Nicole Foss, who under the pen name Stoneleigh co-edits the Automatic Earth website, just did a long-form interview with an Italian magazine where she lays out her peak energy, societal collapse thesis in the coherent, accessible way that fans of her writing have come to expect. One part was especially interesting:

When you have economic contraction you also have a substantial contraction of the trust horizon. This deprives political institutions at the national and international level of the trust that would give them political legitimacy. They become stranded assets from a trust perspective. People no longer internalize the rules that those institutions are attempting to impose. The response is typically surveillance, coercion, and repression. This picture basically suggests that it is pointless to look for solutions from the top down. It is not solutions that will come from the top down but more problems.

So politicians typically make a bad situation worse as expensively as possible. The systems that we have established have become sclerotic and unresponsive, hostage to vested interests with no ability to adapt quickly to give people abilities to cope with rapid change. I don’t look for solutions from them. The people who are part of that system are typically the people who have gained significant amounts from the status quo. These are the last people who are likely to change things, so I don’t look for political actions.

In many parts of the world, especially in parts of Europe, people always ask me if they should take political action, change their policies at a national level to solve these problems. And I tell them unfortunately not because there isn’t any mechanism for these large bureaucratic institutions to offer anything that would realistically help, and that they‘re far more likely to try to maintain their own existence by sucking even more resources out of the periphery in order to maintain the center.

This is a bit like when a body becomes hypothermic, not enough heat. It shuts off circulation to the fingers and toes in order to preserve the body temperature of the core. That’s what we can expect politicians and political systems to do. Unfortunately for us, we are the fingers and toes and we have to look after ourselves. Nothing is coming from the top.

My solutions, such as they are, are grassroots solutions. We have to build things from the bottom up. Our centralized life support systems will fail over time because they’re critically dependent on tax revenues that won’t be there and cheap energy that won’t be there. These centralized systems won’t be able to deliver the goods and services we’ve come to rely on.

What we need are alternatives that come from the bottom up. The reason these work is because they operate within the trust horizon. They don’t have to stay small. They can grow to whatever size the trust supports and that can be different in different places. The crucial thing is that they come from the bottom up, they’re small and responsive and not bureaucratic, they make the best use of very small amounts of resources because they don’t have enormous administrative overhead.

It’s amazing what can be done at a very small scale. It wouldn’t replace what the centralized services have given us, but we can cover the basics. The key point is that we have to do it right now because we don’t have much time before we start to see centralized systems failing to deliver what they have delivered in the past. The amount of money in the system can contract very quickly. That undercuts what these centralized systems are capable of delivering in the next few years. So we must start right now building grass roots initiatives, and community is crucial to that.

We need to begin at the individual level because if we are on a solid foundation ourselves we can then help others. If we are not then our attempt to help others is fundamentally weakened. So we have to get our own house in order but then we have to think much more broadly. We must build community. Relationships of trust are the foundation of society. So we need to work with our neighbors, we need to know our neighbors and we need connections with family and community so we’re less dependent on money.

In many parts of the world where people really don’t have any money anyway, their society functions on barter and gifts, working together, exchanging skills. This works as a model. It doesn’t get you a large fancy sophisticated industrial society because it doesn’t scale up that well. But it works very well at a small scale, and this is the kind of structure that we need to rebuild.

In some parts of the world there’s a lot more of that than in other parts. So it’s actually interesting to think that it’s not necessarily the places that are the wealthiest at the moment that will do best in the future.

The analogy I use is that if you’re going to fall out of a window how much it hurts when you hit the ground depends on how many floors up you were at the time. If you were on the hundredth floor and you do nothing to prepare before you fall it’s going to be fatal. If you’re much further down it’s less painful. If you fell out of a ground floor window you might not even notice. You just pick yourself up, dust yourself off and not very much has changed.

So the places that will do best are the places where there is already a lot of trust at the foundational level, where people are used to working together, where people are not that far removed from the land. Places where there’s an enormous disconnect between resources that are available in that area and what resources that are actually used, where societies are highly atomized and used to a very high standard of living, those places will see enormous shock to the system because those people don’t have any skills or connection to land or family to fall back on.

Some thoughts
Viewed through a “trust horizon” lens, a lot of global and national institutions are indeed becoming “stranded assets”. Who outside of the New York Times editorial department trusts the European Union or the Federal Reserve these days? How many people still think the companies selling processed food or advertising prescription drugs on TV have their customers’ welfare at heart? Virtually no one who can read.

If you need an excuse to get to know your neighbors or generally get involved in the local community, this is it.

Big modern cities are the 100-story windows in Foss’ analogy. Life there is going to get very hard very fast if her systemic failure predictions come true. Conversely, small towns with thriving farmers markets and lots of roof-top solar panels will find the next couple of decades relatively less stressful. As Foss says later in the interview, “If you psychologically prepare for a much lower material standard of living in advance, it doesn’t have to be anywhere nearly as painful.”

Here’s the full interview:

The Fed just spoke. Here’s a slightly edited transcript:

Blah blah blah … the economy has been expanding moderately … blah blah blah boilerplate inanity blatant lie … the Committee seeks to foster maximum employment and price stability ….

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

This of course comes as no surprise to anyone. But seeing it in print had exactly the impact you’d expect. Stocks erased their early losses, the dollar tanked, and precious metals soared. With good reason. It is now the stated policy of the US government to have negative real interest rates for years to come (eons in trader-time).

The carrying cost of gold and silver bullion will remain more or less zero, while all manner of “risk-on” strategies and carry trades will generate virtually guaranteed returns. Think back a decade or so and ask your younger, more naive self what the result of open-ended zero interest rates would be. You’d have probably said “that will never happen, but if it did, gold and silver would go parabolic”. You’d be half right. Grab those junior miners with both hands.

As the Greek default (and it is a default no matter what they end up calling it) is finalized this week, the consensus seems to be that failure to reach a deal would cause a global financial apocalypse.

That may be true. And if it is, why aren’t we more worried about Illinois? It’s more or less the same size as Greece, its finances are in the same generally catastrophic shape, and its leaders are just as feckless and dishonest. It owes tens of billions of dollars to various investors and stakeholders and will clearly have to stiff many of them at some point. The following article captures the “failed state” dilemma perfectly:

Dripping with red ink: Will anyone fix Illinois’ budget mess?

The question isn’t whether Illinois’ finances are in dreadful shape, it’s how to fix the problem. Or perhaps more accurately, will legislators have the political will to fix it when they return to Springfield for their spring session?

Even though the legislature and Gov. Pat Quinn last year imposed a temporary 67 percent state income tax increase, Quinn’s office expects to have a $500 million budget deficit this year.

Quinn is calling for a 9 percent cut in most areas of state government, except education and health care. But even with cuts at that level, the state would have a projected $800 million budget deficit for fiscal 2015, the year when most of the tax hike expires.

Quinn’s budget spokesman, Kelly Kraft, said the state’s fiscal situation is not pretty.

“These projections clearly demonstrate that action must be taken to control not only Medicaid costs but also (pension) costs, or all other areas of government will continue to be squeezed,” Kraft said.

Looking at the bigger picture, the state has a backlog of about $8.5 billion in unpaid bills and owes about $27 billion in outstanding bonds. And then there’s the roughly $80 billion owed to the state’s public employee pension funds.

Now, legislative leaders and Quinn are floating ideas to cut the two areas that account for the biggest chunks of the state budget — pension contributions and Medicaid.

In the proposed $33.7 billion budget for fiscal 2013, the state’s pension payment will be $5.3 billion, and Medicaid will cost taxpayers about $7 billion.

Proposals include reducing the benefits or the eligibility for Medicaid. On pensions, ideas include decreasing the benefits and increasing the contributions for current employees. A new pension system was approved last year, but it’s only for new employees, and there’s debate on whether the benefits for existing employees can legally be changed.

One of Quinn’s ideas for reducing the state’s pension costs is to shift the burden somewhere else: to local school districts.

“About 21 percent of what the state puts in … is for state employees,” Quinn told reporters earlier this month. “More than half of the money we contribute every year is for teachers who are outside of the city of Chicago — suburban and downstate teachers.”

Supporters of the idea say it would make school districts think twice about giving employees big raises at the end of their careers to boost their pensions. School districts would have some skin in the game if they had to pay for those pension boosts, rather than the state, the supporters say.

Opponents argue that shifting costs to local school districts isn’t real reform, and would just force them to increase local property taxes.

Improving the picture won’t be easy when the legislature reconvenes Jan. 31, particularly in an election year, when politicians might find it difficult to cut services for constituents or hurt the feelings of unions that represent state workers.

To summarize, even after a massive tax increase Illinois is looking at a half a billion dollar deficit. That actually sounds manageable in the scheme of things — not even a billion dollars, chump change in this inflation-ravaged world. But the annual deficit is less of a threat than all those accumulated liabilities: “Looking at the bigger picture, the state has a backlog of about $8.5 billion in unpaid bills and owes about $27 billion in outstanding bonds. And then there’s the roughly $80 billion owed to the state’s public employee pension funds.”

The reported deficit, in other words, doesn’t include all the stuff that should have appeared in past budgets but was hidden in order to get through the next election. How a state with a constitutional mandate to balance its budget can do this in the first place — and how an “unpaid bill” can be excluded from the annual budget — is a question for future prosecutors. But for investors it’s a clear sign that some sort of default is coming.

Why then would anyone buy an Illinois municipal bond, or accept a state contract that requires future payments, or move a business to the state, or keep a business in the state, or do anything else that required faith in the willingness or ability of the state to pay its bills? The only possible answer is that Illinois isn’t Greece; it’s Spain or Italy, an entity so big and important that its failure is inconceivable. When it hits the wall, Washington will have no choice but to step in and cover its unfunded pensions and teacher salaries and muni bond interest. In the same way that a Spanish bond is really a German bond because Germany has no choice but to make good on it, the big insolvent US states are wards of the central government.

The bottom line effect of all this stepping up and bailing out is to exchange a solvency/debt crisis for a currency crisis in which the markets at some point figure out that failed states are so numerous and their needs so great that the printing presses will never stop.

Gold and silver mining stocks will be the dot-coms of the second half of this decade. Yet most of the people who bet on them will lose money because they ignore the first rule of speculative sectors, which is that no matter how well the sector does, most of its constituent companies will fail.

This rule applies wherever hot money is chasing untested concepts, but it’s uniquely valid for mining, where reserves are uncertain until actually dug up, mines can cave in without warning, local laws can change in unfavorable ways, and managements frequently make dumb acquisitions. These risks make even the most attractive mine something of a crapshoot. Two recent examples:

Hecla’s Hangover
January 11, 201. Hecla already had a headache, but now it’s suffering from a full-blown hangover.

The series of unfortunate incidents that plagued Hecla Mining’s (NYSE: HL ) mile-deep Lucky Friday mine during 2011 attracted the scrutiny of the Mine Safety and Health Administration, which has now ordered the mine’s primary shaft closed until it can be cleared of debris that has accumulated over the years. Hecla estimates that the maintenance work will keep the mine shut through early 2013, leaving embattled silver investors to wonder whether someone spiked their holiday eggnog.

Hecla shares plummeted by more than 26% this morning, essentially mirroring a 26% reduction in the miner’s 2012 production outlook from 9.5 million ounces to 7 million ounces. Despite a strong price environment that saw the average price of silver in 2011 surge by 74% over the prior-year average, Hecla’s stock has lost some 54% of its value over the past 12 months. Though shareholders may wish to avert their eyes, the following image captures the devastation:

   
Kinross in Play After Paying Too Much for African Gold
Jan. 20 (Bloomberg) — By paying too much for acquisitions in western Africa, Kinross Gold Corp. is now turning itself into the cheapest gold-mining target in the world.

Kinross, Canada’s third-largest gold producer, fell the most in almost two decades after saying this week it will write down the value of its Tasiast mine in Mauritania. The company sold for 76 cents per dollar of net assets yesterday, versus the industry median of 2.5 times, according to data compiled by Bloomberg. Writing off the excess $4.6 billion it spent on Tasiast would still leave Kinross at a 50 percent discount to its competitors, the data show.

   
Hecla and Kinross are big companies which have been around forever, and they still hit common speed bumps. They’ll both survive, though, which is more than can be said for some junior miners with similar problems. Without money in the bank or other projects to share the load, an operating or cash flow problem can be fatal for a junior.

So why bother with mining stocks when you can just buy the metals? Because in the aggregate mining stocks will probably outperform the underlying metals (the fact that they haven’t lately just means they’ll outperform by an even bigger margin in the future), and the best miners will do two or three times as well as the metals.

So consider them, but show them some respect. Don’t buy just one, no matter how much of sure thing your broker or brother-in-law says it is. Instead, buy five or eight or ten, even if it means owning just a few shares of each. Or buy a mutual fund or ETF and let them do the diversifying for you. GDX holds a basket of major gold miners, GDXJ a basket of junior gold miners, and SIL most of the silver miners. One transaction and you own the sector.

The sector, of course, contains winners and losers, so the real prize goes to whoever has more of the former than latter. As mining guru Rick Rule likes to say, most junior miners aren’t viable, so all the gains in that sector come from the remaining 10 or 20 percent. So if you really want to be part of the coming mania you have to be a stock picker.

One low-stress way to do this is to piggy-back on the work of established analysts. They’re not always right but they do spend their days trying to separate solid properties from holes in the ground guarded by liars. Their best ideas go first to subscribers and/or investors, but they can’t keep everything to themselves. In media interviews, mining experts like Sprott’s John Embry frequently name a few of their favorites, and the funds managed by people like Tocqueville’s John Hathaway are required to report what they’re buying and selling. Once that information is public, it’s fair game.

Last but not least, keep some free cash available for opportunities like Kinross and Hecla, which are now takeover candidates.

Just based on national balance sheets, 2012 will be somewhere between challenging and catastrophic. But debt and deficits might be the least of our near-term problems if Jim Rickards is right. In his latest King World News interview he predicts yet another war, “sooner rather than later”:

Iran will not be allowed to have a nuclear weapon. They’re going down that path, and this is coming to a head sooner rather than later. They don’t want to give up the program, so all the bargaining is a pretense. They go through the motions of negotiations but it’s all to stall for time.

The Obama administration has woken up to the fact that it’s time to get serious. Things are moving very quickly. Israel has integrated itself into the US and European command and there are joint US/Israel exercises; the pieces have begun to move on the chessboard.

For Israel this is existential. If Iran gets nuclear weapons they’ve said they’ll burn Israel to the ground. So it’s not just a strategic rebalancing, it’s life or death. The US wants to go in first [for a variety of reasons], but there’s residual distrust. How do the Israelis know that the US won’t reach an accommodation with Iran and leave Israel holding the bag? All the information I have is that the US is going to do it. We’ll take out their air force and command/control system, and suppress their missiles.

It is not in the US interest to see China cut off from Iranian oil, so we’ve cut a deal with Saudi Arabia to make up the difference. The Chinese care about the oil, not who’s selling it. Russia is more interested in selling weapons, so they’re approaching it as an arms dealer, selling weapons to replace the ones we destroy. They’re also the biggest oil exporter and win financially if oil goes up.

This will be done with air power, sea power, financial warfare, sabotage, special operations. It’s already going on: Iran’s nuclear scientists are being assassinated, financial sanctions on Iranian banks are being dialed up. The Iranian currency has plunged and inflation is soaring. This is financial warfare; the cyber warfare has been well-advertised.

The Iranians do have a few tricks up their sleeves, including submarines and speedboats. There will be casualties and the US will lose at least one vessel. Still, it’ll go fairly quickly and the US is counting on the Iranian people to rise up against the regime once the war begins.

It’ll take oil to $200 and gold past $2,000. We’ll see a general flight to safety and quality and a lot of volatility in the stock market.

Some thoughts
Rickards is analyzing and predicting, not advocating, so don’t blame the messenger. His scenario is consistent with what Israeli leaders have been saying for years and more recently with the movement of US warships to the region. Something big does seem to be coming.

For more details see this excellent report by Chris Martenson.

In one sense this latest war is, if not right, at least understandable. A fight is clearly brewing and the US wants to both protect an ally and keep the oil flowing.* But in another sense it’s absurd. Multiple simultaneous wars are for solvent superpowers with sound currencies and flexible finances, and the US no longer qualifies. Our military is overextended and exhausted and this year Washington will borrow its defense budget from China, add another trillion to the official national debt and maybe three trillion to unfunded liabilities and other off-balance-sheet but very real obligations.

Austrian economics — and common sense — teach that the more leveraged the system the less able it is to withstand external shocks. And war in the Middle East sending oil to $200 would be the mother of all external shocks.

$8-a-gallon gas would be like a gigantic tax increase, shifting the global economy back into reverse and preventing the peripheral Euro-zone countries, Japan and the US from getting their borrowing under control. Who will buy the extra trillion or so dollars of sovereign debt? The world’s central banks, obviously, so the printing presses will run flat-out for the rest of the decade.

The secondary effects are harder to predict but far scarier. The global financial system is hiding trillions of dollars of bad loans and nearly a quadrillion dollars of derivatives, which is another way of saying the developed world’s biggest banks are ready to evaporate. Will the Fed and ECB be able to stop that avalanche when it comes? Who knows? It looks like we’re back at square one in the inflation/deflation argument.

* In response to some well-founded criticism (thanks guys), a reference in this paragraph to “crazies with nuclear weapons” was replaced with something less offensive and hopefully more accurate.

If investing seems harder than it used to, you’re not imagining things. U.S. stocks are down from a decade ago, the gold/silver miners haven’t kept up with the underlying metals, and though Treasury bonds have done pretty well, only a lunatic would count on them going forward.

And now that MF Global has crashed and taken its customers’ money with it, we’re faced with the possibility that even if our stocks go up, the accounts they’re in might disappear without a trace. So yeah, it’s harder than it used to be.

On this last point, there’s clearly a market for advice on how to minimize brokerage account risk, and BullMarketThinking’s Tekoa Da Silva has has just published a report, “Bulletproof Your Shares”, that does a good job of explaining the various alternatives. The report sells for $44.95, but he’s graciously allowed DollarCollapse to post a few excerpts:

The Greatly Misunderstood MF Collapse
What most investors haven’t grasped yet, and what the mainstream media has not reported—is the fact that MF Global was not just a clearinghouse for Futures and Futures Options—it was a clearinghouse for securities as well. This means the “first domino” in the broker dealer industry has already fallen. Now the question remains—was it an isolated case? Or will there be more dominos to fall?

As reported to me by the Securities Investor Protection Corporation (SIPC), 800 MF Global account holders suffered ownership losses holding shares in their accounts. Those account holders are now being replenished by the SIPC. A second question remains: How much has been paid out, and how much does the SIPC have left in the event of another broker dealer collapse? This they could not share.

As stock investors–how are we supposed to respond and prepare if these collapses begin spreading to stock broker dealers? How would you respond if you were informed your stock broker went bankrupt—and your assets are in the hands of trustee to be split among a long line of creditors?

Many claim they’ll be protected by the SIPC, which insures stocks accounts from broker collapse up to $500k for securities, and account cash balances up to $250k. But what if you have more than $250k in cash and/or more than $500k of securities in your account? What if one of the largest broker dealers in the country went bust, bringing down thousands of accounts and depleting the entire reserves of the SIPC?

Additionally, we have yet to see the largest debtor nation in the history of the world (The United States of America) come under budget funding pressure by the bond markets. What if two major broker dealers went bust, while at the same time, the U.S. government suffers a major Treasury bond auction failure? This would result in billions of dollars of non-recoverable losses by investors, who would likely never invest in the financial markets again. Under that scenario you can forget about relying on the SIPC.

With these risks in mind—what if I were to tell you that for the cost of administrative fees, you can purchase an additional layer of “common-sense insurance” on any size stock portfolio, even on share investments worth north of $100 million? Well that’s what I’ve discovered in my research. I found there are two additional layers of preventative action you can employ starting right now to protect your shares in the event your broker dealer goes bust. These two methods are so reliable, that even if your broker lost all the cash and securities held in each and every one of its customer accounts, you’d be able to sleep safe and sound, knowing your investments would be fully protected.

Da Silva goes on to outline those extra layers of protection, their costs, paperwork requirements and set-up procedures, while answering some related questions like what to do if you lose a paper certificate and how to manage this kind of transition in a tax deferred investment account:

Q: I want to use these methods of share ownership for my stocks, but they’re stuck in a 401k or IRA—What do I do?

A: Self-directed 401ks and IRA’s are the best option. What the financial community does not tell individual investors is that self-directed retirement accounts can offer the flexibility of investing in nearly everything—from gold and silver coins, to farmland, farm tractors and oil wells. This includes shares investments using DRS and paper certification. Please see our Resources section at the end of this paper, for the names of a few companies which offer self-direction services for retirement accounts.

The full report is available here.

Europe’s parade of surreal financial news just keeps coming. This week, investors are paying Germany to take their money by accepting negative interest rates on new government debt:

Germany Issues Bills With Negative Yields As Economists Agree Country Is In Recession
Continuing the schizoid overnight theme, we look at Germany which just sold €3.9 billion in 6 month zero-coupon Bubills at a record low yield of -0.0122% (negative) compared to 0.001% previously. The bid to cover was 1.8 compared to 3.8 before.

As per the FT: “German short-term debt has traded at negative yields in the secondary market for some weeks with three-month, six-month and one-year debt all below zero. Bills for six-month debt hit a low of minus 0.3 per cent shortly after Christmas…The German auction marks the start of another busy week of debt sales across Europe. France and Slovakia are also selling bills on Monday, with Austria and the Netherlands selling bonds on Tuesday. Germany will auction five-year bonds on Wednesday, while Thursday sees sales of Spanish bonds and Italian bills. Italy finishes the week with a sale of bonds on Friday.”

Still the fact that the ECB deposit facility, already at a new record as pointed out previously, is not enough for banks to parks cash is grounds for alarm bells going off: the solvency crisis in Europe is not getting any easier, confirmed by the implosion of UniCredit which is down now another 11% this morning and down nearly 50% since the atrocious rights offering announced last week. On this background Germany continues to be a beacon of stability, yet even here the consensus is that recession has arrived. As Bild writes, according to a bank economist survey, Germany’s economy is expected to shrink in Q1, with wage increases remaining below 3%. And as deflation grips the nation, potentially unleashing the possibility for direct ECB monetization, look for core yields to continue sliding lower, at least on the LTRO-covered short end.

And big European banks are borrowing from their corporate customers rather than lending to them:

Banks Turn Borrowers, Seek Cash from Customers
European banks have found a new way to bring in cash. They borrow it–but instead of turning to each other to bring in funds, they are borrowing it from companies that were once happy to deposit their excess cash in exchange for interest. Worries over the eurozone crisis have hit both the banks and their former depositors, and now both have worked out a new arrangement that seems to satisfy them both–at least for now.

Reuters reported Monday that banks, wary of borrowing from one another or a central bank over debt fears, have begun negotiating secured lending arrangements with companies flush with extra cash–which, instead of receiving a regular unsecured interest payment in exchange for their money, now insist on collateral and other measures in so-called repo deals or short-term secured lending.

While companies themselves are reluctant to talk about such measures, one source said that in one specific category of lending, companies account for 25% of these deals. Very large companies with an abundance of cash are typically the ones that will execute such arrangements. Johnson & Johnson, Pfizer and Peugeot are reported to be among them, as some of the most recent entrants into the repo field.

These two events are clear signs of a stressed system. But they’re not an immediate threat to anyone’s portfolio. That will come when the peripheral Euro-zone countries start refinancing their sovereign debt. On Thursday and Friday, for instance, Spain and Italy have to convince the markets to lend them a total of almost 20 billion euros:

Spain tests demand for weaker euro zone states’ bonds

MADRID, Jan 12 (Reuters) – Spain will provide 2012′s first real test of demand for debt from the euro zone’s bruised periphery on Thursday when it sells around 5 billion euros ($6.39 billion) of bonds.

Italy will also venture into markets with a short-term debt sale before embarking on this year’s massive campaign of bond issuance at an auction on Friday.

The two countries are among weaker euro zone states scrambling to convince markets they can slash their deficits while somehow also stimulating growth and creating jobs and are seen as especially vulnerable should the debt crisis escalate.
Spain’s Treasury will auction a new three-year benchmark bond and reopen two bonds each maturing in 2016, in a sale that is expected to attract substantial support from domestic banks flush with European Central Bank cash.

“The massive size of the three-year lending from the ECB reinforces the view that auctions should be supported by domestic investors,” said BNP Paribas strategist Ioannis Sokos.

A Treasury bill sale will meanwhile give Italy a first taste of investors sentiment before it auctions up to 4.75 billion euros of bonds on Friday.

Rome is scheduled to sell 8.5 billion euros in 12-month BOT bills and 3.5 billion euros of bills maturing at the end of May.

Italy must refinance more than 90 billion euros of longer-term bonds falling due between February and April, and with no end in sight to the European debt crisis, its bonds remain under intense pressure, with yields at levels viewed as unsustainable.

The European Central Bank has pumped so much liquidity into the system that this week’s debt sales will probably succeed without rattling the markets too much. But that 90 billion euros Italy has to roll over between February and April will make every day a new adventure.

Over the holidays we tempted fate by booking a multi-stage plane trip … and ended up with cancelled flights, missed connections, and blank-faced airline employees who sincerely didn’t care if we spent a night or a week on the terminal floor.

While I wallowed in self pity over this loss of control, my wife noted that it’s not just the airlines. Big Food, Big Pharma, and the big banks, among others, are all just as customer-unfriendly. This distracted me from my rage and I spent some time thinking about how strange it is that in a time when Apple is creating Star Trek-level gadgets that streamline and simplify their users’ lives, and Amazon is making shopping almost supernaturally easy, there are huge industries that seem to go out of their way to make their customers’ lives complicated and hard.

Why do they do this when it makes so many people so mad? A pharmaceutical company CEO, for instance, probably can’t leave the house without someone accusing him of doubling the price of a crucial prescription drug while spending millions marketing erectile dysfunction pills to TV football viewers. An industrial food company exec can’t attend a cocktail party without being cornered by someone who reads labels and is appalled by trans fat, high fructose corn syrup-laden “food”. Goldman Sachs execs must cringe every time they pass a newsstand where the latest Rolling Stone is calling their company a “vampire squid”.

And airline employees, of course, must be abused non-stop by people like me who have had their vacations turned into exercises in enforced patience and asymmetrical negotiation. South Park caught the general mood perfectly with this (warning: very rude) episode:

Anyhow, on a different vacation this line of thought might have been nothing more than a way to occupy a pissed-off mind for an hour or so. But this time I had James Rickards’ new book Currency Wars on my Kindle (a device from customer-friendly Amazon that makes my life simpler and easier), and while waiting for a flight I came across this:

The third principal is that complex systems run on exponentially greater amounts of energy. This energy can take many forms, but the point is that when you increase the system scale by a factor of ten, you increase the energy requirements by a factor of a thousand, and so on. The fourth principal is that complex systems are prone to catastrophic collapse. The third and fourth principals are related. When the system reaches a certain scale, the energy inputs dry up because the exponential relationship between scale and inputs exhausts the available resources. In a nutshell, complex systems arise spontaneously, behave unpredictably, exhaust resources and collapse catastrophically.

That’s a pretty good framework for understanding these huge, complex, mostly dysfunctional industries. They’ve spent decades consolidating and concentrating and now have to generate sales on pretty much any terms, no matter how questionable, in order to avoid death by complexity. The customer takes a back seat to the desperate institutional need to survive and the product gets crappier and crappier until the production/delivery system breaks down.

The same dynamic is at work in the global financial system, says Rickards. In the US, a dollar of new debt produced nearly that much in new GDP in the 1960s. But today the return on new debt is negative. From here on, we can borrow as much as we want and the only result will be more debt. Wealth won’t increase at all. But we can’t stop; as with any other Ponzi scheme, the choice is more debt or instant bankruptcy.

This stage is generally followed by catastrophic failure, with the only question being what else the financial system takes down with it. As Rickards puts it:

A considerable challenge arises when one considers the interaction of human behavior and market dynamics. The complexity of human nature sits like a turbocharger on top of the complexity of markets. Human nature, markets and civilization more broadly are all complex systems nested inside one another like so many Russian matryoshka dolls….When you apply this paradigm to finance, you begin to see where the currency wars are headed.

It was fun while it lasted. We Baby Boomers got to diss our elders when we were young and borrow without restraint through middle-age. Few generations have traveled such a smooth stretch of financial/psychological highway.

But now that we’re…old…the world we created isn’t so congenial. Our savings are inadequate, jobs are scarce, and retirement, as a result, is out of reach for many of us. We are, in short, reaping what we’ve sown these past four decades. From today’s Wall Street Journal:

Oldest Baby Boomers Face Jobs Bust
Many older Americans fear they will be working well into their 60s because they didn’t save enough to retire. Millions more wish they were that lucky: Without full-time jobs, they are short of money and afraid of what lies ahead.

Deborah Kallick was a professor of biomedical chemistry at the University of Minnesota until she ventured into the private sector in 2000 with a job in genome research. She is now one of more than four million Americans aged 55 to 64 who can’t find full-time work. That number has nearly doubled in five years, according to U.S. Department of Labor figures in October.

Ms. Kallick, 60 years old, has been unemployed since 2007 and lives in the Northern California home of an ex-boyfriend. She has run out of unemployment insurance, used up most of her retirement savings and is indebted to relatives and credit-card companies.

A good job could settle her accounts, she said. Until then, Ms. Kallick relies on generosity, occasional consulting work and the sale of sweaters, purses and other possessions on eBay.

“It is very hard to work through this and learn to be calm and happy day to day,” said Ms. Kallick, who never married. “It has taken a lot of strength and courage to learn to do that.”

Older Baby Boomers are trying to postpone retirement, as many find their spending habits far outpaced their thrift. With U.S. unemployment at 8.6%, and much higher among people in their teens and 20s, younger members of the labor pool accuse Boomers of refusing to gracefully exit the workplace.

But their long-held grip is slipping, as employers look past older Americans to younger, cheaper workers.
The Labor Department counts people as unemployed only if they have looked for a job in the previous month. By that definition, 6.5% of workers aged 55 to 64 were unemployed in October, below the national average but more than twice the jobless rate for the group five years earlier.

Taking into account the number of older people who want full-time work but are unemployed, working part-time or need a job but have quit looking, the percentage jumps to 17.4%, or 4.3 million Americans ages 55 to 64, according to the government data. The number has grown from 2.4 million in October 2006.

This group without full-time work now accounts for more than one in six older Americans seeking positions.

In some ways, older people are doing better than everyone else: Among all U.S. workers, 20% are unemployed, underemployed or have given up looking for jobs. But older people have far less time to rebuild savings.

“This is new. It is different. It is worse than we have experienced before and it is very widespread,” said Carl Van Horn, head of the John J. Heldrich Center for Workforce Development at Rutgers University. “It is going to get worse. You are going to have a higher level of poverty among older Americans.”

Older people have more trouble finding new jobs. Among unemployed workers older than 55, more than half have been looking for more than two years, compared with 31% of younger workers, according to the Heldrich Center. Among older workers who found a new job, 72% took a pay cut, often a big one, the Rutgers data show.

The problem has been building for decades: Inflation-adjusted, middle-class incomes have stagnated in parallel with a free-spending culture of indebtedness that has left many Americans with too little saved. Over the same time, many U.S. companies cut pensions and shifted to less-generous retirement-savings plans such as 401(k) accounts that have stagnated or diminished in the market tumult of past years.

Older families aren’t just failing to save, they are increasingly draining accounts that were supposed to help finance retirement.

The median household headed by someone aged 55 to 64 has $87,200 in retirement accounts and other financial assets, according to Strategic Business Insights’ MacroMonitor database. If each of the 4.3 million unemployed or underemployed people in this age group runs through half the family savings, that will, in theory, total $188 billion in lost retirement money.

The typical retirement-age household has too little saved to maintain its standard of living in retirement, according to actuarial and Federal Reserve data.

Financial planners often advise that retirement resources be large enough to provide 85% of a person’s working income. Median households headed by a person aged 60 to 62 with a 401(k) account have saved less than one-quarter of what is needed in that account to live as well in retirement, according to Fed data analyzed for The Wall Street Journal by the Center for Retirement Research at Boston College.

The trouble spreads across generations. Older people hang on to jobs or, out of desperation, take lower-level jobs for which they are over-qualified. Either way, they displace younger workers.

In the past, older people who lost jobs often gave up and retired. No longer. In October, two-thirds of people aged 55 to 64 had jobs or wanted them, up from 59% in 1994, according to Labor Department data.

At an age when they should be generating peak incomes and savings, many unemployed and underemployed Americans are applying for early Social Security benefits and spending what’s left in their retirement accounts.

Kathi Paladie, 64 years old, lost her job as an executive assistant at a mortgage company in Tacoma, Wash., six years ago. She hasn’t found full-time work since but works occasionally as a phone interviewer for a political survey firm.

Her retirement savings is spent, and she said her monthly $800 Social Security checks, $100-a-week unemployment benefits and occasional paychecks barely cover expenses.

“If I don’t buy a lot of groceries, then I am OK,” said Ms. Paladie, who is divorced. “I do a lot of puzzles sitting here and watching TV. And I play with my bird. And that’s about it.”

She rarely goes out, she said, “but I’ve got a clean house.” To save money, she sometimes eats Frosted Flakes for dinner. She shares them with her African Grey parrot, Muffin, who also likes the sweetened cereal.

Ms. Paladie hasn’t been to the doctor for five years, she said. She frets about paying rent after her unemployment benefits run out next year. Her daughter lives nearby but doesn’t have the room for her, Ms. Paladie said. “It is kind of a standing joke,” she said, “that if this fails, that I can always move in with them and sleep in the garage.”

The problem of older, out-of-work Americans extends beyond individuals to the U.S. economy. Among jobless people aged 55 to 64 who want to work, lost annual wages exceed an estimated $100 billion, based on the median income of this age group.
Retirement savings losses exceed $10 billion a year, assuming contribution rates of 8% for employees and 2% for employers. Even if only half the people were working, the economy would gain $50 billion a year in income and another $5 billion in retirement savings.

That doesn’t count the lost wages of people who have taken salary cuts to get new jobs.

Richard Foster, 59 years old, a former computer programmer and software analyst in Arvada, Colo., near Denver, has been unemployed several times over the past decade. The older he gets, the more trouble he has finding jobs in computer mainframes, his specialty, amid changing technologies. And the longer his absence from programming, the harder it is to attract recruiters, who prefer people with experience in the past six months, Mr. Foster said.

These days, he works on the telephone nearly full-time as a customer-service representative. His employer grades him on how fast he finishes each call and how customers rate his service. Mr. Foster recently contracted Bell’s palsy, a temporary facial paralysis thought to be stress-related.

The work pays a lot better than a previous job, delivery driver for a dry cleaner. Still, Mr. Foster said, it pays 40% less than what he earned as a programmer at the University of Colorado Hospital, a job he lost in a restructuring that kept more tenured employees.

Mr. Foster’s wife, Tina, has complications from a detached retina, which keeps her from working. Her treatment is only partially paid for by his medical plan, which classified Ms. Foster’s eye problem as a pre-existing condition.

He has a retirement-savings plan at his new employer, he said, but it’s hard to save, given the couple’s struggle “to make ends meet day to day.” He is putting off dental work, for example, to save money.

While out of work, Mr. Foster said, he sometimes depended on food banks. He filed for personal bankruptcy in 2003. He and his wife got a break recently: his wife’s sister and her husband helped them purchase a home. Mortgage payments to his in-laws are less than his rent. Retirement? He said he has no idea when.

Mr. Foster’s worries aren’t unusual. More than two-thirds of unemployed people older than 50 report extreme stress, trouble sleeping or family strains, according to surveys by the Heldrich Center at Rutgers. More than 60% of respondents said they didn’t expect to hold another full-time job in their field and a similar percentage said they were pessimistic about finding any job soon. One-third of those over 55 reported selling possessions to stay afloat.

In another unfortunate consequence, the younger people are when they apply for Social Security retirement benefits, the lower their monthly checks for the rest of their lives. Two-thirds of Americans older than 50 expect to file for the benefits earlier than they would prefer, or already have done so, according to the Rutgers survey.

“People are taking in boarders, they are moving in with their kids, selling their homes for the cash that they can live on,” said Abby Snay, executive director in San Francisco for JVS, a community agency that teaches work skills.

Although her agency has long focused on young people, the fastest-growing client group is closer to retirement age. Before the recession, only 11% of her clients were older than 55; now, it is 17%.

“We are seeing people in a panic, in survival mode,” she said. “They are about to finish their financial assets and all they have after that is their retirement funds. They are trying to figure out some kind of bridge so they won’t have to pay an early withdrawal fee for their retirement incomes.”

Ms. Snay has even seen former donors return as clients. “There is a level of shame and humiliation,” she said, “and, ‘What have I done wrong?’ ”

She recently offered older clients a workshop on the website LinkedIn. She recalled some people said, “‘If I put up a picture, no one will hire me.’”

Her response: “We advise people to put up a photo, put their best foot forward.”

Some thoughts
Where to start? Maybe with the observation that prolonged good times produce a lack of foresight. If the world is only going to get better, worrying about the downside and planning for it is wasted effort, since there will always be resources and opportunities more than adequate for tomorrow’s challenges. In evolutionary biology terms, late-20th century America selected for optimistic, present-tense people.

But that attitude and the behaviors it engendered — borrowing rather than saving, building excessive entitlement and military structures, breaking the dollar’s link to stabilizing forms of money like gold — inevitably convert good times into hard times, in which an optimistic, present-oriented perspective begins to look like utter cluelessness.

In retrospect it seems so obvious. If Boomers had been paying attention, instead of buying 4,000 square foot houses, new cars and big screen TVs, we’d have reacted to rising indebtedness by living small and saving big from the 1980s onward. Instead of voting for whoever promised the most free stuff, we’d have demanded balanced budgets and hard choices.

But we didn’t. We became “consumers” rather than builders. Our savings rate was near-zero for much of this time, and our debt ballooned during what should have been our prime saving years. So what’s coming isn’t a natural disaster. It’s the result of choices made by intelligent, well-educated people who should have known better.

Today, if you’re 55, haven’t saved a lot of money and can only find part-time work, the math is pretty clear: you’ll never retire because you’ll never accumulate any more capital.

And the truly sad part of this story is that there’s no solution. As the debts we’ve taken on really bite in coming years, the US (and Europe and Japan) will be presented with the choice of liquidating excessive debt through default (producing massive job losses for marginal workers and eliminating the whole concept of retirement for most people) or inflating it away (evaporating the nest eggs of savers who own bonds, cash, or bank CD, also making retirement a lot harder). Either way, Boomers are the main victims.

Greece has been out of the spotlight for a couple of weeks, which means it’s past due for another market-rattling announcement. And sure enough, today we find out that its economy is shrinking even faster than expected:

Greece Apparently Even Worse Off Than Realized, Hitting Euro, Stocks
This flew under the radar a little bit because we were all waiting with bated breath for the pulse-pounding thrills of the latest FOMC statement, but apparently Greece’s economy is in even worse shape than realized.

“Who could possibly have foreseen that?” asked no one.

Nevertheless, it might be knocking the euro for another loop, although it’s tough to separate out the various actors hammering on the euro today, including the overarching sense of disappointment with last week’s EU summit, the results of which are crumbling as we speak. Recently the euro was down to $1.3026 against the dollar, near its low for the day and pushing critical technical levels.

This “news” has been discovered and reported by the bean-counting minions of the Troika, who have taken on the thankless task of hanging out in sunny Greece in winter to make sure it’s holding up its end of the bailout bargain by getting its fiscal house in shape.

Apparently not so much, reports Stelios Bouras of Dow Jones Newswires:

“The International Monetary Fund sees the Greek economy deeper in recession in 2011 than the government expects and a wider-than-forecast budget shortfall, adding that the country has still a lot of work to do on reforms.

In a country review, the IMF said Tuesday the Greek economy is forecast to contract by up to 6% in 2011, versus Greece’s official estimate for negative economic output of 5.5%, ahead of a downturn in 2012 in the region of 2.75% to 3%. In its fourth year of recession, Greece has already revised lower its growth figure to 5.5% of output for 2011 from a forecast of negative 3.8% earlier in the year.”

What’s more, Greece is not exactly rushing down the road to fiscal reform:

“Among the changes the IMF said Greece needs to adopt in order to return to a growth path are shutting down inefficient state entities, reducing the large public-sector work force, cutting public wage and pension levels and stronger budget control.

‘Greece is still well away from the critical mass of reforms needed to transform the investment climate.’”

Here’s a prediction: The Greek economy is going to continue to disappoint, thanks to these austerity measures and the broader euro-zone recession

Meanwhile, the big European banks have been up to their usual oddly self-destructive hijinks…

Banks Sit in a Tangled Web
Many European Lenders Have Sold Sovereign-Default Protection to One Another

European banks do have insurance against sovereign-debt default, but they’ve sold it all to each other, Laura Stevens reports on Markets Hub.

Dozens of banks across Europe have sold large quantities of insurance to other banks and investors that protects against the risk of ailing countries defaulting on their debts, the latest illustration of the extensive financial entanglements among the continent’s banks and governments.

New data released last week by European banking regulators suggest the risks of banks suffering losses tied to European government bonds could be higher and more widespread than previously realized.

The numbers show European banks have sold a total of €178 billion ($238 billion) worth of insurance policies, in the form of financial derivatives known as credit-default swaps, on bonds issued by the financially struggling Greek, Irish, Italian, Portuguese and Spanish governments. If those bonds default, as some investors fear they might, banks could be on the hook for making large payments to the holders of the swaps.

The banks have at least partly insulated themselves from such potential losses by buying large quantities—roughly €169 billion worth—of credit-default swaps tied to the same bonds, apparently in large part from other European banks, according to European Banking Authority data.

The disclosures highlight another layer of risk interwoven through the continent’s banking system. Already, investor fears about the hundreds of billions of euros of potentially risky government bonds European banks are holding have eroded confidence in the industry, making it harder for many banks to finance their daily operations.

Some analysts and investors say they had assumed that sovereign credit-default swaps, known as CDS, were primarily sold by giant global investment banks in the U.K., France and Germany, as well as in the U.S. Those banks sell the swaps to big corporate clients and other banks and institutions.

But the new EBA data show a surprising breadth of large and small European banks—at least 38 of them—have sold instruments that protect against potential losses on Greek, Irish, Italian, Portuguese and Spanish government bonds.

Deutsche Bank executives say their positions are well-hedged and that they buy CDS protection only from institutions based outside the countries in which the bank is trying to buy protection. In other words, Deutsche Bank wouldn’t buy Italian swaps from an Italian bank.

…for which the US has an ingenious solution:

U.S. Presses Europe for More
WASHINGTON—A full-court press by Obama administration officials fell short of its goals at the latest European summit, and the U.S. is once again pushing euro-zone officials for a much stronger bailout fund to fight the debt crisis.

U.S. officials praised the deal reached Friday at a European Union gathering in Brussels, which would tighten ties between the 17 nations in the currency bloc. It would penalize members that fail to control their budget deficits and would also put balanced-budget rules in place.

The U.S. hopes the pact will make further action by the European Central Bank and other authorities more palatable down the road.

But the Obama administration was disappointed by the lack of progress in bolstering the European bailout fund as the crisis roils financial markets around the world.

U.S. officials want Europe to build a far more powerful firewall to keep the crisis from spreading in the short run. More financial resources would ensure that Italy, Spain and other major economies facing bond-market threats could finance their governments at sustainable interest rates.

The efforts to forge the fiscal pact were “all for the good,” President Barack Obama told reporters here last week. “But there’s a short-term crisis that has to be resolved, to make sure that markets have confidence that Europe stands behind the euro. And we’re going to do everything we can to push them…in a good direction on this, because it has a huge impact on what happens here” in the U.S.

Officials across the U.S. government are in frequent contact with their European counterparts. Treasury Secretary Tim Geithner conducted a rapid run through five European cities in three days last week, meeting with officials from four euro-zone nations and the ECB, all ahead of the EU summit. Vice President Joe Biden met with Greek officials in Athens, while Mr. Obama continued his phone calls to European leaders.

Obama administration and Federal Reserve officials see the euro-zone debt crisis as one of the largest threats to the sluggish U.S. economic recovery.

With an election focused on economic concerns next year, the administration fears that another downturn triggered by European turmoil could depress the U.S. economy and quickly reverse the recent improvement.

In Brussels, European leaders last week agreed to introduce their permanent €500 billion ($669 billion) bailout fund in 2012, a year earlier than planned, replacing a €440 billion temporary bailout facility. But they planned no major expansion in the fund’s total financial resources available.

U.S. officials want the continent to have much more firepower—perhaps $2 trillion or more—available to lend to struggling euro-zone governments. They believe such vast resources would dissuade investors from betting against the countries’ debt and driving up their borrowing costs.

“The sums that you need for Italy and Spain are huge,” said American Enterprise Institute economist Desmond Lachman, a former IMF official. “You can pass the hat around, but the real money is going to come from the ECB.”

Some thoughts
Greece’s finances are deteriorating…what a shock. Who in their right mind would be building factories or hotels or hiring new workers there now? As government layoffs rise and private sector hiring stagnates, tax revenues will obviously contract and national finances will deteriorate. The only solution — leave the Eurozone, devalue massively and watch the tourists pour in — threatens the “insurance” that the big European banks have sold to each other and is therefore unacceptable to the rest of the EU.

Speaking of credit default swaps, what do you think this means?: “Deutsche Bank executives say their positions are well-hedged and that they buy CDS protection only from institutions based outside the countries in which the bank is trying to buy protection. In other words, Deutsche Bank wouldn’t buy Italian swaps from an Italian bank.” Hmm…it’s not clear that Deutsche Bank buying insurance from Spanish banks to cover Italian debt, and then from Greek banks to cover Spanish debt, is all that reassuring. The people running these banks would be Darwin Award candidates if that organization had a finance category.

Meanwhile, “Obama administration and Federal Reserve officials see the euro-zone debt crisis as one of the largest threats to the sluggish U.S. economic recovery.” It’s only a threat because we’re broke. If the US had a healthy balance sheet, a European crisis would be a once-in-a-lifetime buying opportunity. We could be like Warren Buffett, who builds up a mountain of cash in good times and uses it to buy cheap assets when lesser mortals go bankrupt. Instead we’re so fragile that a few troubled banks 3,000 miles away can send us into another Depression.

And about the US pressing Europe for a bigger bail-out: Sometimes (okay, often) it’s embarrassing to be an American. Easy money is the heroin of the financial world and we’re the main pusher. Generally, the pusher wins arguments with his addict clients, so expect a coordinated US/Europe quantitative easing that dwarfs even the Fed’s secret loan program of the past few years, and expect it soon. Get ready, American and European taxpayers. You’re about to become proud owners of several trillion dollars of slightly used Greek and Italian credit default swaps. Merry Christmas!