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I've had people in the so-called financial industry, and their captive media, scoff at me when I explain exactly how the so-called "economic growth" we've posted up over the last 30 or so years has been a scam -- and more-importantly, why it cannot continue.

To recap the reason for all of this (and the ramp in the markets over the same 30 year period) is this:

Rates are at 10%.  You can borrow $1 million as long as you can come up with $100,000 in interest every year.  Note that the expectation is that you would pay off said bond when it matures, so if you're going to do that in five years (a 5-year bond, not an amortized loan) you'd need to come up with $1,500,000 -- $1 million in principal for the bond 5 years hence and and $500,000 for the five years of interest payments (the latter typically being paid out quarterly.)

But if rates are generally declining on a secular (long-term) basis you can cheat, and this cheating is both very seductive in the short term and extraordinarily destructive over the longer term.

In the short term if the rate of interest declines on a secular basis in five years it looks awfully attractive to roll over that bond instead of pay it off, as the interest rate has gone down.  Much more-dangerously, however, it also looks attractive to keep the interest payment the same and borrow however much more you can by writing an even bigger bond!

So let's assume that in five years the rate of interest is 5% instead of 10%.  You have had $500,000 over that five years in sunk interest cost.  But now you roll over the debt instead of paying it off, and since you do so at 5% you borrow another million dollars by writing a second bond, both of them five years in duration.

Note what happened here -- your original expectation was that you'd have to lay out $1 million to retire the bond.  Instead you kept it and added another million to it.  This is a net $2 million you can spend that you otherwise would not be able to; an utterly enormous "windfall" that appears to literally come from the sky.

So long as this trend continues so does the scheme.  When the $2 million is due if rates have fallen to 2.5% you can now borrow not 2 million but $4 million, and so you do.  The swing in your municipal budget is not $2 million (since you otherwise would have had to lay out the $2 million, but rather $4 million dollars, and all you have to do is keep coming up with that $100,000 a year to keep the scheme going.

That is exactly what has happened in the municipal finance game, in the Federal Government finance game and in the corporate and personal finance game.  It has continued through all of the last 30 years including the 2008 crash!

What happens, however, when rates stop going down?  You suddenly have a problem.  If they don't rise but simply flat-line then while you may be able to roll over that bond you can't borrow more.  So if you had $4 million out you still do and the net "gain" that was magically appearing in your municipal budget stops showing up.

This is what has happened here:

One reason for the lack of borrowing: officials at local governments that were stung by budget shortfalls after the recession have been leery of taking on new debt. Instead, they’ve been seizing on low interest rates to refinance higher-cost bonds. About two-thirds of the $312.5 billion issued through Sept. 30 has been for that purpose, Bank of America Merrill Lynch data show.

Got it?  The state, county and local governments have been refinancing -- but they cannot keep borrowing more, they instead must keep refinancing in order to keep the interest payments manageable.  Note that nowhere is ever mentioned paying off the principal on any of these bonds because that almost-literally never happens.

We have backed ourselves into a corner with ponzi finance and scam in the government sector across the board.  This problem is not limited to the Federal Government; it also exists at the state and local level and in fact in many ways its far worse there than on the federal side, since the exposures there are often not subject to simple legislative action.  Many of the baked-in-the-cake expenditures have managed to grab state constitutional protection which, absent an amendment to same, is virtually impossible to slough off.

This is going to blow up in our faces folks, and I've been warning about it for a long time.  It is an irrefutable mathematical fact that these leverage levels are unsustainable -- and there is nothing that can be done about it now other than living with the relative privation that will and must come in this regard.  The people responsible, including especially the folks at the big banks and other financial outfits that did the book-running for these deals, should be prosecuted for running a ponzi scheme and tossed in prison with the assets of their firms sold off and used to plug the holes to the extent possible, but you know that won't happen any time soon either.

There is no such thing as a free lunch and if you believe you've found one what actually just happened is that you got scammed.

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Wonders never cease.

Of course my emailbox has been overflowing with people asking if I'm going to comment on Bernanke's "new book" and his statements that "someone should have gone to jail."  No, really Ben?  He, of course, tries to excuse himself (and the rest of the Fed) by noting that The Fed is not a law-enforcement agency.

That may be true but that doesn't prevent The Fed from criminally referring things to actual law enforcement agencies, does it?  After all you're not a law enforcement agency either but if someone robs your house you certainly can pick up the phone and call one of those agencies, and if they refuse to act you can raise hell in public.

Bernanke, of course, did none of the above.

But that's not the real problem. No, if you read closely you'll find it here, in the last paragraph of the NY Times article written on his tome by Andrew Ross Sorkin:

He writes that it was simply impossible to save Lehman, pointing to the nearly $200 billion of losses that Lehman’s creditors have since suffered. No one has come forward on the record, nor has any contemporaneous document been produced in the past seven years that said the government had found a way to save the company and specifically chose not to do so for political reasons, a point Mr. Bernanke alludes to in his book. “I do not want the notion that Lehman’s failure could have been avoided, and that its failure was consequently a policy choice, to become the received wisdom, for the simple reason that it is not true,” he writes. “We did everything we could think of to avoid it.”


Now there is an admission.

See, if Lehman's creditors took $200 billion in losses, then Lehman had $200 billion of negative equity.  And here's the rub -- Lehman allegedly had $600 billion in assets when it filed for bankruptcy.

So if the creditors took $200 billion in losses exactly how did that happen?  Well, it happened because the firm had $800 billion in liabilities against that $600 billion in assets.

And that's a problem because under the law The Fed is charged with regulating these firms as is the SEC and other agencies in the government and banks are not supposed to be able to remain open in a negative equity position.  This position did not develop overnight; it took months or years to develop, just as was the case with Colonial (Another instance in which "nobody went to jail" for their supervisory failure, incidentally.)

Lehman, like most large firms, had a number of a divisions and regulatory responsibility for them was spread out but that does not excuse The Fed from its oversight and regulatory responsibility of the whole.

Irrespective of the bad decisions made by Lehman management these agencies, including The Fed, had an affirmative responsibility to police the equity position of the firm and act prior to insolvency.  The Fed, along with the rest of these regulatory agencies, failed to do so through malfeasance, misfeasance or both.

So yes, I argue as does Bernanke that people should have gone to jail.

I just happen to believe that the first person to do so should have been him, closely followed by many others.

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I'll believe it when I see it...

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Oh this is terribly rich -- and funny.

TALLAHASSEE, Fla. (AP) — Two years ago, Augustus Sol Invictus walked from central Florida to the Mojave Desert and spent a week fasting and praying, at times thinking he wouldn't survive. In a pagan ritual to give thanks when he returned home, he killed a goat and drank its blood.

Now that he's a candidate for U.S. Senate, the story is coming back to bite him.

The chairman of the Libertarian Party of Florida has resigned to call attention to Invictus' candidacy in hopes that other party leaders will denounce him. Adrian Wyllie, who was the Libertarian candidate for governor last year, says Invictus wants to lead a civil war, is trying to recruit neo-Nazis to the party and brutally and sadistically dismembered a goat.

It's an awkward situation for the small party that's trying to gain clout.

Hahahaha.... oh that's why Adrian resigned eh?  C'mon Adrian, cut the crap.

This is the well-justified comeuppance for a party that lost its view of what it really stood for quite some time ago.  I ought to know -- I was part of it for a while and resigned in disgust after the state party endorsed Gary Johnson for President, a man who wasn't very Libertarian and who famously stated nobody committed any crimes when it came to the financial crisis.

Oh really, nobody committed any crimes eh?  At the time I put forward a scrolling list of crimes.

Of course the so-called Libertarian Johnson did more than just that.  He also refused to engage on the medical monopoly issue, despite the fact that there are even more crimes found there!

It may be true that the Republicans and Democrats have no principles that matter; they simply run whatever puppet is convenient.  But the Libertarians try to claim they're different; sadly, they're not.

What Sol Invictus has done is thrown this in the party's face in such an outrageous and blatant fashion that it exceeded any thinking individual's tolerance.  But the seed of this disease in the Florida Libertarian Party goes back a hell of a long time, far longer in point of fact, it appears, than the 2012 campaign.

I left the party after attempting to put a stop to this crap by insisting that the party live to its principles and failing to carry the day in that regard.  Adrian himself got involved in his own little game of not really Libertarian, in my opinion, with his driver license screed in which he "refused" to renew his license over Real IDinstead of arguing that he had a right to travel and one cannot force licensing of a right.  There's actually case law precedent on this point, albeit very old case law, but to my knowledge it has never been cited and then overturned.

Instead Adrian did the politician thing and argued that it is "unjust" (e.g. unconstitutional) to be forced to positively identify oneself to obtain said "license."  As I pointed out to Adrian at the time this was a stupid line of attack because if one accepts that the government may license travel by the means common in the present day for non-commercial personal conveyance of one's person and effects, in other words that is not a right but a privilege that the government may grant (because it owns that right and thus may delegate it as it sees fit), then you lose instantly because there is a compelling state interest in being able to prove that only persons eligible to exercise said privilege are granted said license!

In short as I've argued many times a right cannot be subject to license or permit; the two are polar opposites.  You are granted a license or permit to do a thing otherwise prohibited.

The Libertarians have utterly failed in this regard in that their statement of principles and alleged party platform are clear yet they use mealy-mouth words such as "should" instead of "must" and "shall."  This in turn gives rise to the sort of twisted argument-by-expedience, and thus a refusal to demand that candidates adhere to the party principles or be disavowed.

It is a fact of law that one has only one means by which you can prevent someone from running on a given party ballot in this state, and that is to primary said person and beat them.  If you cannot manage to muster enough people, enough money and enough support to do that then anyone can show up on your ballot whether you like it or not, and that's exactly what happened.

The party got what it had coming to it in the form of Sol Invictus; sometimes it takes a while for the cosmic wheel of karma to come around, but it nearly always, given enough time, does.

Goodnight Gracie.

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2015-10-06 10:04 by Karl Denninger
in Editorial , 304 references

This is an outrageous story:

The travesty imprisonment of Orville “Lee” Wollard will continue, with the blessing of Gov. Rick Scott. Last week, Scott cast the decisive vote to keep Wollard locked up for firing a warning shot after being attacked in his home by his daughter’s boyfriend. Police said the boyfriend ripped the surgical stitches from Wollard’s abdomen.

The 60-year-old first-time offender has already served about seven years of a mandatory 20-year term. A Polk County jury had convicted him of shooting into a dwelling and aggravated assault with a firearm.

A charge of child abuse was included because the boyfriend of Wollard’s daughter was 17 at the time of the incident, in 2008.

Curiously, the same prosecutor who’d originally offered Wollard a deal of five years’ probation (with no prison time) told the state clemency board on Wednesday that Wollard should stay behind bars after all this time.

So let's look at what we have here.

A man was attacked in his home by his daughter's boyfriend.  That alone is sufficient, assuming he believed the threat was credible (and it appears he did), to shoot him dead.  Indeed, the record shows that the boyfriend did inflict serious bodily harm (the threat thereof being the threshold for the use of deadly force.)

Instead of shooting the boyfriend he discharged the weapon into the wall.  For this he was charged with use of a firearm in the commission of a felony (shooting in/into an occupied building) and child abuse (since the daughter was not 18) and under Florida's mandatory sentencing law for firearms offenses he was incarcerated for 20 years (since he discharged the weapon.)

The stupidity of the way this law was applied is obvious on its face.  Nonetheless, this is what the law allowed at the time (it has since been fixed, incidentally, however that fix was not retroactive.)

Governor Scott just confirmed that he lacks the mental acuity of an ant, as the law was clearly misapplied in this case.  Florida's 10/20/Life law is a good law in the general sense, but that doesn't mean it cannot be misapplied.  All laws can be misapplied; we would hope that when legislators write them they avoid that through careful construction but since laws are made by men and passed by men this sort of error does occur.

Enter two groups of people who are supposed to prevent this.  The Prosecutor is the first one.  Where are the people in this county and why aren't they picketing that bastard's home and office?

Second, however, is the jury.  Despite what you are told when you are called to Jury Duty your job is to judge the totality of the situation before you.  That's why we have juries in the first place; there is no need to weigh evidence when it is incontrovertible, and often it is.  Indeed, in today's world of cameras and audio recorders it is frequently the case that there is no dispute over what happened at all; there is in fact a record of it in a form that, absent tampering, is known with a fair degree of certainty.

The fact is that your job doesn't end there as a juror despite what the Judge will tell you.  Your job includes judging whether the charge leveled against the defendant is appropriate given the circumstances of the alleged offense.

In other words your job is to determine if a breach of the peace has occurred, not simply if a violation of a "law" has occurred.

Laws are made by men.  Men commit errors.  They commit errors both in declaring something illegal that is not because it violates one's unalienable rights (which no man, and no government, may rightfully infringe) but also in applying a law that was written for one purpose to another either through ignorance, stupidity or malice.

This prosecutor disgusts me.  But what's equally disgusting, if not more-so, are the citizens of Polk county who condemned this man to prison for what appears to be a facially-incorrect application of a law intended for violent criminals to a man who was being attacked in his own home.

Do you live in Polk County?  If so then you have a responsibility to right this wrong.  You are responsible for this Sheriff (you elect him), you pay the taxes that support this county government including the prosecutor's office and you imprisoned this man unjustly.

You did that.  He didn't do it, you did it.

It is your responsibility to fix it and that responsibility rests in each and every one of you.

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