Tag Archives: 2008 crisis

Icelandic Bankers Are Not Too Big To Jail: Face 74 Years In Prison As US Bankers Bask In Bailouts, by Tyler Durden

Posted on October 25, 2015 | Leave a comment

It’s hard to believe that not one criminal act was committed by the US banking set during either the housing and mortgage finance boom or the subsequent bust and financial crisis. Yet, no bankers have gone to jail, and as far as SLL knows, none have gone to trial for mortgage or securities fraud, although such fraud was rampant, or any other white-collar crimes. Iceland has done things differently. From Tyler Durden at zerohedge.com:

As TheAntiMedia’s Claire Bernish exclaims, you could ice skate in Hell sooner than see the United States follow in Iceland’s footsteps with this move: the 26th banker was just sentenced to prison for a combined 74 years between them — each of them jailed for their roles in the 2008 economic collapse.

Five top bankers from Iceland’s two largest banks — Landsbankinn and Kaupþing — were found guilty of embezzlement, market manipulation, and breach of fiduciary duties. Though the country’s maximum penalty for financial crimes currently stands at six years, the Supreme Court is currently hearing arguments to extend the limit. Most of those convicted have so far been sentenced to between two and five years.

Do those sentences sound light to you? Perhaps. Until you consider the curious method of punishment the U.S. employed for its thieving bankers.

While Iceland allowed its government to take total financial control when the 2008 crisis took hold, American bankers — in likely the only bail handout given to criminals of mass destruction — received $700 billion in Troubled Asset Relief Program (TARP) funds.

Thank you, Congress American taxpayer.

Iceland certainly didn’t make it through the crisis unscathed. It repaid the IMF (the final $332 million owed was paid in full, ahead of schedule, earlier this month) and other lenders for funds needed to prevent a complete financial meltdown nearly eight years ago. Icelandic bankers are still being held to task for their illegal market legerdemain that nearly brought down the financial planet.

In contrast, not one banker in America has ever (nor will ever?) be held responsible for their criminal acts. Instead, essentially in addition to the $700 billion windfall — Big Banks are now raking in over $160 billion in profit every year.

Iceland’s president, Olafur Ragnar Grimmson, described how his country not only weathered the storm, but has been labeled the first European country to fully recover from the crisis:

“We were wise enough not to follow the traditional prevailing orthodoxies of the Western financial world in the last 30 years. We introduced currency controls, we let the banks fail, we provided support for the poor, and we didn’t introduce austerity measures like you’re seeing in Europe.”

If only the U.S. government were capable of employing logic.

To continue reading: Icelandic Bankers Are Not Too Big To Jail

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Hobson’s Choice, by Doug Nolan

Posted on October 24, 2015 | Leave a comment

From Doug Nolan at davidstockmanscontracorner.com:

More than two months have passed since the August “flash crash.” Fragilities illuminated during that bout of market turmoil still reverberate. Sure, global markets have rallied back strongly. Bullish news, analysis and sentiment have followed suit, as they do. The poor bears have again been bullied into submission, as the punchy bulls have somehow become further emboldened. The optimists are even more deeply convinced of U.S., Chinese and global resilience (the 2008 crisis “100-year flood” thesis). Fears of China, EM and global tumult were way overblown, they now contend. As anticipated, global officials remain in full control. All is rosy again, except for the fact that global central bankers behave as if they’re utterly terrified of something.

The way I see it, underlying system fragility has become so acute that central bankers are convinced that they must now forcefully (“shock and awe,” “beat expectations,” etc.) react to any fledgling market “risk off” dynamic. Risk aversion and de-leveraging must not gather momentum. If fragilities are not thwarted early, they could easily unfold into something difficult to control. Such an outcome would risk a break in market confidence that central banks have everything well under control – faith that is now fully embedded in the pricing and structure for tens of Trillions of securities and hundreds of Trillions of associated derivatives – everywhere. With options at this point limited, the so-called “risk management” approach dictates that central banks err on the side of using their limited armaments forcibly and preemptively.

With today’s extraordinary global backdrop in mind, I’m this week noting a few definitions of “Hobson’s Choice”:

“An apparently free choice that actually offers no alternative.” (The American Heritage Dictionary of Idioms)

“A situation in which it seems that you can choose between different things or actions, but there is really only one thing that you can take or do.” (Cambridge Idioms Dictionary)

“No choice at all, take it or leave it.” (Endangered Phrases by Steven D. Price)

There are subtleties in these definitions, just as there are subtleties in financial Bubbles. Importantly, over time Bubbles embody a degree of risk where they stealthily begin to dictate ongoing monetary accommodation. These days, global market Bubbles have reached the point where their message to global central bankers is direct and unmistakable: “No choice at all, take it or leave it.” “Keep expanding monetary stimulus or it all comes crashing down – and that’s you Yellen, Draghi, Kuroda, PBOC – all of you…”

To continue reading: Hobson’s Choice

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Wall Street’s Latest Bounce——Ostrich Economics At Work, by David Stockman

Posted on October 18, 2015 | Leave a comment

From David Stockman at davidstockmanscontracorner.com:

It is more evident than ever that the world economy is heading into a deflationary conflagration, but today’s generation of house trained bulls wouldn’t recognize a warning if it slapped them upside their horns. They refused once again last week to exit the casino because they got another signal from Hilsenramp that the Fed is on “hold” until at least next March.

That means we are heading for 87 straight months of ZIRP. So you have to wonder if these fearless robo-machines and day-trading punters by now have come to believe that central banks have abolished time itself—-to say nothing of the law of supply and demand.

As to the latter, any rational investor should have headed out of dodge long ago in the face of the mother of all bond bubbles——a monumental worldwide distortion of debt pricing and “cap rates” which will bring down the entire financial system when it inexorably bursts.

After all, how is it possible that sovereign debt prices and yields have not been drastically repressed by $19 trillion of central bank bond-buying during the last two decades?

The central banks have vast powers, of course, but repeal of the law of supply and demand is not among them. Their big fat bid, therefore, has dominated debt pricing on the margin for most of this century. Yet all that financial purchasing power was conjured from thin air by central banks.

Stated differently, these massive central bank debt purchases did not arise from society’s legitimate pool of savings set aside from current income. Instead, they amounted to a gargantuan fraud of the state, meaning that the financial system is infected with a monetary rot in its very foundations.

Accordingly, the idea that historical (pre-1995) interest rate patterns over the course of the business cycle are relevant to today’s outlook is complete Wall Street flim-flam. Absurdly low interest rates, such as last week’s 60 basis points for two-year treasury notes or 210 bps for 10-year money, do not represent a surfeit of private savings; nor do they reflect business and household “hoarding” of cash in the face of a weak economy or near-term uncertainty, as the talking heads insist day after day.

No, they represent a giant surplus of finance—credit made from whole cloth by the central banks and collateral based Wall Street dealers and lenders. Unlike honest capitalist savings, these vast, meandering pools of liquidity slosh around in money markets, but never become permanently deployed in capital assets such as machinery or software.

Instead, they provide funding for financial market gamblers and carry traders. That is, these central bank generated finance pools provide the transient wherewithal of leveraged speculation; they are not permanent capital itself nor are they invested in long-term claims upon it. Accordingly, the price of financial assets is now artificial and wildly inaccurate—– set by speculators front-running central banks, not price discovery among investors and savers.

Mispriced debt is at the heart of the global financial bubble. That is what allowed the US business sector to raise $2 trillion of net debt since the 2008 financial crisis, yet to deploy all of it on a net basis to financial engineering, especially stock buybacks. The proof that it has not gone into real productive assets is unassailable. Real net business investment is still 17% below its turn of the century level.

To continue reading: Wall Street’s Latest Bounce–Ostrich Economics At Work

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Look Back in Anger, by Doug Nolan

Posted on October 17, 2015 | Leave a comment

Doug Nolan eviscerates a commentary in The Wall Street Journal from mainstream economists Alan S. Blinder and Mark Zandi. From Nolan at creditbubblebulletin.blogspot.com:

October 16 – Wall Street Journal (Alan S. Blinder and Mark Zandi): “Don’t Look Back in Anger at Bailouts and Stimulus…”

Logic dictates that the size of any stimulus be proportional to the expected decline in economic activity—which was enormous in the Great Recession. The Recovery Act and other stimulus measures were costly to taxpayers, and thus much-maligned. But the slump would have been much deeper without them. The Federal Reserve has also come under attack for its unprecedented actions, especially its quantitative easing or bond-buying programs. Yet QE lowered long-term interest rates and boosted stock and housing prices—all to the economy’s benefit. Yes, QE has possible negative side-effects, but for the most part they have yet to materialize. Policy makers who botched the regulatory job before the crisis and shifted to fiscal restraint prematurely in 2011 can hardly be considered flawless. Yet one major reason why the U.S. economy has outperformed the plodding European and Japanese economies is the timely, massive and unprecedented responses of U.S. policy makers in 2008-09. So let’s get the history right.

Getting “history right” has been a CBB focal point From Day One. In last week’s media barrage, Dr. Bernanke repeatedly stated that fiscal policy had turned contractionary – (or at best neutral) suggesting that fiscal stringency was a key factor in the Fed sticking with ultra-loose policies. In Friday’s WSJ op-ed, Blinder and Zandi write: “Policy makers who botched the regulatory job before the crisis and shifted to fiscal restraint prematurely in 2011.”

Since the end of 2007, outstanding Treasury Securities (from Fed’s Z.1) have increased $8.302 TN, or 137%. As a percentage of GDP, outstanding Treasuries almost doubled to 83% (from 42%) in seven years. By calendar year, Treasury borrowings increased $1.302 TN (8.8% of GDP) in 2008, $1.506 TN (10.4%) in 2009, $1.645 TN (11.0%) in 2010, $1.138 TN (7.3%) in 2011, $1.181 TN (7.3%) in 2012, $858 billion (5.1%) in 2013 and $736 billion (4.2%) last year.

In nominal dollars, Federal expenditures increased from 2007’s $2.933 TN, to 2008’s $3.214 TN, 2009’s $3.487 TN, 2010’s $3.772 TN, 2011’s $3.818 TN, 2012’s $3.789 TN, 2013’s $3.782 TN and 2014’s $3.897 TN. Federal expenditures spiked during the crisis and remain about a third above 2007 levels.

“US Post Smallest Annual Budget Deficit since 2007” was a Thursday WSJ headline. “The deficit declined 9% from the prior year to $439 billion—around 2.5% of gross domestic product and below the average the U.S. has run over the past 40 years.”

I remember all too clearly the jubilation that surrounded federal budget surpluses in the late-nineties. Supposedly, a disciplined Washington had made tough choices and finally put its house in order. There was even talk of Treasury completely paying off its debts. It was, however, all a seductive Bubble Illusion. In particular, receipts were inflated by Credit excess-induced capital gains taxes (on inflating stock and asset prices) and booming incomes (especially tech and finance related!). Actually, it all seemed obvious even at the time. It didn’t make sense to me that the Fed and analysts were so prone to misinterpreting underlying dynamics.

Blinder and Zandi: “Yes, QE has possible negative side-effects, but for the most part they have yet to materialize.”

There are myriad deleterious side-effects, and anyone paying attention would agree that many have begun to materialize. One prominent consequences of Federal Reserve rate manipulation has been the loss of the markets’ ability to discipline policymaking. How does it ever make sense to allow politicians access to years of virtually free “money”? Ominously, despite Treasury paying basis points to service a large chunk of our outstanding debts, the federal government is still running significant deficits. While outstanding Treasury debt has increased almost 140% in seven years, 2014 interest payments were up only 8% from 2007 (to $440bn). Government social payments, on the other hand, were up 48% from 2007 levels to $1.897 TN.

To continue reading: Look Back in Anger

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Orwell or Jenga? by Robert Gore

Posted on October 13, 2015 | 6 comments

This website advocates straight line logic, but not straight line thinking. Normalcy bias is the term used by psychologists to describe the tendency to think that what has occurred in the recent past will continue in the future. The dominant social trend of the last 100 years has been the growth of the state. As such, straight line projections to the future are common: world government wielding technology to eliminate civil liberties; mass subservience indistinguishable from slavery; execution of the nonconforming, and so on. 1984 captures a widely shared and feared vision.

The Jenga model offers a different vision. Jenga is a game in which 54 wooden blocks are stacked in a tower and players remove individual blocks until the tower collapses. A Jenga collapse is the opposite of the 1984 outcome. A choice between collapse or totalitarian super state may sound bleak, but the former would be the first real grounds for optimism in many years. Anyone who finds optimism in the latter is beyond hope or redemption.

SLL recently published an article, “The Death Of Cognitive Dollar Dissonance & The Remonitization Of Gold,” by John Butler at The Amphora Report. Butler points out that the present fiat currency and debt regime leads to chronic imbalances in global trade. At some point, exporting countries lose faith in the importing countries currencies and their debt denominated in those currencies. They are, after all, merely unbacked pieces of paper or computer entries. However, the exporters cannot insist on payment in their own currencies and debt, because the importers lack sufficient exporter currency and debt to pay for their imports. Such insistence would throw trade into reverse, imposing costs on both parties. Butler asks the question: “[H]ow can future international monetary arrangements nevertheless facilitate international commerce with exporters and importers at loggerheads over which currencies to use?”

He has an answer: gold. It is not a liability of any government, thus it can’t be subjected to the self-serving machinations made possible by fiat debt. (“Real Money,” SLL, 9/9/15)). Once an exporter, even a small country, demands payment in gold—clearly superior to depreciating fiat debt and currencies—others will follow; nobody will want to be last to acquire gold reserves. The scenario is plausible; the salient point for this article is the possibility that one country could upend the world monetary system by insisting on payment in gold. There have been innumerable discussions, analyses, and proposals for global financial arrangements, expansion of existing or creation of new multinational bodies, and regional or one-world currencies, essentially straight-line projections of historical trend. How “inevitable” are these developments when what we’ve got can be turned upside down just by one country asking for payment in gold? Such an emperor-is-naked moment sounds like Jenga, not all-powerful government.

Indeed, you find blocks precariously perched wherever you look. The monster in the closet of fractional reserve banking is uncontainable bank runs. It was that fear that fueled massive panic, ad hoc emergency measures, expansion of debt, and socialization of risk in the last financial crisis. Only a deluded optimist would think that such measures will rescue the system next time: government debt-to-GDP ratios are higher, the banking industry is more concentrated, hidden leverage and re-hypothecation chains permeate the shadow banking complex, and central-bank promoted interest rates are already close to zero. If Big Brother is depending on the debt-ridden, house-of-cards global financial system (see the SLL Debtonomics Archive tab), he’s apt to be discombobulated.

Surely things are not so precarious with the military and warfare, which is what governments supposedly do best. An objective examination of US intervention in the Middle East and northern Africa since 2001 blows that supposition to smithereens. The claim is that US interventions were maintaining some sort of order and balance of power. Russia and Iran are rescuing a dictator on the ropes, whose second-rate army was losing to a rag-tag band of jihadists numbering at most 100,000, the bulk of their weaponry pilfered from US backed forces, and apparently have destroyed that US imposed order and balance of power. If order and power are so ephemeral, after the trillions of dollars spent, lives lost, and devastation wrought, that they can be vanquished with such minimal effort by Russia and Iran, that’s Jenga tower instability, not Orwell’s iron hand. (We’ll see how the Russian and Iranian “iron hands” work out.)

The world is tied together by computers, and as a recent Wall Street Journal article highlights, they have countless vulnerabilities (WSJ, “Cyberwar Ignites New Arms Race,” 10/12/15). Naturally governments are taking the lead; hacking; probing defense, intelligence, financial, and industrial networks; stealing sensitive information; disabling critical applications with malware and viruses, and trying to defend themselves from such efforts by other governments. The Journal article is undoubtedly only the tip of the iceberg and nobody, given the secrecy inherent in all this, knows all that goes on beneath the surface. But it is not a stretch to suggest that hackers, public or private, with enough time and resources can eventually penetrate any firewall and disrupt any function they target. Jenga!

Discard normalcy bias and adopt an abnormalcy assumption: the future will be quite different from the past. Creaky towers are swaying on shaky philosophical and conceptual foundations and it will take surprisingly little to stress and topple them. Rebuilding from rubble requires far different tools and mindsets than battling Big Brother. The cause for optimism: how many times do we get a chance to learn from our mistakes and build something new?

Coming soon: Beyond Jenga

FREEDOM WORKED.

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Commodity contagion sparks second credit crisis as investors panic, John Ficenec

Posted on October 12, 2015 | Leave a comment

From John Ficenec at telegraph.co.uk:

The collapse in commodity prices has sparked a second credit crisis as investors dump high-yield bonds, shattering the fragile confidence necessary to support global markets. Those calling it a Lehman moment forget their history. Current events have chilling similarities to the Bear Stearns collapse and mark the start of a new crisis, not the end.

Canary in the mine

The world of commodity trading has been thrown into chaos as the cost of borrowing to fund operations soars. Glencore has become the poster child for the sector’s woes as its shares have more than halved in value during the past six months. More worrying has been the impact on the group’s credit profile.


Glencore’s US bonds due for repayment in 2022 have collapsed to around 82 cents in the dollar. Only four months earlier, they had been stable at around 100 cents, implying that those who lent money would get it back plus interest. Now for every dollar lent to Glencore, banks face losses, and as the price of bonds falls the yield has risen to 7.4pc.

Without the oxygen of cheap debt, commodity trading houses are finished. Each trade in oil or iron ore might generate only 1pc to 2pc in margin – but this greatly increases when magnified by debt. The only limit on profits is then how much you can borrow. Greed drives returns.

Glencore is a profitable business when it can borrow at around 4pc, but if it has to refinance at 7pc to 10pc those slim profit margins evaporate.

The fear of those holding Glencore debt can be seen in the soaring price for the insurance against a default, or credit default swaps (CDS). Glencore five-year CDS has soared to 625, from about 280 just a month ago.

A rule of thumb is that a CDS above 400 means a serious risk of a default, or about a 25pc chance in the next five years.

To continue reading: Commodity contagion sparks second credit crisis

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Crisis Progress Report (12): Zero Will be King, by Robert Gore

Posted on October 1, 2015 | 2 comments

THERE IS A NEW TAB AT THE TOP OF THE PAGE: DEBTONOMICS ARCHIVE. IN RESPONSE TO POPULAR DEMAND, READERS WILL HAVE A LINKED LIST OF ALL OF ROBERT GORE’S ARTICLES ON ECONOMICS SINCE SLL MOVED TO THE WORDPRESS PLATFORM LAST YEAR. AS YOU MAY SUSPECT, IT IS NOT BEING POSTED BECAUSE HE HAS BEEN WRONG.

“Markets make opinions” is a psychological truism. Current financial turbulence is putting investors and speculators on notice of economic perturbations that can neither be ignored nor remedied with the standard debt-based pixie dust. Even the permabulls are hedging their public comments and predictions, especially after both dovish and hawkish utterances from ringmaster Yellen sent markets reeling. The punditry and media deal in stories, which the unfolding debt deflation and depression are throwing off abundantly: China, Brazil, crashing commodities, big moves up and down (mostly down) in stock markets, credit spreads blowing out, bankruptcies, possible bankruptcies (Glencore) and Wise Men and Women from finance and governments opining on developments.

What the punditry, with some exceptions (see Blogroll), and the media don’t do is offer much in the way of analysis that either explains causes or predicts effects. They are a mirror into prevailing crowd psychology and emotion, but their so-called causes are generally superficial and don’t stand up to empirical verification. Their predictions are usually straight-line projections of more of whatever happens to be the current same.

That is not because the root causes of the present turmoil are too complicated and complex to ascertain. Quite the contrary, the explanation is simple. As SLL has stated since last year (see “Debtonomics: Robert Gore’s Economic Archive,” SLL) an unwind and contraction of a massive and unprecedented multi-decade debt expansion is underway. It takes no acuity to reach that conclusion, indeed it requires more effort to avoid reaching it.

Complex mental gymnastics are performed and transparently fallacious public statements are made, either to explain why what is obvious to many is not really happening, or to divert attention to irrelevant considerations. People tie themselves up in mental knots to evade reality for psychological reasons. It is not hard to understand why most avoid the debt contraction conclusion. Debt contractions, especially those that run their full course, are economically, financially, socially, and politically painful.

Debt contraction has not been allowed to run its full course since the Great Depression. Governments and central banks shot their wads rescuing the global financial system from the last one, consequently, this one will run its full course. Markets, at least in the short term, are exercises in crowd psychology. Two virtues are required for successful longer term investing: independence and patience. Although the crowd is starting to question, albeit not discard, what has passed for wisdom the last few years, the abandonment of complacency and capitulation to fear won’t happen until markets are much closer to an ultimate bottom. Indeed, such a herd reversal will be one of the telltale harbingers of that bottom. Independent and early recognition of what is transpiring—a full-fledged debt contraction—entails recognition that it will be a lengthy process.

One of the best analysts of stock market dynamics is John Hussman, of the Hussman funds. SLL has posted some of his weekly letters, most recently, “Valuations Not Only Mean-Revert; They Mean Invert,” 9/29/15. The upshot of his analysis is that markets not only revert to a mean, or average, level of valuation after a period of extreme overvaluation (e.g. the current stock market, even after it’s recent fall), but that they overshoot to a state of undervaluation, what he calls mean inversion. Markets being markets, their paths are not straight lines, but rather jagged, negatively-sloped progression within which there are substantial bear market advances, subsequently reversed. Historically, the entire progression from extreme overvaluation to extreme undervaluation can take almost two decades.

The recent demise of former market darlings health care and cable—industries encased in the government cocoons of Obamacare and net neutrality respectively—confirms that even the “best” companies, which in the crony capitalistic economy means most succored by the government, will succumb to the burgeoning debt contraction. However, both the dynamics of such contractions and Hussman’s analysis suggest that we are a long way from anything approaching a true “buying opportunity” for long-term investors. Prices have fallen and an estimated $13 trillion of global wealth has vanished. However, as Hussman notes, prices have not fallen nearly enough in percentage terms to create undervalued bargains, and there are more bankruptcies to come in commodities and across the rest of the economy. Any price above zero is too much to pay for companies whose equity is wiped out.

At this point, assuming your selling is done and you sit mostly in cash, with perhaps a little on the side for speculative shorts, the best investment advice is to be patient. It will probably take appreciably more opinion-making market downside before prominent permabulls switch to the bearish camp, the mainstream media proclaims a long running bear market, and the news is filled with dire headlines. The gloom will get so thick and one-sided that when nobody expects it, a rally will ignite. It won’t be a one-day or one-week wonder, either, it will span a month or two and will recoup a substantial percentage of the losses. The last crisis is instructive. The S&P index topped in October of 2007 and dropped for five months until a rally began, in March of 2008, that retraced half the drop. Such rallies are almost universally disbelieved when they start and almost universally embraced as the beginning of a new bull market when they end. Bullish belief had been restored in May of 2008 when that rally ended. The rest of the year was tears.

Catching the falling dagger has skewered more speculators than Vlad impaled Turks. If you are positioned correctly, stay away from nonstop news and market updates. Obsessing on the short term and watching screens tick by tick will distort or destroy your essential long-term thinking and planning. Use the time and psychological energy saved to write that great novel that everyone has inside them, or get to know your wife and kids. Assume a rally like the one in 2008 is in the offing. If the 2008 rally’s timing is any guide, this one will start between now and New Year’s, but there are no assurances; it may begin next year. While you will want to take profits on your speculative shorts, use the rally as an opportunity to reset those shorts at higher levels and avoid the temptation to try to scalp a few trades from the long side.

We are still at the beginning of this debt contraction and the first big move down is incomplete. Not until the next big move down, after the coming head fake rally, will recognition become almost universal that we are in a severe bear market. If you patiently preserve your fire power by ignoring the day-to-day squiggles and jiggles, your virtue will be rewarded. The invested herd will discover that there is something worse than the zero returns they so decry when they mock cash: negative returns. Deflationary depressions reprice virtually every asset class, real and financial, bestowing jaw-dropping bargains on those few who can plunk down cash on the barrelhead when the time is right. In the land of negative returns, zero will be king.

WHEN WAS THE LAST TIME YOU STAYED

UP ALL NIGHT READING A NOVEL?

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Who Cares? by Robert Gore

Posted on September 16, 2015 | 3 comments

For the record, SLL has no clue whether the Fed will or will not raise its federal funds target rate by twenty five basis points (one quarter of one percent) this week. Goldman Sachs is far more plugged into the Fed than SLL. They have said for some time that the Fed won’t raise the rate and SLL will go with that. Our lack of insight about the imminent move is exceeded only by our disinterest.

Supposedly a hike will unleash Armageddon, while standing pat will stoke a monster equity rally. We’ll see, but keep in mind financial markets’ long history of responses contrary to consensus predictions. The intense preoccupation on the decision is unhealthy, like old people whose sole topic of conversation is their ailments and medications. It betrays all sorts of misconceptions, chief of which is that the economy and financial markets are puppets dancing on strings controlled by the Fed puppeteer.

It is true that the during the eighty months the Fed has held the federal funds rate at zero and instituted three quantitative easings, the stock market has rallied and the economy has staged a feeble recovery. That does not amount to Quod Erat Demonstrandum (QED), the Latin phrase denoting that the proposition—Fed omnipotence—has been demonstrated. Fed easing failed to prevent market crashes and economic contraction after stock market tops in 1929, 2001, and 2007. Similarly, there have been numerous instances when the economy and stock market have done quite well in the face of constrictive Fed policies. The Fed’s interest rate moves usually follow, rather than lead, moves in the Treasury debt market. Whether that is because markets are anticipating the Fed or are actually leading it is a discussion best left for another day.

Once upon a time, the US economy managed to function without a central bank. It had its ups and downs, but the Industrial Revolution remains the high point for the American economy in terms of economic growth and rising per capita incomes. It is an apex of technological, scientific, and industrial discovery, innovation and progress. However, studied indifference to that period, along with an embrace of the shibboleth that government and central bank control of the economy are necessary and proper, are cornerstones of statist conceit. This Fed-centric view feeds into media and Wall Street inertia and intellectual rigor mortis. It is far easier to endlessly discuss the actions of a small group of monetary mandarins, to use David Stockman’s phrase, than it is to figure out what’s really going on in the $17 trillion US economy or the $77 trillion global economy.

Right now, the most salient trend, the reality that shapes all other realities, is debt, which globally stands at about $200 trillion. Central banks have something to do with that debt, of course, ballooning their balance sheets, monetizing sovereign debt and other assets, and suppressing interest rates. However, after an underwhelming recover they force fed, it is clear that all this debt has led only to malinvestment, overproduction and overconsumption, and funded a speculative mania that has systematically mis-priced financial assets and divorced markets from underlying economic reality. Now, with economies sputtering, commodity prices crashing, global trade shrinking, widespread gluts of raw materials and manufactured goods, and anemic growth in consumption, it is clear that the marginal value of an addition dollar, yen, euro, yuan, or real of debt has gone negative, even with zero or negative official interest rates in much of the world. The stage is set for a global debt contraction.

Since 1994, the balance sheets of the world’s central banks have grown from $2 trillion to $22 trillion, 13 percent per year. Impressive indeed, but put that up against the world’s $200 trillion in debt. A 10 percent “correction” in global debt would in effect wipe out the entire two-decade central ban increase. One can argue about multiplier effects magnifying the impact of central bank credit, but with the marginal value of debt going negative, those multiplier effects have gone missing. In the US, the Fed’s balance sheet expansion has only improved the economic prospects of Wall Street speculators, and have not reverberated and multiplied in the real economy.

The debt contraction, heralded by the carnage in commodities, will be much more severe than a 10 percent correction. Debt is interlinked—one entity’s debt is another’s asset—and once it begins to unravel significantly, (housing and mortgage finance in 2008, commodities and emerging markets laden with almost $10 trillion in dollar-denominated debt in 2015) it creates a chain reaction of further unraveling. In 2008 it was stopped only by huge infusions of government and central bank debt and transferring private debt to public balance sheets. The 2008 measures forestalled, but will not prevent, an ultimate reckoning. Total world debt has grown, central banks’ balance sheets are engorged, interest rates are about as low as they can go, and governments are running into financing and political constraints on deficit financing. Against his backdrop, whether or not one central bank raises one interest rate all of 25 basis points will be treated—after whatever market spasms the decision elicits—as the irrelevancy that it is.

One final note. Some commentators have argued that the Fed will raise its rate this week to maintain its credibility. That’s laughable. The Fed was set up as a way to disguise the transition from real money, gold, to fiat debt. For over 100 years it has obfuscated that purpose, disguised its intentions, surreptitiously intervened in markets, and piously maintained its supposed “independence,” zealously fighting all perceived challenges, although it is the financial, political, and regulatory handmaiden for the banking industry. It has no credibility left to maintain, just a set of pretenses that many in the financial industry expediently profess to believe. Whatever decision Janet Yellen and her merry muppets reach, the Federal Reserve will have the same amount of credibility after the decision that it had before it: none.

HISTORICAL FICTION THAT’S BETTER THAN HISTORY AND BETTER THAN FICTION

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The Next Financial Crisis Won’t be Like the Last One, by Charles Hugh Smith

Posted on September 15, 2015 | Leave a comment

From Charles Hugh Smith at oftwominds.com:

It seems increasingly likely the next Global Financial Meltdown will arise in the FX/currency markets.

Central banks are like generals: they tend to fight the last war. The Great Financial meltdown of 2008 was centered in too big to fail, too big to jail transnational banks and other financial entities with enormous exposure to collateral risk (such as subprime mortgages), highly leveraged bets and counterparty risk (the guys who were supposed to pay off your portfolio insurance vanish in a puff of digital smoke, leaving you to absorb the loss).

In response, the central banks and treasuries of the major economies “did whatever it took” to save the private banking sector from insolvency and collapse. In effect, central banks launched a multi-pronged bailout of banks and other financial heavyweights (such as AIG) and hastily constructed a clumsy and costly Maginot Line to protect the now-indispensable private banks from a similar meltdown.

The problem with preparing to fight the last war is that crises arise not from what is visible to all but from what is largely invisible to the mainstream.

The other factor is what’s within the power of central banks to fix and what’s beyond their power to fix. Correspondent Mark G. and I refer to this as the set of problems that can be solved by printing a trillion dollars. It’s widely assumed that virtually any problem can be fixed by printing a trillion dollars (or multiple trillions) and throwing it at the problem.

Yes, the looming student-loan debacle can be fixed by printing a trillion dollars and paying down a majority of the existing student debt.

But lots of other problems are not fixed by printing a trillion dollars. Printing $1 trillion can pay for a lot of make-work jobs, but that’s not the same as boosting employment in a sustainable, organic fashion.

The ocean’s fisheries will not magically come back from being stripmined if a central bank prints $1 trillion. If the $1 trillion is spent wisely, perhaps in a decade or two fisheries can recover. But neither employment or ecosystems can be “saved” by printing money and throwing it at the usual vested interests.

So what else is beyond the easy fix of a quick $1 trillion printing/bailout? How about the foreign exchange (FX) market? Many a government and central bank has attempted to fix the foreign exchange market, but they fail for the simple reason that the FX market is too large to control for long.

To continue reading: The Next Financial Crisis Won’t be Like the Last One

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The Guillotine Blade, by Robert Gore

Posted on September 12, 2015 | 7 comments

There are a number of reasons to suspect that the impending financial and economic crash will be more severe than the 2007-2009 crisis. The recovery since that crisis has been anemic. Real income has not regained its pre-crisis peak. While measures of unemployment have improved, the quality and renumeration of the jobs filled leave a lot to be desired. Governments and central banks have taken on massive amounts of debt, and interest rates are close to generational lows; in some cases they’re negative. Total world debt is significantly higher. Finally, the faith that financial markets have demonstrated in governments and central banks since the bottom in 2009 is dwindling and will soon be gone.

Pundits are forever bemoaning the citizenry’s cynicism and lack of trust in its government and politicians. They’ve become a Greek chorus with the failure of establishment-anointed candidates to gain any traction to date and the ascendancy of Trump, Carson, and Sanders. The wonder is not that people don’t believe, but that there is anybody left who still believes. Government consistently promises more and delivers less than eat-all-you-want-and never-exercise weight-loss plans and miracle wrinkle creams. If it were a business the class action shysters would haul it into court for blatantly false advertising. Lacking that remedy, voters are turning to the outsiders.

For the last six years, US financial markets have conspicuously suspended disbelief. If you keep getting new credit cards and maxing them out without paying them down, you’ll go bankrupt. Incredibly, Wall Street and Washington “economists,” blessed by a majority of academics, assure us that what inevitably leads to ruin for an individual leads to prosperity when followed by governments and central banks. One branch holds that government debt is the key to economic growth; the other branch holds that a central bank exchanging its own conjured-from-thin-air debt for that government debt is the answer. Either branch removes economics from the pretension that the field is a science. Almost as inapt is the reluctant concession by a few that it’s more an art. No, this economics is destined for the Weird and Tragically Deluded Cults bin with the Moonies and the Kool Aid guzzlers.

Many on Wall Street and in Washington know that what they’re peddling is a fraud, but both finance and politics are giant sales jobs, and fiscal sanity has very limited consumer appeal. However, you can only deny reality for so long, and the reality is that magic beans have not sprouted a beanstalk to the sky, only a faux recovery and a growing mountain of debt that does indeed reach the sky. The global economy has to climb that mountain before it can attain even a semblance of growth. The unfolding contraction indicates that it has finally succumbed to altitude sickness.

The computer algorithms that increasingly trade financial markets don’t notice, but the idea that governments and central banks can “manage” anything at all has been taking hits left and right. Crashing commodity markets have made a mockery of efforts to ignite inflation. The normally predictable Swiss revalued their franc and caught the markets by surprise. The Greeks voted down austerity and another farcical European rescue and their government then accepted more stringent austerity and another farcical rescue. The Chinese have frantically attempted and failed to re-inflate their deflating stock markets and economy. After 14 years of the US and its assorted coalitions of the willing, not so willing, and out and out bribed or dragooned mucking around in the Middle East and northern Africa, a stream of refugees leaving various hell holes threatens to overwhelm Europe and their spendthrift welfare states. None dare call it blowback, and every US presidential candidate is proposing more of the same military and foreign policy that produced it.

SLL has predicted that the path of equity markets during the gathering crisis would be similar to that of the last one: roller coaster plunges interrupted by occasional madcap rallies precipitated by announcements of various government and central bank schemes (all of which would eventually prove either ineffectual or counterproductive). SLL may be wrong. Belief ran much deeper back then; now it’s hanging by a gossamer filament. When it breaks, the market graph may well look like the drop of a guillotine blade rather than the more typical sawtooth downward progression. In other words, this crash may happen very quickly. Two words to the wise—which includes all those who read SLL—will be sufficient. Be prepared.

IF YOU WANT TO ENSURE FAILURE, IGNORE SUCCESS. ROBERT GORE’S STUNNING AND PANORAMIC NOVEL IS SET DURING THE MOST SUCCESSFUL—AND MOST IGNORED—PERIOD IN AMERICAN HISTORY.

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