Monday, November 8, 2010

Sunday, October 31, 2010

Damon Vrabel: Debunking Money Part 4 and 5

http://csper.wordpress.com/

In an attempt to layout what really drives the world rather than believing the false notion that 40-something fresh Ivy League grads serving as politicians have the power, these lessons further the Debunking Money narrative that debt-based hierarchical money = financial leverage = true power. Lesson 4 revisits the 20th century past to reconsider where we’ve been, and lesson 5 peers into the 21st century future for a clearer perspective on where we’re going. Huxley would like what he sees.




Damon Vrabel: Debunking Money Part 3

http://csper.wordpress.com/

What is the biggest source of power in the world? Lesson 1 discussed the issue of financial power, but for those who haven’t lived in the world of balance sheet power it may still seem like a vague theoretical notion.

After a short intro about the need to restore the authentic real world vs. the fake corporate PR world, this lesson digs into financial power in more detail, explains how you might think of it in terms of the power parents have over children, and then evaluates some of the popular solutions being discussed in the political realm:

- ending the fed
- cutting back on government in the interest of a “free market”
- putting the banks through bankruptcy.





Sunday, October 17, 2010

ForeclosureGate



Damon Vrabel: Debunking Money Part 2

http://csper.wordpress.com/

This video describes the structural facts (as opposed to theory) of the monetary system. It avoids theoretical terms like “intrinsic value” and “fiat” and “out of thin air” that have been used to confuse us and just sticks to the facts.

The intent of lesson 1 was only to make a couple key points necessary to understand what is described here in lesson 2.


Sunday, October 10, 2010

Damon Vrabel: Money, Myth, and Machiavelli

http://csper.org/renaissance-20.html
Damon Vrabel:

The power delivered to a small group of people by our current privately controlled monetary system is unmatched by any source of power in history. This video reveals the secret that nobody else bothers to point out that explains why everyone in the system is basically controlled by the most senior capital holders behind the elite banks, and why even senior government officials do their bidding while letting them get away with the biggest crimes in history.

Understanding the basic structure of the system also reveals why Ellen Brown’s notion of commonwealth banks is a necessary complement to our current private monetary system.


Friday, September 24, 2010

Seth Klarman

Seth Klarman -
Essentially, the problem is that government intervention interfered with the lessons investors needed to learn. Those who stared into the metaphorical abyss are right back at it, with the possible exception of college endowments, for whom the pain has been long lasting because of their spend rate. Almost everybody else is drinking the Kool Aid again, and it is very troubling. We could have another serious collapse, and people would again not be prepared for it.
http://pragcap.com/deep-thoughts-from-seth-klarman

Tuesday, September 7, 2010

Thursday, July 1, 2010

Wall Street Cheat sheet

http://wallstcheatsheet.com/

Friday, June 18, 2010

TPC on Greenspan's vigilante siren call

http://pragcap.com/alan-greenspan-sounds-the-bond-vigilante-siren-call

followed by TPC:

Chas & Greed:

We do not finance our spending via the bond market. Taxes do not finance spending either. We issue bonds as a form of controlling the Fed Funds rate. It’s a pure monetary operation. Not a fiscal financing operation. We issue bonds to maintain the Fed funds target rate and control excess reserves. People think this is govt debt because that’s how the system works in Europe and under the gold standard. This thinking has never changed despite the dramatic changes in the monetary system after the Nixon shock. I am quite certain that Bernanke understands this (or at least partially), but I am also quite certain that most other people in power do not.

Let’s understand a few things first:

1. foreigners do not fund our spending. That is a fact.

2. The bond market is a monetary tool. NOT a fiscal financing tool.

3. We tax in order to create demand for the currency. In addition, it controls aggregate demand or effectively, the money supply.

I’ll use the example I often use. Please excuse the simplicity, but this can be a mind bending concept if you are textbook taught (trust me, I know the feeling) so I will keep it simple:

I start a productive economy/country and invite my 5 friends to become citizens. Rather than forcing all of us to trade with heavy gold I issue TPC notes. Now, in order to create real demand for these notes I create a tax. This makes you beholden to me via the TPC notes. You MUST have them in your account on April 15th of every year. I’ve created instant demand. This is what the US government does. In return, they spend money on public works, create jobs, supposedly spend money on furthering our nations prosperity (in theory at least) and protection of the nation (a military).

How do I enforce your use of the TPC notes? I create jobs via a military and a police force and pay them well. Don’t want to pay your taxes? Say hello to officer Joe. A group doesn’t want to pay their taxes? You can protest, but if you get out of control I will introduce you to 500 men wearing body armor holding M4 carbines. In other words, don’t question the currency or else….As long an economy is productive, the sovereign nation can enforce the use of said currency, and as long as we don’t issue excessive currency there should always be demand for it. In other words, trust in the national currency is safe as long as the rule of law is maintained, corporations are productive and I maintain my ability to tax you.

I do not borrow from governments or tax to spend as I would if my currency were backed by gold. Interestingly, I can’t TAX you until I’ve credited your accounts with TPC notes. There is no money to be taxed otherwise. So, in effect, I have to SPEND in order to TAX (counter-intuitive to what you have been taught). Taxing debits your accounts (saps liquidity) and crediting is government spending. On my island, I am never revenue constrained. If you don’t pay your taxes I will throw you in jail and confiscate your money. But that doesn’t mean I can spend more when I tax. What do I care if you send me your TPC notes? I can just press a button and credit my “spending” account right after I shred your tattered looking cash. This is what the government actually does. Taxation is essentially a form of maintaining control of private sector spending. Pay your taxes in cold hard cash. The IRS will shred those dollar. They don’t put them in a bag and mail them to the Treasury so they can’t go “spend” it. The only reason they might keep the dollars is if they are pretty and in good condition so they can go back out into circulation.

So what’s the bogey here? What’s the catch? The bogey here is inflation which is constantly moving up and down with the amount of money in the system based on my tax rate, spending, etc. Thus, govt cannot just spend and spend and spend or the extra dollars in the system will chase too few goods and drive up prices. Thus, it’s important to understand that govt cannot just spend recklessly.

In terms of the bond market, the issuance of bonds does not serve the same purpose it did under the gold standard. We actually issued bonds because we were revenue constrained (not enough gold reserves at all times to fund spending without creating massive inflation). Today, we effectively control the value of money in the banking system via bond issuance (a pure monetary operation to control the Fed Funds Target Rate). It can also be thought of as another form of government spending because a treasury bond is basically a savings account. Contrary to popular opinion, QE is actually a deflationary event because it takes an interest bearing instrument out of the private sector’s hands and replaces it with a non-interest bearing deposit. QE is a term that used by people who want to scare you into thinking that the govt is being reckless with their money. The reality is that QE is just an asset swap. Nothing more. Debt monetization is another tool of the fear mongerers who don’t understand that debt monetization is actually impossible so long as the Fed has a target rate. It’s operationally impossible.

The US government is never revenue constrained. They are not like a household or state government. We don’t need China to buy our bonds in order to spend. China gets pieces of paper with old dead white men on them in exchange for real goods and services. They can either hold that money in a checking account at the Fed OR they can do what they wisely do and invest those pieces of paper in what is actually a savings account at the Fed. We also don’t need taxes to spend. The budget deficit is in direct inverse correlation to private sector savings. TO THE PENNY.

This by no means says that the government can just recklessly spend. But it’s imperative that the government spend SOME money otherwise they are simply debiting the system each year via taxation without ever crediting accounts. Just ask yourself what would happen if the govt imposed a one time 100% asset tax?

Many financial theorists actually believe the Great Recession (and the Great Depression) was caused by account SURPLUS. You’ll notice that both events were preceded by great periods of “fiscal competence”, ie, budget surpluses. In reality, the govt had debited too many accounts and forced investors to use too few dollars to chase too many goods. This results in full blown deflation and excessive debt levels (because you borrow what you can’t actually get your hands on). I think the cause is a bit more complex than that but the fact that we are grossly overtaxed and the govt spends very inefficiently is a large contributing factor.

Hope that helps.

Sunday, May 23, 2010

Lessons from High-Performance Companies

Excellent article from Mark. Here is the original link.


What can we learn from companies that have been able to achieve sustainable return on investment and grow their businesses at the same time? How can management teams adapt the strategies and practices of these "high-performance companies" as they consider their own pathways to improving profitability and growth? Let's take a look.

RESEARCH ON HIGH-PERFORMANCE COMPANIES

During the last three decades, there have been many attempts to study and learn from the experiences and practices of high-performance companies. An article in Harvard Business Review (Julia Kirby's "Toward a Theory of High Performance," July 2005) profiled a number of these studies, including In Search of Excellence, the 1982 book by Tom Peters and Robert Waterman, Jr. The question and comment in Kirby's article suggest that a need exists to further define the meaning of high performance: "What does it mean to be a high-performance company? Twenty-three years after In Search of Excellence, we're still searching--and just maybe getting closer to answers."

For the past 10 years, I've led a research project with Joel Litman called the Return Driven Strategy Initiative that has been attempting to describe what it means to be a high-performance company in terms of performance measures. That goes hand-in-hand with understanding the strategic activities and traits that lead to sustained periods of exceptionally high performance in terms of return on investment, growth, and wealth creation.

The Return Driven Strategy framework, which I've written about in the Strategic Management column for this magazine, stems from this research project and is based on three dimensions of performance:

1. Superior and sustainable return on investment (ROI),

2. Growth while maintaining superior return on investment, and

3. Superior total shareholder returns.

The logic of these three dimensions of performance begins with ROI. First, a high-performance company would need to achieve superior return on investment and be able to sustain superior ROI performance for a period of 10 consecutive years or more. Second, a high-performance company would be able to grow the business while continuing to achieve superior ROI during the same period. The combination of superior ROI and growth logically leads to superior shareholder value performance, the third level of performance, assuming the company has adhered to the ethical parameters of its constituents and communities. (See "Return Driven Strategy: The Research.")

But high performance isn't permanent. Every high-performance company we studied faces the risk of fading. Some have already begun to fade in returns or growth. In every case, the reasons for fade can be charted to how the tenets of Return Driven Strategy began to be neglected or couldn't be executed. Meanwhile, the elevation of these companies' performance and the sustainability of high performance can be attributed to attention to these tenets. Companies with mediocre or poor performance demonstrate significant gaps in their business models when viewed through the lens of Return Driven Strategy.

THE RETURN DRIVEN STRATEGY FRAMEWORK

What strategic activities add up to competitive advantage or disadvantage? The Return Driven Strategy framework has been built on a simple theme: If we can better understand how the success or failure of a business is driven by its plans and actions, then we can greatly improve how we value companies and how we run our businesses. The framework describes the pattern of strategic activities shown to drive superior corporate performance. It is composed of 11 core tenets and three foundations that together form a hierarchy of interrelated activities that companies must perform to deliver superior performance.

These tenets and foundations summarize the common activities of high-performance companies and can be used to identify flawed strategies of marginal performers. (For a summary of the framework, see www.returndriven.com and the book by mark frigo and joel litman, driven: business strategy, human actions, and the creation of wealth, www.driventhebook.com.)

LESSONS FROM HIGH-PERFORMANCE COMPANIES

Here are three lessons from high-performance companies that management teams can use in assessing and executing their business strategy:

1. Commitment to Return on Invested Capital and High Integrity. High-performance companies show a strong commitment to and discipline for creating shareholder value by focusing on return on capital. They have goals, performance measures (such as return on invested capital or ROIC), and incentives that are firmly aligned with sustainable ROI. They also find ways to grow their business in a disciplined manner so as not to sacrifice returns. These companies achieve superior returns and growth while adhering to the ethical parameters of their constituents and communities.

A premise of our work in Return Driven Strategy is that the overriding goal of a business entity should be to achieve "superior long-term return on capital."Why is it important to have this commitment? Michael Porter provides insight on this point: "If you don't have the right goal of superior return on investment, you lack the anchor that will help you make good choices about how to compete in the marketplace." (See "The Importance of Being Strategic," Balanced Scorecard Report, March-April 2002.)

The importance of maximizing shareholder wealth "ethically" is a critical element of the Return Driven Strategy framework. We have found that ethics is a necessary (but not sufficient) condition for maximizing value. As Michael Jensen from the Harvard Business School stated in his work on corporate integrity and its relationship to performance: "A company with a culture of integrity will tend to have performance metrics far above those without integrity."

Companies like Johnson & Johnson have achieved superior ROI, grown their business, and shown an adherence to ethical standards. J&J is famous for its Credo, which is a foundation for ethical business conduct at the company and focuses on shareholder value through a philosophy of "capital-efficient profitable growth." One CEO who uses the Return Driven Strategy framework refers to Tenet One as "Doing the Right Things for the Right Reasons." (Kathy Apple, RN, CEO of the National Council of State Boards of Nursing (NCSBN), referring to Mission Driven Strategy, the application of the Return Driven Strategy model in not-for-profit organizations)

2. Focus on Unmet Customer Needs in Growing Market Segments. High-performance companies have a hypervigilant focus on customer need that's much deeper than and different from other companies' focus. To avoid commoditization, they concentrate on fulfilling otherwise unmet customer needs. They have the processes, capabilities, customer information, and customer intelligence to better identify and target customer needs. And they have the discipline to target customer needs only where they have unique capabilities and resources to fulfill those needs and where they can drive superior return on capital. These companies also target the right customer groups with the intent and ability to dominate.

In the mid-1980s, Harley-Davidson targeted otherwise unmet customer needs (lifestyle, freedom, adventure, community) with their offerings (the unique Harley experience) and earned corresponding price premiums (about 30% over competing motorcycles) while pursuing a growing customer group (the Baby Boom generation). This one-two combination of fulfilling higher-level customer needs and targeting and dominating an increasing market segment drove a 20-year run of superior ROI, growth, and shareholder value creation. Today, Harley faces the challenge of growing the business and maintaining superior returns in the face of a saturated market segment.

3. Innovate Offerings to Better Fulfill Customer Needs. High-performance companies constantly reexamine their products and services (their offerings), modifying existing ones and developing new ones that will better fulfill customers' unmet needs. In the Return Driven Strategy framework, "innovate" simply means "changing" your offerings to better fulfill targeted customer needs.

At the same time, companies must get customers to want their particular product or service offerings instead of someone else's (brand the offering). Also, at the outset, management must consider the executability and workability of plans to fulfill customer needs while adhering to the commitment to return on investment. All supporting activities--from partnering to value chain to employee engagement, research and development, and communication--are aligned with this continuous innovation of offerings. In other words, companies will change offerings only if they believe they will create more value for the customer and receive superior return on investment from the innovation.

PUTTING RETURN DRIVEN STRATEGY TO WORK

During the last several years, those of us working on the Return Driven Strategy Initiative research have seen how the Return Driven Strategy framework has been used by boards of directors, executives, management teams, entrepreneurs, and educators. Let's look at some of these uses.

Assessing and Developing Strategy

Assessing and developing the business strategy is an ongoing challenge for most companies. The framework has been used successfully to assess the existing business strategy of a company, a business unit, or a specific initiative. It has also been used in strategic planning to guide the development of the strategy in a way that will ensure alignment with the goal of ethically maximizing shareholder value. The case described in this article is a great example of this application.

Communicating Strategy

Communicating strategy is the first step in strategy execution. If this isn't done well, it can be the root cause of strategy execution failure. Using a common language for describing and communicating strategy can be an effective way to avoid this problem. The Return Driven Strategy framework has been shown to provide a simple, clear language that's consistent with widely used execution frameworks, such as the balanced scorecard, and it provides a link to how the strategy will drive growth and return on investment. Jim Folkes, former vice president, Strategy & Business Development at Laidlaw Education Services, expresses the benefit of the framework in communicating strategy: "Return Driven Strategy is an elegant framework in that it is marked by both ingenuity and simplicity. And it is also marked by completeness in the way it encompasses all aspects of business strategy."

Aligning and Leveraging Execution Frameworks

Over the decades, companies have been using a wide variety of execution frameworks whose popularity comes and goes. Examples are Total Quality Management (TQM), Six Sigma, Lean Manufacturing, and reengineering. The Return Driven Strategy framework provides a way to align execution frameworks to achieve the strategic activities that will drive superior performance. High-performance companies adapt rather than adopt execution frameworks.

Some execution frameworks, such as the balanced scorecard, have achieved a broad level of application and have become a leading strategy execution framework. Companies have used the Return Driven Strategy framework to refine or develop strategy as a logical first step in the development of strategy maps and balanced scorecards. They have also used it to reenergize existing scorecards.

Managing Risk

Risk management is a major concern of boards and executive teams. High-performance companies manage risk and manage the threats and opportunities in forces of change, achieve superior ROI, and grow their business, which can be very risky.

Companies also need to define "risk appetite" as part of their risk management efforts. In the Return Driven Strategy framework, risk appetite is part of the first tenet, "Ethically Maximize Wealth," which means defining exactly what "maximize wealth" means to the organization and what levels of risk are acceptable for a given set of wealth creation goals. This can provide a systematic approach for defining "risk appetite."With this approach for defining risk appetite, the framework can be used to examine an entire strategy and any specific initiative.

Another challenge in risk management is identifying key risk indicators. The primary foundation of Return Driven Strategy is "Disciplined Performance Measurement and Valuation," which should include risk metrics, specifically risk metrics and performance measures that will provide insight into the risk profile of an organization in the context of risk appetite.

Mark Beasley, a board member of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and director of the Enterprise Risk Management Initiative at North Carolina State University, comments about a more strategic approach to risk management: "This framework fully describes the business strategy and activities that drive great financial performance and makes the connection between strategy and shareholder value. It can provide a way for directors and management to evaluate strategic plans and strategic initiatives and identify key risks that could destroy shareholder value while considering the upside of risk in terms of the opportunities."

Business and Executive Education

The framework also has been used in business and executive education. It's the foundation for an innovative MBA curriculum in the Kellstadt Graduate School of Business at DePaul University, which is one of the largest part-time MBA programs in North America and is consistently ranked in the top 10 in the nation by U.S. News & World Report. The program is the fastest growing in the Kellstadt GSB.

In corporate universities and executive education programs, the Return Driven Strategy framework has been used as a foundation for executive leaders and management teams. Business educators like its focus on creating shareholder value ethically. Arthur Kraft, former chairman of the board of the Association to Advance Collegiate Schools of Business (AACSB International) and dean at George L. Argyros School of Business and Economics at Chapman University, puts it this way: "The principles and concepts in Return Driven Strategy capture what we as educators and thought leaders should embed in our curricula and teachings in business schools throughout our undergraduate, graduate, and executive education programs. Business schools must focus on the importance of a firm commitment to ethically create shareholder value."

MOVING FORWARD

How is your company doing? How can you move the company in the right direction? Empowering and enabling managers with a clear way of strategic thinking and a roadmap for execution in today's changing environment is a necessity. The lessons from high-performance companies are a good starting point and can provide valuable ideas for moving forward.

RELATED ARTICLE: Return Driven Strategy: The Research

IN 10 YEARS, more than 15,000 publicly traded companies around the world have been screened for deeper study by our research teams, who categorized firms based on their cash flow characteristics. As much as 30 years of cash flow performance of each firm was included in the screening process and in the deeper, company-specific analysis afterward. In each case, the cash flows provided a realistic lens of the economic reality of the business. With this perspective, the Return Driven Strategy Initiative was able to categorize and study the patterns of high-performing firms, mediocre businesses, early-life-cycle companies, turnarounds, cyclicals, perennial poor performers, and outright bankruptcies.

The financial discipline underlying this business strategy research isn't inconsequential. Many firms that receive substantial press for being highly admired companies are found to have admirable public relations skills but less than superior financial performance. At times, companies regarded as having become "great" have in actuality been great turnarounds. Firms like this are worthy of study for how to dig a business out of a hole, but they are greatly lacking as cases for sustainable high-value achievement.

In our research, companies deemed as having "superior performance" or as "high-performance companies" were required to meet the following stringent tests:

* Cash flow returns, comparable to a very diligently computed return on invested capital (ROIC), had to exceed twice the cost of capital consistently for more than 10 years straight (rate of return on equity (ROE) was used for financial services companies).

* Growth rates in invested capital, the principal of the business, much like a savings account, had to exceed local gross domestic product (GDP) growth rates and industry averages in rates or totals over the same period.

* Total shareholder returns (TSR)--a combination of the share price gains adjusted for any stock splits plus dividends--had to exceed market performance over the time period consistent with high cash flow return and growth levels.

Our research teams and partners also reviewed tens of thousands of articles, books, case studies, and annual reports covering each company. They conducted extensive financial analyses for each company; conducted interviews with managers, customers, vendors, and competitors of the companies; carefully analyzed compensation plans and other corporate governance issues; and examined how the companies created wealth while adhering to the ethical parameters of their communities.

Mark L. Frigo, Ph.D., CMA, CPA, is director of The Center for Strategy, Execution, and Valuation in the Kellstadt Graduate School of Business and Ledger & Quill Alumni Foundation Distinguished Professor of Strategy and Leadership in the School of Accountancy at DePaul University in Chicago. He is a leading expert in strategy design and strategic risk management. Mark and Joel Litman are the cocreators of the Return Driven Strategy[R] framework and the coauthors of DRIVEN: Business Strategy, Human Actions, and the Creation of Wealth. You can reach Mark at mfrigo@depaul.edu.

Mark would like to acknowledge Joel Litman, a director at Credit Suisse and cofounder of The Center for Strategy, Execution, and Valuation, for his contributions to this article.

Wednesday, May 5, 2010

Tuesday, February 16, 2010

Evening Readings: 16 Feb 2010

http://www.zerohedge.com/article/guest-post-jobs-plan-wed-get-if-leading-innovation-scholars-and-growth-economists-werent-bei
http://www.zerohedge.com/article/guest-post-jobs-plan-we%E2%80%99d-get-if-leading-growth-economists-and-innovation-scholars-weren%E2%80%99t-b

CDS: Credit default swaps 101

From Here:
http://www.zerohedge.com/article/all-you-ever-wanted-know-about-current-sovereign-cds-market-were-afraid-ask-cds-bond-basis-c

Now that sovereign CDS traders are about to reprise the role of Jason Bourne, and be hunted by international intelligence agencies just because under the not so wise advice of their prime brokers and preferred CDS salespeople, they dared to buy a minimum amount of $5 million in 5 year CDS of [Spain|Portugal|Greece], it is worthwhile to expose this sovereign CDS "thingy" once and for all. The following BofA research report 1will introduce not only the basics, but get into some of the more arcane concepts for those who feel that the need to roundhouse Spanish intelligence officers is about to reach boiling point (call it 30-bp spread induced synesthesia).


First, in theory...

Market pessimism

Sovereign CDS are the favourite instrument used by investors to target countries with fiscal troubles and debt-rollover problems. Since the global crisis started three years ago, governments’ role has grown exponentially worldwide, thanks to the efforts of all Keynesians. The resulting transfer of risk from private to public sector finally puts a price on government credibility, which is being reflected in the rise of sovereign CDS levels globally. Back in the days when Enron/WorldCom caused a spike in credit spreads to a level implying a 10% cumulative 5y default probability for A-rated firms, few believed that one in 10 US investment-grade companies could close their doors in five years. Not only did historical evidence not support such a view, common sense seemed to go against it. What do we have now? Even after prospects for Europe backstopping Greece have risen significantly, the default probability for Greece is still pricing at 25%. Now, Italy is the new single A, with 10% default probability assuming 40% recovery. There seem to be few “invincible” countries left in the world. The market puts a 4% likelihood of a US default and that ranks the seventh safest in the world. Things go downhill from there with the next level being China matching UK, both at 7% chance of default.

To position for a default, there is little dispute that the sovereign CDS is the most direct and effective instrument. However, it is worthwhile asking what is the real likelihood of a sovereign default. Of all the 57 countries that have sovereign CDS quoted on Bloomberg (SOVR ), the average stands at 203bp, which implies a default probability of 16%, again assuming 40% recovery. We are looking at nine countries out of these 57 to default if the world does evolve according to these metrics. Is the market too pessimistic or are we missing something here? Think about what happened when the US market was pricing in a 10% default probability for all ‘single A’ names back in Enron/WorldCom days and what happened to those investors who bought protection at the peak.

Instead of default, may keep printing

No, we are not suggesting investors sell sovereign CDS protection blindly simply because we think the market may be too pessimistic about the world when looking at such high implied default probabilities. Indeed, worldwide government intervention financed by printing money may be so disconcerting that we think the sovereign issue will stay with us for an extended period time. However, there are several things investors may want to pay attention to, and the relative value play does exist.

Although we have seen multiple incidents in the past of sovereign defaults on foreign liabilities, it is quite rare for countries to refuse to make payment in full in nominal terms on their domestic-currency-denominated debt. However, for countries that rely extensively on external financing, there is a chance of default; because you can’t print money to pay back foreign liabilities. For other countries that also have high and increasing debt burdens denominated in domestic currencies, the strategy may be different. We should not expect default; instead, we should form expectations on interest rate levels, yield curve shapes and volatilities. Interestingly, the second camp spans a large set of countries, including those many are familiar with: US, Japan, Germany, China, and many others.

Linkage of rates, volatility and CDS

Interestingly, when an economy starts to emerge from a deep recession, inflation tends to stay low for quite sometime due to the large overcapacity to be absorbed. The absence of inflation supports relatively loose monetary policy. If uncertainty about the recovery persists, the government will also likely err on the side of providing sustained support to the economy through active fiscal policy. Putting the two together, we usually get a yield curve that tends to be steeper to reflect increasing concerns on the government’s fiscal discipline and financing capability. Hence, wider CDS should also mean a steeper yield curve. The correlation between the rate level and the sovereign CDS spread, however, is less certain since a weak economy tends to depress the level of interest rates while concerns over government finance tends to push it higher.

What is more interesting is the relationship between the volatility and sovereign CDS spread. From a theoretical perspective, both capture the value of options. In both cases, one pays a premium and waits until the government runs into trouble with its finances. In this sense, the implied volatility and the CDS spread should see a positive correlation. The positive correlation should also express itself through market dynamics. Wider CDS reflects higher uncertainty which causes the market to whip around on each piece of positive or negative news. The increased realized volatility should also have an impact on the implied volatility. However, the relationship is more complicated. In addition to the usual factors impacting volatility, such as the mortgage dynamics in the US and structured products hedging in Japan, a government’s response to its financing difficulty may drive a wedge between swaption price and the CDS price. As we argued, for those countries with little external debt, printing money is always an option (typically a preferred one) for the government to avoid default. Thus, though interest rates may rise sharply, there may not be the default that allows CDS protection buyers to realize their reward. Thus, the correlation between the volatility and CDS spread may be weaker for these countries. On the other hand, for those countries with more external debt, the correlation should be higher, especially during periods of heightened sovereign risk.

The correlation matrix among sovereign CDS, volatility and volatility skew over the last 13 months reveals some interesting patterns. First, the correlation among the CDS is extremely high, reflecting the potential contagion effect which is prevalent based on historical observation in the emerging market crises of Latin and Asian cases. It also reflects the illiquid nature of sovereign CDS market. One needs to source multiple markets to build meaningful risk for a portfolio of reasonable size, forcing an order-driven correlation. Second, the correlation of volatilities is much lower and less certain. It ranges between -0.3 and 0.5. We try to choose the part of volatility surface which is relatively immune from mortgage and structured-hedging issues to isolate the effect of sovereign risk concerns driven by investor positions. We are not surprised by the dispersion of volatility correlation and believe it simply reflects the fact that factors affecting the volatility are too many to be removed cleanly. What is encouraging is the positive
correlation in 100bp-payer skew. They are all positive, though the magnitude is lower than that of the CDS. Similar to CDS, the correlation reflects investors’ unease over government actions that could potentially cause higher interest rates. What comes out as a surprise is the correlation between sovereign CDS and the volatility skew. They are negative! Even for the CDS spread with its own country/region’s volatility skew. It can be argued that if the sovereign risk rises, the interest rate is much more likely to rise, and there should be enhanced interest in buying high-strike payers to move up the skew at the same time as the CDS widens. However, for this to be true, we have to assume that the investor base is the same and they are equally likely to invest in both. Unfortunately, none of the assumptions seems to be true. The investor base does intersect at the macro camp. Beyond that, the swaption market has traditionally belonged to rates investors, until last year when the field attracted many equity and credit investors who were very concerned about hyperinflation spoiling their feast. The expansion of rates-volatility as an investment choice reflects one advantage the rates market enjoys – liquidity.

Implications

By using a shorter period to calculate rolling correlation, we found that the correlation between CDS and volatility is extremely unstable. For example, the correlation between US CDS and USD 2y30y volatility varies between -0.87 and 0.91 over the past one year. Similar results can be seen from EUR 2y10y volatility and German CDS. We view this as good news and there are some investment implications for both the macro-oriented and relative-value investors.

For macro-oriented investors, if the view leads to the conclusion that moneyprinting is unsustainable on a global basis, it is better to buy CDS protection and buy volatility through payers at the same time. Such a strategy should work even better for those countries with higher external debt dependence. Lack of correlation between the volatility and CDS at normal times would provide diversification benefit when both move sideways. In the event of a spike in sovereign risk, the volatility will rise with the CDS spread and positions will become correlated in favour of better portfolio performance.

For investors who are looking for relative value, however, we think that the default risk may have been overpriced at current levels, especially for countries like US and Japan. As such we would think selling CDS protection and buying payers may be a better trade. In this case, the correlation does not help that much due to the lack of it. However, in extreme cases where these countries face the prospects of immediate default, we expect the volatility will likely move up along with rates to offset the loss in CDS spread.

And now, in practice:

When Germany comes to the rescue

News on Euro sovereigns continued to shape performances in all European asset classes this week. Somewhat more concrete developments on the political front allowed for significant tightening in peripheral spreads as well as temporary pickups in risk appetite. The odds of a complete disaster scenario have declined but nevertheless, concerns regarding the fundamental differentiation between core and non core Europe are likely to subsist in the long term, in our view. In addition, open questions on the exact nature of the support and its implementation (including the resulting cost to be bared by core countries) are likely to maintain pressure on both core and peripheral spreads and keep volatility close to current levels.

The ECB can pursue its gradual exit

While some are hoping to hear about a possible extension of the relaxed ECB collateral rule at the March meeting, the reality is that the ECB is rather heading in the other direction, having already in mind the exact steps to remove its excessive liquidity provision. In comments made on 11 February, Weber provided a more specific description of the “gradual exit”, noting that first the maturity of outstanding liquidity will be reduced then that the “most likely next exit issues will be a gradual return to normal tenders in longer term operations”, meaning 3M LTRO operations will move from full-allotment back to fixed amount/variable rate.His comments suggested on the other hand that unlimited allocation via the 1W MROs should stay in place for longer, inline with our view that liquidity will remain abundant in the system in 2010.

A normalisation of sovereign credit curves is triggered

Inline with the usual positive relationship between spread levels and CDS curve slopes, the substantial tightening of CDS spreads/ bond peripheral spreads following first the headlines on the preparation of a potential aid package for
Greece was accompanied by a steepening (ie normalisation) of CDS and ASW curves.

The reduced probability of an imminent default prompted a stronger tightening in short term CDS spreads. The Spanish 3s5s CDS curve has now disinverted, ie the 3y Spanish CDS is now tighter than the 5y, but most impressive is the steepening observed in Portugal and Greece (6.5bp and 4.6bp respectively – see margin table). Going forward, we might see a short term breakdown of the positive relationship between spreads and slopes as the reaction this week from European officials will likely keep away concerns of an imminent disaster scenario and additional spread widening is therefore likely to be greater on the longer end, resulting in a steepening of CDS curves.

Bond ASW curves have also experienced some normalisation, with a stronger ASW richening of short term bonds. The 2y10y ASW curve remains however inverted in Greece (see Chart 14). The shape of ASW curves in peripherals is not only function of the risk assessment but also depends on distribution of coming supply. In Greece, the new 10y to be syndicated by Greece in February is likely to be the next key driver of the curve.

And signs of a transfer of risk can be expected

The next development in our view is a relative widening of German, French and other core countries’ CDS relative to peripheral CDS. If a concrete decision on Greek financial aid is taken at the Ecofin meeting on 15-16 February (not the base case scenario according to latest headlines), a guarantee for Greek bond issuance for instance, we expect the CDS market to react in a similar way as when sovereigns set up guarantees for their banks (see charts next page). The current high risk associated with peripheral countries would be partly transferred to those now deemed safe with the extent of the move depending on the involvement of each country in the rescue package. On the other hand, if no concrete announcement is made, it is also likely that CDS spreads for core countries will continue widening, as risks of a weakening of the overall Eurozone increases.

On the bond side, a concrete announcement would likely result in a compression of peripheral spreads as German bonds would likely sell-off (both due to a return in risk appetite and as a result of speculations on increased German borrowing needs to finance the Greek bailout) while peripherals would rally on lower credit risk.

And dissecting the CDS-bond basis...We sure hope the Spanish spies read this to realize how unfounded their prosecution of CDS traders is

Basis at much lower levels than in Jan-Mar 2009 Although most sovereign CDS spreads broke their Feb-09 record highs in the past two weeks, this did not translate in new highs for the CDS-bond basis. The latter was rather well contained for all countries (see chart 17 with SovX vs cash and chart 18 with single name basis, based on bond spreads to OIS).

The fact that five syndicated auctions took place in January could be one of the reasons behind the strong sell-off in peripheral bonds and therefore the tighter basis compared to Feb-09. Also, this crisis being more driven by fundaments (e.g. high deficit ratios, fears of unsustainable debt) rather than a global increase in risk aversion, it is reasonable to expect a more pronounced reaction in the bond market. Long term bond holders find more reasons to be concerned.

Since 11 January, the basis declined for Greece and Ireland (see Table below) while it increased most in Portugal and also Germany and France. Demand for bonds in the latter two held very well as a result of a flight to quality and liquidity.

Sharp jump in short dated CDS flattened basis curves

Up to the middle of this week, a very strong sell-off in the short end of peripheral curves resulted in a flat bond term structure for some countries (chart 14). However, it remains that the inversion of CDS curves was more dramatic, resulting in a flattening of basis curves across countries. So why the sharp jump in short dated CDS curves? Part of the movement was due to a sudden rush to hedge default risk – some banks were using short dated CDS to cover their country exposure. In market panics, CDS spreads react faster than bonds. Short dated CDS was the easiest (and in some cases the only way) to hedge country risk. As mentioned above, short dated CDS spreads have tightened this week, but for most countries the basis remains wide in the short end.

Trading thoughts

1) Tightening of German basis We believe in a tightening of front-end German CDS-bond basis. If Germany announces a concrete intervention to help Greece, its CDS should widen (see transfer of risk above) but German bonds could suffer to a greater extent. They will become less attractive in the higher risk appetite environments while also being pressured by heavy supply in the 2y and 5y.

2) Cross country: We like to go long Belgian basis versus Italian one in the 5y. Another trade to play a normalisation is to go short the French basis versus the Dutch one. France has cheapened much more than other AAA countries on the CDS side (see Table above), either due to fears regarding the exposure of French banks to Greece or its high rollover risk. Yet if the situation regarding Greek banks deteriorates we believe it should start to impact further on Dutch credit as well, while on the rollover risk, we highlight that Netherlands has a similar 27% of debt to refinance by year end.

Drivers of the CDS-bond basis

Theoretically, both CDS spreads and yield spreads to risk free rates represent premiums received when taking an exposure to the risk of default of an entity. However a basis can exist in practice between CDS spreads and bond spreads.

Difficulty to short in cash market (increasing the basis)

Sourcing of bonds in the repo market could be difficult. Banks tend to buy CDS instead of shorting cash bonds in order to hedge their credit exposures or to express a negative view on a single name. This pushes the basis up.

Difference in relative liquidity (basis increasing with high bond liquidity)

The basis will move in such a way that provides extra compensation for investors in less liquid segment/markets, favouring countries with very liquid bond markets. This is also true, when it comes to sectors; liquidity in CDS market concentrates on maturities in 5 and 10years, whereas in the bond market, liquidity is already high in the very front end and can extend to the 30y.

Issuance patterns (mixed effect, usually decreasing basis for govies)

Banks involved in bonds syndication tend to buy protection in CDS markets during the issuance, causing the basis to widen (mainly observed in the corporate side). On the other hand, new bonds (especially govies) are often issued at a higher yield in order to attract sufficient interest during auctions, depressing the basis as a result. This was for instance the case at the launch of the 5y Greek bond at the end of January and at the Portuguese 10y syndication on 10 February.

Funding issues (decreasing the basis)

Not all investors are able to borrow at repo levels. Some of them may find it easier to obtain credit exposure by selling CDS than by being long the bond. This makes CDS spread relatively low versus bond spreads (to OIS / repo). This is particularly true at year end, when balance sheet reductions are working against cash positions and contributing to the cheapening of the bonds versus CDS (off balance sheet instruments).

Difference in players

The divergence in the types of investors in each market, with bonds mostly taken up by pension and insurance funds, while banks and short term investors are more active in CDS.

  1. 1. Sovereign CDS are options too, like swaptions; February 12, 2010

Sunday, February 14, 2010

The Math behind the US Deficits?


From HERE: This one is of very HIGH significance:


THE PROBLEM:

All money in the United States, except coins, is created as someone’s debt. When our nation spends more than it takes in, a deficit is created and our government “borrows” the money mainly from commercial banks. As the debt builds, so does the interest. As the interest takes up a larger percentage of the budget, real programs get squeezed.

The latest example of the squeeze is Obama’s announcement cancelling future manned space flights. No more advancing the human race in space, it’s too expensive. NASA’s total annual budget? $18 billion. Amount spent on interest on just the current national debt? At the traditional rate of 5% it will total more than $700 Billion in 2010! But guess what? While the Treasury Department reports that “only” $383 billion was spent on interest last year…,



…the real amount of money spent on interest last year alone nearly equals the total amount of money our government takes in!

Please let that sink in.

That’s right, this is no joke! Yes, that chart from the Treasury is completely misleading – as in deceptive. In fact, when all the money spent buying down interest rates is considered, we are actually spending ALL of our nation’s income, or more, just for the privilege of using our own money system!

Consider that by the end of 2010 we will have $14.3 Trillion just in current debt, just at the Federal level. “Deficits don’t matter,” right? Yet we are seeing debt driven events ripple around the globe. And since the end of 2008 through September of 2009, the U.S. Federal Reserve had committed $6.4 Trillion just aimed specifically at programs designed to keep interest rates low! And that is conservative, in fact it can be said that the purpose of nearly all the backstops and bailouts was to keep the cost of debt low! This would include backstops like the one given to the FDIC to prevent bank panic from spreading… is that not in effect buying down interest rates? Of course it is. Total commitments? More than $11 Trillion as of September 2009.

If that’s too much of a stretch for you, let’s be really conservative and only look at the amount of money actually invested by the Federal Reserve during that timeframe to buy down rates, about $1.5 Trillion! The largest section of this money went directly into buying up mortgage paper through the GSEs.

So, we spent $1.5 Trillion, at least, buying down interest rates, the sole purpose of which is to mask the debt load. This is because debt saturation has occurred and at normal interest rates, the debt load cannot be supported by incomes. That is true on all levels.

If you combine the amount the Treasury spent directly on interest in 2009, $383 billion, and add it to the $1.5 Trillion used to keep rates low, then it can and should be said that the Treasury actually spent at least $1.88 Trillion on interest!

How much money did the Federal Government take in? $2.2 Trillion is all. Remember, comparing debt or interest to GDP is a FALSE argument, a Red Herring. Income is the only thing that matters when it comes to carrying debt.

$2.2 Trillion in income, $1.88 Trillion in real interest expense. How are we looking?



This conservative estimate means that we actually only have about $320 billion to spend on everything else that’s not interest related. States going bankrupt? Roads in disrepair? The value of your retirement falling? Jobs hard to find? People going hungry?

According to www.federalbudget.com, this is how Congress currently spends our money. Note that their Treasury Department expenditures exceed $700 Billion in 2010, and that just the top three budget items exceed the total amount of revenue collected by our government. That’s without any mention of the amount spent to keep rates low.



Have you ever been trapped by logic? When this happens to your brain, it will know it. Oh sure, you may try to weasel your way out, but deep inside you will know you’ve been had.

To those who think this can reverse or that it was a one-off expenditure, you simply do not understand the exponential growth that is occurring, nor will you see the parabolic collapse that is coming.

The collapse of debt has already begun in the private sector, but the government is simply picking up that collapse and creating a parabolic growth phase of government spending and government debt. Here it is presented in the Fed’s own charts… What exponential growth? This exponential growth:



That chart spans more than the past century and is experiencing a classic parabolic blow off move that has gone quite vertical. Parabolic moves ALWAYS collapse, it is just a matter of when. When this curve collapses, it is going to be very painful for many people indeed.

Looking at that chart, is there anyway possible to believe the budget forecasts stating that the deficit is going to start coming down soon? What would that mean to the economy if it really happens at this point? Would the economy still be growing or would it be shrinking? Are those light bulbs I see coming on? Pretty illuminating isn’t it?

Okay, now we’ve seen that our outlays (spending) are skyrocketing, let’s take a look at the collapse of current receipts, again our nation’s income, but this time let’s view it in terms of year over year change. Here you will see a historic collapse of tax revenue on the Federal level:



The chart of outlays has moved into a parabolic blow off phase upwards, while at the same time the chart of current receipts has already peaked and is now collapsing downwards. This, of course, is causing deficits to enter a parabolic move of their own – the Fed refers to this deficit as our “national savings.”



The hollow words “deficits don’t matter” echo through my mind. They are spoken in the arrogant tone of supposedly educated people who continue to spread their debt backed manure. Of course they spread this manure knowing that it fertilizes their returns.

The stench of that manure ripens further as many argue that we can simply print money without debt and that will inflate existing debt away. That is a comical notion if you understand that it requires income to service debt and that the rate of debt expansion is far outstripping the rate of income growth.

If that math doesn’t convince you that change is about to come to our monetary system, then nothing will! Remember the housing bubble? “Real estate never goes down,” remember? I was one of the few who was warning about it early on, but now everyone seems to think they saw it coming. Do you see this coming as well? Or, do you believe that it’s possible to “inflate away debt…” even though your money is backed by debt?

YES, absolutely the rules are going to change, that’s exactly what I’m saying. But I’m also saying that the rule changes will not be simply printing money within the same old framework.

The day after the TARP program was announced in November 2008, I wrote a paper called Death by Numbers. In it, I simply added up all the debts on the personal, corporate, and Federal Government levels and demonstrated how the same people are ultimately responsible for all the debt on each level to the tune of $303,053 per man, woman, and child in the United States – more than $1.2 million just for my family of four, and this did not include the debt on the state and local government levels. People were stunned, you cannot argue the numbers, yet nothing has changed. Besides getting worse that is.

Recently I updated the math in an article called Zombie Nation – The Rise of the Mathematical Plague. In it I added the cost of additional debt, not counting the trillions spent bailing out mortgages in the GSEs, and showed that each worker in the United States is now responsible for $704,530 each! This is an impossible math situation as the average wage simply cannot support that much debt, especially when interest is considered.

Now, through demonstrating how much of our income actually goes to interest on our debt, we are demonstrating the same bad math just expressed in another manner. But let’s have some fun and challenge the sanity of those who believe that adding debt will cure a debt problem by asking a couple of pretty easy questions…

“Is it possible to add money to inflate away debt in a system in which money is backed by debt?”

This is what many people are saying will happen, right? Of course the fact is that almost all of our money is backed by debt. Creating more money means creating more debt. The real question becomes how do incomes keep up with the debt creation? Are they? Of course not…

Next question:
“In a system in which money is backed by debt, what happens to the supply of money if you decrease the quantity of debt?”

Of course the supply of money would fall! Do you see the dilemma that is created when you back your money with debt? We can’t pay back our debts without decreasing the supply of debt backed money, and if we do that, then the economy will suffer. But if we continue to pile on debt, then more and more of our money will go to pay interest and our economy will suffer. Those are the choices we are presented with in our current Federal Reserve Debt based system.

Thus we are damned if we do, and damned if we don’t. And it’s not just us who are damned. The entire world is built around the same clearly unsustainable system.

This begs the question, “Why is our system built like that, and to whose benefit was it made that way?”

I think you know the answer to that question – this current system was built around the Federal Reserve Act that was passed in the year 1913, and it took the money power from Congress and moved it to the private banks and bankers.

The very same interests that created this monetary conundrum are telling us “consumers” that we need to spend more to get their credit (debt) flowing again! LAUGH OUT LOUD, that is hilarious! Then they use the money created and the tax dollars that flow to them from us CITIZENS to buy the political and judicial systems! Talk about irony of ironies, the money system doesn’t even belong to them, it belongs to us! We don’t have to pay anyone for the right to use our own monetary exchange system, that notion is simply ludicrous, yet we have all been living under that system our entire lives!

Simply put, our money system was stolen from us. We can either take it back or we can continue to swim in the manure, the choice is ours, not theirs.

The globe is saturated with debt. Adding one dollar of debt now subtracts 15 cents from GDP.



The velocity of debt is zero, the debt saturation point. Adding additional debt will only cause future defaults and falling employment.

This debt saturation is causing default waves that ripple around the globe. Subprime in the U.S., Banks in the U.S., Commercial Real estate, etc. Now the debt bombs are detonating in Dubai, then Greece, in Portugal, Spain, Ireland, and even Japan. The bombs are just waiting to explode in England, Germany, the rest of Europe, and even China. Even if the bombs don’t explode immediately, the debt smolders causing global economies to suffocate. Germany is the latest to report that despite all the efforts to prevent it, their GDP is simply not growing (neither is ours in reality).

Our statistics are not comparable with bygone eras. Debt saturation has caused a phase transition and attempts to cover-up this transition have resulted in huge distortions of the truth. Below is a chart published by SG Cross Asset Research showing their computations of net liabilities to GDP. This includes liabilities that are off balance sheet, and they far exceed the liabilities carried on balance sheet:



Yes, our governments are insolvent. Insolvent being a condition in which you can no longer service current debts. That has already occurred in the United States. That is why we resorted to “Quantitative Easing” and why we use several methods to artificially buy down our interest rates. If we could have continued to borrow more money at normal rates we would have but we didn’t and we can’t as the stress in our debt auctions is now showing time and again.

We can show that insolvency in the math in several different ways. Thus you are a witness to the biggest lie and accounting scandal in the history of mankind. No, that is not an exaggeration, it is a fact, a very sad fact that we are all going to have to face one way or the other and soon.

To all those who point to this (Democrat/ Republicans!) and that (bad assed unions who are ruining our country) and claim the other thing (banks need to lend more, lol) regarding our economy, all I can really say is that your eye is way off the ball. The game of debt backed money with the ever escalating interest going to private individuals is nearing an end… the mathematical outcome of the game was decided before it ever started.

If you view the current situation objectively, you will come to the inescapable conclusion that the rules of the game must change. Who is it that is going to bring those new rules to you? The same people who created the current debt backed system? Have you heard of any solutions that address this root of the problem? Are you waiting to be rescued, or are you hiding in your bunker?

THE SOLUTION:

Yes, printing money without debt is an alternative, but that doesn’t make the current debt go away and it doesn’t bring spending back to match income. The quantities of money required to be printed would be so vast that you would soon find yourself printing trillion dollar bills.

Another solution would be to buckle up, spend FAR less, tax FAR more, and default on current debts. The economy will suffer hugely and for decades as a result, and in the end, with debt backing our money the result would be that eventually the same old cycle would repeat as the next debt bubble builds anew.

The inescapable conclusion is that if you live inside of a debt backed box, our nation and human kind will continue to be held back.

There is only one right answer for the long haul, for the good of our nation and of the world. That answer is to replace the Federal Reserve Act with the provisions of Freedom’s Vision. This will return the money system to Congress and to the People where it belongs. It will cleanse the debts and derivatives to lessen leverage in the economy while restoring balance sheets, not just for our Federal Government, but for States, Banks, Businesses, and Individuals.

Implementing Freedom’s Vision will:
1. Avoid the disaster about to unfold – regardless of how we get there, by inflation or deflation, the math of debt that underlies our currency does not work. This would break that math and preempt the negative events that are going to follow should we fail to take action.

2. End the practice of debt backed money for our Federal Government. Lower taxes and more productivity result.

3. Provide direct and immediate relief for people in debt, accomplished in a way that’s fair to everyone including those who are not in debt and without creating excessive price inflation, deflation or a giant “moral hazard.”

4. Provide direct and immediate compensation for those who are savers and have been damaged by past practice.

5. Provide relief for States, almost all of whom are in deep debt trouble.

6. Cleanse the banks and financial businesses of unserviceable debts and derivatives and would ensure that they stay that way. All banks would survive the transition, immediately benefiting from improvements in our citizen’s balance sheets. The same process would be used to cleanse other financial like businesses.

7. Businesses, both large and small, would immediately benefit from our citizens and the banks improved balance sheets.

8. Unfunded liabilities would immediately get better with zero percent price inflation.

9. Limits on special interests would separate their money from politics lessening the pressure to continually increase the quantity of money. This allows long term decision making. Special interests associated with the banking, oil, defense, food, insurance, and other industries would no longer have their huge pull. Thus politicians would not have to focus on spending our resources on special interests, but instead on the interests of the people. Budget pressures would decrease as a result.

10. States would exercise more control over their own destiny. Lower taxes on the state level, more productivity. Low cost money would become available to repair and upgrade current infrastructure and to build the infrastructure of tomorrow’s commerce.

11. The powers possessed by the central banks would be greatly diminished freeing our country and others from their methods of control via debt, now even issued worldwide by the IMF. Countries would no longer be working to pay central banks interest. Instead they would work to develop their own rule of law. Their productive labors could be used to improve their own infrastructure, to feed and cloth themselves, and to build a future for themselves. In other words, they need to be taught how to fish, not simply given a fish and asked to pay it back forever and ever.

12. No price inflation eroding away future savings. People who take on reasonable debt could once again make progress towards paying it off.

13. Massively supports education, underpinning progress so that we may continue to lead the world in innovation and the production of meaningful technologies.

14. Provides a national mission - focused on creating the energy and infrastructure of the future. REAL and meaningful economic growth would ensue and massive new employment would result.

Many argue that such a plan is not possible or is too difficult to implement. Some feel that collapse must happen first while others do not see the threats at all.

As I look back through history, here is what I see: I see that mankind has been making a steady march towards progress. I see the evolution to the Magna Carta, then to our own Constitution. I see the evolution of economic theory, although painfully slow, it has progressed from rudimentary trade, theories of self-interest, to Adam Smith’s Invisible Hand, to an understanding of supply and demand. I see monetary systems and their progression from sea shells, to wooden sticks, to metal coins, to gold, to paper, to digital.

Now THE major hurdle to overcome is how debt backs our money. We CAN and we WILL overcome this obstacle. It is the next step in the progression, a step that will be taken. To think that we will not progress goes against thousands and thousands of years of history. It will happen because the math of debt is forcing it to happen, it is the only logical conclusion. Nature has a way of pointing in the right direction. When that direction is clear, you know it, it is just, the math supports it and therefore it will last and become the next step forward for humankind.

Yes, “it’s the DEBT, Stupid!” It time to get on with Freedom’s Vision!