Leverage: How Cheap Money Will Destroy the World [Hardcover]

On the very last page of the book I learn that the author received the Reed Irvine Accuracy in Media Award for Grassroots Journalism, for his coverage of the 2008 market meltdown. This confirms my own already formed very high estimation of the author and his work. In fact, although I normally do links at the end of the review, let me open with some other books that are world-class and within which I place this work as comparable:

The Battle for the Soul of Capitalism
The Soul of Capitalism: Opening Paths to a Moral Economy
Griftopia: A Story of Bankers, Politicians, and the Most Audacious Power Grab in American History
SAVAGE CAPITALISM AND THE MYTH OF DEMOCRACY: Latin America in the Third Millennium
Democracy Incorporated: Managed Democracy and the Specter of Inverted Totalitarianism (New in Paper)

Here is the author's three-line conclusion to the longer chapter that ends the book (my own notes in parenthesis):

01 Federal and state governments KNEW what was going on, and are COMPLICIT. (This introduces me to the reality of "control fraud," where the government commits impeachable acts that are not sanctioned; I also learn in this book that when Congress passes laws it does not include sanctions for failure by the GOVERNMENT to uphold those laws.)

02 We cannot defer tough choices. (This crisis has been over thirty years in the making, with governments complicit all along the way, the mathematics of compound interest on debt and inflation assure a catastrophic end in 2013-2014 [the dates from another reading, probably Paul Craig Roberts].)

03 "The math is never wrong." (From page 187. I was never strong in math or economics, but this book has certainly taught me the difference between ideological idiots pontificating on economic assumptions, and honest thinkers using more rigorous easy to validate sources and methods and models.)

Here are my quick notes on this great book:

+ Leverage is corruption - like counterfeiting money
+ Bubbles are Ponzi schemes
+ Cannot cut total debt without cutting MORE than the current deficit each year -- end borrowing AND cut spending
+ Unsecured debt is toxic, credit unions and banks printing money they do not have
+ Total loss of integrity in 2006 - "liar loans" and "no documentation loan"

+ NOT JUST HOUSES. Cars, cell phones, credit cards, health care, college tuition loans -- the latter even more toxic because corrupt legislators enacted exclusion from bankruptcy protection

+ Corporate debt skyrocketed while governments looked the other way

+ Deflation is GOOD. (Buy the book, I will not summarize this excellent bit).

+ Leverage creates appearance of wealth, not actual wealth.

+ All levels of governments erred in projecting continuation of the bubbles that their tax revenues were based on, this led to severe over-commitments and over-spending.

+ State and local pension are toast.

+ Contracts are worthless--unenforceable--in a collapsed economy.

QUOTE (97): "The answer is found in the fact taht the government allow3ed market participants to repeatedly lie and get away with it by backstopping them against losses."

I am reminded of the books by Kurt Eichenwald, especially the older book, and the chronicle of Enron:
The Informant: A True Story
Conspiracy of Fools: A True Story

+ Not only is Congress complicit in all of this financial crime, but the media is as well. Here I suspect the author refers not to the journalists that wanted to publish what they knew, but rather the corrupt editors and publishers--the same ones that turned down fully paids ads against the Iraq War that I and others sought to fund.

+ There was NO GROWTH under Clinton or Bush Junior (nor has there been under Obama, whose Administration is actively fabricating information -- the actual unemployment today is 22.4%, and we lost over two million jobs in the last two months -- anyone who does not know this, or worse, knows this and conceals the fact, is part of the treasonous sloppy mess that has become America -- a cheating, lying culture.

QUOTE (107): "Our government has provided an illusion of recovery."

Here I must point to Chris Hedges, one of a handful of great journalists along with Greg Palast, John Pilger, and Seymour Hersh:

Empire of Illusion: The End of Literacy and the Triumph of Spectacle

+ Bernanke at the Federal Reserve is impeachable for seeking 2% inflation, something the author points out is directly in violation of the Constitution. For this section alone the book is worth buying. I completely support the author's view that ZERO inflation (and implicitly, full employment for citizens) is what we should be pursuing.

+ Gold is NOT protected--not only can the government slap a very painful appreciation tax on its when it is offered for sale, but black market transactions will come with their own grave risks.

+ Contraction of the economy is CERTAIN to be 20% to 40%, this will be a second Great Depression (if not a second Dark Ages, a reference used by the Financial Times to suggest we will be far worse off in relative terms than during the Great Depression).

+ What has been absent has been the RULE OF LAW. Our own governments (local, state, federal) have betrayed the public trust and with malice aforethought, ignored or concealed the obvious mathematics of truth. the author speaks of the willful refusal by the government to prosecute and enforce the law.

+ 60% of the mortgages written in mid-2006 were actively fraudulent (unqualified, various forms of documentation or various points of fact falsified by the lender or the borrower or both).

He recommends the following book:

The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry

+ There is a two-tier legal system in the US, with the government and the privileged elite "free to violate the law with impunity." ) + What has been absent has been the RULE OF LAW. Our own governments (local, state, federal) have betrayed the public trust and with malice aforethought, ignored or concealed the obvious mathematics of truth. the author speaks of the willful refusal by the government to prosecute and enforce the law.

+ 60% of the mortgages written in mid-2006 were actively fraudulent (unqualified, various forms of documentation or various points of fact falsified by the lender or the borrower or both).

He recommends the following book:

The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry

+ There is a two-tier legal system in the USA, with the government and the privileged elite "free to violate the law with impunity."

+ Superb section on false government statistics. The only thing the author misses is that the Congressional Budget Office (CBO) is equally false, Congress mandates their "assumptions" rather than asking them what the assumptions should be. In a word, as I and others have been saying for some time, the federal government as well as most state governments are out of control and lacking in both intelligence and integrity.

+ Great section on the Federal Reserve, the author is comfortable with ending the Fed but more focused on reforming the Fed to include a mandate that it focus on honest statistics, staple prices, and zero inflation.

He cites Laurence Kolikoff, a Boston University economist (who is also running for President), I will be reviewing one of Professor Kolikoff's books shortly.

+ Payroll tax cuts are underfunding Social Security, which is in any case hollow -- all the money has been spent, the "lockbox" is holding potentially worthless IOUs from the Department of the Treasury.

He has a number of conclusions, and I disagree with those that denigrate the book in any way. These are all, in my lay opinion, very solid, and some of them are EYE-OPENING. I will skip over his excellent recommendations, precise recommendations, on both trade (China does wage and environmental arbitrage), and Medicare / Medicaid.

QUOTE (162):"If trade is a mess, then our tax system is the unholy spawn of Satan." Totally agree. While the author focuses on a flat tax or the "Fair Tax," I have asked him to look at the Automated Payment Transaction (APT) Tax, and look forward to his response on that. I have also recommended this solution to the one Presidential candidate I think could lead a third wave victory over the two-party tyranny and of course am myself running for President until such time as my chosen candidate agrees to adopt the We the People Reform Coalition package -- otherwise I will continue to run myself.

+ Spending by the federal government is out of control and unConstitutional.

+ Defense spending must be reduced (most have no idea that only 1% of the Pentagon budget goes to people, yet this is what Leon Panetta just cut hardest. The rest of the cuts are fiction. 50% of the 99% spent on corporate programs is fraud, waste, and abuse. We could have a STRONGER military if we had an HONEST Administration that held the Pentagon accountable in all respects.

+ EYE-OPENING: Liquid Flouride Thorium Reactor (LFTR) with following quote:

QUOTE (180): "Each coal-fired power plant in the United States literally throws away about thirteen times as much energy as it produces."

Karl Denninger, the profane and eloquent author of the Market Ticker blog, has distilled his high-quality Internet ranting into a simple, intelligible diagnosis of the state of our economy and, to some extent, our polity. For those familiar with Denninger's blog, you will notice a concerted effort to make an argument that is as inoffensive as possible. It is mostly free of the global warming skepticism and religiosity that likely would dismay the typical American leftist; those on the right will enjoys his condemnations of class warfare and illegal immigration.

The book itself is an indictment of the abusive borrowing and lending by banks, governments, corporations, and consumers over the last three decades; while this borrowing has driven an illusory prosperity, it will be the eventual cause of a moderately or horribly painful reckoning. The first half of the book discusses key concepts of compound interest and the debt circle, which you probably should have learned in school, and then explained how these basic principles have been intentionally or unintentionally ignored. The most cogent argument Denninger makes is that lending must always be backed with tangible assets equivalent to the value of the loan or else charge interest rates sufficient to compensate the risk bondholders and stockholders take when they provide necessary additional capital to back the loan. The message is clear: lenders keep trying to sell money they don't have.

The second half of the book takes an important turn. Noting that most books of this type advise how to avoid the catastrophe, Denninger makes a clear and haunting point. There are no shelters. There are no safe havens. The best shelter against catastrophe is to restore honest lending and a sustainable economy and polity in the United States (or wherever your native land may be). The rest of the book discusses a variety of solutions (some borrowed from others with attribution) to make the United States into that kind of nation, touching on tax policy, trade policy, and energy, among other topics.

The work's weakness lies in Denninger's frequent claim that there is a need for "national conversation and debate" on issue X or Y. The debates Denninger mandates are incredibly difficult, ranging from overhauls of all state and Federal laws, potential Constitutional changes to give Congress additional enumerated powers, to decisions of how indigent people in need of critical care are going to receive or pay for it. Is the civil society that has proven capable of ignoring three decades of gross mismanagement in Congress and boardroom capable of implementing prudent reform in a time of catastrophic economic crisis? Denninger provides no reason to think so, unless he and his enthusiastic forum denizens start running for office. Some readers also might question Denninger's Whiggishness about technology.

I thought the book would explain more, unfortunately some questions remain unanswered. For example Denninger says recessions and depression bring balance after expansions basically resetting to a null-state, but if you look at the value of the dollar in 1900 it was $1 and in 1950 it was still only $0,50 after going to $0,30 in the 1920 boom expansion and after the 1930 bust. I thought the Depression was suppose to correct this? Denninger doesn't explain what strange inflationary force caused the value of the dollar to halve, after you correct for booms and busts. Maybe that's the nature of the paper currency not linked to gold, as the dollar was no longer on gold-standard after the confiscation of gold in the 1930. It seems currency debasement without the gold standard is inevitable after all, and if so, maybe he's expecting too much from the self-correcting nature of busts? Surely paper currency without the gold standard has it's advantages, but if continuous debasement of 50% over 50 years is inevitable even with the self-correcting nature of a bust, maybe the gold standard is preferred, even if those lead to more booms and busts according to Denninger.
Also, Denninger equals the Americans situation to Romans, Babylonians etc., but offers little explanation why the situation is the same and why they end up the same. More explanation on this part was needed.