A Tale of Securitized Cod, Babylonian Finance and Simple Math. Part 2

In the first part of the entry, I tried to explain the ancient (Babylonian) understanding of the effects produced by unbalanced rates of wealth extraction from an economy. The ancient economists had a simple, realistic and no-nonsense view created by learning during thousands of years of trial and error. The second part will be focussed on the examination, in simple terms, of the modern economic developments, through the lens of the ancient, realistic perspective. In other words: let's see what a Babylonian economist would think about securitizing the cod as a mythological endeavor to create wealth?

In order to keep this entry short, I would like to strongly recommend, to those with a keen interest in the process of unsustainable wealth extraction, five interesting background materials:

• a great radio interview with Dr. Michael Hudson on 94.1 KPFA (http://kpfa.org/archive/id/48892) in "The way we were and what we are becoming"
• an extremely interesting take on the role of usury and fractional reserve banking in the process of unsustainable wealth extraction: "Fractional Reserve Banking as Economic Parasitism" (IMHO this paper has about 10% tinfoil hat material, but there rest is good, ... really good)
• a short video essay explaining the basics of stable and transitional political systems: "The American Form of Government"
• an essay/presentation of the interconnection between personal freedom, productivity growth. excess production, and statism (state used by oligarchies as an instrument to enforce their economic privileges) : Statism is Dead
  
• a long presentation which is IMHO the best and most detailed analysis of the means employed for controlling the individual: The Turning of the Tide . He clearly explains the concepts of Hassle-Free-Zone, Problem-Reaction-Solution Scenario, Opposames, Pyramid-Structure etc (this is an old talk given by David Icke, long time before he went bananas with reptilian aliens interbreeding with Martian refugees stranded on Earth and conspiring together to sacrifice Princess Diana in an Isis-style, ritual sacrifice :) ....This clip is Icke at his best, and if we think it's was made back in 1996, it becomes almost prophetic.)
  

With the prerequisites out of the way, we can return to the tale of securitized cod, Babylonian finance and simple math. In the first part of this entry the hypothetical examples presented were oversimplified in order to demonstrate the inevitability of the inflection point, as being the point in time at which a small oligarchy acquires all the wealth in a system (or a country). For the first hypothetical example the inflection point occurs 78 years after the start.

After the inflection point, not only that the majority becomes completely destitute, but most important, the controlling elites cannot extract wealth at the previously high rates, they were accustomed to. The system becomes useless even for the very elite controlling it.

In real life things are a little bit more complicated, and the Babylonian economists knew it because they knew very well what truly lies behind the economic S-curve. One may argue that modern economists, who developed from it the modern day concepts of Laffer curve, Phillips curve, Kuznets curve etc., do not have such a clear understanding. What the Babylonian economists knew, is that there is a minimum acceptable level of wealth for which a serf remains productive. Bellow this minimum level, an individual cannot be used as productive livestock, and falls from the economic system (becomes a beggar and dies quickly in poverty, tries to rebel and is killed by the state repressive apparatus, commits suicide in despair or simply escapes oppression, by emigrating to a better country/kingdom).

Let's modify our previous simple model by considering a minimum wealth level required for subsistence . Those falling below this level disappear from the productive force of workers/serfs. Obviously, the wealth distribution among serfs is not uniform (there is a wealth scale for the poor and middle class too). The effect of such a wealth dispersion among the poor can be easily approximated in a spreadsheet calculation by imposing a minimum rate of expected wealth growth among the serfs to compensate for the exponential growth of statistical Gaussian dispersion of wealth among the poor.
It's not as complicated as it sounds, but this idea of minimum rate of expected wealth growth among the serfs, is extremely important in modern economics, and is the root cause for the elite generating the illusion of wealth for ordinary people, through various myths, such as the wealth generated by securitization of cod, inflation, housing and stock bubbles etc.

Let's use for the third example the following conditions:
-constant population of 1000 people (each starting with an equal wealth of 1 gold coin)
-the annual growth of the economy is 2.8%
- a group of 10 elite rulers (1% of population) extracts wealth at an unsustainable rate of 9%
- the inflection point is delayed to 80 years, and theoretically the rulers can enjoy all this time without fear of revolt.




If in the same example, if we introduce a minimum expected annual wealth growth rate for the poor of 2.4% , things change significantly. We can see the decrease in the number of productive serfs, generates the the S-curve, which is just the portion of total wealth evolution curve (between the start of the unsustainable wealth extraction process and it's end, at the new inflection point. The lifespan of the society shrinks from a theoretical life of 80 years to 67 years. The stability interval for the society decreases exponentially with the increase in the rate of wealth extraction required by the rulers (if we increase the extraction rate to 12%, the lifespan decreases to 32 years).

This new, early, inflection point, of course, requires a reset of the society by the same old means: revolution, war or a jubilee (partial wealth redistribution) . The Babylonian economists did not care about the hypothetical decrease in total wealth after the inflexion point, because after the inflexion point, ... the society was no more.



Also, the decrease in the productive population, induced by the unsustainable wealth extraction, results in a decreased average growth rate, below the maximum growth potential of the country. In this case it starts with a 2.8% yearly growth and ends with 0%, resulting in an average growth of only 1.7%.

And here comes the modern economic mythology brought by fractional reserve banking, fiat money, inflation, securitization, globalization etc. The impoverished serfs are conned with the perception of illusory wealth growth, and can be maintained fully productive even after the inflection point at the end of the classic 'Babylonian' S-curve. The system can continue to survive even after experiencing a decrease in real growth. It can result in apparently healthy economies which, in fact, are walking zombies in terms of real wealth (as the Icelanders found out).



In our example, the illusion of wealth would be used to move the inflection point back to theoretical level of 80 years. More important the natural "Babylonian" S-curve is destroyed/distorted, and the total apparent growth approaches the theoretical level of growth possible for that country (in our example that is 2.8%) . Also by creating the illusion of wealth for the masses, the rulers can increase the rate of unsustainable wealth extraction. All is needed is to have enough illusory wealth given to the serfs in order to compensate for additional extraction.

We have to remember that the modern economic mythology does not create real wealth. It just creates an illusion of wealth for the masses. The incredible result is that these illusions can actually stabilize a society past the theoretical inflection point of real wealth creation/extraction. All this comes at a great cost. In the last stages of this modern economic 'miracle' the illusory wealth is required to grow itself at an unsustainable rate, and not even the most perfect illusion can accommodate an unsustainable growth rate. In time, even a part of the wealth of the elite becomes illusory, and that makes the jubilee option impossible: The modern S-curve (yellow curve) becomes a hook.

A king may agree to donate 90% of his wealth to the poor, just in order to preserve the viability of his monarchic line, but he may find it very difficult to convince his prime minister and the commander of the royal guard to do the same. In our example, the illusion of modern finance ends after 80 years of unsustainable extraction with the elite owing all wealth in the country, but only 36% of it is real ... the rest belongs to AIG's balance sheets. If the elites would donate all their wealth in a jubilee it would barely cover half of the wealth the poor serfs believe they have.

The big problem with modern financial mythology is that most of wealth illusions don't last very long, because no illusion can accommodate for ever the exponential unsustainable wealth extraction. The solution provided by the elite when an mechanism of illusory wealth creation does not work anymore is simple: they replace it with another illusion. In Iceland, the first illusion was privatizing the fish swimming in the ocean. When that didn't work anymore, the innocent and unsuspecting cod was securitized. (That was a move very good for the cod, because the illusion of securitization falsely increased the the value of the catch, requiring smaller catches. Less cod fished, better chance of survival for the cod).

When the illusion provided by securitization of the cod was not able to hide the effects of unsustainable wealth extraction, ...no problem ... it was replaced by the illusion of easy wealth through by forex trade. The Icelandic government fell because they could not imagine quickly another illusion mechanism, they couldn't invade another country (Monaco is too far away for the fishing fleet of the modern vikings) and there was no real wealth left in the country for a jubilee (since they are facing a huge external debt).

One may ask how can these illusions for the poor can defy the law of conservation? The answer is very simple: sending the the people in real (not illusory) debt. The former fishermen (who not long ago had been converted over night in currency traders), found recently they have to pay a debt 8.5 times larger than their country GDP. I have no doubt that only a fraction of this debt has been actually spent and wasted by the viking equivalent of the American day-traders. If historical patterns are correct, a significant part of this debt, (which has to be payed now by all Icelanders, even by those who continued to fish during the time of collective dellusion), is safely tucked in real money, in the accounts of those who perpetrated the unsustainable wealth extraction.

Moreover, most of that stashed money, probably, is not even owned by the local viking elite, but by unnamed and faceless foreign financial rulers, because today, capital flows freely through the borders, especially when it flows in the right direction of unsustainable wealth extraction. The Argentinian serfs learned that lesson when they tried to get their money out of their accounts from the local branches of big foreign banks, after the collapse of the dollarization/peso-convertibility illusion .

The Russians learned that when, as a result of the '97 crisis, the unsavory class of oligarchs have taken the products of their wealth extraction efforts to the safety of the western banks and the country was left bankrupt. Some of the oligarchs have been recycled by the siloviki revolution and the Russians are relearning the same lesson now: just look how fast the Russian dollar reserves are vanishing.

Globalization is a wonderful invention, which allows the financial elite of a country to loot another country without an actual military invasion. All what they needed, is to bribe the hungry elite of that foreign, less developed country. And it's not only about stealing money from another country. Serfs from one country can be pitted against serfs from another country, without realizing they are all victims of the same globalist wealth illusion and this game brings a real profit only for corporations.

What happens now between China and US is both sad and hilarious. In order to have an export based economic "miracle", China has to resort to currency manipulation and dollar sterilization. As a result the hard earned yuan savings of the poor Chinese serfs are converted in dollar bonds and extended as credit to the once wealthy, American serfs who had their good manufacturing jobs outsourced to ... China. The American serf, although he lost his good manufacturing job when he was outsourced to China, had the illusion of wealth because the recycled trade imbalance money produced an increase in the value of his house and he could buy cheap Made in China crap from Walmart. Now this globalist bilateral illusion is unraveling fast.

The American serf has been foreclosed and the HELOC (or flip-over illusion) has vanished. He is in debt up to his eyeballs and there is no way he can find again a good manufacturing job (his previous job is now in a recently closed factory in China)
The Chinese serf, found himself without that well paid ($200/month) job in an export factory (job stolen from the fat American imperialist serf), because, well ... the American serf has no money to spend anymore. If historical patterns are to be confirmed again, probably in the next stage, the Chinese serfs will discover in horror that most of their savings entrusted to the state banks, are gone.

It is amazing to watch a great Charlie Rose interview from 1994, with Sir James Goldsmith and Laura Tyson (Chair of the US President's Council of Economic Advisers during the Clinton Administration and currently recycled as economic advisor to president Obama).




(Edit: Today, March 7, 2009 I found that this excellent interview exposing the GATT globalist scam has been taken out of the public youtube clips. If anybody knows of at least a surviving transcript, I would appreciate a link.
Edit 2: March 8, 2009. Many thanks to Political Football Fun who found an alternate link. This extraordinary interview can still be accessible for the public as a Google Video clip, although any search for "Charlie Rose" and "Goldsmith" doesn't return any working video clip. The link that still works is : http://video.google.com/videoplay?docid=5064665078176641728)
On one side we have Sir James Goldsmith, trying to expose the scam (and that was back in 1994) and on the other side we have the government official trying hard to sell the illusion to the American serfs. It was all for the good of ..... ordinary Americans .....

It is interesting to note, that a country with a very 'sophisticated' financial system (ie completely infected by the wealth extraction parasite), such as US is, can run several mythological economic technologies in parallel:

• -wealth illusions planted/promoted in foreign countries, which are in fact acts of covert economic warfare and pillaging (see "Confessions of an economic hit man" ).
• -globalist WTO/free-trade/outsourcing/deficit (scamming both American and foreign serfs)
  
• -domestic set of bubbles with global impact: dotcom, housing, subprime, commodities and let's not forget the old stock bubble (here is a great chart courtesy of 'Now and the Future')
  
• -plain inflation (the oldest trick in the book)
  
• -directly charging the taxpayer for the unsustainable wealth extraction. That can be done slowly in time (the usual growth of US government debt-"Deficits don't matter") or in a "shock and awe" style (bailouts)

One may think, that our innovative friends on Wall Street will be able to create another economic myth, and scam the American serf with another 'miracle' in order to delay the inflection point with another 10-20 years. Many believe that, inspired by the wisdom of Allan Greenspan, president Obama will be able to create a new illusion called the Greenscam (renewable, green, alternative energy), and unleash it through the New New Deal (We give you Hope, you give us money!). They may do it, but I don't believe a green bubble can be pumped the required volume for replacing all the illusory wealth lost in the previous the previous bubbles.

Others believe the Fed intentionally tries to bring down the economies of the rest of the world in order to repatriate the money of the local corrupt elites to the financial safety of the US (financial asylum for foreign oligarchs). There are already signs of private capital flight from the rest of the world into US, and there are clues that such a process has already began (these clues range from the Real Estate Chinese Tourism in US to the data on treasuries holdings as determined by Brad Setser). I personally, don't believe the financial immigration of foreign elites (and their accumulated loot) is significant at present. Of course, small spending for contingency plans (such as buying a house in US) is normal, but that is just a sign of people thinking at applying for financial asylum status in US. Even if such a gathering (and taxing) of the capital brought for safety in US, starts on a huge scale, I don't see how it can delay the inflection point with more than 5-10 years.

There is the last group who sees the modern escape from the inflection point conundrum, as a massive plan of extending the dollar seignorage to the whole world. I'm talking about the Steil plan of getting rid of all national currencies and having only three currencies in the world: the dollar, the euro and a new Asian currency. Of course, the new Asian currency and the euro will be in fact proxies for the dollar. For this last hypothesis there are some interesting developments happening all over the world lately.

But let's suppose all these three modern-economics, escape mechanisms will be successfully implemented. USA gets out easy from the current crisis, collecting the wealth of all foreign deposed (or still in power) rulers. Maybe they will kick the can further down the road, for another 10-15 years.... Then what?

The modern arsenal of illusion and covert theft is out of ammo, because the proportion of real wealth will be close to 0 , there will be nobody left to steal from and no economy can function only on illusory wealth. Since there will be little or no real wealth left in the system, no jubilee will be possible. That leaves available only two of the three ancient Babylonian solutions for exit from the current crisis: revolution or a really big war.

There is also the possibility the elites won't have enough time left for implementing new scams as an exit strategy, and they will face an inflection moment much sooner than expected. Here is another great chart from Now and the Future, :




(In the last installment, I will try to present what I believe to be a simple solution to get rid of the instability, oppression and suffering caused by unsustainable wealth extraction in human societies)