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2014-05-22 08:31 by Karl Denninger
in Editorial , 256 references Ignore this thread
The Death Of Reason *
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A few days ago I penned an essay entitled How Allegedly-Reasonable People Wind Up Labeled BS Artists, in which I went after Paul Craig Roberts on his claim (circling the conspiracy-minded like a hive full of angry hornets) that the Fed had "secretly" bought up $140+ billion in Treasuries in Belgium.

I pointed out that if you're going to make such a claim then you are effectively claiming that The Fed has committed and is committing bank fraud on a continuing basis -- so just come out and say it.

So what did he write as a follow-up?  A couple of days ago he claimed this:

In response to our account of the mysterious large rise in Belgium’s Treasury purchases , it was suggested that the transaction would show up on the Fed’s balance sheet. However, the Fed is under no obligation to show the transaction.

Gee, who "suggested" that Paul?  Got a problem with attribution over there?

Paul goes on to talk about GAAP standards and the claim that a corporation does not have to itemize and disclose the details of "any event that represents less than 5% of its assets."

Ah, but that's not the whole story, you see.  The reason is that The Fed has statutory requirements in its operation; specifically, the Fed is barred from lending against an obligation of a foreign government.  (10A(2))

There are a number of other restrictions as well.  Swap lines are legal because the obligation is in US Dollars, and must be repaid in dollars.  If the swap had to be repaid in Euros, for example, it would be illegal because the Euro is an obligation of a foreign government.  That would result in The Fed taking currency risk -- an act that is explicitly against the law.

Now there is a fly in the ointment, of course, in that if you lend against a US Obligation that happens to be somewhere other than in the US you might have trouble seizing the collateral if the government involved disappears out from under you.  

But the fact remains that if you're going to argue that The Fed is engaged in some secret set of transactions that are questionable at best, and quite-possibly flatly illegal, then show your work.

Oh, and don't point to the Flow of Funds statement (the Fed Z1) either -- especially when you simply make things up that aren't actually there.  Anyone who's read me for any length of time knows damn well that I go over that thing (although I freely admit to not going over every single line) on a quarterly basis.  It is important to note that the Z1 is an attempt to capture all credit market flows that come into or touch US institutions.  

But wait -- Paul pointed to an alleged change that facially appears to sort of validate his thesis, right?


The line Paul cites ("Credit Market Borrowing") is a rate change, not a level, and is both seasonally adjusted and annualized.  

The level (that is, total amount) of "Rest of World" exposure as of last report among entities The Fed tracks in the US (2013/Q4) was 2,889,455, or $2,889 billion.  That is an advance of $64.9 billion in actual dollars over the last quarter (Fed table Z1/Z1/LA264104005.Q), not $142 billion. 

So no, Paul, what you claimed is not "hidden" in there.  How desperate do you have to be to scour a document that you ought to be familiar with and then take a SAAR (that is, seasonally-adjusted annualized rate of change!) figure and try to claim that it's a one-quarter difference and thus "this is where it might have been hidden"?

In short: smiley

In addition, since Paul insisted on trying to defend a blown thesis with something that looks good but doesn't pass the 15 second smell test (if you know what you're looking at) he managed to get me to spend another 15 seconds reading some of his other material while I was looking for something that I could fact-check.

That was unfortunate (for him), because I ran across this recent missive of his:

Not even Japan and Germany posed a threat to the US. Neither country had any prospect of invading the US and neither country had any such war plans.

Let’s assume Japan had conquered China, Burma, and Indonesia. With such a vast territory to occupy, Japan could not have spared a single division with which to invade the US, and, of course, any invasion fleet would never have made it across the Pacific. Just as was the fate of the Japanese fleet at Midway, an invasion fleet would have been sitting ducks for the US Navy.

Assume Germany had extended its conquests over Europe to Great Britain, Russia and North Africa. Germany would have been unable to successfully occupy such a vast territory and could not have spared a single soldier to send to invade America. Even the US superpower was unable to successfully occupy Iraq and Afghanistan, countries with small land areas and populations in comparison.

So the argument appears to be (again, left unsaid but broadly-hinted at) that we shouldn't have entered WWII at all.  We shouldn't have done anything when the Japanese bombed Pearl Harbor.  We had no dog in the fight.  The Japanese invasion of China would have ultimately stopped there of its own weight. We had no right to do anything except protest loudly after Pearl was immolated by Japanese bombs.

Same with Germany and Hitler.  We had no right to interfere.  If the entire European Continent was left speaking German and every single Jew was rounded up and exterminated from Russia's border to the Atlantic, we still had no right to interfere. Leave aside obligation; we're talking about whether it would be correct on a moral and ethical basis to come to someone else's aid in that circumstance.  Of course we all make these decisions without the benefit of hindsight at the time we make them (and did then) but what Paul appears to be arguing is that in the fullness of time when the facts are known if we could go back and do it again we shouldn't.

Really?  You're going to piss on the grave of one of my Uncles who served in WWII, along with the grave of my father who would have gone to fight but was barred from doing so because he had TB and they wouldn't take him?  Never mind all of those who went to fight and never came home.

Paul goes on to reference Ukraine, which I suspect is what prompted his missive in the first place.  I just had an interesting call yesterday afternoon; Press TV wanted a comment from me on the Ukraine situation. I wasn't available for a formal interview but I did give them one over the phone. I suspect they were looking for something simple in a 30 second sound-bite.  What they got was something else entirely; who knows if they ran it.

See, Ukraine is not a simple situation and trying to distill it down into "US Bad, Russia Good" or "US Good, Russia Bad" is intellectually dishonest -- and that's being kind.

So what I attempted to lay out in the short time I had (and I might have failed simply due to the limits of time) is that:

  • The US has clearly been interfering in political affairs in Ukraine, and has no right to be there doing so.  That's a "bad."
  • Russia has clearly been interfering in political affairs in Ukraine, and has no right to be there doing so.  That's also a "bad."
  • The United States had its head firmly planted in its ass when it failed to take into account the fact that Russia had, in Crimea, its only deep-water 12 month naval port. To believe they would simply walk away from that is both unreasonable and stupid.

  • Russia, and the United States, are both refusing to recognize the right of a people to choose their government including its replacement or dishonor as they direct.  That very right is the foundation of the United States and as such our abuse of same is especially galling, but human rights do not have political borders -- therefore the same charge applies to Russia.

  • Ukraine, on its own volition, entered into a vassal state agreement with Russia where it obtained single-source energy supplies at below market rates, essentially taking welfare from Russia.  It is beyond stupid to believe that this was an actual "gift"; there is always a price associated with same and if you're going to act like you have a right to some other nation's resources by other than a free-market purchase at market prices don't be surprised when that quid-pro-quo shows up at your front door -- in a tank.

There was more, but I think you get the idea.  This isn't a simple situation and neither side is "right."  Arguably the worst part of it is that Ukraine itself has acted in ways contrary to its own best interest when it came to energy flows and has put itself in a box from which there is no easy or quick escape.  Entitlement mentality is lethal not only among individuals but nations as well; there is always a price exacted.

I think the situation over in Ukraine sucks and because there is no simple answer it has a particular quality to its sucking that could quite-easily lead to some really ugly outcomes, including a (for real, with lots of bullets flying) civil war that has the risk of spreading beyond the nation itself.

War sucks -- on that point PCR and I agree.  I also have grave concerns and issues with sending our troops into any sort of combat where the goal and rules of engagement are other than "kill anything that moves until the other side sues for peace."  In my view if you're not doing it that way then you're not justified in going at all, and yes, I understand that this means that a lot of civilians will die.  

Now let's deal with that point -- civilian deaths -- because Paul seems to think that this is an argument against war. Indeed, he leads his piece with:

Did you know that 85 to 90 percent of war’s casualties are non-combatant civilians? That is the conclusion reached by a nine-person research team in the June 2014 issue of the American Journal of Public Health. The deaths of soldiers who are fighting the war are a small part of the human and economic cost. Clearly, wars do not protect the lives of civilians. The notion that soldiers are dying for us is false. Non-combatants are the main victims of war.

Nope.  Those people are not victims.  They're legitimate targets.  I reach this conclusion predicated on our Declaration of Independence, a document that lays forth principles that I accept as factual.

To the point, I accept the following as natural laws:

  • All persons have unalienable rights as a consequence of being human. Governments do not bestow rights because you cannot bestow that which you do not first possess.  Governments can only protect or disabuse individual rights.

  • Those rights include life, liberty and pursuit (but not guarantee) of happiness.

  • Governments are instituted among populations with and by the consent of the governed for the explicit and sole legitimate purpose of securing those rights.  That is, government only has one legitimate purpose -- to protect and secure individual rights, providing the means and forum for redress of wrongs that one individual commits against another. 

The simple fact remains that if you honor the premise that all governments only exist with the consent of the governed then there are no true innocents in a war except for infants and children and the responsibility for their casualty falls on the shoulders of their parents as the negligent parties because by definition if you live in a land as a citizen you are responsible for allowing the government of that land to exist and act beyond its just powers.  If that government does something evil and unacceptable and you get killed as a consequence when war breaks out that's part and parcel of your dereliction of the duty that comes with citizenship and is the price of your decision to sit in silence while said outrages take place instead of putting a stop to them.

Sleeping while on duty is a good way to get yourself killed whether you're in the military or not.

Perhaps the risk of you getting killed as a direct and proximate consequence of your gross negligence might wake you up to your responsibility to not allow a government to continue to exist that undertakes any actions beyond the just boundary of defending individual rights!

The lesson we ought to learn from this centers on making sure we don't make those sorts of mistakes in other places, both now and in the future.  Dependence is bad.  Single-source dependence is really bad, especially when coupled with implicit or explicit subsidy.  As I have previously noted in my writing on this matter so-called "trade" as a sop to mollify what could otherwise turn into a military excursion does not work when we're talking about single-source, non-market-based "trade."  That is in fact the state of being a vassal and when you finally reject the other party and try to tell him "get out!" (irrespective of how and why) the guns are rather likely to come out simply because the other guy sees this as your violation of what he believes was a bargain; you got the benefit you negotiated for and then screwed him.  Since he can't take recourse to the courts in your nation and in his he can't enforce his judgment that leaves him with only recourse to guns.  (As an aside, isn't it interesting how this is the same situation that arises with various "prohibition" style items within a nation?)

It's easy to find a way to twist and distort so as to make a claim -- whether it has to do with war or whether it is something more mundane, such as trying to claim a seasonally adjusted and annualized figure is in fact a single-quarter change in level.

However, both wind up being, on even cursory examination, no better than trying to claim that 2 + 2 = 6.

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Comments on The Death Of Reason
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Djloche 7k posts, incept 2008-07-07
2014-05-22 09:18:52

Thanks for the comments on the mystery buyer of dog squeeze treasuries. I am interested to see who ends up being the buyer. Given how circle jerk they are already, I too had thought it was the Fed. But if the math doesn't work, the math doesn't work and it was someone else.

"The Constitution is the IDE. The 2nd Amendment is the debugger."
Aztrader 8k posts, incept 2007-09-10
2014-05-22 10:15:49

Do you think that the Fed has purchased bad paper from the banks? When I see the category "other" on their balance sheet, we have to wonder. Is it possible the Fed is using the same accounting that the banks are using ignoring mark to market for all their assets? If so, doesn't this violate thier charter?

Unfortunately, we will never know because they are fighting tooth and nail from being formally audited.
Tickerguy 202k posts, incept 2007-06-26
2014-05-22 10:17:12

Unfortunately, we will never know because they are fighting tooth and nail from being formally audited.

Bullshit. The Fed's transactional flows (financial statements) are in fact audited.

"Perhaps you can keep things together and advance playing DIE games.
Or perhaps the truth is that white men w/IQs >= 115 or so built all of it and without us it will collapse."
Uppity_peasant 4k posts, incept 2009-06-26
2014-05-22 11:13:37

Paul Craig Roberts wrote..
Lets assume Japan had conquered China, Burma, and Indonesia. With such a vast territory to occupy, Japan could not have spared a single division with which to invade the US, and, of course, any invasion fleet would never have made it across the Pacific. Just as was the fate of the Japanese fleet at Midway, an invasion fleet would have been sitting ducks for the US Navy.

Roberts is some kind of special idiot. Even with the broken Japanese naval codes in hand, Midway boiled down to a crapshoot mostly tilted in our favor by a guy named Commander John C. Waldron, and his solitary torpedo bomber wing from USS Hornet (the immortal Torpedo 8).

The squadron did not destroy any enemy aircraft with their defensive rear .30-caliber machine guns, nor did they damage any of the Japanese carriers.

All 30 men died except for one. All they did was suck the Japanese fighter cover from operational altitude down to the deck.

When the American dive bombers finally stumbled on the Japanese fleet, there was no significant Japanese fighter opposition at their attack altitude.

Luck, really. Paul Craig Roberts is full of crap, on this piece of American military history, at any rate.

If it's true that "assault weapons" are "weapons of war" and don't belong on the streets of America, why do the police need them? Who are the police at war with?
Seankerrigan 53 posts, incept 2012-10-10
2014-05-22 12:23:34

With regard to the citizen being wholly or partially responsible for his/her government's actions in war -- and by extension is an active participant in that war, I would disagree with your accepted facts, specifically that "Governments are instituted among populations with and by the consent of the governed."

The government is a social machine. A machine can be defined as a tool with multiple parts, each with a definite function, that applies power to achieve some purpose. By that definition, the government, corporations and other bureaucracies are machines, with individuals serving particular functions, but unlike a car motor or a radio, they have no physical form. We assign them ownership of offices, patents, real estate, and other physical things, but a desk is not a government anymore than you are your toaster.

Government is a fiction, obeyed by most because it is easier, obeyed by some because it gives power over the rest. Just because I was born here (and generally accept its dictates based on rational calculations having to do with force) does not mean I acknowledge it as legitimately representing me.

I would go further and say the only legitimate government is a small (though not necessarily limited government) based upon the principle of consensus. Only then can it truly represent everyone. You might say this is unworkable, but the Iroquois Confederacy operated under this model (in addition to a federalized system of local control, which was also consensus driven). In this way, there is a government, but it governs no one because it has no use of force.
Ktrosper 6k posts, incept 2010-04-06
2014-05-22 12:23:44

Gen wrote..
The Death Of Reason...
Heh. Seems to be alive and well here ;) Enjoyed the last bit on Natural Rights. Thanks.

The unexamined life is not worth living.-Socrates
The only stable state is the one in which all men are equal before the law.-Aristotle
Liberty exists now in the spaces government has not yet ch
Snowman 1k posts, incept 2009-03-09
2014-05-22 12:23:48

Don't get the hoopla over this.
Investors are selling equities and non-US assets and buying Treasuries. To some degree a FX play here too.
These investors (US and non-US) have accounts with Euroclear.
What's the fuss?
Cmalbatros 523 posts, incept 2008-05-07
2014-05-22 12:23:58

Karl, you are part Canine with a heightened sense of B.S. detector. Why did Roberts write without proof to back up his claims?

The only regulation that works - is failure.
Remember, the value/price of stocks and shares fall as well as plummet.
Mannfm11 9k posts, incept 2009-02-28
2014-05-22 12:24:03

With all the surplus funds floating around, it would be a reach to prove unequivocally the Fed itself financed such a transaction. The transaction could have been done in Euros with a series of derivative trades. It could be a hedge against another trade as well, like against Greek bonds or other PIGS paper that has gotten extremely expensive.

The reason for the mess in Ukraine will probably never see the light of day. I do believe we are trying to start the cold war again. I also believe that the people in the Ukraine are tired of getting fucked by the Russians, the Western Bankers and the leaders that are being paraded in front of them. Just as I am tired of the stage show we see in the US. The consent of the governed isn't always possible.

I have a sense the Communist revolution in Russia was about big oil and I suspect this one is as well. All the nonsense about filling the void with American gas is just that. If they attempt to do that, you can expect natural gas to seek a level much closer to the price of oil, thus your gas bill doubling at the least, once you figure the retail transmission costs and mark up. Sell the same shit for triple the price or greater. All they have to do is get the Russians out of the market.

All wars are about 3 things, food, minerals or generational hatred between groups, who probably fought wars in the past over the same thing or whose God is right. World War I was over these things. World War II was somewhat a result of the hard feelings over the previous war along with the Japanese seeking minerals and slave labor. It is deeper than that, but those were key components.

The nature of the oil and gas business demands control over supply along with control over the source of minerals. Extracting gas out of shale has opened a new avenue in energy that wasn't present before. It has also resulted in massive leasing of land. The oil and gas lease has some terms in it that force drilling and production of these minerals or the lease expires, usually after 5 years or when production ceases for a period of time, whichever is later. There has been massive leasing, so there has to be massive drilling and some production, even in a bad market. The industry pretty much demands producing as much of the substances as one can produce, as fast as they can produce it. Though waiting has some benefits, it also has its hazards, one of them being needed cash flow is denied. Knock a major producer out of the market and it opens the door to higher prices and a faster mode of production.

I would suggest Russia is the last frontier of on land minerals. There is really no telling how much of a lot of stuff they have there. The bankers here screw us out of everything we have, so why not the Russians. I doubt those involved really give a damn about what happens to the people in the Ukraine. I doubt we really gave a damn about what was happening to the Jews in Germany, as Albert Speer indicated in his book we could have ended that war merely by bombing their electricity. Why did we wait until the Russians got there 2 or 3 years later?

John Xenakis of Generational dynamics contends that war is part of the human DNA. Examining my own psyche, I have to admit that I can't disagree. Why else would so many people line up to participate in such a stupid activity? Usually so those in charge can gain more power and wealth at the expense of those under them? Hitler is always on the other side.

The only function of economic forecasting is to make astrology look respectable.---John Kenneth Galbraith
Godzillaman 174 posts, incept 2010-06-10
2014-05-22 12:24:14

"Did you know that 85 to 90 percent of wars casualties are non-combatant civilians? That is the conclusion reached by a nine-person research team in the June 2014 issue of the American Journal of Public Health. The deaths of soldiers who are fighting the war are a small part of the human and economic cost. Clearly, wars do not protect the lives of civilians. The notion that soldiers are dying for us is false. Non-combatants are the main victims of war."

Duh! Who do you think is the most important cog in the war machine?

They tried to play that game with the Japaneses when they had no problem plinking off medics and Red Cross.

You fight to win. The only rule in war is that their is none.

When was the last time we declared war? I though so.

PGR has been frightening me lately but I am just a caveman.

"You would prefer another target, a military target? Then name the system!"

Good thing the Germans bomb Pearl Harbor.

Sunkeye 309 posts, incept 2010-12-14
2014-05-22 19:31:07

Roberts' stuff used to REALLY hit home w/ me. Was a big fan but then he went kinda
goofy tho I can't recall right now on what particular matter.

I stopped following his byline and he joined the list of other guys who "spoke to me" and then proceeded to lose me over some issue or other.

- Paul Craig Roberts
- Rush Limbaugh
- Bill Bennett
- Pat Buchanan
- G. Gordon Liddy

Limbaugh: never really liked him but he was 1st w/ anti-pc pushback. Admired that A LOT but when he went after Chelsea Clinton and then the illegal drug hypocrisy...

Bennett's book on virtues loved it but then turned he was a Vegas "player."
Blew his cred to smithereens - well w/ me anyways.

Buchanan: My all-time #1 politics guy. LOVED him & his sis too. But then he tried to sell Intelligent Design oh man that was a dark day ...

G-Man: I love the G-man. So over the top man's man stuff it's almost caricature except for one thing - with Liddy it's legit. Shook his hand twice.
Funniest political talk show host I've ever heard. But like Buchanan he tried to rationalize ID. Ugh.

I'm getting older by the minute & maybe in my dotage going soft ...
I still read Denninger tho (and will til his ban hammer gets me ;-)

PacificNW the hill on which I make my stand. Scout party member Trail Of Tears 2.0
Whopper 15 posts, incept 2013-09-06
2014-05-22 21:19:32

This is the way journalism is supposed to work.

Another reason to audit the Fed with a SIG like Barofsky at TARP . Who knows what is in that swamp.
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