capital-dome-dcEveryone wants to escape from the depression cycle we are in.  I, above all people, heartily wish this.  But we must see this period not as something to evade but something to embrace…for change.  Obama ran on ‘change’ but appears to not understand what this really means.  He feels, it is more cosmetic.  I, on the other hand, believe that what has to change are 2 things: our free trade dogma and our military spending sprees.  Once we get a grip on both, we will have no worries about Social Security and other systems set up to keep us alive and well.

First, the US must finally admit, we no longer run the world financial systems.  We refuse to do this.  We pretend to be a creditor nation even as we have less and less credit.  We have absolutely no sovereign wealth at all.  All lending must be based on capital.  Yet, we are going to capitalize the IMF by giving them money which we must borrow from China, Japan or OPEC:


Raw Story » Obama proposes US loan $100 billion to International Monetary Fund


U.S. President Barack Obama Monday asked Congress to back an expansion of an IMF emergency fund by $500 billion in a move designed to expand its reach to big emerging-market nations.

Obama should have told Congress, ‘We have no money to give to the IMF because we have no money.  Any money we give will be fake money based on no capital and no sovereign wealth.  This is all IOUs given to the IMF so they can lend it to Eastern Europe.

For this is the main destination of these loans based on US debts.

At the G20 summit, “the Germans did not want an EU effort to bail out the banks,” reported the Asia Times. “They wanted the International Monetary Fund (IMF) to bail out a substantial part of the EU financial system instead. The reason was simple: The IMF receives loans from the United States, as well as China and Japan, meaning the Europeans would be joined by others in underwriting the bailout. The United States has signaled it would be willing to contribute $100 billion to the IMF, of which a substantial portion would go to Central Europe. (Of the current loans given by the IMF, roughly 80% have gone to the struggling economies in Central Europe.)”


When the EU wishes to evade something, they suddenly are a collection of individual nations.  When they want more power, they are suddenly a single entity.  This morphing between two steady-states is destabilizing world fiancial systems.  If the US were to present itself as a collection of 50 states that  may or may not be one entity, depending on the situation at hand, we would swiftly drive everyone nuts.


As the US sucked down millions of foreign workers into our country, we always insisted [until recently] that their children learn to speak English and swear fealty [until recently where people can now be dual citizens and thus, no have a real commitment] so we are ‘one nation’.  Europe, on the other hand, is split up by religion as well as language.  The ethnic wars due to this are extremely bloody and break out at a moment’s notice.


Usually during bad economic cycles….the EU wishes to suck into their budding empire, all of Eastern Europe.  But this has failed due to the temptations of playing money games.  Eastern Europe ran off the rails, playing wild currency games [which they have tended to do in the last 200 years, over and over again!] and are now destroying all of the Western European banking system which played along with Eastern European lending bubbles.


The US cannot bail out Eastern Europe.  The US can’t bail out all of Southeast Asia.  Nor can be bail out South American countries.  Or anyone, for that matter.  We have to withdraw from the bail out game simply because we are the main entity that needs desperately to be bailed out.  We don’t know this due to the ability to print money and hand it out.  But this is going to change with a very loud bang and not in the distant future, either.  First, more news:


Canada Cuts Benchmark Rate to 0.25%, May Keep It There For More Than Year   ZIRP is spreading like wildfire.  The Japanese system is becoming the norm, not the exception.  During the last 15 years, I have been in a rage over the Japanese ZIRP system.  Even as their GDP grew for a record number of years, they clung to the ZIRP system of lending.  When inflation hit Japan and was over 3%, they still held onto their ZIRP system.  No matter what happened, they refused to change ZIRP.  They ceased to be anything resembling modern banking.


Never, ever has this happened before in the last 1,000 years.  Never, ever has this been done for more than one year by one of the top three economies of the world.  No one can run a ZIRP system for very long due to its destruction of capital.  The only way this can be done is if a country bases its entire economy on exports.  Which is what Japan did.  More about that in a minute.  As all the G7 nations slide into a Japanese ZIRP regime, they find that they can borrow money to infinity if it is always debts in perpetuity.


GloboTrends Wiki / perpetuity


Value of Perpetuity



PV = C/r,


where C = yearly Cash payment, and r= rate of return interest


example: perpetuity paying $500 a year, with relevant interest rate of 12%, the value of the perpetuity is


= $ 500 / 0.12


= $4,166.67


Note: if the interest rate had been LOWER 10%, then the value (of the perpetuity) would be HIGHER


= $500 / .10


= $5000.00


So, the value increases with decreases in interest rates, and vice-versa


Perpetual debts are Medieval.  Yes, from the era of kings and knights jousting and maidens in towers, medieval.  In 1230, Fibonacci created the first European book explaining how to figure out forward payments of debts.  Nearly instantly, the Northern Italian city-states seized up on this to sell war bonds that paid out fractional amounts in perpetuity.  So, to avoid taxes, this was a ‘painless’ system which had a lot of pain….but IN THE FUTURE.  Namely, these perpetual debts increased warfare and strife and increased debts that were never paid off.


The only way to deal with these accumulating debts was to have a constantly growing political empire.  So imperialist expansion had to grow faster than imperial debts.  Right off the bat, they came up with a formula that ran these perpetual debts at between 3%-12%.  Now, look at the formula above.  The value of these perpetuities were higher if the interest rates were lower!


Now, as the planet’s major economic and trade empires go into yet another cycle of tremendous debt building, all of which are PERPETUAL DEBTS, we get what?  Why, super-low to the point of vanishing, interest rates!  And why is this?


It makes the debts much more valuable for the holders of these debts, right?  This also means, savers MUST buy these perpetual debts because they drive down all interest rates!  So, instead of holding time-sensitive savings systems that one can withdraw from, easily, one is locked into a PERPETUAL system which can be traded BUT NOT PAID OFF.  It never closes.


Now, before our heads hurt too much, let’s look into how this operates in the real world: all major governments wishing to spend money to prop up their economies, use perpetual debt issues to capitalize all systems.  One by one, systems outside of the government’s perpetual debt system can no longer raise funds because all funding is flowing into buying perpetual debts.  These governments, in turn, LIE about what is going on.  And claim, they must drop interest rates even lower so that lending can increase.


But over time, as the ZIRP system of PERPETUAL DEBTS suck down more and more capital, the only entity that can issue more debt becomes the government, itself.  We see this all across the planet now.  Banks are NOT creating loans based on capital.  They are creating loans based on GOVERNMENT ZIRP PERPETUAL DEBTS.  And can we escape this system?


Obviously, not.  This is why it is such a danger.  We escaped it the last two times via massive world wars.  Thanks to science, we now have the ultimate death weapons with which we can destroy all of this perpetual debt: nuclear warfare.


Now, in the past, some nations like Russia or China or FRANCE…escaped from the ZIRP PERPETUAL DEBT trap via revolutions.  So did the US.  Of course, these are extremely destructive, too.  And usually involves lots of tremendous violence and death.  This is probably why I have been yelling for so many years about cheap loans: they are DEADLY.


For the same reason, all things from the Cave of Wealth and Death are deadly: the simple solutions, the easy way of doing things, always ends up the most painful way of doing things.  All the cheap tricks are very, very expensive.  Northern Italy discovered the joys of perpetual debts coupled with super-low lending until they were utterly destroyed by waves of foreign armies, populace uprisings, etc.


Using the “perpetuity in growth” formula is a convenient way to calculate terminal values, which can help determine the net present value of an opportunity. After all, who can accurately forecast growth rates, margins, and interest rates five years from now?

Unfortunately, aggressive growth rates and low discount rates can lead to extremely high terminal values. The impact of these extreme terminal values can encourage a buyer to overpay for a company.

Beware of valuations that depend on large terminal values. You do not want your future to depend on finding a “greater fool” to bail you out.


I love this: it is yet another proof of my own way of thinking.  Namely, the perpetual growth estimations always tend towards increasingly wild thinking so that if we dare go past more than three years, we end up in psycholand.  The examples used by this book talk about estimating a construction company’s future profits.  It showed how, if you calculate ahead from 2002 to 2009, the profits soar.  Only they didn’t, not in real time.


About calculation interest rates 5 years ahead: they will all be nearly zero.  This is because of the perpetual debt machine which is now in high gear.  More and more people hold more and more perpetual debt and this debt’s value to its holders grow as interest rates race to zero.  And so both are now growing at a mad rate.  But interest rates can’t go below zero….EXCEPT THEY CAN!!!


This was done by deep-in-public-debt Japan: when their inflation rate was over 3%, government debt interest rate via the Bank of Japan sat at almost zero percent!  Now, the US is moving into the same trap and bond traders talk about a bond bubble forming.  Absolutely!


Far from ‘inflation’ disappearing, IT IS CHANGING INTO PERPETUAL DEBTS that are bigger if interest rates are lower!  And THIS IS A TRAP.  It is very much a dark part of the Cave of Wealth and Death!  It is not a great and wonderful thing, it is a terror and a horror.  Its very simplicity and its deeper nature which is PERVERSE means, the more we struggle in this spiderweb of debt, the more we get entangled!


This is why I am FURIOUS that the US is now using PERPETUAL DEBT to capitalize the IMF!  This increases not only our own danger but puts the entire planet into increasing danger from WWIII.  Now, let’s go even deeper into this mess:  below is a speech given yesterday by the new head of the NY Federal Reserve:


FRB: Speech–Kohn, The Economic Outlook–April 20, 2009


Consideration of the likely shape of the recovery depends very much on understanding how we got to where we are now. And this is where the Federal Reserve thinkers are the weakest. For a number of years earlier in the decade, U.S. economic growth was supported importantly by rapid increases in consumption and housing, which, in turn, were fueled by an extended surge of global credit. A FATAL combination, one that the Fed should have terminated, instantly, back in 2003. Housing demand was propelled, in part, by persistently low long-term interest rates, —which is due to the perpetual debt system run by our government overspending— loose underwriting standards on mortgages, and, for a while, expectations of continuing increases in house prices that resulted in the building of too many houses and the elevation of home prices to unsustainable levels. These same developments fed a surge in consumption through the effects on wealth of rising house prices and through various financial innovations that allowed many households to liquefy their housing wealth.

Housing was a tool, not a source.  That is, the exposure to more debt was based 100% on one’s income.  The housing was used as a hook so debtors would not walk from their obligations.  When they do walk, all systems collapse, because then, all the sureties upholding all debt promises, collapse in value and thus, further destabilizing the banking structures and this drives them into the government’s perpetual debt system.

Financial intermediaries were further exposed by generally inadequate compensation for risk and increased leverage. As the housing boom petered out and then reversed, both households and lenders found themselves overextended, developments that led to a mutually reinforcing pullback in spending and lending. The dynamics of this adjustment, which coincided with the collapse of the global credit boom, helped push the U.S. economy into deep recession….

WE ARE IN THE MIDDLE OF A HUGE CREDIT BOOM! This very minute, credit is growing. But NOT in ‘markets’ but in ‘governments’! Frankly, for me, this is a revelation. Namely, I didn’t think this way, before. I gained this knowledge via reading some very good books and online information services. Thus a broad range of policies are in place to foster recovery. NOOOO! The Fed is interacting with the government to make this much, much worse! But economic recoveries are also typically shaped by powerful internal cyclical dynamics. Indeed, it appears that some of the forces that had been holding down growth are starting to abate. Totally false. In particular, the recent data suggest that the multiyear contraction in home sales and new construction may be nearing an end. House prices could well continue to fall for a while, and months’ supply of unsold homes will likely remain elevated for some time. At some point, however, house prices will begin to flatten out, and fears about buying into a falling market will start to wane. At the same time, the improved affordability of homeownership resulting from reduced house prices, low mortgage interest rates, and government programs (including incentives for first-time homebuyers) should boost demand. Because inventories of unsold homes are still very high relative to sales, it may take a while for any pickup in demand to translate into higher production. But even stabilization in residential construction would remove what has been a significant drag on the U.S. economy….

Cheap mortgages based on the ZIRP government perpetual debt system is NOT GOOD.  And not sustainable.  Eventually, even the government will run out of potential future credit and will crash.  Japan is already at 170% GDP.  We are approaching that.  I have noted in the past, the cheaper the interest on loans, the deeper into debt we go.  America is NOT all about building houses.  It has to be productive.  House building and speculation is a DEAD END.

Spain after it raided the New World of its gold and silver, had an immense estate bubble which then saddled the empire with immense mountains of PERPETUAL DEBTS which was how the government paid for all of its many, many imperial wars!  Then, Spain went bankrupt, over and over again, WITHOUT escaping from these perpetual debts, only dragging them down somewhat and moving more of them into the further future…on and on until Spain ceased to be an empire and barely was able to be even a country.

Another factor at work is the sharp fall in prices of oil and other commodities since the middle of 2008. This decline in prices–which partly reflected the worldwide drop in demand–has helped bolster real incomes and consumer spending in the United States….

For years and years, our leaders assured us that oil prices don’t create inflation or swing our economic cycles. Of course, it does, immensely. Thank you, Kohn, for admitting the obvious.

In the current episode, the imbalances preceding this contraction were substantial, and we are still dealing with the consequences of the developments that precipitated the downturn….

Imbalances of all sorts from top to bottom are at fault and fixing these so they cease feeding the perpetual debt death machine is very important, more important than killing poor peasants using expensive robot assassins shooting expensive missiles. Exports were an important source of strength for the U.S. economy in recent years. It is hopeless. Everyone, without exception, in our top ranks of government and ‘industry’ constantly harp on our wonderful exports and how important these are….while TOTALLY ignoring imports. However, the global nature of the current economic downturn means that they are unlikely to provide much support for domestic production going forward. Activity in foreign economies, taken together, contracted in the fourth quarter at a rapid pace–similar to that in the United States. Recent indicators point to equally dismal outcomes in the first quarter and, although there have been a few signs of stabilization, have yet to send a clear signal that the global economy has hit bottom. The intensification of financial turmoil was global, and many of our trading partners are also facing constraints on credit availability….

All of them are creating credit. Obviously, via government fiat. So, talking about the lack of credit is stupid. We must discuss why perpetual debt issues by governments are bad. And how the perpetual ZIRP system kills interest rates that banks normally use to capitalize themselves via attracting savings which are capital, not more debts. On the one hand, we cannot rule out the possibility that adverse economic conditions will cause deeper cuts in prices, a greater softening in wages, and a steep decline in inflation expectations. Substantial declines in inflation would raise real interest rates, thereby restraining the recovery even more. Moreover, the risk that inflation could be lower will be exacerbated to the extent that economic activity falls short of the path that I have described. In these circumstances, the Federal Reserve would continue to look for ways to relieve financial pressures and encourage spending.

Spending isn’t falling. At least, not in the perpetual debt sector. All governments of the major powers [not Iceland, Ireland or Eastern Europe, they have zero power] are raising spending and increasing public debt. This way, they hope to flood the world with funny money based on their ability to create perpetual debts at will. On the other hand, the Federal Reserve’s actions to ease credit conditions have resulted in a tremendous increase in its assets and in bank reserves. All ‘wealth’ is being rendered worthless and then, moving into government coffers where they capitalize perpetual debt issues. Some observers have expressed concern that these actions, if not reversed in a timely manner, are sowing the seeds of a sharp pickup in inflation down the road. Or rather, a flight from paper money! We see the first glimmers of this in gold markets…. We are firmly committed to acting in a way that preserves price stability, Ie: stagflation—-and we believe we have the tools to absorb reserves and raise interest rates when needed. Except, if they do this, they destroy the value of perpetual debt government bonds. Moreover, we are working with the Treasury to introduce legislation that would enlarge our tool kit for moving away from the extraordinary degree of financial stimulus we have put in place when the time arrives.


YIKES!  So, these clueless fools who destroyed us because they refuse to look at history, are now working on a ‘tool kit’ that will undo the ‘extraordinary….financial stimulus’ they created?  And pray tell, what is this wonderful machine?  So far, the only machine that destroys this system is to have a world war or a violent revolution where all government debt is denied and any bond holders are killed or told to go to hell, forever.


FEDERAL RESERVE statistical release 



The red box shows the declines.  Production and utilization declines are now similar to late 1930, early 1931.  The total index is now -2.6% below the beginning of the bubble.  In other words, all the good we gained from that vast debt bubble has been totally lost.


I altered the graph below.  For example, I compared the spreads between capacity and utilization, comparing only the manufacturing sector which is the red line.  The blue bars show that the smallest spread was in the 1990 Gulf War I recession.  The stagflation years were the next two biggest spreads.  The height of the Volcker interest rate hikes was in 1982.  So that spread was nearly as bad as the present spread.  But of course, ’09 is not done.  The decline is not finished.  It will be the worst since the Great Depression and every bit as long, too.


Utilization of our industrial base has been in continuous decline, overall.  The peaks are lower and lower and the falls are increasing.  Now, one of the problems with our scheme of increasing the value of our export industry as the basis of our economy is, it doesn’t fix anything. If we sell a lot, overseas, but buy a lot more from overseas, this is bad.


But even selling mostly to exports is bad, look at Japan!  We must strengthen INTERNAL markets, not try to flood external markets while they do the same, to us!


Regional Economic Report (Summary) (April 2009): Bank of Japan  Click on image to enlarge:


All of Japan is in very steep decline.  This is a major problem.  Their ZIRP system no longer gives them any advantage since every major competitor market is doing the exact same thing.


Japan Eases Recession Pain as Wage Cuts Support Jobs (Update1) –


Toshio Taniguchi is one of about 10,000 workers at Tokyo-based Renesas Technology Corp. who accepted a pay cut last month to keep the company alive.

“It was tough to swallow,” said Taniguchi, a 62 year-old worker at the company, Japan’s biggest unlisted chipmaker. “But most people are just thankful they still have jobs.”

ZIRP continues its destruction.  Ever since it was installed, wages have fallen in Japan.  Here, in the US, this also has been true.  We have significant inflation of all things of necessity [food, medicine, rents] but dropping wages and higher debt loads. The cheaper the interest rates, the less money the workers get and the worse their joint condition. 

Japan, the country with the most flexible wage system in the developed world, –ie, the workers have no security, no rights and no real unions and no political power—is slashing pay rather than sacking people,—this is an illusion, since over one third of the workers are ‘part time’ even when working full time, they have no unemployment pay or severance pay or anything at all!—easing the pain of what may be the country’s worst recession since World War II. A longstanding tradition of lifetime employment gives companies such as Toyota Motor Corp. and Renesas little choice, even if millions of workers like Taniguchi have to make do with less.

ONE THIRD of Toyota’s workers are ‘part time’!  The ‘lifetime employment’ covers fewer and fewer as the older workers die or retire.  Eventually, it will cover no one.

“Many people are spared a tragic outcome, even if there’s a downside for everybody,” said Robert Feldman, head of Japan economic research at Morgan Stanley in Tokyo. “It helps remove the fear factor.”

GAH!  Feldman is a creep.  He is a gnome, of course.  So he is OK with the pay collapse.  It won’t happen to HIM.  And dropping wages to ‘preserve jobs’ is a classic Great Depression ploy!  This makes Toyotas cheaper to manufacture and thus, forces all competitors to drop wages to compete with Toyota!  This is a depression cycle, immensely so!

Not all Japan’s workers are equally protected. In addition to paring wages for full-timers, companies are cutting temporary staff, a group that makes up more than a third of the country’s 56 million-person workforce. Before the economic bubble burst in the early 1990s, only 20 percent of workers were temporary.


If the number of ‘part time workers’ rises the same degree this cycle, 50% of Japan’s workers will be ‘part time’ by 2012.  This is insane.  The G7 should have attacked Japan for its very aggressive destruction of worker’s purchasing power.  This is why the world is so lopsided.  Now, we all have to play Japan’s game.  Dropping wages, rising perpetual debt leading to ZIRP forever and forever or until someone goes nuts and destroys the entire government and perhaps, all of Japan.


Now, another graph: The Velocity of Money and Economic Deflation :: The Market Oracle :: Financial Markets Analysis & Forecasting Free Website


Another feature of perpetual debt ZIRP systems.  The central bank is sucking down all equities, all assets and is the sole capital holder in our system, when all is said and done.  Anything that grows at a 1500% rate is a damn bubble.  picture-54

The first major peak for money velocity was during WWI.  It fell to new lows in mid-1920’s, not at the start of the Great Depression.  It did grow during the depression, after 1932.  Grew very rapidly due to government programs.  But was still much less than during WWI.  Only by 1990, did we see it surpass the WWI levels.  It is still well above the average.  Will it crash to 1946 levels of only 1.15?  


If we can’t produce more perpetual debt, it will.  The decline from 1940-1946 was during a time our government ran up record debts.  But due to war rationing, the velocity of money fell due to nowhere one could spend it.  So people bought war bonds.  Velocity shot upwards once the war rations ended.  


We have no rationing here, yet.  We did have a bit of this in the early 1970’s.  The probabilities of this happening is low.  This is because, the government would rather see prices inflate and thus, goods are rationed.  This leads to higher money velocity.  But in a ZIRP system, cutting wages is how we ration goods.  And this is the riddle.  





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Filed under free trade, money matters, war and peace



  2. I agree with a lot of what youre saying here but it could do with more detail. – That’s what’s cool about working with computers. They don’t argue, they remember everything and they don’t drink all your beer. Attributed to Paul Leary

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