low quality fast food, with used props often more beautiful women. The promotion is often tied to further debt extension. We have a unique connection among alcohol, sex, power, retail consumption, debt financing, and fat intake. This climax connection is lost on casual observers, at the cost of lost innocence. Ironically, sexual appeal evaporates with drunkenness, crippled indebtedness, obesity, machismo, as well as being glued to the tube.
The tell-tale physical symptoms of addiction, delirium tremens come as stock & bond bubbles and busts. The ravaging effects on the body financial arrive without fail, as it becomes more subject to the naturally growing ebb & flow cycles of credit expansion and withdrawal. Excess invites a healthy cleansing to naturally correct the excess. That process has been interfered with by official cabinet, agency, and regulatory actions, including central banks. Volatility is another unmistakable trait which has increased with each passing decade. The VIX and VXN are more followed than in decades past, measures of implied option volatility, early warning contra-indication signals of tremors. Little is reported on the disturbing decrease in such indexes, which has occurred at the same time as wider public participation and bond speculation volume. The casualties in recent years have been the disappearance of individual pensions, paltry earnings from preserved retirement plans, absent personal saving habits, and lost life savings. This is not normal to a stable system, but rather a characteristic known to a "crash & burn" financial society much like the life of an alcoholic or drug addict. Binge benders are followed by unconsciousness, hitting bottom, successful withdrawal, then hopefully detox treatment.
No addiction system exists without a foundation of denial, based here upon deceptive USGovt statistical reporting and defense of overvaluation by conflicted experts. The denial has over time extended to public belief that peak wealth will be restored. Extreme examples are basic reluctance and refusal to even open account monthly statements, common in 2001 and 2002, but not so much in 2003 and 2004. High stock price-earnings ratios were justified in the past peak from new economy miracles. In this peak, low bond yields are justified from magnificent flexibility. Few seem to notice the parallels in bubble dynamics as they would with Uncle Sam stumbling in his step, occasionally falling to break bones, slurring his words, betraying family trust, and shirking responsibilities. The denial has permeated into the distorted measurement of inflation, the gross domestic product, and jobs. Each is critical in the explanation of a healthy recovery, thus the target of outrageous lies. Quite the complicated topic, inflation is improperly defined and measured with convenient overlooking of key components. GDP is absurdly lifted by queer hedonic adjustments to account for greater computer and transmission speeds, as well as sharply distorted higher by understating inflation. Jobs reports are loaded with estimates from obsolete models which have little bearing on outsource trends. Most new jobs created are domestic part-time and foreign outsourced. Denial is not as simple as an isolated lie. It develops and mushrooms into an entire system, with layer upon layer of departure from the truth, fortified vigorously by defense of untruth. It starts with the basic lie, offers excuses, extends to comparisons, justifies with minimization, and culminates in a rationalization of the sick entirety. As with alcoholism and drug addiction, a vast system is required to maintain and keep that system in place. A lie requires three lies to support it, as the wise adage goes. The same is true for a denial system, as a false premise requires three illegitimate pillars of support.
The compromise required to live day after day within an addiction system, justified within a troubled conscience, often involves massive ethical violations. Denial is a "system of maintained lies" which almost always extends to dishonesty in significant relationships. Pathways of addiction are littered with secret drinking buddies, extremely odd supplier friends, telephone bookies, flirtatious dalliances, as well as adulterous affair partners and betrayed promises. In the financial world, the sanctioned marriage in the USGovt house is embodied between the executive branch (Dept of Treasury cabinet) and congressional branch (Federal Reserve outsourced partner). Ethical violations within the debt addiction framework come in the form of illicit affairs between either the Fed or Treasury and the large financial institutions. The adulterous partners extend beyond the gold cartel, led by money center banks JPMorgan, Goldman Sachs, Bank of America, and Morgan Stanley. Cozy gold leasing and bond carry trade speculation make for a center spread for the master and his concubines, critical in support of the USDollar. Other partners exist for certain, taken from any list of Wall Street investment bankers and other large banks. The secretive relationships are denied, just like adultery in a marriage. They involve clandestine meetings, as in affairs. Many actions actually take place overnight, under the cover of darkness in international FOREX and bond markets. As in affairs, they involve key gifts such as sweet deals on gold bullion leases, tipoffs of Fed policy directions, and hints of foreign central bank interventions.
In the last few years, the Working Group for Financial Markets (aka the Plunge Protection Team) has solidified the adulterous harem into a veritable syndicate. PPT actions have called into question the free market integrity of the stock market, meaning the house has rigged the game and has interfered with equilibrium forces. In addition, suspicious secret partnerships appear to have been forged. Rumor is rampant that the fatally overextended JPMorgan has been taken into receivership by the Fed after derivative book meltdown, in a manner resembling a "kept woman." Its partner Sumitomo was selected as "midwife" by the Bank of Japan, consummated after a $1.4 billion cash "dowry" was delivered in the summer of 2003. Movement of the recklessly bloated Fanny Mae to Dept of Treasury oversight smacks of a second wayward harlot taken in as a "kept woman" after another hedgebook blowup.
Not to be outdone with ethics violations, corporate fraud is astonishing in recent years. Enron, Adelphia, WorldCom, Citigroup, Tyco, Imclone, and Global Crossing lead the list of executive theft and fraud, notwithstanding Martha Stewart and her relatively minor transgression. Dishonesty has become institutionalized, a probable consequence of illegitimate money. Brokers such as Bocanevic and Quattrone suffered criminal convictions, while Grubman still enjoys access to the casino (for now). Mutual funds have not been spared either, as names like Janus, Putnam, and Strong have been charged for improper collusion with hedge funds and overnight trades. It is estimated that up to 50% of all corporate debt is lodged inside Special Purpose Entities held offshore, such as in Caribbean banks, apart from declared balance sheets. This is tantamount to lying to the family about the checking & savings accounts. On the one hand, the NYSE censured specialist firms for violations like front running public trades. On the other hand, NYSE chairman Grasso faces charges of improper disclosure and a severance package in excess of what Not For Profit organizations warrant. The entire stock market has been exposed as a den of thieves next to a steamy brothel. Much like gamblers suffering steep losses, investors return to the same casino in search of redemption, only to find further losses.
Actual teaching of the public, indoctrination on debt adoption to be certain, depends upon propaganda disseminated by the Fed Chairman and Governors. It is echoed with minimal dissent by the financial pundits. High school kids are not taught about alcohol, liver disease, nor the progressive grip of addiction. Our children are indeed taught to invest at a young age. Our college students are improperly taught about a debt-based economy, and a debt-backed currency. Our adults are treated with more sinister and corrupt motives, and are taught to act like sheep. The Fed fanned fears of deflation in order to justify continuation of relaxed monetary policy even after price inflation had arrived, even though prevalent depressed prices among finished products were a lagged effect from decades of extraordinary inflation. The indoctrination has included a raft of twisted definitions addressed in a previous weekly essay "Orwellian Financial Newspeak." Definition and distortion of inflation lies at the center of the false teaching. We are constantly bombarded with absurd assurances that inflation is tame despite ample evidence to the contrary. It could actually be three times what the CPI indicates. We are now given empty assurances that a huge trade gap is a harmless globalization phenomenon, and that huge foreign daily credit input is a sign of healthy flexibility. My label for the Fed is the "Dept of Inflation." Others tag them with the name "Ministry of Propaganda." The dual roles are symbiotic; one exists toward the benefit of the other. Minimize the risk, and extend the largesse. The Fed is both, and many pundits are their lackeys, as our government and institutional control of information has made great strides toward the Total State described by George Orwell.
Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 23 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com.
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