The Global Economy Burns, While its Leaders Fiddle

China is by no means a panacea of economic equality or perfect policy. It has a fast growing portion of billionaires and accounts for nearly a third of the world’s luxury goods consumption, while its per capita GDP ranks 125^th globally, and 2.8% of Chinese live below the poverty line (according to ‘official’ stats).

In contrast, the US has an official poverty rate of 14%, though think tanks like the Economic Policy Institute, consider this estimate low. Still, in its latest 5-year economic plan, the Chinese government at least gave lip service to how to deal with its growing inequality - by increasing certain wages by 40%, decreasing taxes on the poor and increasing them on the rich.

The US government has no such strategy, except in campaign speeches, as reflected by our anemic economy. Instead, we witness inane partisan prattling over the deficit and what mini-budget modifications are needed to bring it into line, most of which would disproportionately detract from the people that had the least to do with inflating it. (i.e. anyone not running a bank or hedge fund.)

Yet, like our own, inequality figures will worsen for China, which will ultimately destabilize its economy. The result of attracting that menacing, mercurial entity called ‘global capital’ is inflated growth figures predicated on bulging service sectors and population wealth gaps. The more capital sloshing around a country, the more destabilized it becomes, and the more its leaders pretend that’s not the case. 

Global speculative capital (the kind flowing through any major financial entity) is cunning, aggressive, greedy, shortsighted, and yes, cowardly (it doesn’t stick around when things get shaky.) If it were a person, it would smack down minions of grandmothers and infants to get to the door of a fiery building first, and then deny burn victims healthcare. It hates rules, which is why it likes promoting the notion of markets free of them.

Individual investors in silver are the latest casualties of speculative capital’s fickleness. People that invested their own money in silver were snuffed by the entities that borrowed or invested other people’s money to do the same. The COMEX found the anti-speculation religion it never sought during run-ups of commodities prices for items like food and fuel, and raised silver trading margins.  Though those hikes were the prevalent reason for silver’s price plummet, all they really did was give fast capital a chance to book profits and alter course.

Any investment is subject to fundamental forces, like supply and demand or how much US economic policy is devaluing its currency. But, it’s more subject to speculative whims, like who's in and out, by how much and how fast, whether its a fund or an entire nation.

The time-honored scheme in which controlling capital cons ordinary people (or governments) to join it before crashing or heading for the hills has devastated many individuals and economies. That ploy ran rampant during the crash of 1929. Banks put up their ‘own’ capital, which was really borrowed capital, to spur individuals to do the same with their savings. When banks pulled out, people were hosed thrice – through the loss of their savings, the decimation of their bank accounts that the powerhouses used for speculative purposes  -  under the guise of – serving their clients, and by a raging Depression that killed jobs and hopes.

Not much has changed. Matt Taibbi’s recent excoriation of Goldman Sachs reveals how gray the line is between screwing and screwing, one’s clients. Only now, when banks lose money, governments and central banks reward them with trillions of dollars of subsidies, using the excuse of aiding the population and avoiding larger catastrophe. They say things like - it takes time to increase employment, but we can waste no time in propping up our financial system. Or - pensions and teachers caused budget failures, but we’ll keep holding excess reserves, borne of debt, for banks in case they need it, and pay interest on it.

We are in an ongoing global economic depression. The signs are everywhere, even as they are lost on economic leaders that put private banks and short-term speculative capital before citizens and long-term working capital. Central banks use other people’s future money in the form of debt to do this. No central bank holds, and thus enables, more national debt than the Federal Reserve.

I hate to keep repeating this, but until someone of some ability to do anything gets it, I’m going to keep going. Last week, Fed chairman, Ben Bernanke, co-enabler with Treasury Secretary, Tim Geithner (among others) of our ballooning debt and mis-prioritized economic policy, urged Congress for another debt cap increase, or else.  The guy holds about  $2.5 trillion of debt on his books, being used for – nothing helpful to the general economy. A simple transfer would solve the debt cap problem in a nanosecond. Going a step further, a simple exchange of any of the $1.5 trillion of excess bank reserves receiving interest from the Fed, would do the same.  Instead of defaulting on, how about retiring, some debt? Thinking outside the box.

All around the world, the bodies and countries with the most power keep screwing people (some like IMF head, Dominique Strauss-Kahn, literally) and entire nations, while supporting their banking systems.  Last week, S&P announced it would downgrade Portugal if it didn’t play ball with the IMF and EU over its 4-year 78E billion-bailout program in return for hacking public programs.

Echoing our own Congressional goons spewing spending cuts in the face of inadequate revenues and for-bank-manufactured mega-debt, the S&P noted, “Two-thirds of the projected savings in [Portugal’s] 2012 budget will likely come from spending cuts.”

On a roll, the IMF also declared Italy needs ‘structural reform’, meaning labor market reform, less public ownership and more private investment to “unlock its growth potential.” (aka invite more speculative capital at its earliest convenience.)

Meanwhile, thousands of people are again striking in Greece, as the IMF and EU discuss more austerity measures, following the bank bailout that provoked public outrage a year ago, and a rating downgrade by S&P. The EU remains more concerned with investors regaining confidence in Greece than economic stability of its citizens. Then, there’s Ireland, for whom its last bailout didn’t dent its 14.5% unemployment rate, or fill in the gaping holes its banks dug.

In short, the global ‘remedy’ for depressed economies and debt-bloated banking sectors remains to do  – more of the same - and pretend  this will beget a different outcome. Yet, there is no way this strategy will result in more stable economies.  What we can expect instead is further widespread deterioration.

Blackstone buying Dynegy: Deja Vu to next Energy Crisis

I hate when mistakes are so obviously repeated, yet no one seems to care. Yesterday, Blackstone announced it would take-over (i.e. take private) Houston-based energy company, Dynegy, in a $4.7 billion deal in which Blackstone would acquire $4 billion of Dynegy's debt, and Dynegy would sell 4 power plants to NRG, Energy Inc. Because of the sheer inability to look more than no steps in front of it, Congress left open a really important loophole (within a financial reform package comprised of loopholes) for certain private equity firms. They get to keep buying energy companies - they get to take them private, away from the eyes of regulators, and by doing so - they get to screw around with your lights.

About a decade ago, a little company called Enron (aka one of the fastest growing companies in the country in 1999) messed about with everything from unregulated energy derivatives to broadband to power grids. That didn't end well. And it wasn't just Enron - many energy companies participated in the great energy manipulation play at the turn of this century. I list them all and describe the repercussions in the 'Energy, Enron and Entropy' chapter in my first book, Other People's Money. The companies included Williams, El Paso, Reliant and Dynegy. Dynegy was also the hot potato between Enron and Citigroup - after a merger with Enron failed, Enron declared bankruptcy. The whole situation forced Citigroup's favorite former Treasury Secretary, Robert Rubin, to lob a call into the rating agencies to play down Enron's debt problems (no conflict of interest was ever determined, so what if Enron owed money to Citigroup).

At any rate, the Enron situation was caused by a severe lack of energy industry oversight (at the physical power grid and financial derivatives level), despite energy being something upon which each of us relies every day. And now, the non-introspective attitude of New York Times and other, journalists shows the Blackstone-Dynegy deal as just another smart financial play:

"Buyout firms have been seeking to put their billions of dollars in untapped investor capital to use. With banks openly seeking out deals to back once again, private equity firms have sought to step up their core business of acquiring and selling companies.

This type of depiction ignores the growing danger of this trend for the rest of us. Those smart firms - they used to dabble in energy, then moved over to housing, and now they're back to energy. Yet, each decision results in disaster for the rest of us. Plus, running energy companies in the dark, so to speak, is exactly what set us up for the Enron/Worldcom type fraud, disruption, bankruptcy and layoff cycle of 2001-2002. We are being set up again. Dynegy shareholders are getting some cash and some private equity firm will have control over its customers' energy demands and the related billing. Maybe Congress will pretend to do something about this in a few years, once it's over and the blackouts and related job cuts are behind us.