Category Archives: banking

Will the Federal Reserve Cause the Next Riots? by Ron Paul

What the Fed is doing now will be the final nail in the coffin for the economy, and it’s hard not to see how the coming Greater Depression won’t spark riots. From Ron Paul at ronpaulinstitute.org:

Federal Reserve Chair Jerome Powell and San Francisco Fed President Mary Daly both recently denied that the Federal Reserve’s policies create economic inequality. Unfortunately for Powell, Daly, and other Fed promoters, a cursory look at the Fed’s operations shows that the central bank is the leading cause of economic inequality.

The Federal Reserve manipulates the money supply by buying and selling government securities. This means that when the Fed decides to pump money into the economy, it does so by putting it in the pockets of wealthy, and oftentimes politically-connected, investors who are able to spend the new money before the Fed’s actions result in widespread inflation. Wealthy individuals also tend to be among the first to invest in the bubbles that form when the Fed distorts interest rates, which are the price of money. These investors may lose some money when the bubble bursts, but these losses are usually outweighed by their gains, so they end up profiting from the Fed-created boom-bubble-bust cycle.

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The World Is Drowning In Debt, by Daniel Lacalle

The numbers are terrifying, and their real-world consequences will be even more so. From Daniel Lacalle at dlacalle.com:

According to the IMF, global fiscal support in response to the crisis will be more than 9 trillion US dollars, approximately 12% of world GDP. This premature, clearly rushed, probably excessive, and often misguided chain of so-called stimulus plans will distort public finances in a way in which we have not seen since World War II. The enormous increase in public spending and the fall in output will lead to a global government debt figure close to 105% of GDP.

If we add government and private debt, we are talking about 200 trillion US dollars of debt, a global increase of over 35% of GDP, well above the 20% seen after the 2008 crisis, and all in a single year.

This brutal increase in indebtedness is not going to prevent economies from falling rapidly. The main problem of this global stimulus chain is that it is entirely oriented to support bloated government spending, and artificially low bond yields. That is the reason why such a massive global monetary and fiscal response is not doing much to prevent the collapse in jobs, investment, and growth. Most businesses, small ones with no debt and no assets, are being wiped out.

Most of this new debt has been created to sustain a level of public spending that was designed for a cyclical boom, not a crisis and to help large companies that were already in trouble in 2018 and 2019, the so-called ‘zombie’ companies.

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The new deal is a bad old deal, by Alasdair Macleod

The Internet’s best economist explains why the New Deal was a huge mistake, and why we’re about to repeat it, except this time only huger. From Alasdair Macleod at goldmoney.com:

So far, the current economic situation, together with the response by major governments, compares with the run-in to the depression of the 1930s. Yet to come in the repetitious credit cycle is the collapse in financial asset values and a banking crisis.

When the scale of the banking crisis is known the scale of monetary inflation involved will become more obvious. But in the politics of it, Trump is being set up as the equivalent of Herbert Hoover, and presumably Joe Biden, if he is well advised, will soon campaign as a latter-day Roosevelt. In Britain, Boris Johnson has already called for a modern “new deal”, and in his “Hundred Days” his Chancellor is delivering it.

In the thirties, prices fell, only offset by the dollar’s devaluation in January 1934. This time, monetary inflation knows no limit. The wealth destruction through monetary inflation will be an added burden to contend with compared with the situation ninety years ago.

Introduction

Boris Johnson recently compared his reconstruction plan with Franklin D Roosevelt’s New Deal. Such is the myth of FDR and his new deal that even libertarian Boris now invokes them. Unless he is just being political, he shows he knows little about the economic situation that led to the depression.

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The Great American Shale Oil & Gas Massacre: Bankruptcies, Defaulted Debts, Worthless Shares, Collapsed Prices of Oil & Gas. by Wolf Richter

The carnage in the oil and gas patch has been gruesome. From Wolf Richter at wolfstreet.com:

The bankruptcy epicenter is in Texas.

The Great American Oil Bust started in mid-2014, when the price of crude-oil benchmark WTI began its long decline from over $100 a barrel to, briefly, minus -$37 a barrel in April 2020. Bankruptcies of US companies in the oil and gas sector started piling up in 2015. In 2016, the total amount of debt listed in these filings hit $82 billion. Bankruptcy filings continued, with smaller dollar amounts of debt involved. In 2019, the shakeout got rougher.

And this year promises to be a banner year, as larger oil-and-gas companies with billions of dollars in debt collapsed, after having wobbled through the prior years of the oil bust.

The 44 bankruptcy filings in the first half of 2020 among US exploration and production companies (E&P), oilfield services companies (OFS), and “midstream” companies (gather, transport, process, and store oil and natural gas) involved $55 billion in debts, according to data compiled by law firm Haynes and Boone. This first-half total beat all prior full-year totals of the Great American Oil Bust except the full-year total of 2016:

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Federal Reserve: Everything is fine. Just like in 2008, by Simon Black

The last group of people’s economic prognostications that you would want to put any stock in are the seers and geniuses at the Federal Reserve. From Simon Black at sovereignman.com:

It’s nothing but rosy news coming from the Federal Reserve.

Recently the Fed released this reassuring statement:

“The banking system remains well-capitalized under even the harshest of these downside scenarios. . .”

In other words, everything is just fine.

Yet at the same time, the Fed also announced that it would impose restrictions on bank dividends and stock buybacks, essentially preventing banks from passing along their profits to shareholders.

If those two statements strike you as completely contradictory, you’re right.

If the Fed isn’t worried in the slightest because the banking system remains strong ‘even under the harshest downside scenarios’, then why restrict what banks can/cannot do with their private profits?

This forked tongue communication style is becoming somewhat of a trend.

Back in March, the head of the FDIC released a video asking Americans to NOT withdraw their money from the banks.

“Your money is safe at the banks,” she said, with soft piano music in the background. “The last thing you should be doing is pulling your money out of the banks thinking it’s going to be safer somewhere else.”

This reminds me of back when Ben Bernanke repeatedly told the public, and Congress, that housing prices would continue rise, and that a subprime mortgage meltdown would not affect the broader economy.

Or in July 2007 when Bernanke said: “Overall, the U.S. economy seems likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008.”

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Mall and Hotel Loans Are Blowing up Commercial Mortgage-Backed Securities, by Wolf Richter

The debt implosion is just getting started, but in the commercial mortgage-backed securities market it’s picking up steam. From Wolf Richter at wolfstreet.com:

CMBS delinquency rates for retail properties spiked to 18% and for hotel properties to 24%.

he delinquency rate for Commercial Mortgage Backed Securities (CMBS) spiked by 317 basis points to 10.3% in June, after having spiked by 481 basis points in May, which had been the largest month-to-month spike in the data going back to 2009, according to Trepp, which tracks securitized mortgages for institutional clients.

Another 4.1% of the underlying loans missed the June payment deadline. Because they’re not yet 30 days past-due – they’re marked in “grace” period or “beyond grace” period – they’re not yet included in the delinquent pile. A loan that is in the “grace” period or in the “beyond grace” period could revert to “current” in July without a payment being made, if the borrower enters into a forbearance agreement with the loan servicer. If the borrower fails to obtain a forbearance agreement, the loan will be added to the pile of 30-plus days delinquent loans:

Trepp suggested that this still might get a little worse, but more slowly, and not much worse. “So perhaps we have reached terminal delinquency velocity,” as the report put it, where “most of the borrowers that felt the need for debt service relief have requested it.”

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Mount Printmore, from The Burning Platform

https://www.theburningplatform.com/2020/07/04/mount-printmore/

David Stockman on the Fed’s Death Blow to Private Savings

Private savings have shrunk to virtually nothing, just when it would have been nice to have a cushion against the exploding federal deficit. From David Stockman at internationalman.com:

Private Savings

International Man: People have been warning of impending fiscal and monetary doom for a long time.

What is different now that will finally usher in the day of reckoning?

David Stockman: It is self-evident that the solution to a state-imposed supply-side shutdown of the economy is not more counterfeit money, erroneous price signals, inducements to rampant speculation and moral hazards, and further zombification of the main street economy.

Once upon a time, even Washington politicians feared large, chronic public debt, and not merely because they were especially intelligent or virtuous. We learned that in real time during 1981, when the deficit hawks among the GOP Senate college of cardinals nearly shut down the Gipper’s supply-side tax cuts out of fear of mushrooming deficits.

To be sure, these dudes didn’t know Maynard Keynes from Emanuel Kant, but they did know that Uncle Sam has exceedingly sharp elbows and that when he becomes too dominant in the contest for funds in the bond pits, private households and business borrowers get bloodied and crowded out.

That is to say, in the days before massive central bank monetization of the debt, there was a natural counter-balancing constituency in the equations of fiscal politics. We heard from them, too, in our congressional days when the car dealers, feed mill operators, tool and die shops, building contractors, restauranteurs and countless more main street businessmen of the Fourth Congressional District of Michigan let it be known loud and clear that Jimmy Carter’s big deficits were doing unwelcome harm to their bottom lines.

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Doug Casey on What Happens Next for China—Collapse or War with the US?

The two alternatives presented in the title are not mutually exclusive. War has ushered in many a collapse. From Doug Casey at internationalman.com:

China Collapse

International Man: While many have been distracted by the unrest in the US, tensions with China are soaring.

Recently, Beijing passed a national security law that would undermine Hong Kong’s autonomy. What comes next for US-China relations?

Doug Casey: I lived in Hong Kong, on and off, from 1985 to 2005. When I first moved there, it was a Chinese city, but there were a lot of Western expats.

When I returned most recently, it had transformed into a Chinese city with very few expats. They’d all gone to Singapore.

What’s happening in Hong Kong is unfortunate, but frankly, it’s none of our business. Unfortunate things are happening in a hundred places around the world. You just can’t solve other people’s problems for them, nor should you try. Nobody likes a busybody.

As I’ve said so many times in the past, the US government has got to stop sticking its nose in other people’s business. The US has been acting as the world’s self-appointed cop since at least WWII, as often as not stepping in on the side of the bad guys—whether it knew it or not— and bankrupting itself while making enemies in the process.

In the case of Hong Kong, my view is that the Beijing regime is totally wrong, but it would be a disastrous error for us to get involved.

The same goes for the South and East China Seas, which were in the news a few years back. The US is sending a bunch of aircraft carriers there to show the flag, which is dangerous and provocative and none of our business. Just as it would be none of China’s business if the US decided to make the Gulf of Mexico its own private backyard sea. Should China try to contest that? Should China step in if Mexico decided the Gulf is really its territorial water?

The fact is that Chinese and US businessmen get along just fine. If the Chinese prove to be unethical or dishonest, a US business should just stop working with the firm that cheats them. Why should the US government be involved?

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Great news from the most prosperous nation on earth, by Simon Black

You can inflate your way to prosperity, just look at Zimbabwe. From Simon Black at sovereignman.com:

By the mid-1990s, the economy of Zimbabwe was in serious trouble.

The national government under its dictator Robert Mugabe had spent years confiscating private property– real estate, businesses, factories, bank deposits, etc.

And unsurprisingly, this had a disastrous effect on the economy.

Productive citizens and talented entrepreneurs left Zimbabwe in droves– after all, who would want to keep operating under such awful conditions?

So within a few years, everything from food production to mining output to manufacturing had plummeted.

The banking sector collapsed. Unemployment soared. Tax revenue dried up.

So Mugabe did what most politicians would do in that position: he started printing money.

This is an old trick that governments have relied on for thousands of years.

The ‘denarius’ coin of ancient Rome, for example, contained 93.5% silver in the early 100s AD under Emperor Trajan. By the time Aurelian became emperor the following century, the coin contained only 5% silver.

And as the denarius became less and less valuable, prices across the empire soared. Merchants had to keep increasing their prices in order to receive the same amount of silver that they used to… so inflation was rampant.

This is precisely what happened in Zimbabwe.

The government conjured absurd quantities of money out of thin air in order to make ends meet… but the new money had no value.

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