When The Money Runs Out… So Does The Empire by smonebkyn


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									When The Money Runs Out… So Does The

Empires are typically financed by theft and forced tribute

The Dow stabilized yesterday. Gold rose $22.
In 2006, we wrote a book with Addison Wiggin called Empire of Debt: The Rise of an Epic Financial
Crisis. The idea of the book was as follows:
Empires are not the result of conscious thought; they happen when a group is large enough and
powerful enough to impose itself on others.
But empires are expensive. They are typically financed by theft and forced tribute. The imperial power
conquers… steals… and then requires that its subjects pay “taxes” so that it can protect them.
The US never got the hang of it. It conquers. But it loses money on each conquest.
How does it sustain itself?
With debt.
It doesn’t take tribute from the rest of the world; it borrows from it. As far as we know, no other empire
has ever tried to finance itself by borrowing.
But it is a special kind of debt. The US borrows in its own currency – which it can print as it chooses. If
the burden of repayment is too high, in theory, the Fed can just print more dollars to satisfy its
Here is further insight from two foreign policy professors Flynt Leverett and Hillary Mann Leverett:
      Since World War II, America’s
      geopolitical supremacy has rested
      not only on military might, but
      also on the dollar’s standing as
      the world’s leading transactional
      and reserve currency.
      Economically, dollar primacy
      extracts “seignorage” – the
      difference between the cost of
      printing money and its value –
      from other countries, and
      minimizes US firms’ exchange
      rate risk.

      Its real importance, though, is
      strategic: Dollar primacy lets
      America cover its chronic current
      account and fiscal deficits by issuing more of its own currency – precisely how Washington
      has funded its hard power projection for over half a century.

In the 1950s and 1960s, this posed little risk to foreigners, because the US dollar was backed by gold.
But in 1971 – on August 15 – President Nixon repudiated the greenback’s gold backing.
Nevertheless, the dollar reigned supreme. Foreign nations needed to stock dollars in order to settle up
on their overseas financial transactions. The US printed dollars… Americans spent them on foreign
goods… foreign central banks bought them from their local merchants and manufacturers, and
reinvested much of them in US government debt.
The dollars went out… in exchange for valuable goods and services… and then they came back in
exchange for – more pieces of paper!
                                                                                Year after year, the US
                                                                               ran a trade deficit. Year
                                                                               after year, US paper
                                                                               dollars and Treasury debt
                                                                               stacked up in foreign
                                                                               banks. We haven’t done
                                                                               a recent calculation. But
                                                                               the last time we looked,
                                                                               net cumulative deficits
                                                                               were approaching the
                                                                               $10 trillion mark.
                                                                               When foreign central
                                                                               banks took in dollars,
                                                                               they had to print local
                                                                               currencies to give to
                                                                               local exporters in
                                                                               exchange for dollars.
                                                                               The owner of an export
firm presented the dollars to the local bank; he needed yuan, yen or zlotys to pay his bills. The local
central bank invested those dollars back in the US.
This is how the US credit boom led to an explosion of cash and credit all over the world. Foreign
central banks had to increase their money supplies – by printing up local currencies – to use to
exchange for the rush of dollars.
This is what led Ben Bernanke to refer to a “global savings glut.” Actually, these were not savings at all
– but money created ex nihilo by central banks.
Our point is that all empires end when they are defeated by a more vigorous empire… or when their
financing runs out.
And now we are seeing the beginning of the end. From the Leveretts:
      America is increasingly viewed as a hegemon in relative decline, China is seen as the
      preeminent rising power. Even for Gulf Arab states long reliant on Washington as their
      ultimate security guarantor, this makes closer ties to Beijing an imperative strategic hedge.
      For Russia, deteriorating relations with the United States impel deeper cooperation with
      China, against what both Moscow and Beijing consider a declining, yet still dangerously
      flailing and over-reactive, America.

Economist Liam Halligan, writing in British newspaper The Telegraph elaborates:
      Beijing has struck numerous agreements with Brazil and India that bypass the dollar.
      China and Russia have also set up ruble-yuan swaps pushing America’s currency out of the
     picture. But if Beijing and Moscow – the world’s largest energy importer and producer
     respectively – drop dollar energy pricing, America’s reserve currency status could unravel.
     That would undermine the US Treasury market and seriously complicate Washington’s
     ability to finance its vast and still fast-growing $17,500 billion of dollar-denominated debt.

When the money runs out… so does the empire. Perhaps with a whimper. Or maybe a bang.
Copies of Bill’s new book, Hormegeddon, are selling fast. So, if you haven’t already got your copy, you
can claim it now here. Bill’s colleague Porter Stansberry says Hormegeddon explains an idea that
completely changed the course of his life.
When you claim your book, you’ll also receive some of Bill’s best essays and access to a new project he
is working on that is not yet available to the general public. Click here for the details.

Too Big To Fail Has Not Ended … It’s Only
Gotten Worse

Despite “Mission Accomplished” Announcement, the Giant Banks Are Worse Than Ever
Last week, Paul Krugman said too big to fail is over:
     There was indeed a large-bank funding advantage during and for some time after the crisis,
     but it has now been diminished or gone away — maybe even slightly reversed. That is,
     financial markets are now acting as if they believe that future bailouts won’t be as favorable
     to fat cats as the bailouts of 2008.

This news is part of broader evidence that Dodd-Frank has actually done considerable good, on
fronts from consumer protection to bank capitalization ….

But as David Dayen notes, Krugman’s stretching the facts:
The report [that Krugman relies on for his claim that too big to fail] doesn’t really say that
future bailouts won’t be as favorable to the fat cats, or even that market participants believe
that: it does say that large financial institutions would likely continue to enjoy lower
funding costs than their counterparts in times of high credit risk (see page 40). Furthermore,
the report so completely second-guesses itself that it shouldn’t be taken as evidence of
anything, as the report itself states in numerous spots. Presumably a Nobel Prize winner has
come across reports with muted conclusions before and would know not to get too far out
in front of the facts by amplifying them.


The report did not say that the advantage has “essentially disappeared.” GAO ran 42
models to try and assess the subsidy. In 2013, 18 of those models effectively tested positive
for the subsidy, 8 tested negative, and 16 showed nothing. That’s fairly inconclusive, and
not at all as definitive as Krugman makes it.


Gretchen Morgenson reported on the same study in the news, and managed to get it
right, contrawhat Krugman thought he could get away with on the op-ed page.

      (GAO’s) methodology was convoluted and its conclusions hardly definitive.
      The report said that while the big banks had enjoyed a subsidy during the
           financial crisis, that benefit “may have declined or reversed in recent years.”

           The trouble with this mishmash is that big bankers and even policy makers will
           cite these figures as proof that the problem of too-big-to-fail institutions has
           been resolved. Mary J. Miller, the departing under secretary for domestic
           finance at the United States Treasury, wrote in a letter about the report: “We
           believe these results reflect increased market recognition of what should now be
           evident — Dodd-Frank ended ‘too big to fail’ as a matter of law.”

           Not exactly. As the report noted, the value of the implied guarantee varies,
           skyrocketing with economic stress (such as in 2008) and settling back down in
           periods of calm.

           In other words, were we to return to panic mode, the value of the implied
           taxpayer backing would rocket. The threat of high-cost taxpayer bailouts
           remains very much with us.

     There’s more: Morgenson actually watched the hearing about the report, and found credible
     questioning of GAO’s methodology, in particular the narrow way in which they defined the
     subsidy as entirely about lower debt costs, instead of the lower cost of equity and benefits
     to stockholders. I’ve also heard that bond prices, with their focus on immediate-term risk,
     are simply an inaccurate indicator of short-term borrowing costs, particularly those in the
     securities lending markets.

And a few days after Krugman wrote his piece, the Washington Post reported:
     Eleven of the biggest U.S. banks have no viable plan for unwinding their businesses
     without rattling the economy, federal regulators said Tuesday, ordering the firms to
     address their shortcomings by July 2015 or face tougher rules.


     The Federal Reserve and the Federal Deposit Insurance Corp. called the banks’ resolution
     plans, or “living wills,” “unrealistic or inadequately supported.” They said the plans “fail to
     make, or even to identify, the kinds of changes in firm structure and practices that would be
     necessary to enhance the prospects for” an orderly resolution.


     “Each plan being discussed today is deficient and fails to convincingly demonstrate how,
     in failure, any one of these firms could overcome obstacles to entering bankruptcy
     without precipitating a financial crisis,” Thomas M. Hoenig, vice chairman of the FDIC,
     said in a statement Tuesday.


     Regulators, especially Hoenig at the FDIC, worry that banks are generally larger, more
     complicated and more interconnected than they were before the meltdown.

     And the average notional value of derivatives for the three largest firms exceeded $60
     trillion at the end of 2013, up 30 percent from the start of the crisis.


     “There have been no fundamental changes in their reliance on wholesale funding markets,
     bank-like money-market funds, or repos [repurchase agreements], activities that have
     proven to be major sources of volatility.”

David Stockman – Ronald Reagan’s budget director – writes:
     The giant regulatory diversion known as Dodd-Frank has actually permitted the TBTF
     banks to get even bigger and more dangerous. Indeed, JPM and BAC were taken to their
     present unmanageable size by regulators—ostensibly fighting the last outbreak of TBTF—
     who imposed or acquiesced to the shotgun mergers of late 2008.

     So now these same regulators, who have spent four years stumbling around in the Dodd-
     Frank puzzle palace confecting thousands of pages of indecipherable regulations, slam their
     wards for not having sufficiently robust “living wills”. C’mon! This is just another
     Washington double-shuffle.

     The very idea that $2 trillion global banking behemoths like JPMorgan or Bank of America
     could be entrusted to write-up standby plans for their own orderly and antiseptic
     bankruptcy is not only just plain stupid; it also drips with political cynicism and cowardice.
     If they are too big to fail, they are too big to exist. Period.

And Michael Winship notes:
     In The New York Times, columnist Gretchen Morgenson writes, “Six years after the
     financial crisis, it’s clear that some institutions remain too complex and interconnected to
     be unwound quickly and efficiently if they get into trouble.“It is also clear that this status
     confers financial benefits on those institutions. Stated simply, there is an enormous value in
     a bank’s ability to tap the taxpayer for a bailout rather than being forced to go through

     Morgenson adds, “Were we to return to panic mode, the value of the implied taxpayer
     backing would rocket. The threat of high-taxpayer bailouts remains very much with us.”

     Financial professionals echo her concern. Camden Fine, president and CEO of the
     Independent Community Bankers of America, notes in American Banker (not without self-
     interest) that while the size of big bank subsidies may have “diminished since the crisis …
     the larger point is that the biggest and riskiest financial firms still have a competitive
     advantage in the marketplace. They can still access subsidized funding more cheaply than
     smaller financial firms because creditors believe the government would bail them out in the
     event of a crisis. No matter how you cut it, a subsidy is a subsidy. And this subsidy is one
     that puts the American taxpayer on the hook. …

     “Meanwhile, the largest financial institutions are only getting bigger. According to our
     analysis of call report data from the Federal Deposit Insurance Corp., since the end of 2009,
     the assets of the six largest financial institutions have grown each year. Their total assets
     rose from $6.41 trillion in 2009 to $7.22 trillion in 2014 — a total increase of $800
     billion. The top six banks are also responsible for more than half of the $2 trillion
     increase in total U.S. banking assets in the years since 2009.”

As Senators Brown and Vitter stated, “Today’s report confirms that in times of crisis, the
largest megabanks receive an advantage over Main Street financial institutions. Wall Street
lobbyists may try to spin that the advantage has lessened. But if the Army Corps of
Engineers came out with a study that said a levee system works pretty well when it’s sunny
— but couldn’t be trusted in a hurricane — we would take that as evidence we need to act.”

We’ve noted for years that, the Dodd-Frank financial “reform” bill is a joke which:
    • Was just aP.R. stuntwhich didn’t really change anything
    • Increases the risky derivativesholdings of the banks
    • Makes the “too big to fail” bankseven bigger
    • “WillNOT stop the next financial crisis from coming“
    • Isall holes and no cheese… aplacebo for a sick economy
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