Chinese Banks Push Back On Shadow Banking Regulations - Expose "Catch-22" For Financial System

In November, we discussed how the post-Party Congress measures to deleverage and crackdown on the worst abuses in China’s credit bubble took an important step forward with the announcement of a new era of regulation for China’s $15 trillion shadow banking and asset management industry. See "A New Era In Chinese Regulation Means Turmoil For $15 Trillion In China"s Shadows". In particular, the authorities turned their sights on wealth management products (WMPs).

On the way out are “guaranteed returns” and “capital pools” which had turned the $4 trillion sector into a leveraged Ponzi scheme. We joked that in a “radical and shocking” departure from the norm, financial institutions would have to offer yields based on the risk and returns of the underlying assets. Paying out guaranteed returns with new funds from depositors would no longer be allowed.

Commentators at the time described it as “a new era of regulation” which would lead to tighter risk control and slower but higher quality growth in the Chinese economy, blah, blah. However, our interest was piqued by the implementation date for the new rules. This is slated for the end of June 2019, providing Chinese banks and the entire shadow banking system a grade period to get their house in order. As we suggested.

We can only guess the delay reflects the enormity of the problems discovered by China’s regulators when they finally looked under the hood.

We didn’t have to wait long for confirmation that our cynicism was justified. It turns out that there was a “closed-door meeting” last week during which Chinese banks laid out the systemic risk if the regulators pursue their reform plan. According to Reuters.

Ten Chinese banks have raised strong objections to the central bank’s recent move to tighten rules on the asset management sector, saying it may cause a rush of redemptions among other risks, three sources with knowledge of the matter told Reuters.

Senior executives from the joint-stock banks said during a closed-door meeting in Shanghai last week that the rules would have a big impact on financial markets and could even “trigger systemic financial risks”, according to the sources, who declined to be identified due to the sensitivity of the matter. The executives also said the new rules on removing implicit guarantees for wealth management products (WMPs) could spark liquidity risks and increase market volatility, the sources said late on Thursday.

Unlike the Big Four state-owned banks, the smaller banks have limited scope to increase lending in the absence of WMP funding...and that"s ignoring the "black holes" hidden beneath the surface.

In short, the entire Chinese financial system, from depositors to banks to asset management companies, has become addicted to the WPM model. Reforming it will only advance the crystallization of losses and bankruptcies, never mind largescale protests from investors who have always assumed that, somehow, the banks would make good on their promises. On a small scale, the clearest example of the near-impossibility of reforming WMPs without threatening China’s financial system, was the example of Foresea Life Insurance in May this year. This report from Fortune captured Ponzi nature and risk of civil unrest.

A Chinese insurer has warned the country’s regulators of defaults in the billions and possible unrest unless it is allowed to launch new products again. Foresea Life Insurance asked the China Insurance Regulatory Commission (CIRC) in a letter dated Apr. 28 to lift its ban, “in order to avoid inciting mass incidents by clients and localized and systemic risks, producing greater damage to the industry,” reports the Financial Times. It further warned that, with an expected redemption of $8.7 billion this year, the insurer might not be able to meet payouts without selling new products.

The Bloomberg article portrays the feedback they gave to regulators on the new regime as “a rare protest by Chinese bankers as pressure mounts amid a government campaign to de-leverage and de-risk the country’s massive and increasingly complex financial system”. However, it’s much more than that, it’s essentially a plea for the survival on the part of smaller banks. Without large pools of deposits, smaller banks have relied on WMP and other shadow banking conduits for funding. In the absence of guaranteed returns, leverage and fraud, that might not have been a problem.

The new rules will pose a direct challenge to a business model that small- and mid-tier banks have been relying on to drive asset expansion and profit growth, bankers told Reuters earlier. “Every time when the regulators announce tighter regulations it would almost always benefit the large state banks and hurt the smaller ones, because they (the latter) are taking much bigger risks,” said a senior executive at one of the country’s big four state-controlled lenders.

The joint-stock banks, which are unable to compete against large state banks for public deposits, have depended on selling WMPs with implicit guarantee of fixed returns to attract retail funds. In turn, they invest the money they manage into stocks, bonds and non-standard debt assets to generate profit. Bank executives said at the meeting the 28.38 trillion yuan of banks’ WMPs, part of the so-called shadow banking sector, have allowed them to bypass regulatory restrictions on credit expansion and capital constraints.

The problem for Xi Jinping and his cronies is that they left the situation to fester for way too long before attempting to intervene. In an effort to dissuade the authorities, here is Reuters on more warnings from the threatened banks.

If the current draft of the rules takes effect, banks will be forced to offload assets beforehand, including selling bonds, stocks and other liquid assets at a discount and asking clients to repay loans before time, the sources said. “No matter which solution we choose, it will hit financial markets,” they added.

The banks also said rules on strictly limiting bank WMP investments in non-standard debt assets and private equities would reduce their support for the real economy and increase financing costs for companies, the sources said. They also suggested the central bank remove certain rules and extend the transition period for the new rules - currently up to June 2019 - to three years to smooth the impact, the sources said.

…which basically amounts to a “Catch-22” situation for China’s financial system.

Meanwhile, it’s worth highlighting a (very) recent example of fraud in the Chinese banking system which encompassed the WMP sector. Last Friday, the South China Morning Post (SCMP) reported on the 722 million yuan ($109 million) fine – the industry’s biggest penalty - served on Guangfa Bank, the largest bank in Guangzhou city. The bank covered up the default of two bonds issued by phone maker, Cosun Group, which had ben sold on an Ant Financial Holdings’ WMP platform. As the SCMP explains.

Ant Financial and 10 other banks sought compensation for investors from Zheshang Property and Casualty Insurance, which had provided insurance coverage on the debt, only to discover that the insurer had been issued fake letters of guarantee by Guangfa’s branch in Huizhou city. The fraudulent documents were created using counterfeit corporate seals made by branch staff. The case involved as much as 12 billion yuan, as the bank tried to channel money to cover its mounting bad loans and operational losses.

“Guangfa did everything that regulators hate the most,” said Chen Shujin, chief financial analyst at Huatai Securities. “They gave an under-the-table guarantee, and made illegal interbank investments to cover up a non-performing loan.”

The epidemic of fraud across China’s financial system has been obvious for years. The Catch-22 situation faced by the Chinese authorities boils down to a timing preference. With Xi’s position cemented for the next five years, the authorities can bring on the “Minsky moment” adjustment, knowing that the economy can recover by 2022. Or they can postpone it, leading to a truly catastrophic collapse down the road.
 

 

 

“Russia Did It” and Other Crimes

Posted with permission and written by Rory Hall, The Daily Coin

 

 

 

 

 

We haven’t had a system of capitalism since the Federal Reserve and Woodrow Wilson hijacked the US Treasury and US economy in 1913. Our financial, monetary and economic system has morphed into fascism, corporatism or something more akin to communism/socialism. The way our economy operates today, in 2017 - it is certainly not capitalism.

 

Since 2008, the ruling and banking class haven’t even tried to hide the FACT that our system is about oligarchs and theft – anything but capitalism. The same could be said for Europe and most any Western “developed” nation. We have a program called Quantitative Easing, which is a fancy, made-up way of saying money printing and bond market manipulation. We also have, proven in a court of law, rigged FOREX markets – the global currency market. The LIBOR market (loan interest rate market) is also rigged as proven, once again in a court of law.

 

Look at Greece, Venezuela and Zimbabwe for the second time in less than 20 years. These three nations have seen their economies completely collapse. Greece has been propped up by the European Central Bank because if Greece’s economy were to rot away in the same way as Venezuela and Zimbabwe, then Germany and Deutsche Bundesbank, Germany’s central bank, would collapse. This would trigger a global economic collapse that would make 2008 look like a rounding error. This will not do.

 

Until what is explained above is understood, capitalism will continue to be made out to be the bad guy of our economic problems. As long as capitalism is made the enemy, the ruling and banking class criminals can and will continue their global crime sprees uncontested. One can not compare our current economic system to capitalism when it has almost nothing to do with capitalism. If one compares it to fascism, then the truth is more easily understood. Fascism is all about inequality – haves and have nots, with nothing in-between. What do we hear from the mainstream media over and over – the one thing they actually get right – is there is an attack on middle class incomes and middle class America. This is 100% correct. Until the middle class is completely wiped out, the oligarchs can not truly dictate what the masses will accept.

 

The US government does not represent the interests of the majority of the country’s citizens, but is instead ruled by those of the rich and powerful, a new study from Princeton and Northwestern Universities has concluded.

The report, entitled Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens, used extensive policy data collected from between the years of 1981 and 2002 to empirically determine the state of the US political system.

After sifting through nearly 1,800 US policies enacted in that period and comparing them to the expressed preferences of average Americans (50th percentile of income), affluent Americans (90th percentile) and large special interests groups, researchers concluded that the United States is dominated by its economic elite.
Source

If you combine this information with what is happening today with the “Russia did it” narrative then we see how these oligarchs push the mass of people to accept whatever lie they are pushing. If there is information that will prove Hillary is a treasonous criminal who should be investigated and then imprisoned for high crimes, well, simply ignore that information and never, ever present credible information on any mainstream media TV or radio. TV and radio are for entertainment, not real information.

 

No one who is promoting the Russiagate allegations is trying to debate William Binney’s allegations.

Instead, all of the news media are plastered with allegations of ‘Russia’s meddling in American democracy’.

William Binney is the mathematician and Russia-specialist, who quit the NSA in 2001 as its global Technical Director for geopolitical analysis, because of the lying about, and manipulations of, intelligence, that he saw — distortions of intelligence by the George W. Bush Administration — in order to ‘justify’ systematic, massive, and all-encompassing, Government snooping into all Americans’ private electronic communications. His, and some colleagues’, efforts to get the Inspector General of the US Department of Defense to investigate the matter, produced FBI raids into their homes, and seizures of their computers, so as to remove incriminating evidence they might have against higher-ups. According to Binney, NSA’s Director, Michael Hayden, had vetoed in August 2001 a far less intrusive and more effective system of signals-intelligence collection and analysis, which might have enabled the 9/11 attacks to be blocked — a more effective system that would have been less expensive, less intrusive, and not violated Americans’ Constitutional rights. Hayden went on to head the CIA, until the end of George W. Bush’s Presidency. Afterward, Hayden joined the Chertoff Group and other military-industrial-complex contractors of the US federal Government. There were no such rewards for any of the whistleblowers. Source

All of these issues are interconnected. If the economy were capitalistic, we would have real news on TV and radio. If we had real news on TV and radio, we would hear from people like William Binney and

reports like Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens would be reported on as well. This would lead directly to the arrest of people like Prescott Bush, George Bush, Sr, George Bush, Jr, the Clinton Crime Family and Obama. This would then lead to the arrest of every banking president and banking “C” level executive for the past 50+ years. This would then lead to the arrest of the “C” level executives of some of the largest corporations in the world.

 

It all begins, as we have stated time and again, with a corrupt currency. Once a currency becomes corrupt, the entire system is forced into a life of corruption and crime to cover up the lies the currency is telling. The currency we have in our wallets is a criminal, corrupt liar. Until we attack this criminal and correct the lies, we will continue to be slaves to the oligarchs.

 

 

 

Questions or comments about this article? Leave your thoughts HERE.

 

 

 

 

“Russia Did It” and Other Crimes

Posted with permission and written by Rory Hall, The Daily Coin

 

 

 

Check out these other articles by our contributors:

 

John Rubino - Gold vs. Bitcoin: The Pro-Gold Argument Takes Shape

Peter Diekmeyer - The 2.4 Trillion Hidden Fed Tax

Ed Steer - Gold and Silver Digest

Eric Sprott"s Weekly Wrap-Up

 

Why Socialism Is Dead

Authored by Gary North via GaryNorth.com,

Socialism was a specific philosophy of government ownership of the means of production.

The democratic welfare state was never a variety of socialism.

Marx, the most famous socialist, despised democracy. He despised all attempts at economic amelioration through legislation. He wanted a proletarian revolution. He preached -- the correct verb -- a religion of revolution. That was the thesis of my first book, Marx"s Religion of Revolution (1968). You can download it here.

He was silent about how the state would allocate resources under his system. He published nothing about the actual operations of the post-revolutionary society, socialism, and its final successor, communism. Late in his career, in his final major publication, little more than a pamphlet, he wrote this: "Between capitalist and communist society there lies the period of the revolutionary transformation of the one into the other. Corresponding to this is also a political transition period in which the state can be nothing but the revolutionary dictatorship of the proletariat." (Critique of the Gotha Program, Pt. IV, 1875) This was a purely political focus. He was silent throughout his career about how the state should or will or can run the economy.

He provided some famous slogans. He offered rhetoric about the inevitable triumph of the proletarian class. But he offered no guidelines for the leaders of the victorious proletarians.

Socialists in the nineteenth century were equally silent about how the state can allocate production so as to create the good society.

In the twentieth century, there was no major detailed theoretical treatise on the economics of socialism that went into detail about the actual operations of central planning agencies in a world where the state owned the means of production. There was no equivalent of Ludwig von Mises" Human Action or Murray Rothbard"s Man, Economy, and State or George Reisman"s Capitalism.

In retrospect, this seems incredible. Here was a movement that captured the Soviet Union and China. Yet there was not a single book, let alone a shelf of books, available to Lenin in 1917 and Mao in 1949 that could serve as a guide to the kind of economic organization that they should impose. There was no treatise that could serve as a blueprint for the socialist New World Order, whether non-revolutionary socialism or Marxist communism. Yet Marx said that his was scientific socialism -- not utopian socialism, like the works of his critics.

Utopia meant "nowhere." They were all utopian socialists, including Marx.

Socialism has always been a movement based mostly on rhetoric. There was never any logic to it. There were endless promises about how politics or class revolution could bring in a socialist paradise, but there was nothing written about how this paradise would operate.

Marx offered his famous ten steps in The Communist Manifesto (1848), but they were mere slogans. The fact that he included a central bank (#5) is indicative of how confused he was about the transition from capitalism to socialism to communism. He never went into any further detail. He had plenty of time to offer details. He died in 1883.

Here is what defenders of socialism refuse to face: there is no theory of socialist economic planning.

Socialist economic theory has always been missing in action. There is also no practical treatise that has served as a guide for socialist economic planners after their national revolutions. Socialist economic planning has been chaotic. No theory of socialist planning ever emerged from this chaos.

When we look at the history of socialism, meaning the state ownership of the means of production, there are few examples.

The USSR and Communist China did come close, but the black markets always operated in both societies.

There have been tiny Communist states: Albania, Cuba, and North Korea. None have produced a theory of socialist planning.

The Labor government of Great Britain from 1945 to 1951 nationalized coal mining and much of medical care, but it did not extend control over the capital markets of The City, the separate legal jurisdiction of the bankers in the center of London. The Bank of England maintained most of its sovereignty. Labor nationalized it in 1946, but then failed to exercise control. It remained Keynesian.

In short, there are no working models of socialism. This is fitting because there are no theoretical models of socialism. It has always been based on rhetoric, not logic. It has never been based on any system of economic causation. It has no theory of economic sanctions comparable to the sanctions in the free market of monetary profit and loss.

This was pointed out in 1920 by Mises in his classic essay, "Economic Calculation in the Socialist Commonwealth." He argued that socialism is inherently irrational in theory. It has no system of private property. It, therefore, has no capital markets. But without capital markets, there can be no prices for capital. Without prices for capital, central planners do not know how to allocate capital to serve the wants of the people. So, he argued, pure socialism cannot survive.

This argument was never successfully refuted by any socialist. Polish immigrant and University of Chicago Professor Oskar Lange wrote several articles in the late 1930"s on Mises" arguments, but they were strictly theoretical. When he went back to Communist Poland in 1945, and was later put into positions of authority in planning bureaus, nothing that he had written in his famous essays was actually implemented by the Polish government. His hypothetical socialist planning board always remained pure theory. It was based on the idea that central planners can do trial and error pricing to allocate capital. But there are no consumer-generated prices in a socialist commonwealth. More to the point, there were no economic sanctions attached to them. If there is no system of monetary profit and loss, there are no meaningful economic sanctions placed on the planners. But there are surely political sanctions, as the planners discovered under Stalin and Mao. It wasn"t that the dictators liquidated capital. It was that they liquidated political opponents and bureaucrats who lost their favor.

There have been very few Marxist economists teaching in American universities. They have had zero influence on the profession. There have hardly been many more socialist economists on the campus. There was a flurry of publicity in the late 1960"s regarding a tiny group of these people, who call themselves the Union of Radical Political Economists. It had the unfortunate acronym of URPE, which was pronounced "urpee." I studied under one of its major figures in grad school, Howard Sherman. He lectured coherently. He wrote in English. He did not use equations. He never presented the case for socialism in the classroom that I attended. If he converted anybody to socialism, it must have been in private.

The socialist professors are confined mainly to the sociology departments and the English departments. These people have never taken an economics course. They do not comprehend the logic of economic causation. Like their predecessors in the nineteenth century, they confine their comments to rhetoric.

We see crowds of undergraduates who claim to be in favor of socialism. But none of these people has ever read a book on socialist economic theory. This is understandable since there isn"t one.

They are motivated by rhetoric. Rhetoric is all they have been exposed to. They go to large mass meetings to protest this or that aspect of capitalism. But they have no agendas. They don"t have a personal agenda, and they don"t have a social agenda. In this sense, they are just like Karl Marx.

The difference is this: they are not going to find sugar daddies like Frederick Engels, who ran his family"s textile plant in Manchester and used a little of his money to put Marx on the dole for four decades.

These people are noisy, but in terms of pursuing a systematic agenda for turning the United States into a socialist commonwealth, they really are harmless.

When Deng Xiaoping inaugurated an agricultural reform in 1979 which relied heavily on private ownership, he launched the most impressive period of economic growth that any large country has ever experienced. But that ended socialist economic planning. When, on December 25, 1991, Mikhail Gorbachev announced that the Soviet Union was going out of business, that ended the lure of socialism among the intellectuals. They had always clung to socialism because they expected that their class would exercise power in a socialist regime. When it became clear that the Soviet Union was too feeble to impose its will on the Russian masses, that was the end of their infatuation with Communism and socialism. It was always about power. It was never about the logic of socialism.

So, in this month, the 100th anniversary of Lenin"s Bolshevik revolution in Russia, we can rejoice in the fact that socialism is dead. From a theoretical standpoint, it was never alive. It was a corpse from day one. It was sustained by rhetoric, not logic.

If you want to visualize the future of socialism, think of Lenin"s corpse in Lenin Square. It"s all dressed up with nowhere to go.

Is Capitalism Dead Or Merely Dying?

Authored by Raul Ilargi Meijer via The Automatic Earth blog,

New Zealand’s new prime minister Jacinda Ardern calls capitalism a blatant failure. Former Greek finance minister Yanis Varoufakis says capitalism is ‘merely’ coming to an end because it is making itself obsolete. Mathematics professor Bruce Boghosian claims that without redistribution of wealth, our market economy would not be stable, because wealth always tends to concentrate. The people at Artemis Capital Management write that the stock market has begun self-cannibalizing like a snake eating its tail, and the only reason we’re not in a recession already is ‘financial alchemy’.

At the very least we can say that the system is under pressure. But what system is that? It would be nice to have a clearcut definition of capitalism, but alas, there are many, about as many as there are different forms of it. That doesn’t make this any easier. Americans call many European economies ‘socialist’, which seems to mean they are not capitalist. But Scandinavian countries don’t function like the Soviet Union either.

And if you see how much money is involved in transfer payments to citizens in the US, the supposed bastion of free market capitalism, it’s tempting to conclude the system has already failed. But even with transfer payments, inequality is at record levels. That would seem to confirm Boghosian’s statement that “even if a society does redistribute wealth, if it’s too small an amount, “a partial oligarchy will result..” So what then?

Varoufakis and others want a “universal basic dividend”, or “universal basic income”. Would that be the end of capitalism as we know it? Or is it just a -perhaps more extreme- form of ‘state capitalism’? Varoufakis deems it inevitable because technology will eradicate so many jobs from societies that people won’t be able to make money from work. Personally, I’ve long thought that the pending large-scale demise of pensions systems will lead to some form of UBI.

37-year-young Jacinda Ardern is very clear in her assessment of New Zealand’s form of capitalism. If you’ve got the worst homelessness in the developed world, you have a broken system. If the system fails the people, it’s no good. Other people might argue that capitalism never promised to take care of everyone. Or rather, not through state interference. Labour’s Ardern has her view:

New Zealand’s New Prime Minister Brands Capitalism A ‘Blatant Failure’

[Jacinda] Ardern, has pledged her government will increase the minimum wage, write child poverty reduction targets into law, and build thousands of affordable homes. In her first full interview since becoming prime minister-elect, she told current affairs programme The Nation that capitalism had “failed our people”. “If you have hundreds of thousands of children living in homes without enough to survive, that’s a blatant failure,” she said. [..] “When you have a market economy, it all comes down to whether or not you acknowledge where the market has failed and where intervention is required. Has it failed our people in recent times? Yes. How can you claim you’ve been successful when you have growth roughly 3%, but you’ve got the worst homelessness in the developed world?”

So to which extent should a state interfere in markets, and in society at large? There are obviously wide ideological divides when it comes to answering that one. Does that mean there is no answer possible at all? Perhaps not. Perhaps the answer lies in the fact that the system is predestined to fail, as Boghosian’s mathematical models suggest: “Our work refutes the idea that free markets, by virtually leaving people up to their own devices, will be fair..”

That doesn’t necessarily demand a lot of interference, we could ‘simply’ write the rules of the game in such a way that the ‘natural tendency’ towards wealth concentration is blocked. An example is the history of the top US income tax rate. Arguably, the nation was doing a lot better under Eisenhower and Kennedy, with a top rate of 91%, than it is today. If you put a few rules like that in play, perhaps including Varoufakis’ idea of a ‘common welfare fund’, maybe the state doesn’t have to interfere much otherwise.

One of the main underlying claims of capitalism, and of macroeconomics in general, is that markets -and societies- will sort themselves out if left alone. Bruce Boghosian says this is not true, and that he has the math to prove it. The entire notion of markets tending towards a ‘supply-demand equilibrium’ is nonsense, he says (echoing Minsky, Steve Keen et al). Trickle-down economics is a figment of the imagination, while trickle up-economics flourishes.

This refutes much of what our economic systems are based on, which would appear to indicate that we need an urgent revision of these systems. Unless we would agree that Darwin-on-Steroids is a good idea. We don’t and won’t, because it would mean Stephen Foster’s “frail forms fainting at the door” all over the place. A market ideology that causes widespread misery has no future.

The Mathematics of Inequality

Seven years ago, the combined wealth of 388 billionaires equaled that of the poorest half of humanity , according to Oxfam International. This past January the equation was even more unbalanced: it took only eight billionaires, marking an unmistakable march toward increased concentration of wealth. Today that number has been reduced to five billionaires.

 

Trying to understand such growing inequality is usually the purview of economists, but Bruce Boghosian, a professor of mathematics, thinks he has found another explanation—and a warning. Using a mathematical model devised to mimic a simplified version of the free market, he and colleagues are finding that, without redistribution, wealth becomes increasingly more concentrated, and inequality grows until almost all assets are held by an extremely small percent of people.

 

“Our work refutes the idea that free markets, by virtually leaving people up to their own devices, will be fair,” he said. “Our model, which is able to explain the form of the actual wealth distribution with remarkable accuracy, also shows that free markets cannot be stable without redistribution mechanisms. The reality is precisely the opposite of what so-called ‘market fundamentalists’ would have us believe.”

 

While economists use math for their models, they seek to show that an economy governed by supply and demand will result in a steady state or equilibrium, while Boghosian’s efforts “don’t try to engineer a supply-demand equilibrium, and we don’t find one,” he said. [..] The model tracks the data with remarkable accuracy, he said. He and his team will soon publish a paper on how it relates to U.S. wealth data from 1989 to 2013.

 

“We have also begun to apply it to wealth data from the ECB, and so far it seems to work very well for certain European countries as well,” he said [..] It turns out that when agents do well in early transactions, the odds are so increasingly stacked in their favor that—without redistribution from taxes or other wealth-transfer mechanisms—they will get more money, and keep accruing wealth inevitably.

 

“Without redistribution of wealth, our market economy would not be stable,” said Boghosian. “One person would run away with all the wealth, and it would keep going until it came to complete oligarchy.” And even if a society does redistribute wealth, if it’s too small an amount, “a partial oligarchy will result,” Boghosian said.

If markets and societies cannot survive under current rules, theories and ideologies, what do we do? The Artemis guys strongly suggest we stop the practice of excessive stock buybacks- even if they’re the only thing propping up the whole market system. Because they’re leading us straight into a recession. Because they’re making that recession a lot worse.

Volatility and the Alchemy of Risk

The Ouroboros, a Greek word meaning ‘tail devourer’, is the ancient symbol of a snake consuming its own body in perfect symmetry. The imagery of the Ouroboros evokes the infinite nature of creation from destruction. The sign appears across cultures and is an important icon in the esoteric tradition of Alchemy. Egyptian mystics first derived the symbol from a real phenomenon in nature. In extreme heat a snake, unable to self-regulate its body temperature,will experience an out-of-control spike in its metabolism. In a state of mania, the snake is unable to differentiate its own tail from its prey,and will attack itself, self-cannibalizing until it perishes. In nature and markets, when randomness self-organizes into too perfect symmetry, order becomes the source of chaos.

 

The Ouroboros is a metaphor for the financial alchemy driving the modern Bear Market in Fear. Volatility across asset classes is at multi-generational lows. A dangerous feedback loop now exists between ultra-low interest rates, debt expansion, asset volatility, and financial engineering that allocates risk based on that volatility. In this self-reflexive loop volatility can reinforce itself both lower and higher. In a market where stocks and bonds are both overvalued, financial alchemy is the only way to feed our global hunger for yield, until it kills the very system it is nourishing.

[..] At the head of the Great Snake of Risk is unprecedented monetary policy. Since 2009 Global Central Banks have pumped in $15 trillion in stimulus creating an imbalance in the investment demand for and supply of quality assets. Long term government bond yields are now the lowest levels in the history of human civilization dating back to 1285. As of this summer there was $9.5 trillion worth of negative yielding debt globally. Last month Austria issued a 100-year bond with a coupon of only 2.1%(6) that will lose close to half its value if interest rates rise 1% or more. The global demand for yield is now unmatched in human history. None of this makes sense outside a framework of financial repression.

 

Amid this mania for investment, the stock market has begun self-cannibalizing… literally. Since 2009, US companies have spent a record $3.8 trillion on share buy-backs financed by historic levels of debt issuance. Share buybacks are a form of financial alchemy that uses balance sheet leverage to reduce liquidity generating the illusion of growth. A shocking +40% of the earning-per-share growth and +30% of the stock market gains since 2009 are from share buy-backs. Absent this financial engineering we would already be in an earnings recession.

 

Any strategy that systematically buys declines in markets is mathematically shorting volatility. To this effect, the trillions of dollars spent on share buybacks are equivalent to a giant short volatility position that enhances mean reversion. Every decline in markets is aggressively bought by the market itself, further lowing volatility. Stock price valuations are now at levels which in the past have preceded depressions including 1928, 1999, and 2007. The role of active investors is to find value, but when all asset classes are overvalued, the only way to survive is by using financial engineering to short volatility in some form.

Yanis Varoufakis doesn’t so much argue that capitalism has already failed, he says it is bound to fail in the near future. Because new technology, including artificial intelligence, will destroy too many jobs for society to continue to function intact. That is already happening, in that we both produce and consume Google’s ‘products’, but we get none of the profits. An example:

Google’s Plan To Revolutionise Cities Is A Takeover In All But Name

Alphabet’s weapons are impressive. Cheap, modular buildings to be assembled quickly; sensors monitoring air quality and building conditions; adaptive traffic lights prioritising pedestrians and cyclists; parking systems directing cars to available slots. Not to mention delivery robots, advanced energy grids, automated waste sorting, and, of course, ubiquitous self-driving cars. Alphabet essentially wants to be the default platform for other municipal services. Cities, it says, have always been platforms; now they are simply going digital.

 

“The world’s great cities are all hubs of growth and innovation because they leveraged platforms put in place by visionary leaders,” states the proposal. “Rome had aqueducts, London the Underground, Manhattan the street grid.” Toronto, led by its own visionary leaders, will have Alphabet. Amid all this platformaphoria, one could easily forget that the street grid is not typically the property of a private entity, capable of excluding some and indulging others. Would we want Trump Inc to own it? Probably not. So why hurry to give its digital equivalent to Alphabet?

Google aims at taking over our entire communities, and claims this will be to our benefit. We let the new technology companies expand far and wide, to a large extent because our ‘leaders’ don’t understand what is happening any better than we do. But that is not a good thing, for many different reasons. It’ll be very hard to whistle them back later, both because of the wealth they’re building, and because of the intensifying links they have to government, including -or especially- the intelligence community.

Capitalism Is Ending Because It Has Made Itself Obsolete

Former Greek finance minister Yanis Varoufakis has claimed capitalism is coming to an end because it is making itself obsolete. The former economics professor told an audience at University College London that the rise of giant technology corporations and artificial intelligence will cause the current economic system to undermine itself.

Mr Varoufakis [..] said companies such as Google and Facebook, for the first time ever, are having their capital bought and produced by consumers. “Firstly the technologies were funded by some government grant; secondly every time you search for something on Google, you contribute to Google’s capital,” he said. “And who gets the returns from capital? Google, not you. “So now there is no doubt capital is being socially produced, and the returns are being privatised. This with artificial intelligence is going to be the end of capitalism.”

 

Warning Karl Marx “will have his revenge ”, the 56-year-old said for the first time since capitalism started, new technology “is going to destroy a lot more jobs than it creates”. He added: “Capitalism is going to undermine capitalism , because they are producing all these technologies that will make corporations and the private means of production obsolete. “And then what happens? I have no idea.”

 

Describing the present economic situation as “unsustainable” and fearing the rise of “toxic nationalism”, Mr Varoufakis said governments needed to prepare for post-capitalism by introducing redistributive wealth policies. He suggested one effective policy would be for 10% of all future issue of shares to be put into a “common welfare fund” owned by the people. Out of this a “universal basic dividend” could be paid to every citizen.

Has capitalism failed already, as Jacinda Ardern claims, or will that happen only in the future, as Varoufakis says? It may be a moot question once the system and the markets start collapsing. That they will, and must, is not a question but a certainty, even a mathematical one. Whatever your ideology, that is not a good thing. And the current ideology has caused this, that much is clear.

If the remaining wealth is not divided better than it is today, those who have gathered most of it will also find themselves in non-functioning societies and communities. Unless perhaps you’re George W. and have property in Paraguay.

But even then. We’re eating our tails.

The Future Of The Third World

Authored by Jayant Bhandari via Acting-Man.com,

Decolonization

The British Empire was the largest in history. At the end of World War II Britain had to start pulling out from its colonies. A major part of the reason was, ironically, the economic prosperity that had come through industrialization, massive improvements in transportation, and the advent of telecommunications, ethnic and religious respect, freedom of speech, and other liberties offered by the empire.

The colors represent the colonies of various nations in 1945, and the colonial borders of that time – click to enlarge.

 

After the departure of the British — as well as the French, German, Belgians, and other European colonizers — most of the newly “independent” countries suffered rapid decay in their institutions, stagnant economies, massive social strife, and a fall in standards of living. An age of anti-liberalism and tyranny descended on these former colonies. They rightly became known as third-world countries.

An armchair economist would have assumed that the economies of these former colonies, still very backward and at a very low base compared to Europe, would grow at a faster rate. Quite to the contrary, as time went on, their growth rates stayed lower than those of the West.

Socialism and the rise of dictators were typically blamed for this — at least among those on the political Right. This is not incorrect, but it is a merely proximate cause. Clarity might have been reached if people had contemplated the reason why Marxism and socialism grew like weeds in the newly independent countries.

Was There a Paradigm Shift in the 1980s?

According to conventional wisdom, the situation changed after the fall of the socialist ringleader, the USSR, in the late 1980s. Ex-colonized countries started to liberalize their economies and widely accepted democracy, leading to peace, the spread of education and equality, the establishment of liberal, independent institutions. Massive economic growth ensued and was sustained over the past three decades. The “third world” was soon renamed “emerging markets.”

Alas, this is a faulty narrative. Economic growth did pick up in these poor countries, and the rate of growth did markedly exceed that of the West, but the conventional narrative confuses correlation with causality. It tries to fit events to ideological preferences, which assume that we are all the same, that if Europeans could progress, so should everyone else, and that all that matters are correct incentives and appropriate institutions.

The beginning and end of the Soviet communist era in newspaper headlines. The overthrow of Kerensky’s interim government was the start of Bolshevik rule. To be precise, the Bolsheviks took over shortly thereafter, when they disbanded the constituent assembly in in early 1918 and subsequently gradually did the same to all non-Bolshevik Soviets that had been elected. A little more than seven decades later, the last Soviet Bolshevik leader resigned. It is worth noting that by splitting the Russian Federation from the Ukraine and Belorussia, Yeltsin effectively removed Gorbachev from power – the latter was suddenly president of a country that no longer existed and chairman of a party that was declared illegal in Russia. [PT] – click to enlarge.

The claimed liberalization in the “emerging markets” after the collapse of the USSR did not really happen. Progress was always one step forward and two steps back. In some ways, government regulations and repression of businesses in the “emerging markets” have actually gotten much worse. Financed by increased taxes, governments have grown by leaps and bounds — not for the benefit of society but for that of the ruling class — and are now addicted to their own growth.

The ultimate underpinnings of the so-called emerging markets haven’t changed. Their rapid economic progress during the past three decades — a one-off event — happened for reasons completely different from those assumed by most economists. The question is: once the effect of the one-off event has worn off, will emerging markets revert to the stagnation, institutional degradation, and tyranny that they had leaped into soon after the European colonizers left?

The One-Off Event: What Actually Changed in the 1980s

In the “emerging markets” (except for China) synchronized favorable economic changes were an anomaly. They resulted in large part from the new, extremely cheap telephony that came into existence (a result of massive cabling of the planet implemented in the 1980s) and the subsequent advent of the new technology of the internet. The internet enabled instantaneous transfer of technology from the West and as a consequence, unprecedented economic growth in “emerging markets.”

Meanwhile, a real cultural, political, and economic renaissance started in China. It was an event so momentous that it changed the economic structure not just of China, but of the whole world. Because China is seen as a communist dictatorship, it fails to be fully appreciated and respected by intellectuals who are obsessed with the institution of democracy.

But now that the low-hanging fruit from the emergence of the internet and of China (which continues to progress) have been plucked, the “emerging markets” (except, again, for China) are regressing to their normal state: decay in their institutions, stagnant economies, and social strife. They should still be called the “third world.”

There are those who hold China in contempt for copying Western technology, but they don’t understand that if copying were so easy, Africa, the Middle East, Latin America, and South Asia would have done the same. They were, after all, prepared for progress by their colonial history.

European colonizers brought in the rule of law and significantly reduced the tribal warfare that was a matter of daily routine in many of the colonies — in the Americas, Africa, the Middle East, and Asia. Britain and other European nations set up institutional structures that allowed for the accumulation of intellectual and financial capital. Western-style education and democracy were initiated. But this was helpful in a very marginal way.

What is Wrong with the Third World

For those who have not traveled and immersed themselves in formerly colonized countries, it is hard to understand that although there was piping for water and sewage in Roman days, it still isn’t available for a very large segment of the world’s population. The wheel has existed for more than 5,000 years, but a very large number of people continue to carry water in pots on their heads.

Lead piping supplying water to homes already existed in Roman days, 2000 years ago.

The Ljubljana Marshes Wheel, which is more than 5,000 years old

There are easily a billion or more people today, who have no concept of either the pipe or the wheel, even if they went to school. It is not the absence of technology or money that is stopping these people from starting to use some basic forms of technology. It is something else.

Sir Winston Churchill, the war-time Prime Minister of Britain, talking about the future of Palestine said:

“I do not admit… that a great wrong has been done to the Red Indians of America or the black people of Australia. I do not admit that a wrong has been done to these people by the fact that a stronger race, a higher-grade race, a more worldly wise race… has come in and taken their place.”

Cigar-puffing British war-time PM Winston Churchill was as politically incorrect as they come. If he were alive today, he would probably be labeled the newest Hitler by the press and spend 90% of his time apologizing. Perhaps we shouldn’t mention this, but there are many Churchill monuments dotted across Europe and one can be found in Washington DC as well (alert readers will notice that a decidedly non-triggered Washington Post fondly remembered Churchill as an “elder statesman” a mere 10 months ago; rest assured that won’t stop the social justice warrior brigade if they decide to airbrush him out of history). Just to make this clear, your editor is not exactly the biggest fan of the man who traded away half of Europe to Stalin because he felt he could “trust the Soviet communist government” and who was clearly a tad too enamored of war, a characteristic Robert Kaplan described in his strident, amoral pro-war screed Warrior Politics: Why Leadership Demands a Pagan Ethos as follows: “Churchill’s unapologetic warmongering arose not from a preference for war, but from a breast-beating Victorian sense of imperial destiny…” Neither the breast-beating nor the sense of imperial destiny are really our thing, but we tip our hat to the man’s utter lack of political correctness and his associated willingness to offend all and sundry with a nigh Trumpian alacrity and determination. [PT]

On Islam, he said:

“How dreadful are the curses which Mohammedanism lays on its votaries! Besides the fanatical frenzy, which is as dangerous in a man as hydrophobia in a dog, there is this fearful fatalistic apathy. The effects are apparent in many countries. Improvident habits, slovenly systems of agriculture, sluggish methods of commerce, and insecurity of property exist…”

Talking about India he famously said:

“I hate Indians. They are a beastly people with a beastly religion.”

A remark often attributed to Churchill, although this remains unverified, has certainly stood the test of time so far:

“If independence is granted to India, power will go to the hands of rascals, rogues, freebooters; all Indian leaders will be of low caliber and men of straw. They will have sweet tongues and silly hearts. They will fight amongst themselves for power and India will be lost in political squabbles. A day will come when even air and water will be taxed in India.”

Europeans of that time clearly knew that there was something fundamentally different between the West and the rest, and that the colonies would not survive without the pillars and the cement European management provided.

With the rise of political correctness this wisdom was erased from our common understanding – but it is something that may well return to haunt us in the near future, as the third world fails to fulfill expectations, while people who immigrate to Europe, Canada, Australia and the US from there fail to assimilate.

The Missing Underpinnings: Reason And All That Depends On It

Until now, the hope among people in the World Bank, the IMF, and other armchair intellectuals was that once the correct incentives were in place and institutions were organized, these structures imposed from on high would put the third world on a path to perpetual growth. They couldn’t have been more wrong.

The cart has been put in front of the horse. It is institutions that emerge from the underlying culture, not the other way around. And cultural change is a process taking millennia, perhaps even longer. As soon as Europeans quit their colonies, the institutional structures they left started to crumble.

Alas, it takes a Ph.D. from an Ivy League college and a quarter of a million dollar salary at the World Bank or the IMF to not understand what the key issue with development economics and institutional failures is: the missing ingredient in the third world was and is the concept of objective, impartial reason – the basis of laws and institutions that protect individual rights.

This concept of reason took 2,500 years to develop and get infused into the culture, memes, and genes of Europeans — a difficult process that, even in Europe, was never fully completed. European institutions were at their root products of this concept.

A justly famous quote by Thomas Paine (a prolific writer with a side job as a founding father and revolutionary). Paine was deeply suspicious of self-anointed authorities, both of the secular and clerical variety, who in turn regarded him as dangerous. His writings inter alia provoked a so-called “pamphlet war” in Britain (it would be best if all wars were conducted via pamphlets). [PT]

Despite massive efforts by missionaries, religious and secular, and of institutions imposed on poor countries, reason failed to get transmitted. Whatever marginal improvement was achieved over 200 to 300 years of colonization is therefore slowly but surely undone.

Without reason, subsidiary concepts such as equality before the law, compassion and empathy won’t operate. Irrational societies simply cannot maintain institutions representing the rule of law and fairness. The consequence is that they cannot evolve or even maintain institutions the European colonizers left behind.

Any institutions imposed on them — schools, armies, elections, national executives, banking and taxation systems — must mutate to cater to the underlying irrationality and tribalism of the third world.

Western Institutions Have Mutated

Education has become a dogma in “emerging markets”, not a tool; it floats non-assimilated in the minds of people lacking objective reason. Instead of leading to creativity and critical thinking, it is used for propaganda by demagogues.

Without impartial reason, democracy is a mere tribal, geographical concept, steeped in arrogance. All popular and “educated” rhetoric to the contrary, I can think of no country in the non-western world that did well after it adopted “democracy.”

The spread of nationalism (which to a rational mind is about the commonality of values) has created crises by unifying people along tribal lines. The most visible example is provided by events in the Middle East, but the basic problem is the same in every South Asian and African country and in most of South America.

India, the geographical entity I grew up in, was rapidly collectivized under the flag and the national anthem. It has the potential to become the Middle East on steroids, once Hindutava (Hindu nationalism) has become deeply rooted in society.

Assessing the Current Predicament

In Burma, a whiff of democracy does not seem to have inhibited a genocide perpetrated by Buddhists against the Muslim Rohingya. Thailand (which was not colonized in a strictly political sense) has gone silent, but its crisis continues.

Turkey and Malaysia, among the better of these backward societies, have embarked on a path of rapid regression to their medieval pasts. South Africa, which not too long ago was considered a first-world country, got rid of apartheid only to end up with something even worse.

The same happened with Venezuela, which was among the richer countries of the world in the not-too-distant past. It is ready to implode, a fate that may befall Brazil as well one day. Pakistan, Bangladesh, Nepal, and East Timor are widely acknowledged to be in a mess, and are getting worse by the day.

Indonesia took a breather for a few years and is now once again in the thrall of fanaticism. India is the biggest democracy, so its problems are actively ignored by the Western press, but they won’t be for long, as India continues to evolve toward a police state.

Botswana was seen as one of the countries with the fastest and longest-lasting economic growth. What was ignored was the fact that this rather large country has a very small population, which benefited hugely from diamonds and other natural resources. The top political layer of Botswana is still a leftover from the British. The local culture continues to corrode what was left by them, and there are clear signs that Botswana is past its peak.

Part of the central business district in Gaborone, Botswana. Long time readers may recall an article we posted about 2.5 years ago: “Botswana – Getting it Right in Africa”. We are not sure if much has changed since then, but it is worth recalling that Botswana started out as the third-poorest country in Africa when it became independent in 1966 and is today one the richest. The very small population (by African standards) combined with the large income the country obtains from diamond mining no doubt played a role in this, but being rich in natural resources means very little per se. Botswana never fell for Marxism. When the country gained independence, its political leadership adopted democracy and free markets and never looked back. Botswana is a very homogenous society in terms of religious and tribal affiliations, which differentiates the country from most other former colonial territories in Africa. From our personal – admittedly by now a bit dated – experience, we can state that Botswana is the only African country in which one is unlikely to encounter any corruption – not even the lowliest government minion will ask for bribes as far as we could tell (in many African countries, officials begin demanding bribes the moment one wants to cross the border). Considering all that, we are slightly more hopeful about Botswana, but it is not an island. Deteriorating conditions in neighboring countries may well prove contagious at some point. [PT]

Papua New Guinea was another country that was doing reasonably well before the Australians left. It is now rapidly regressing to its tribal, irrational, and extremely violent norms, where for all practical purposes rape is not even considered a crime.

Conclusion: A Vain Hope

The world may recognize most of the above, but it sees these countries’ problems as isolated events that can be corrected by further impositions of Western institutions, under the guidance of the UN or some such international (and therefore “non-colonialist”) organization.

Amusingly, our intellectual climate — a product of political correctness — is such that the third world is nowadays seen as the backbone of humanity’s future economic growth. Unfortunately, so-called emerging markets are probably headed for a chaotic future. The likeliest prospect is that these countries will continue to cater to irrational forces, particularly tribalism, and that they will consequently cease to exist, disintegrating into much smaller entities.

As the tide of economic growth goes out with the final phase of plucking the free gift of internet technology nearing its end, their problems will resurface rapidly – precisely when the last of those who were trained under the colonial system are sent to the “dustbin of history”.

USA: Export Glass Parking Lots Now, or Be a Banana Republic (Venezuela) Later

Our future is increasingly looking like either an Elitist Authoritarian style Socialism with lower standards of living and lots of small wars, or Populist Authoritarian Dictatorial style "Capitalism" which will drive us to one big war and lots of dead people - Vince Lanci

Amazon economy? Bankrupt states? Obamacare? MEH. None of that matters, Vince Just
wake me when the little fat guy nukes one of our carriers.- "Bon Scott"

Demographics as Political System Driver

Is Venezuela a proxy for the US? Initial reactions, our own included, are NO WAY. But think about it. The 2008 bank bailout was the opposite of capitalism. Obamacare is a socialization of medicine. Medicare claims rise, skilled jobs and people (drug addled?) available for them are disappearing. 

It would seem as the East (growing young taxable middle class population) moves towards a capitalistic (not democratic) model, we are moving towards a more socialist system. And that is in no small part because of  our demographics. The baby boom generation distorts every thing they touch demographically: from homes, 401ks, to Gyms, and now healthcare. This is not a judgment, although we have done a polemic style piece blaming them for everything before. 

The wave of Boomers from birth to death were the most powerful drivers of secular trends we have witnessed. And like it or not, the
US is moving towards a more socialist setup on the back of that demographic. It has to. Sure it will go
kicking and screaming as the shrinking middle class bites back by
voting in anti-elitist candidates.  But Trump?

Trump is really just an
authoritarian  carpetbagger in disguise.  But that will not matter.
People will vent, then be disappointed.. then project their expectations
onto someone else with empty selfish rhetoric (Hillary), or worse..
terrifyingly insecure selfish action (Trump 2020).

From "BoomerCare" Is Here to Stay- Demographics Don"t Lie:

The Market Will Fix Everything.. And it Won"t Be Pretty

Market clearing events will happen one way or another. Maybe not on an your timeline. But clearing events will happen. It always ends in 1 of 3 ways. Poverty, Death, or Collapse

1. POVERTY:  The Baby Bust, Gen X, Gen Y, and Millennial Groups hold the bag and exist at a lower standard of living. (Zombie Existence)
   
   • taxes, inflation, lies, and inferior standards are the methods
   
   


2. DEATH: By War
   
   • the ultimate market clearing, de-complexifying event.
   
   
   • social stratification levels flatten and people are all reduced to the same thing. Humans -Fight Club post debt erasure
   
   


3. SOCIETAL COLLAPSE: . In which event  centralized constructs disappear and simpler but functioning entities take their place- Fight Club again
   
   • EU- collapses, nation states re-emerge
   
   
   • US- Entitlement systems don"t just get worse as in 1 above. They totally break
   
   
   • Emerging Markets- regress to war lords and anarchy
   
   

Rapid fire micro news is mind numbing now. As we are constantly forced  to look at the little picture the world moves towards  militarily driven solutions. As one Soren K. Group contributor "Bon" is saying:

Amazon economy? Netflix loses Disney? MEH.  None of that matters. Just wake me when the little fat guy nukes one of our carriers. Then Ill be happy to pay attention. "Cause that is where we are going. The VIX will stay at 7% while bombs are dropping on Seoul. Markets do not reflect risk. And we are going bankrupt unless we start a war. I"m waiting to buy a spot in "Detroit by the Sea" when the war starts... NJ will be cheap then right?

Indeed, our future is increasingly looking like  

1. Elitist Authoritarian style socialism with lower standards of living and lots of small wars, or


2. Populist Authoritarian Dictatorial "Capitalism" which will drive us to one big war

And so, take note of Venezuela... Detroit"s cousin to the South. Then look at IL, CT, and NJ. What we call entitlement programs are really socialist programs.  Or just nuke  North Korea, Iran, and the Saudis Michael Corleone style.

BEAUTY AND THE BEAST - Venezuela is our Newest Dictatorship

via Dave  Pell

"Venezuela always has all the superlatives. It"s the world"s highest inflation by a lot. It"s the world"s highest murder rate. A lot of economists will tell you it"s the most mismanaged economy in the world. And now, a lot of people are saying the world"s most recently born dictatorship. But when I went down there, it was a great place to live, which sounds crazy now, but it"s beautiful." A reporter who has been covering Venezuela describes what"s it like to see a democracy destroyed? "Things can always get worse and worse and worse, and there"s no rule that says that a miserable situation has to end, just because it"s too miserable." (Even Radiohead lyrics got depressed by that line...)

+ "Fugitive Venezuelan soldiers have declared a rebellion against "the murderous tyranny" of the president. Dissident officers have fled the country, seeking asylum. Grenades have been fired at the Supreme Court and, this weekend, assailants under the command of a mutinous captain attacked an army base, making off with weapons." From the NYT: As Maduro"s Venezuela Rips Apart, So Does His Military.

+ "Since Venezuela"s economy began to melt down in 2014, violence, triple-digit inflation, and shortages of food and medicine have caused hundreds of thousands of people to flee in the ways available to them. Elites have obtained U.S. visas and left for Miami. Those in the middle class have escaped by plane to places such as Buenos Aires. The poor have walked across the border to Colombian cities. But there is no refugee flow quite like that of the Warao to Manaus." From BusinessWeek: Forced Into the City After 9,000 Years in the Jungle.

Demographically Driven Banana Republic or Nuclear War ?

We are on an economic Venezuelan path but few see the emperor"s creeping nakedness yet.  A generation that was the peak of capitalistic success (excess) in terms  of stock  valuations will next sound the siren for more socialist policies. And that is not necessarily a bad thing. Problem  is we"ve saved nothing in the good times to prepare for it.

Worse, those that did try to save were robbed by the Fed and other trickle up policy tools. And those people need the kind of help that capitalism won"t provide in its current US form short of soylent green.

Failed Democratic Socialist policies de-evolve into dictatorships as the need to
use force increases. That is Venezuela now. Failed Capitalistic Democracies.....
same thing. Difference here is we replace Capitalism (true capitalism
does not exist in the US now) slowly with Socialism to appease the have-nots.. and then we
fail.

Or we could just have a bigger external war while we still can. Venezuela does not have that choice.

Why the Government Fails at Welfare

Via The Daily Bell

The leviathan created by the modern welfare state is one of the gravest threats facing the American republican system. Dangers levied by the continued use of the government’s dole come both fiscally and socially. Fixes being floated from Congress to community organizations still lack a cohesive focus on reform in the mainstream public discourse.

The federal welfare apparatus has bloomed into a disastrous menagerie of nearly one hundred programs. Representative Warren Davidson (OH8-R) has introduced legislation that will consolidate 92 of the programs in an attempt to minimize waste and redundancy.  Davidson isn’t alone in his calls for welfare reform.  Other members of the House Freedom Caucus are publicly demanding that welfare reform be tied into the promised Trump tax reform package.

Even if House conservatives get their way, it’s not clear if the welfare model is sustainable. Stacked up against other industrialized countries, the U.S. clearly gets the worst bang for its buck.  In part, the reason for the failings comes from flawed designs for the American social safety net.

Governments on both sides of the Atlantic seem to be settled on the model of government intervention supporting those in need, but several Pacific Rim countries offer a different model based on social responsibility.

Pacific Rim Models

The tiny nation of Singapore has dazzled economists and pundits since it gained its independence from Great Britain. By embracing free market principles Singapore has raised its per capita income from $500 to over $52,000 in the short time it has been free of colonial shackles.

Even more exciting is the attitude the government takes on social welfare programming.  Since its inception, the state has taken a hard stance on handouts.  The government’s longtime approach has been underpinned by the idea that universal benefits are “wasteful and inequitable” and has chosen to base their safety net on social pressures. Singapore’s philosophy on welfare follows

Singapore’s philosophy on welfare follows three basic principles: each generation should pay its own way, each family should pay its own way, and each individual should pay his or her own way.   These aren’t just guidelines.  The legislators codified the importance of family reliance by enabling seniors to file litigation against their children if they refuse to support them.

In addition to heavy social pressures, the state also requires compulsory savings for retirement, housing, and other items deemed social necessities.  By requiring employers and employees to designate money for individual “rainy day funds” the government ensures that citizens have money when in need while simultaneously avoiding onerous taxes and bureaucracy that accompany the American and European models.  

Other Pacific Rim countries have also dabbled in alternative forms of social welfare.  Chile once instituted a meritocratic point based system which enabled those in lower income brackets to advance through subsidies offered by the state and was able toproduce better results than those in Europe and America.

Japan also has a history of creating social pressures to ensure the elderly and those in need are taken care of without government intervention.  Hong Kong, another of the Pacific’s shining societies has its own take on welfare in which increased productivity from workers equals increased benefits.

While those in Congress struggle to find the solution to America’s welfare woes it is important that they look not across the Atlantic to the failing welfare states of Europe for policy, but rather to the east and take note of the alternatives offered by market-based models.

States Rights

Instead of waiting on the national government to create a solution to one of America’s most pressing problems several states have taken the initiative and attempted to create a sustainable welfare model. By embracing the federalist model and utilizing the states as laboratories of democracy lawmakers can see what works and what doesn’t in real time. Already some states have produced promising results.

Legislators in Maine took a bold step in implementing conservative style welfare reform. Initiated by a Republican governor, Paul LePage, the reforms sought to address the growing number of welfare recipients in the state and the massive budgetary mess that came along with it. In Maine, able-bodied adults are required to work, train, or volunteer at least on a part-time basis to receive any government benefits.

The plan drew steep criticism from both the Obama administration and liberal media outlets as both claimed that the measure unfairly targeted the poor in a budget reducing measure and would create more harm to those in need. The results of Maine’s experiment, however, have proven quite the opposite. 

Maine has lowered its unemployment rate and has 10 times fewer residents on welfare. Even more exciting for Mainers, those who came off of welfare saw their incomes rise by an average of 114 percent. Proving that Maine’s results are not just a fluke, Kansas has implemented a similar program and has likewise alleviated a great deal of the state’s poverty.

Policy think tanks across the country have analyzed the finding of Maine’s experiment and have called on their state governments to follow suit. Some even heralded the program as a model for the nation. The problem facing many action oriented states come from restrictions put in place by the federal system. While the Republican lead welfare reform of the 90s did a great deal to push welfare to the state level, it also left a great deal to be desired.

To function as independent bodies, as the federal system intends, and better serve their most vulnerable citizens’ states ought to have greater freedom to experiment with welfare reforms.  Congress could act to give states a greater say in how welfare is implemented within their borders if reform is to be both helpful to those in need and sustainable.

Market-Charity

The government has a long history of implementing duplicative, ineffective policies and leaving communities to pick up the pieces. From the feds creating the modern ObamaCare healthcare debacle to city government literally stealing donations meant for children, every time the state attempts to intervene to solve a societal ailment it just makes it worse. Welfare is no different. Luckily for Americans, the government doesn’t control their fate, they do.

When looking to alleviate the suffering of their fellow citizens, Americans need only look inwards. American citizens are already the most charitable citizenry in the world, and keep giving more money every year. Moreover, private charity organizations, by and large, run much more efficiently and with substantially lower overhead.

Private groups are providing money, resources, and life-changing services better than the government is. Tired of seeing their impoverished neighbors get tossed around by the welfare system one group started an organization to successfully transition people off government support and into self-sufficiency. The core idea of such missions is to have neighbors helping their community members rise to their full potential and become productive by their own means. Of course, neighbors helping neighbors only works if there are opportunities available to them.

No government intervention or individual generosity can finally end poverty. The only force powerful enough to lift people out of the clutches of poverty is free market capitalism. Many who advocate for expanding the welfare state in its traditional form fail to realize the positive power markets can play in reducing poverty.

The wealthiest societies are not those which provide their citizens with cradle to grave care; it’s actually the complete opposite! The freer the society the easier it is for individuals to act and create wealth which in turn raises the standard of living. If allowed to thrive, market forces will create the greatest outcome to workers, companies, and those in need.

If the government is serious about helping the disadvantaged it should stop with the various welfare schemes, which inevitably fail, and get out of the way of the real engines of wealth creation. Neither the federal government nor any local authorities have the means to truly address poverty. Government fails; freedom works.