Friday, February 7, 2014

Republicans Discover Evidence of Jobs Crisis

By Ezra Klein Feb 6, 2014

The U.S. has been in a jobs emergency since at least 2008. The cause of the crisis -- too little demand -- isn’t mysterious, and neither are the solutions. We could invest in infrastructure to create construction jobs. We could give tax breaks to employers who hire new workers. We could restore the payroll tax cut to workers so they have more money to spend. We could help state and local governments hire back some of the employees they laid off during the recession. Macroeconomic Advisers, an economic consulting firm, found that the American Jobs Act, which contained many of these policies, would have created 2 million jobs.

But in recent years, these policies have been either blocked or canceled by congressional Republicans. They fought Democrats to scuttle the American Jobs Act and allow the payroll tax break and long-term unemployment benefits to expire. Creating jobs, they argued, was neither feasible nor affordable.

That’s the proper context in which to view this week’s hysteria about Obamacare. The nonpartisan Congressional Budget Office just released updated estimates for the health law. It found that the disastrous rollout last fall put Obamacare behind schedule -- on track to insure 2 million fewer people than projected by the end of 2014. On the other hand, it also found that insurance premiums were about 15 percent lower than projected, and that the law would cost less than previously estimated. It found that the risk corridors designed to safeguard insurance companies from the effects of acquiring too many high-risk customers -- which Republicans have been calling an “insurer bailout” -- will actually yield $8 billion in net payments from insurers to the federal government.

The finding that made the news, however, concerned the Affordable Care Act’s long-term effect on labor supply. In past reports, the CBO has estimated that the law will, on net, lead some people to drop out of the labor market or cut back on their hours because their health insurance is no longer tied to their job. Imagine a 62-year-old who would like to shift to part-time work but can’t because he can’t afford -- or, due to pre-existing conditions, wouldn’t even be sold -- insurance on the individual market. Now, because Obamacare has made that insurance affordable and available, he can -- and will. As a result, his work hours will be (voluntarily) reduced.

Previously, the CBO had estimated this would reduce total hours worked by about 0.5 percent. Now, it estimates the effect at 1.5 percent to 2 percent of hours worked -- a reduction in hours equivalent to more than 2 million full-time jobs.

The CBO was very clear about what this means: “The estimated reduction stems almost entirely from a net decline in the amount of labor workers choose to supply, rather than from a net drop in business’ demand for labor, so it will appear almost entirely as a reduction in labor force participation and in hours worked relative to what would have occurred otherwise rather than as an increase in unemployment.”

The CBO’s clarity didn’t forestall a festival of motivated misreadings. The conservative Washington Times, for instance, featured this headline: “Obamacare will push 2 million workers out of labor market.” That has the distinction of being not only untrue but also the very opposite of the truth. Workers are choosing to cut back hours -- not being pushed to do so.

Whether this is good or bad depends on your views about human flourishing. Lower labor-force participation is bad for economic growth. On the other hand, the point of life is not for everyone to work every possible hour until they die. Workers should be able to choose to leave their jobs or cut their hours without worrying that their families won’t survive a medical emergency. In addition, as the Urban Institute’s Donald Marron tweeted, “employers will be competing harder for workers,” which will push wages to rise for everyone remaining in the workforce.

In context, the freakout over the CBO estimate is perverse. Is it really the Republican position that we should do nothing - - in fact, cut aid -- for the millions of long-term unemployed, but express shock and terror that employed people will, in a few years, cut back their hours or leave the labor force by choice? Shouldn’t we be more concerned about people desperate to join the workforce, who can’t, than about people voluntarily leaving the workforce, who can?

Some Republicans will say, of course, that they don’t oppose helping the jobless. They just oppose increasing the deficit or increasing taxes to do so. But repealing Obamacare raises the deficit, too! So rather than increasing the deficit to help people who want jobs get them, we would be increasing the deficit to make sure people who want to leave their jobs can’t. That’s insane.

Policies don’t exist in vacuums. By untying the link between employment and health care, the Affordable Care Act reduces the incentive to work. But there are ways to increase incentives to work without making people dependent on their jobs for health insurance. We can help people without taking away their health care.

So here’s a simple proposal. Repeal of the Affordable Care Act would cost hundreds of billions of dollars over the next few decades because of the law’s spending cuts and new revenue. So instead of repeal, how about if Congress devotes that same amount of money to policies to increase employment now. Republicans could even dictate that all the money flow to targeted tax cuts.

If they are worried about employment rather than scoring points against Obamacare, this should be an easy compromise to strike. Anyone think it will be?

The Reality of a "Trans Pacific Partnership"

Thursday, February 6, 2014

A Bill To Return Power To The People

by Richard Long

If you follow politics, you know the names Koch, Adelson, American Crossroads and Priorities USA Action. If you don’t know the names, you know their tools, the fearmongering ads that purport that voting for this candidate or another will cause the downfall of the country.

These are donors and organizations that spent millions of dollars trying to elect the next president. All in all, the 2012 election cost $5.8 billion, up from the $5.4 billion spent in 2008, with a majority of that money being spent not by candidates campaigns themselves, but rather given to super-PAC creations that arose following the Supreme Court’s Citizens United decision. This decision allowed individuals and groups to spend in unlimited amounts, as long as it went to “unaffiliated” political action committees, that could, in turn produce stuff like this.

This deluge of cash could be slowed, however, with the introduction of a bill today by Democrats Minority Leader Nancy Pelosi (Calif.) and Representative John Sarbanes (Md.), who also wrote an introductory op-ed in this morning’s Washington Post. The bill, dubbed the “Government by the People” Act, would work to reduce the power of special interests and big money, and restore the power to the people.

The bill has three main provisions:
  • Providing a $25 refundable “My Voice” tax credit, designed to attract donor participation.
  • Creating a “Freedom From Influence” Matching Fund that would match donations on a six-to-one basis under $150. A candidate would have to prove their support is from a broad base in order to receive these funds, and agree to limit large donations.
  • Giving established candidates additional funds in the last 60 days of the campaign to battle the onslaught of negative ads from Super PACs. This would act as a counterbalance for the candidate that truly has broad support versus the candidate what has donors with deep pockets.
While for much of America’s history special interests and wealthy donors have gotten extra consideration, since the Citizens United Supreme Court decision, this has allowed, nay, demanded, that candidates that wish to gain office cater to these groups. This essentially means that America has gone to that golden rule that reads, “he who has the gold makes the rules.” We have seen this in the creation of tax loopholes, bills that make it into law, and even court decisions.

The effects of the Government by the People Act would be that politicians are more responsive to the majority, not the few. In order to receive matching funds, they would have to spend more time trying to solicit donations from constituents, and less time courting the few wealthy donors that would invariably make demands of them.

Right now, 69 percent believe that the Republican party pushes policies that favor the rich, and 30 percent of Americans believe the same of Democrats. Unfortunately, the government “by the people, for the people” seemingly has perished from this Earth, and been replaced with a government by the few and for the few. This bill is an attempt to return the country somewhat to Lincoln’s standard, by taking the power away from the rich and returning it to the people.

Daily Kos has a petition where you can add your support to the passage of this bill. Though aiming for 10,000 signatures, as of this writing, the petition has already doubled that number. If you disagree with the notion that big money should run politics, become a citizen co-sponsor of the Government by the People Act by adding your name to the petition here.

'I Want Them To Be Worried We’re Watching... To Never Know When We’re Overhead.'

Law enforcement push 'persistent surveillance' monitoring systems

- Jon Queally, staff writer 
(Promotional image: Persistent Surveillance Systems)“I want them to be worried that we’re watching.
I want them to be worried that they never know when we’re overhead.”

'I Want Them To Be Worried We’re Watching... 
To Never Know When We’re Overhead.'
That's what Police Chief Richard Biehl of Dayton, Ohio told the Washington Post while referring to the people of his city as he supported new aerial surveillance technology that would allow his officers to "track every vehicle and person across an area the size of a small city, for several hours at a time."

Focused on the work of Persistent Surveillance Systems—a Dayton-based company that is already providing aerial surveillance for large events, like political rallies and sporting events—the Post's reporting reveals that even as "Americans have grown increasingly comfortable with traditional surveillance cameras, a new, far more powerful generation is being quietly deployed."

For its part, Persistent Surveillance bills itself as a "full-service, wide area surveillance provider" that sells its capabilities to law enforcement agencies, border patrol, and others private firms. According to the company's website, their signature "Hawkeye II" surveillance system "is similar to a live version of Google-Earth—only with a TiVo-like capability" and provides:
Wide-Area Surveillance Sensors and Services that enable continuous, second-by-second video monitoring of a city-sized area. Because of the very high-resolution nature of PSS's sensors (up to 200 megapixels), vehicle and pedestrian activity can be tracked over a 16 square-mile area. If an event-of-interest happens within this area (a murder, for example), users can rewind the event to identify the perpetrator's place-of-origin, meeting locations, accomplices, driving routes, and final destination.
 (Click for larger image. Source: WaPo) 

According to the Post:
Already, the cameras have been flown above major public events such as the Ohio political rally where Sen. John McCain (R-Ariz.) named Sarah Palin as his running mate in 2008, McNutt said. They’ve been flown above Baltimore; Philadelphia; Compton, Calif.; and Dayton in demonstrations for police. They’ve also been used for traffic impact studies, for security at NASCAR races and at the request of a Mexican politician.
Predictably, those in favor of the hovering surveillance technology, like Police Chief Biehl and the company's president Ryan McNutt, say the whole purpose of the 'unblinking eye-in-the-sky' is to solve crimes or prevent them from happening. And as McNutt explained, he envisions his companies technology not just attached to small planes, as they are now, but to ones with longer and wider ranges as well. He also thinks fixed surveillance units could "protect" large areas, boasting to the Post that "a single camera mounted atop the Washington Monument [...] could deter crime all around the [Natioanal] Mall."

But privacy advocates contend this is just another creepy development in the evolution of the 'Big Brother' society that George Orwell warned about and the National Security Agency has helped turn into a global enterprise.

“There are an infinite number of surveillance technologies that would help solve crimes . . . but there are reasons that we don’t do those things, or shouldn’t be doing those things,” said Joel Pruce, a University of Dayton postdoctoral fellow in human rights who opposed the use of the surveillance aircraft in Ohio supported by Biehl.

And Jay Stanley, a privacy expert with the American Civil Liberties Union, told the Post:  

“If you turn your country into a totalitarian surveillance state, there’s always some wrongdoing you can prevent. The balance struck in our Constitution tilts toward liberty, and I think we should keep that value.”

Fracking's Terrifying Water Usage Trends Spell Disaster

New study shows that fracking boom is happening in places that can least afford to lose precious water supplies

- Jon Queally, staff writer 
Almost half (47%) of all U.S. wells are being developed in regions with high to extremely high water stress. This means that more than 80 percent of the annual available water is already allocated to municipal, industrial and agricultural users in these regions. (Source: Ceres)

The irony of fracking: It destroys the natural resource it needs most. The tragedy for those living nearby fracking operations: That natural resource is the fresh—and increasingly scarce—water supply on which they, too, depend.

And not only does fracking—or hydraulic fracturing—demand enormous amounts of fresh water no matter where it takes place, a troubling new study released Wednesday found that a majority of places where the controversial drilling technique is most prevalent are the same regions where less and less water is available.

Overlay the regions where most of the fracking is being done in North American with the places experiencing the most troubling and persistent water resource problems and the resulting picture becomes an alarm bell as politicians and the fossil fuel industry continue to push fracking expansion as the savior for the U.S. and Canada's energy woes.

According to the report, Hydraulic Fracturing and Water Stress: Water Demand by the Numbers (pdf), produced by the non-profit Ceres investor network, much of the oil and gas fracking activity in both the U.S. and Canada is happening in "arid, water stressed regions, creating significant long-term water sourcing risks" that will strongly and negatively impact the local ecosystem, communities, and people living nearby.

“Hydraulic fracturing is increasing competitive pressures for water in some of the country’s most water-stressed and drought-ridden regions,” said Ceres President Mindy Lubber, in announcing Hydraulic Fracturing and Water Stress: Water Demand by the Numbers. “Barring stiffer water-use regulations and improved on-the-ground practices, the industry’s water needs in many regions are on a collision course with other water users, especially agriculture and municipal water use."

Richard Heinberg, senior fellow of the California-based Post Carbon Institute and author of a recent book on the "false promise" of the fracking industry, says the irony of the study's findings "would be delicious if it weren't so terrifying."

"Nationally," according to Heinberg, "only about 50 percent of fracking wastewater is recycled. Billions of gallons of freshwater are still taken from rivers, streams, and wells annually for this purpose, and—after being irremediably polluted—this water usually ends up being injected into deep disposal wells. That means it is no longer available to the hydrological cycle that sustains all terrestrial life."

Click here to look at Ceres' interactive map on fracking and water use.

The study drew on industry data detailing water usage from from 39,294 oil and gas wells from January 2011 through May 2013 and compared that information with "water stress indicator maps" developed by the World Resources Institute (WRI).

What it found:
Over 55 percent of the wells hydraulically fractured were in areas experiencing drought and 36 percent overlay regions with significant groundwater depletion – key among those, California which is in the midst of a historic drought and Texas, which has the highest concentration of shale energy development and hydraulic fracturing activity in the U.S.

In Texas, which includes the rapidly developing Eagle Ford and Permian Basin shale plays, more than half (52 percent) of the wells were in high or extreme high water stress areas. In Colorado and California, 97 and 96 percent of the wells, respectively, were in regions with high or extremely high water stress. Nearly comparable trends were also shown in New Mexico, Utah and Wyoming.

Among hundreds of hydraulic fracturing companies whose water use was evaluated, those with the highest exposure to water sourcing risk are Anadarako (APC), Encana (ECA), Pioneer (PXD) and Apache (APA). Most of the wells being developed by each of these companies are in regions of high or extreme water stress. The top three service providers, Halliburton, (HAL) Schlumberger (SLB) and Baker Hughes (BHI), handled about half of the water used for hydraulic fracturing nationally and also face water sourcing risks.

Although water use for hydraulic fracturing is often less than two percent of state water demands, the impacts can be large at the local level, sometimes exceeding the water used by all of the residents in a county.

"It's a wake-up call," Professor James Famiglietti, a hydrologist at the University of California, Irvine, told the Guardian. "We understand as a country that we need more energy but it is time to have a conversation about what impacts there are, and do our best to try to minimise any damage."

The irony of the latest findings, explained Heinberg in an email to Common Dreams, is based on the fact that "much of the fracking boom is centered in the western United States—Texas, Oklahoma, Colorado, and California—which just happens to be drying up, likely as a result of climate change. And that climate change, in turn, is happening because we're burning fossil fuels like oil and natural gas."

Heinberg observed that the Ceres report is largely written from the standpoint of the oil and gas companies—using much of their data—and directed at those who may be invested or would like to invest in the continuation or proliferation of the industry. However, he indicated, detailing the increasing difficulties the industry and its investors are likely to experience in sourcing water for their operations is still valuable for those opposed to fracking.

"In California, where I live," he said, "we're experiencing a 500-year drought. The grape-wine industry here in Sonoma County is facing disaster. Farmers in the Central Valley are weighing whether to plant at all this year. The fact that California's Democratic governor [Jerry Brown] wants to spend what little water we have on fracking—which will only make our climate problems worse—makes the report frighteningly relevant."

A Clear and Present Danger to Financial Stability

The Fed's Taper Sends Global Shares and Emerging Markets Tumbling

The selloff that began in May 2013, when the Fed announced its plan to scale back its asset purchases, resumed with a vengeance on Monday as global shares were slammed in heavy trading sending the Dow Jones for a 326 point-loss on the day. The proximate cause of the rout was a worse-than-expected manufacturing report and sluggish construction spending, but the underlying source of the trouble was the Fed’s decision to wind down QE which, according to Bloomberg news, “helped drive the S and P 500 up 157 percent from a 12-year low in 2009.” The Fed’s tightening has reversed the dynamic that pushed equities into the stratosphere and generated an unprecedented boom in the emerging markets. Now capital is fleeing the EMs to the safety of US Treasuries while jittery investors ditch stocks and wait to see if the storm passes or gradually gains strength.

The mood on Wall Street has turned bearish overnight as markets in Europe and Asia continue to hemorrhage led by another bloodletting on Japan’s Nikkei which has slumped by a full a 14 percent since its Dec. 30 peak. Societe Generale’s emerging market strategist, Benoit Anne, summed up the mood in a terse note to her clients saying, “There is no point spending too much time trying to pick and choose when faced with a severe market crisis like the one we are witnessing in front of our screens. Right now, sell everything.”

Markets have entered a new phase in the ongoing financial crisis, a crisis which originated on Wall Street where trillions of dollars of fraudulently-manufactured “toxic” assets were produced by a criminal bank cartel and sold to unsuspecting investors around the world. Rather than write down the losses and restructure the banking system, policymakers at the Central Bank and US Treasury opted to conceal the damage with massive bailouts, financial repression, zero rates and regular infusions of liquidity, all of which helped to hide the rot at the heart of the system. The Fed’s plan to taper has removed the veil and exposed the weakness of an undercapitalized system that has been made more unstable by 5 years of misguided policy. This is real source of the problem.

Just as the Fed’s uber-accommodationist policy lifted stocks to record highs in the months preceding its taper announcement, so too, the withdrawal of central bank support is likely to increase the pace of the decline. That is why we expect the taper to be implemented in a stutter-step manner, stopping and starting sporadically depending on conditions in the market. Naturally, this will undermine the Fed’s attempts to send investors a clear message about the direction of policy. It also means that new Fed chairman Janet Yellen is going to spend less time trying to maintain the Fed’s mandate of “price stability and full employment” then simply putting out fires. Here’s a clip from Naked Capitalism with some background on the turmoil:
“Since Bernanke started talking about “tapering off” Quantitative Easing, the bond markets have freaked out. This is a very logical reaction….Bernanke and other Federal Reserve economists appear bewildered by this phenomenon. The impression one gets from their follow-up comments is that they wished they could ask bond speculators “did you read the damn speech?” The answer, of course, is no and for good reason.

All investors need to know is the conditions under which QE … will be pursued has changed. Now the substantive change may actually be relatively minor, but that’s irrelevant to speculators. The reason is very simple: those holding assets with longer maturities will take huge capital losses with relatively small changes in interest rates ……It is better to exit now when those future changes are uncertain then take even more massive losses.” (“Market rout continues, proving abject failure of Fed’s forecasts and policies”, Naked Capitalism)

This is the logic of selling early even though the reduction of asset purchases is still in its opening phase. There’s no sense in waiting until the last minute and taking a chance of getting trampled in the stampede to the exits. Just cash in and relax.

The Fed’s trillion cash injections have created a fantasy world of ever-rising stock prices that’s gradually giving way to the emerging reality of dismal earnings, chronic-high unemployment, droopy incomes, stagnant wages, swollen P/E ratios and a bloated financial sector that requires a larger and larger share of the nation’s wealth to avoid another devastating collapse. This is the situation we find ourselves in today, a situation that is papered over with propaganda about meaningless data points that fail to identify the real source of the problem, which is the gigantic capital hole created by the toxic assets that have not yet been written down, but are still sucking the life out of the bedraggled economy via debt servicing, rate and liquidity subsidies, and the reshaping of economic policy to preserve zombie institutions which need to be euthanized.

The problem is not hard to grasp, in fact, most people will understand what’s going on by just reading this two-paragraph excerpt from an article which appeared in Forbes magazine back in February, 2009. Here’s a clip from the piece titled “Zombie Firms and Zombie Banks”:
”Beginning in 1991, Japan experienced a financial crisis that has been documented and studied by many. Japan’s crisis was triggered by a real estate and equity price bubble followed by a collapse of equity and real estate prices. But unlike the examples I cited above, Japanese policymakers met the crisis with prolonged denial and then, when conditions forced recognition of the severity of the problem, very halting steps to address it. Banks were not forced to recognize the condition of their balance sheets and were encouraged to continue lending to firms that were themselves unprofitable. Anil Kashyap labels these “zombie firms.”

Zombie banks continued to direct capital to zombie firms. This charade continued for more than a decade, with the result that the once-powerful Japanese economy was completely stagnant for that period. The government’s main response was to dramatically increase spending on infrastructure and frantically try to get Japanese households to save less and consume more. The resulting “lost decade” of economic growth cost Japan more than 20% of GDP.” (“Zombie Firms And Zombie Banks”, Thomas F. Cooley, Forbes)

Sound familiar? This same phenom is playing out in the US today. The Fed has spared no expense to perpetuate the illusion that the zombie banking system is solvent and that the trillions of dollars in losses from worthless assets has somehow vanished into thin air. But they haven’t vanished. They are either hidden-away via accounting trickery, passed off to gullible, yield-crazed investors, or transferred onto the Fed’s bulging balance sheet. In any event, the debts are real, they’re impeding the recovery, they’re sucking the life’s blood out of the economy, and they’re clear and present danger to financial stability.

The red ink has to be purged, just as the rickety, Potemkin banking system has to be put out of its misery. We need a fresh start.

When the Rich Write the Rules to Make Themselves Richer

The Attack of the Robots

Economists are not very good at economics. We know this because we had a huge housing bubble that collapsed, which almost none of them saw. The pre-crash projections from the Congressional Budget Office imply that this downturn has already cost us more than $7.6 trillion, or $25,000 per person. This could have been prevented if we had economists in policy positions who understood how the economy worked.

But even if economists aren’t very good at dealing with the economy, they still can provide value to society. In particular they can be a great source of entertainment. That’s how we should view the story that robots will take all of our jobs and leave most of the population unemployed.

This story has become a popular theme lately among Washington policy types. There are important people from across the political spectrum running around town wringing their hands over the prospect that the economy may not provide jobs for large segments of the labor force.

The first aspect of this story that should impress people is that many of the same people have been wringing their hands about the exact opposite problem, most likely without even knowing it.

Remember the story about how the aging of the baby boomers will bankrupt us because we will have too few workers to support the surge of retired baby boomers?

In that story, all of us aging baby boomers will be left waiting around for someone to change our bedpans. But now we are supposed to be worried that we won’t have any work for people to do because the robots will be there to do it faster and cheaper.

Either of these stories could in principle be true, but they cannot both be true. If robots are capable of doing most of the tasks that humans now do, then we don’t have to worry about declining ratios of workers to retirees. We will have plenty of robots to do the work for us.

Alternatively, if we are facing labor shortages because there are too few workers to support a growing population of retirees, then clearly robots will not have taken everyone’s job. At worst we have to worry about one of these problems, but not both.

Let’s assume robots are the problem. This would actually not be a new story. The robots might be new, but this is the story of productivity growth that we have dealt with for centuries. Ordinarily we think productivity growth makes us richer, since we can produce more goods or services in every hour of work. This can lead to rising pay and living standards or alternatively more leisure time.

However, the robot story is somewhat different or so its proponents would claim. Robots are supposed to lead to such rapid increases in productivity that there will be no way for all the displaced workers to be reemployed. The problem in this case is not productivity; rather the problem is that all the benefits are going to the owners of the robots.

Before evaluating the logic of this one, it’s first worth noting that we have yet to see any evidence to back up this picture of the economy. In the last six years, productivity growth has been notably slower than in the years from the beginning of the productivity speed-up in 1995 to the beginning of the downturn in 2008. There also is no evidence that robots and other technological change is responsible for the upward distribution of income in the last three decades.

But there is a more fundamental problem with this robot-driven inequality story. The owners of the robots won’t directly get rich from owning the machines: robots will presumably be relatively cheap to make. After all, we can have robots make them. If the owners of robots get really rich it will be because the government has given them patent monopolies so that they can collect lots of money from anyone who wants to buy or build a robot.

Patents are not given to us by the gods or nature, we write patent laws. If patent monopolies are making most of us poor and a small number rich, then we can just write the laws differently. It’s very simple; we make patents shorter and weaker. That could mean 10 years rather than 20 years. And perhaps more importantly, we make patent enforcement more difficult.

That means interpreting the patents more narrowly. For example, the next time some character like Jeff Bezos tries to claim a patent on something like one-click shopping, we not only turn down his patent suit, but we fine him really big bucks for trying to beat his competitors in the courts rather than the marketplace and for wasting everyone’s time.

If we adjust patent laws to better serve the economy we can ensure that robots and other technological breakthroughs make most of the world richer not poorer. The economists might tell us that the problem of inequality is just the natural progress of technology and the economy, but the bubble and its collapse should have taught us better than to take this crew seriously. The problem is really just one of the rich writing the rules to make themselves richer.

Why Ordinary Food Will be the Future of Medicine

The Health Care Doctors Forgot

The Problem

Few issues have become so intensely debated and politically charged as the need to reform the health care system. This debate has resulted in the ObamaCare program (The Affordable Care Act), which aims to expand and improve health care, thereby reducing health care costs.

Presently, US health care costs constitute 18% of GDP, up from about 5% around 1970 (1). These costs are burdensome and many sectors of our society are paying the price. School programs are being scaled back because of the escalating costs of retiree health care benefit programs, as illustrated in Michigan where they are “laying off teachers, scrapping programs and mothballing extracurricular activities…[because of]…health care bills of retirees.“(2). About 60% of personal bankruptcies are now attributed to medical care costs (3) and these rising costs are eroding family incomes (4), among many other devastating outcomes.

It is also far from evident that the almost four-fold increase in the costs of healthcare (as a percent of our dollars) since the 1970s is leading to better health outcomes.

A solution is urgently needed but, in my opinion, this will not happen if we depend on the health care reform proposals offered in recent years, either from the political right or the political left. These proposals mostly concern who will pay a bill that is dependent on the use of expensive pills and procedures. This is not the needed solution because it ignores a strategy that decreases demand for services by improving health.

Current prevention programs are inadequate

Present day wellness programs are mostly cosmetic. Advisories to quit smoking, wear seat belts, use stairs not elevators, monitor blood pressure, use alcohol in moderation, and exercise regularly, make medical sense but, except possibly for smoking cessation, I don’t see how they can have much effect on improving health and reducing health care costs. Similarly, the United States Department of Agriculture makes dietary recommendations (think Food Pyramid) but these also are modest, at best, and highly questionable at worst (5).

As a consequence, by relying on modest or ineffective dietary and lifestyle recommendations (6,7) the health care system as a whole allows, even encourages, the use of very expensive pills and procedures. Consider, for example, the preventive component of the new ObamaCare program (3). This program wants to offer “free preventive women’s services, including mammograms,” to ensure “that there are no out-of-pocket costs on patients receiving … colonoscopies and provide lower prescription drug costs for people on Medicare.” These will cost money but there is little evidence they will significantly improve overall outcomes (8-10).

Much the same criticism can be made of personalized medicine and other projects of corporations (11) and governments (12) to target medical interventions to specific organs, ailments and individuals (14). I can find little or no evidence that these measures will improve health and decrease demand for health care services. In fact, I suggest (and the pharmaceutical industry hopes) that the thrust of personalized medicine will increase the use of pharmaceuticals as doctors will target illnesses detected earlier.

Add to this the alarming statistic that the third leading cause of death in the U.S. is the use and misuse of pills and procedures (15). Is it any wonder we have an ineffective, costly health care system? Our health care system is travelling a path to self-destruction, regardless of who pays the bill.

The solution

When I examine the various proposals made in recent years to reform this system, I see all as having one remarkably consistent omission. It is our neglect of the remarkable ability of nutrition to promote health and decrease illness. I particularly refer to the emerging evidence on the exceptional health benefits provided by a whole food plant-based (WFPB) diet—or should I say, re-emerging evidence. Re-emergence because the idea of the healing power of food has been around at least since the time of ancient Greece. Hippocrates said it best when he exclaimed, “Let food be thy medicine.”

“Let food be thy medicine.”

I am referring here not only to the well-known ability of nutrition to prevent diseases like heart disease, cancer and diabetes but to the ability of the WFPB diet to actually treat and thus reverse diseases that are already diagnosed or forecast by out-of-range risk factors.

A WFPB diet (5) is defined as one rich in antioxidants and complex carbohydrates. It also avoids animal-based foods, refined carbohydrates, and added fat typically used to make processed, convenience foods. The remarkable health benefits of the WFPB diet is attributed to its being naturally low in fat (10-12% of diet calories), low in protein (10-12% of calories), high in complex carbohydrates (75-80% of calories) and abundant in natural vitamins and minerals.

The science behind a WFPB diet is compelling. A WFPB lifestyle is effective in the short and long terms against a broad spectrum of diseases and ailments (16,17). Population-level studies show lower chronic disease rates the closer diets approximate the nutritional composition of a WFPB dietary lifestyle (7,18). That is, these population studies show the effects on a long term basis and that this dietary lifestyle serves the body’s innate biological tendency to repair itself and so constantly create health. But a WFPB diet can also act to reverse disease progression in a manner that is surprisingly fast (a few days to a few weeks). Such a diet can therefore function as a medical treatment.

The remarkable treatment effects are best documented in a clinical trial for patients with advanced heart disease (19-21). In one published study (19), seriously ill heart patients (i.e., 49 cardiac events during eight years prior to dietary intervention) cured themselves of coronary heart disease by adopting the WFPB dietary lifestyle. Now, 26 years later, five have passed but none from coronary disease (22). Additionally, the occurrence of cancer in these individuals is only about 10% of that expected (23). These results are unprecedented in a clinical trial.

In a 74-week study on type 2 diabetics (24), a close approximation of the WFPB diet decreased body weight, serum HbA1c (the preferred clinical indicator for Type 2 diabetes) and blood lipid levels even more than a companion group who adopted the traditional American Diabetes Association diet (25). The WFPB dietary effect is so pronounced that in our experience it may cause hypoglycemic shock among those who continue their insulin enhancing medications (personal communications: J McDougall, N. Bernard, and TN Campbell).

Additionally, a rich body of evidence has come to light in recent years to support the ability of a WFPB diet to suspend progression of, or even reverse, serious diseases like melanoma (26), prostate cancer (27), multiple sclerosis (28), rheumatoid arthritis (McDougall, J. Diet: only hope for arthritis. McDougall Newsletter (2002) and many other diseases (5). The breadth of this dietary effect both to prevent and to reverse such a diversity of diseases and ailments is truly remarkable.

Much of the benefit of a WFPB diet originates from the avoidance of cow’s milk protein, the most biologically active protein of animal origin yet known, which in experiments markedly promotes cancer development (29-31). A discussion of the multiple mechanisms accounting for this effect on cancer may be found elsewhere (5). Cow milk also elevates serum cholesterol (total, LDL) as well as early lesions that lead to heart disease (32, 33), decreases the production of cells that repair heart vessel damage (34) and is the major cause of early childhood allergies (35, 36).

It is now abundantly clear that the health restoring effect offered by the WFPB diet is greater than that of modern medicine. The WFPB treats a broader range of diseases, it is more effective, and it acts just as fast or even faster. Nor, importantly, is it typically reliant on a detailed diagnosis. Were a composite pill made containing the best of all known pharmaceutical drugs, such a pill could not compare with the benefits of a WFPB diet. When the lesser side effects are taken into account, it is no contest. Thus nutrition is now in a position to displace modern medicine as the treatment of choice for chronic disease.

Seeing the diet, not the nutrient

A common question asked by many people is why has this remarkable information not been widely shared and why is it so foreign for so many people. Sad to say, the general topic of nutrition—irrespective of any particular brand of nutrition—is almost never taught in medical schools and receives only meager funding from federal agencies. As a result, the public must rely on corporate messages (generously offered) that are far more concerned about marketing products, not about promoting human health. These messages are supported, if at all, only by evidence obtained on out-of-context nutrient-rich products and supplements.

I acquired this more comprehensive view of nutrition after spending decades initiating and directing well-funded academic research and teaching programs in nutritional science (my funding was obtainable because it was deemed cancer research!) and after participating for decades on expert panels in food and health policy development. My own community of nutrition research colleagues has been doing honorable, sincere work for a long time, but we also have been working within a paradigm that is largely responsible for miscommunicating this science to the public. We are good at researching details but come up short describing how these details can be assembled into a fabric of information that is useful for the public. We work well with the threads of the tapestry, not on the tapestry itself, unless that tapestry is woven to please the gods of the corporate world.

The food and drug corporate complex increasingly infiltrates and corrupts academic research (5). It also helps steer food and health policy and public nutrition information in a direction of their liking. Such mischief becomes possible because of a fundamental flaw in how we think about the concepts of biology, nutrition and medicine. We focus on parts but fail, miserably, to see the whole. When we rely only on parts, almost any health claim can be made to look good. This deeply embedded reductionist practice occurs in response to a “free market system” that requires a system of intellectual property protection that depends on a description of parts, appropriately patented and specifically described. In nutrition, this means relying on individual nutrients; in medical practice, this means relying on drugs.

The food and drug corporate complex increasingly infiltrates and corrupts academic research

Nowhere, in my opinion, is this flaw of worshipping biological parts rather than the whole more damaging than it is in the science of nutrition and in the practice of medicine. In reality, nutritional efficacy is wholistic (‘w’ intended) but our research investigations of nutrition are reductionist. Reductionist details, when presented in isolation, cause massive confusion. As a result, everyone pays, both with their wallets and in lost health. Also, because the practice of medicine is constrained by procedures and treatments within a reductionist paradigm, it follows that wholistic nutrition does not fit into this practice. This is an extremely costly mismatch, with tragic consequences on so many accounts.

If there is a realistic hope of resolving the health care crisis, which extends into so many sectors of our society and our planet, it must begin by accepting nutrition as a wholistic concept. Communicating this to the public suggests that nutrition scientists should take the lead but, in doing so, it will be necessary for the academic community to cleanse itself of the numbing stranglehold of corporate control. Only by doing so can this professional community generate the public support that our discipline richly deserves.

To summarize, adoption of the WFPB dietary lifestyle offers far more health benefits than the modern medical system. For those who comply, current evidence shows that at least 90% of all cardiovascular disease and type 2 diabetes, upwards of 70% of all cancers, and a broad spectrum of other illnesses can be prevented, even cured. Assuming that this message is effectively communicated, I estimate that at least 75% of contemporary health care costs could easily be saved. Sparing the side effects (often death) of the existing system would be a very large additional bonus.

It is now time to replace the current medical-based disease care system with a diet-based health care system as Hippocrates prompted us to think about two and a half thousand years ago. We face some extraordinary problems, health improvement, health care costs, serious environmental disarray, unforgiving violence and political polarization and discord. We are entitled to despair but only if we continue to rely on the same medical and health strategies that got us to this place. Based on the extraordinarily positive responses that I personally receive in my hundreds of lectures and the millions of readers of our books, I am optimistic. All we need to do is 1) honestly demonstrate this effect to the public and 2) develop affordable and convenient programs to facilitate transition and I am confident that exceptional progress can be made.

For the skeptics of this information, I say try it. You will see for yourself. Far more evidence for this opinion is available in The China Study (2005) (5) and in Whole (2013) (37) and also: Esselstyn, C. J. Prevent and reverse heart disease. (Avery Publishing, Penguin Group, 2007), Ornish, D. et al. “Can lifestyle changes reverse coronary heart disease?” Lancet 336, 129-133 (1990) and essays and books at <>. See also the websites:,‎, and

Footnote: Also, an online course on this topic (with 30 Category I CME and CEU credits) is available at

1 Baker, S. L. U.S. national health spending, 1960-2011. (2013). .

2 French, R. Michigan’s education time bomb: costly, loophole-ridden retirement system threatens public schools. (2007).

3 Anonymous. ObamaCare facts: facts on the Obama health care plan, (2013).

4 Auerback, D. I. & Kellermann, A. L. A decade of health care cost growth has wiped out real income gains for an everage US family. Health Affairs 30, 1630-1636 (2011)

5 Campbell, T. C. & Campbell, T. M., II. The China Study, Startling Implications for Diet, Weight Loss, and Long-Term Health. (BenBella Books, Inc., 2005).

6 Committee on Diet Nutrition and Cancer. Diet, Nutrition and Cancer. (National Academy Press, 1982).

7 Expert Panel. Food, nutrition and the prevention of cancer, a global perspective. (American Institute for Cancer Research/World Cancer Research Fund, 1997).

8 Gotzsche, P. C. & Jorgensen, K. J. Screening for breast cancer with mammography. Cochrane Database of Systematic Reviews, doi:10.1002/14651858.CD001877.pub5 (2013).

9 Blennerhassett, M. Breast cancer screening: an ethical dilemma, or an opportunity for openness? Qual. Prim. Care 21, 39-42 (2013).

10 Erpeldinger, S. et al. Is there excess mortality in women screened with mammography: a meta-analysis of non-breast cancer mortality. Trials 14, 368 (2013).

11 Anonymous. Drug discovery & development (2013).

12 Stribley, L., Egbuonu-Davis, L. & Fritz, P. The federal government’s key role in healthcare innovation.

13 Lindpaintner, K. Genetics in drug discovery and development: challenge and promise of individualizing treatment in common complex diseases. Brit. Med Bull. 55, 471-491 (1999).

14 Anonymous. Personalized medicine. Wikipedia (2013). And Chaufan and Joseph (2013) The ‘Missing Heritability’of Common Disorders: Should Health Researchers Care? International Journal of Health Services 43: 281 – 303

15 Starfield, B. Is US health really the best in the world? JAMA 284, 483-485 (2000).

16 Campbell, T. N. Personal communication. (2012-13).

17 Esselstyn, C. B. J., Gendy, G., Doyle, J., Golubic, M. & Roizen, M. F. Treating the cause of coronary artery disease (to be published). J Family Practice (2014).

18 Doll, R. & Peto, R. The causes of cancer: Quantitative estimates of avoidable risks of cancer in the Unites States today. J Natl Cancer Inst 66, 1192-1265 (1981).

19 Esselstyn, C. B., Jr. Updating a 12-year experience with arrest and reversal therapy for coronary heart disease (an overdue requiem for palliative cardiology). Am. J. Cardiol. 84, 339-341 (1999).

20 Morrison, L. M. Diet in coronary atherosclerosis. JAMA 173, 884-888 (1960).

21 Ornish, D. et al. Can lifestyle changes reverse coronary heart disease? Lancet 336, 129-133 (1990).

22 Fulkerson, L. Forks over Knives; referring to Esselstyn patients 92 min (Monica Beach Productions, Santa Monica, CA, 2011).

23 Esselstyn, C. J. Personal communication. (2011-2013).

24 Barnard, N., Cohen, J. & Ferdowsian, H. A low-fat vegan diet and a conventional diabetes diet in the treatment of type 2 diabetes: a randomized, controlled, 74-wk clinical trial. Am. J. Clin. Nutr. 89, 1588S-1596S (2009).

25 Franz, M. J. et al. Evidence-based nutrition principles and recommendations for the treatment and prevention of diabetes and related complications. Diabetes Care 26, S51-S61 (2003).

26 Hildenbrand, G. L. G., Hildenbrand, L. C., Bradford, K. & Cavin, S. W. Five-year survival rates of melanoma patients treated by diet therapy after the manner of Gerson: a retrospective review. Alternative Therapies in Health and Medicine 1, 29-37 (1995).

27 Frattaroli, J. et al. Clinical events in prostate cancer lifestyle trial: results from two years of follow-up. Urology 72, 1319-1323 (2008).

28 Swank, R. L. Effect of low saturated fat diet in early and late cases of multiple sclerosis. Lancet 336, 37-39 (1990).

29 Campbell, T. C. Chemical carcinogens and human risk assessment. Fed. Proc. 39, 2467-2484 (1980).

30 Madhavan, T. V. & Gopalan, C. The effect of dietary protein on carcinogenesis of aflatoxin. Arch. Path. 85, 133-137 (1968).

31 Youngman, L. D. & Campbell, T. C. Inhibition of aflatoxin B1-induced gamma-glutamyl transpeptidase positive (GGT+) hepatic preneoplastic foci and tumors by low protein diets: evidence that altered GGT+ foci indicate neoplastic potential. Carcinogenesis 13, 1607-1613 (1992).

32 Meeker, D. R. & Kesten, H. D. Experimental atherosclerosis and high protein diets. Proc. Soc. Exp. Biol. Med. 45, 543-545 (1940).

33 Meeker, D. R. & Kesten, H. D. Effect of high protein diets on experimental atherosclerosis of rabbits. Arch. Pathology 31, 147-162 (1941).

34 Foo, S. Y. et al. Vascular effects of a low carbohyrdate high protein-diet. Proc. National Acad. Sci 106, 15418-15423 (2009).

35 Vandenplas, Y., Steenhout, P., Planoudis, Y., Grathohl, D. & Althera Study Group. Treating cow’s milk allergy: a double-blind randomized trial comparing two extensively hydrolysed formulas with probiotics. Acta Paediatr. 102, 990-998 (2013).

36 Katz, A., Virk H., N., Yuan, Q. & Shreffler, W. Cows’ milk allergy: a new approach needed? J. Pediatr. 163, 620-622 (2013).

37 Campbell, T. C. Whole. Rethinking the science of nutrition. (BenBella Books, 2013).

This article originally appeared on Independent Science News.

Wednesday, February 5, 2014

Drones and the NFL is a Non-Profit? Bullshit!

Google Has Launched a For-Profit Privacy Invasion Into Our Electronic Lives

By Steven Rosenfeld
February 3, 2014 | AlterNet

No longer content to vacuum up, scan, index and sell analytics based on the content of our texts, emails, searches, locations and more, Google now has a new target: tapping, mapping and colonizing the networks wiring our lives.

Google argues that it has the right to collect your most sensitive data, as long as it flows across an open WiFi network,” [3] said [4] last month after Google announced a $3.2 billion acquisition of Nest [5], which sells WiFi-controlled home heating appliances. “Now do you want to let this company inside your home?”

“Uhm… I hate to break this to the ACLU—given they’re supposed to be on the cutting edge of the privacy debate—but the thing is, Google’s already in our homes,” commented [6] PandoDaily’s Yasha Levine. “It has been in our homes for a long, long time. And not just in our homes, but at work, in our cars and even when we’re walking down the street.”

“As many have pointed out the privacy concerns of this development are huge,” wrote two other PandoDaily writers, Carmel Deamicus and Michael Carney. “Nest products track detailed information [7] about their users’ movements, in addition to things like a user’s WiFi IP address, and whether the specific address is a home or a business.”

Google is poised to cross another personal boundary. It is not just that our questions and queries are being aggressively collected, parsed, sold and resold, but that the networks tying together our digitized lives—via our devices, their settings and passwords—are also being eyed by the global data-hungry Goliath.
“The acquisition will help Google close the circle of search, people and goods in a broad Internet of Everything,” wrote [8] Wall Street Journal editor Michael Hickins. “As Aaron Levie, CEO of Box Inc. tweeted, ‘With home automation, self-driving cars, robots, mobile, and life sciences, Google is setting itself up to own the 21st century.’”

Anyone who cares about maintaining some degree of privacy should pay attention. Google has been doing a lot more than its lobbyists and executives have disclosed when defending or promoting its initiatives. Here are four examples that undescrore Google’s corporate ethos that any data it can grab is Google's for the taking.

  1. Street View: not just street mapping. After being sued by 38 states, Google admitted last March that its weird-looking cars outfitted with roof cameras facing four directions were not just taking pictures; they were collecting data from computers inside homes and structures, including “passwords, e-mails and other personal information from unsuspecting computer users,” the New York Times reported [9].
  2. Gmail: prying and spying. This October, a federal judge refused to dismiss a potential class-action lawsuit brought by Gmail users who objected to its practice of analyzing the content of all the messages on its network and selling byproducts to advertisers. Those suing Google said it violated federal wiretap laws.
    This issue isn’t new to Google. In congressional testimony in 2009, Google’s lawyers said [10] its email technology was used for scanning for spam, computer viruses and serving ads “within the Gmail user’s experience.” But last fall, U.S. District Court Judge Lucy Koh held that Google never told Gmail users that Google would create personal profiles and target users with ads. Nor did people who are not Gmail users, but who were writing to Gmail addresses, agree to let Google collect and parse their messages.
  3. Google Safari: not just hunting WiFi. Google’s court record includes more than just grabbing and snatching data. In early 2012, theWall Street Journal broke the story that its software was bypassing security settings for Apple devices using the Safari browser. “Google hated this [Safari’s anti-tracking features] and used a secret code to bypass this security setting,” the blog GoogleExposed wrote [11]. “This exposed millions of Safari users to tracking for months without them even knowing about it.” In August 2012, the Federal Trade Commission fined [12] Google $22.5 million, its largest civil fine, noting that Google also had violated previous privacy agreements.
  4. Android: another data gateway. One year after the FTC fine, [13]’s Michael Horowitz, who writes its Defensive Computing feature, noted Google was back to its old tricks. “Google knows nearly every WiFi password in the world,” he declared, explaining that was the result of backdoor access to hundreds of millions of phones and devices using its Android operating system.
    “Sounds great. Backing up your data/settings makes moving to a new Android device much easier,” Horowitz wrote, citing how the company sold this feature to consumers. “It lets Google configure your new Android device very much like your old one. What is not said, is that Google can read the WiFi passwords.” The good news, he said, is that this feature can be turned off. “The bad news is that, like any American company, Google can be compelled by agencies of the U.S. government to silently spill the beans.”

ComputerWorld was careful [14] not to pick just on Google for domestic spying. DropBox, Microsoft, Apple, Yahoo, FaceBook, Skype—and others—all do pretty much the same thing: read user data and grant government access to it. But Google’s mission, detailed [15] in its patents, stands apart. Its business is based on analyzing user metrics with ever-growing [8] precision, and selling those insights to advertisers.

Thus, the recent handwringing [16] by Google CEO Eric Schmidt that Google—and others—was taken advantage of by America’s top spymasters following Edward Snowden’s still-unfolding National Security Agency whistleblowing, is more than hollow. It’s a farce. The record shows that Google knows exactly what it is doing.

2014 is likely to be a year where the trade-off for more profits and data for Google will be the loss of privacy. It’s not paranoid to say that Google’s acquisition of Nest is at the cutting edge of colonizing the links between our electronic devices and our lives. The trend of aggregating all the data that’s out there is behind many privacy-invading social media products, such as an app launching this week [17] that literally allows a man to walk into a bar, see a woman and know her name “before he even says hello."

Later this summer, Google will start selling its voice- and video-capturing Glass eyewear. Google Glass may be fantastic as a hands-liberating computing platform, but it also enables its users to film, analyze or spy upon others from afar. But it's up to us to say where the red lines should be drawn when it comes to protecting privacy and personal rights, and balacing those aganist overly intrusive individuals, corporations, institutions and governments.


Tuesday, February 4, 2014

Prelude to a Crash

Margin Debt Hits All-Time High in December

The Fed’s easy money policies have pushed margin debt on the New York Stock Exchange (NYSE) to record levels laying the groundwork for a severe correction or another violent market crash.

In December, margin debt rose by $21 billion to an all-time high of $445 billion.

Buying equities on margin, that is, with loads of borrowed cash, is a sign of excessive risk taking the likes of which invariably takes place whenever the Central Bank creates subsidies for speculation by keeping interest rates pegged below the rate of inflation or by pumping trillions of dollars into the bloated financial system through misguided liquidity programs like QE.

Investors have shrugged off dismal earnings reports, abnormally-high unemployment, flagging demand, droopy incomes, stagnant wages and swollen P/E ratios and loaded up on stocks confident that the Fed’s infusions of liquidity will keep prices going higher. It’s only a matter of time before they see the mistake they’ve made.

The chart below illustrates how zero rates and QE lead to excessive risk taking. The correlation between the stratospheric rise of margin debt and the Fed’s destabilizing monetary policy is hard to avoid. This is what bubblemaking looks like in real time.

Chart: Seeking Alpha.

In the minutes of the FOMC’s December meeting, FOMC officials acknowledge the froth they’ve created in financial assets which is why they’ve begun to scale back their asset purchases. The Fed hopes that by gradually winding down QE they’ll be able to stage a soft landing rather than a full-blown crash. Here’s an excerpt from the FOMC’s minutes:
“In their discussion of potential risks, several participants commented on the rise in forward price-to-earnings ratios for some smallcap stocks, the increased level of equity repurchases, or the rise in margin credit. One pointed to the increase in issuance of leveraged loans this year and the apparent decline in the average quality of such loans.”

There you have it, the Fed sees the results of its work; the distortions in P/E ratios, the exuberant stock buybacks (“equity repurchases”), the deterioration in the quality of leveraged loans, and the steady rise in margin debt. They see it all, all the bubbles they’ve created with their gargantuan $3 trillion surge of liquidity. Now they have started to reverse the policy by reducing their asset purchase from $85 bil to $65 bil per month, the effects of which can already be seen in the Emerging Markets.

The bubble in Emerging Markets has burst sending foreign currencies plunging and triggering a sharp reversal in capital flows. The hot money that flooded the EMs,–(which lowered the cost of borrowing for businesses and consumers)–is entirely attributable to the Fed’s policy. QE pushes down long-term interest rates forcing investors to search for higher yield in other markets. Thus, the cost of money drops in EMs creating a boom that abruptly ends when the policy changes (as it has).

Capital is fleeing EMs at an unprecedented pace precipitating a dramatic slowdown in economic activity, higher consumer prices and widespread public distress. The Fed is 100% responsible for the turmoil in emerging markets, a fact which even mainstream news outlets blandly admit. Here’s an excerpt from an article in Bloomberg just this week:
“Investors are pulling money from exchange-traded funds that track emerging markets at the fastest rate on record…More than $7 billion flowed from ETFs investing in developing-nation assets in January, the most since the securities were created, data compiled by Bloomberg show…

Emerging economies have benefited from cheap money as three rounds of Fed bond buying pushed capital into their borders in search of higher returns…

The Fed’s asset purchases had helped fuel a credit boom in developing nations from Turkey to Brazil. Accumulated capital inflows to developing-country’s debt markets since 2008 reached $1.1 trillion, or $470 billion more than their long-term trend, according to a study by the International Monetary Fund in October.” (“Record Cash Leaves Emerging Market ETFs on Lira Drop“, Bloomberg)

The Fed doesn’t care if other countries are hurt by its policies. What the Fed worries about is how the taper is going to effect Wall Street. If the slightest reduction in asset purchases causes this much turbulence abroad, then what’s it going to do to US stock and bond markets?

The answer, of course, is that stocks are going to fall…hard. It can’t be avoided. And while the amount of margin debt is not a reliable tool for calling a top; it’s safe to say that the recent spike in investor leverage has moved the arrow well into the red zone. Investors are going to cash out long before the Fed ends QE altogether, which means the selloff could persist for some time to come much like after the bubble popped and stocks drifted lower for a full year. Now check out this clip from Alhambra Investment Partners newsletter titled “The Year of Leverage”:
“For the year, total margin debt usage jumped by an almost incomprehensible $123 billion, while cash balances declined by $19 billion. That $142 billion leveraged bet on stocks far surpasses any twelve month period in history. The only times that were even close to as leveraged were the year leading up to June 2007 (-$89 billion) and the twelve months preceding February and March 2000 (-$77 billion). Both of those marked significant tops in the market.” ( Alhambra Investment Partners newsletter titled The Year of Leverage)

Repeat: “The $142 billion leveraged bet on stocks far surpasses any twelve month period in history.” 

Investors are “all-in” because they think that the Fed has their back. They think that Bernanke (or Yellen) will not allow stocks to fall too far without intervening. (This is called the “Bernanke Put”) So far, that’s been a winning strategy, but that might be changing. The Fed’s determination to taper suggests that it wants to withdraw its stimulus to avoid being blamed for the bursting bubble. (“Plausible deniability”?) That’s what’s driving the current policy. Here’s more on margin debt from Wolf Richter at Testosterone Pit:
“On the New York Stock Exchange, margin credit has been hitting new records for months. All three mega-crashes in my investing lifetime have been accompanied by record-setting peaks in margin debt. In September 1987, a month before the crash, margin credit peaked at 0.88% of GDP. In March 2000, when the crash began, margin credit peaked at 2.7% of GDP. In July 2007, three months before the downdraft started, margin credit peaked at 2.6% of GDP. Now, margin credit has already reached 2.5% of GDP.” (“Plagued By Indigestion, Fed Issues Asset-Bubble Warning”, Testosterone Pit)

Stock market crashes are always connected to massive leverage, loosey-goosey monetary policy and irrational exuberance (“excessive risk taking”), the toxic combo that presently rules the markets. The Federal Reserve is invariably the source of all bubblemaking and financial instability.

As we noted earlier, equity repurchases or stock buybacks are another sign of froth. Here’s an excellent summary on the topic by Alhambra Investment Partners:
“In the third quarter of 2013, share repurchases totaled $128.2 billion, the highest level since Q4 2007. For the twelve months ended in September 2013, aggregate share repurchases were an astounding $445.3 billion; the only twelve-month period greater than that total was the calendar year of 2007 and its $589 billion.

The common argument advanced in favor of such share repurchases is that companies are using cash to recognize undervalued stocks, but that is total hogwash…

…corporate managers are no different than the reviled stereotypical retail investor. Both leverage themselves further and further as the market goes higher, not in recognizing undervalued stocks or companies but in full froth of chasing obscene values via rationalizations.” ( Alhambra Investment Partners newsletter titled “The Year of Leverage”)

In other words, corporate managers are doing the same thing as your average margin investor. They are loading up on financial assets–not because they think they are a good value or because they expect higher earnings –but because Fed policy supports artificially-high prices. That’s what’s driving the bull market, the Fed’s thumb on the scale. Remove the thumb, and you have a whole new ballgame (as we see in the EMs). There’s also a bubble in high yield “junk” bonds which just had their second biggest year on record (Total issuance $324 billion) Investors are only too happy to dump their money into high-risk debt believing that companies never default or that the Fed will save the day again credit tightens and the dominoes start tumbling through the debt markets. According to Testosterone Pit:

“The cost of a high-yield bond on an absolute coupon basis is as low as it’s ever been,” explained Baratta, king of Blackstone’s $53 billion in private equity assets. Even the riskiest companies are selling the riskiest bonds at low yields… Why would anyone buy this crap?” (“Bubble Trouble: Record Junk Bond Issuance, A Barrage Of IPOs, “Out Of Whack” Valuations, And Grim Earnings Growth”, Testosterone Pit)

Why, indeed? Of course, the author is just being rhetorical, after all, he knows why people are piling into junk. It’s because the Fed has kept a gun to their heads for 5 years, forcing them to grab higher yield wherever they can find it. That’s how Bernanke’s dogwhistle monetary policy works. By slashing rates to zero, the Fed coerces investors to speculate on any type of garbage that’s available. That why junk “just had its second biggest year on record.” You can thank Bernanke.

Housing is also in a bubble due to the Fed’s zero rates, withheld inventory, government modification programs, and an unprecedented uptick in all-cash investors. Clearly, there’s never been a market more manipulated than housing. It’s a joke.

The surge of Wall Street liquidity has spilled over into housing distorting prices and reducing the number of firsttime homebuyers to an all-time low. The homeownership rate is actually falling even while prices climb higher, which is just one of many anomalies created by the Fed’s policy. (Who’s ever heard of a housing boom, where the number of firsttime homebuyers is dropping?)

Also, the Central Bank has purchased more than $1 trillion in mortgage-backed securities (MBS) via QE, which begs the question: How can housing prices NOT be in a bubble?

As we noted earlier, the Fed understands the impact its policies have had. They know the markets are overheated and they’re determined to do something about it. A recent article in Bloomberg explains the Fed’s plan for winding down QE “without doing damage to the economy”. Here’s a short excerpt from the piece:
“Janet Yellen probably will confront a test during her tenure as Federal Reserve chairman that both of her predecessors flunked: defusing asset bubbles without doing damage to the economy…

Yellen is ‘going to be trying to do something that no one has ever done,’ said Stephen Cecchetti, former economic adviser for the Bank for International Settlements, the Basel, Switzerland-based central bank for monetary authorities. She needs ‘to ensure that accommodative monetary policy doesn’t create significant financial stability risks,’ he said in an interview…

The Fed’s ‘first, second and third lines of defense” for dealing with such imbalances is to rely on supervision, regulation and so-called macro-prudential policies, such as mortgage loan-to-value restrictions, Bernanke told the Brookings Institution in Washington on Jan. 16. ….Only as a last resort would it consider raising interest rates.’ (“Yellen Faces Test Bernanke Failed: Ease Bubbles“, Bloomberg)

You got that?

So the Fed is going into the “bubble-deflating” biz.


And uber-dove Yellen is going to put things right. She’s going to eliminate the price distortions and gradually return the markets to normalcy.

Right, again.

She’s going to wind down QE and start to reduce the Fed’s $4 trillion balance sheet.

Oakie dokie.

And she’s going to do all of this without raising interest rates or sending stocks into freefall?

Right. It’s a pipedream. The first sign of trouble and old Yellen will be scuttling across the floor of the New York Stock Exchange with a punch bowl the size of Yankee Stadium.

You can bet on it.