Tag Archives: Central banks

The Cult Of Central Banking Is Dead In The Water, by David Stockman

Posted on April 30, 2016 | Leave a comment

The world will be a much better place when David Stockman’s headline comes true. From Stockman at davidstockmanscontracorner.com:

The Fed has been sitting on the funds rate like some monetary mother hen since December 2008. Once it punts again at the June meeting owing to Brexit worries it will have effectively pegged money market rates at the zero bound for 90 straight months.

There has never been a time in financial history when anything close to this happened, including the 1930s. Nor was interest-free money for eight years running ever even imagined in the entire history of monetary thought.

So where’s the fire? What monumental emergency justifies this resort to radical monetary intrusion and repression?

Alas, there is none. And that’s as in nichts, nada, nope, nothing!

There is a structural growth problem, of course. But it has absolutely nothing to do with monetary policy; and it can’t be fixed with cheap money and more debt, anyway.

By contrast, there is no inflation deficiency—–even by the Fed’s preferred measure. Indeed, the very idea of a central bank pumping furiously to generate more inflation comes straight from the archives of crank economics.

The following two graphs dramatize the cargo cult essence of today’s Keynesian central banking regime. Since the year 2000 when monetary repression began in earnest, the balance sheet of the Fed has risen by 800%, while the amount of labor hours used in the US economy has increased by 2%.

At a ratio of 400:1 you can’t even try to argue the counterfactual. That is, there is no amount of money printing that could have ameliorated the “no growth” economy symbolized by flat-lining labor hours.

Owing to the recency bias that dominates mainstream news and commentary, the massive expansion of the Fed’s balance sheet depicted above goes unnoted and unremarked, as if it were always part of the financial landscape. In fact, however, it is something radically new under the sun; it’s the footprint of a monetary fraud breathtaking in its magnitude.

In essence, during the last 15 years the Fed has gifted the US economy with a $4 trillion free lunch. Uncle Sam bought $4 trillion worth of weapons, highways, government salaries and contractual services but did not pay for them by extracting an equal amount of financing from taxes or tapping the private savings pool, and thereby “crowding out” other investments.

Instead, Uncle Sam “bridge financed” these expenditures on real goods and services by issuing US treasury bonds on a interim basis to clear his checking account. But these expenses were then permanently funded by fiat credits conjured from thin air by the Fed when it did the “takeout” financing. Central bank purchase of government bonds in this manner is otherwise and cosmetically known as “quantitative easing” (QE), but it’s fraud all the same.

In essence, Uncle Sam has gotten $4 trillion of “something for nothing” during the last 16 years, while the Washington politicians and policy apparatchiks were happy to pretend that the “independent” Fed was doing god’s work of catalyzing, coaxing and stimulating more jobs and growth out of the US economy.

No it wasn’t!

To continue reading: The Cult Of Central Banking Is Dead In The Water

Leave a comment

Posted in Economics, Economy

Tagged , ,

An Exponential Decay Function, by Robert Gore

Posted on April 4, 2016 | 4 comments

For a long time, economic policy in affluent, developed countries has attempted to end-run reality. While there have been isolated remnants of intellectual integrity that stood in opposition, much of what passes for the field of economics has provided cover. Delusions being more comforting than reality—and often more profitable in the short term—financial markets have fully endorsed them. Evading reality doesn’t make it go away, and evasion makes the eventual consequences that much more severe. Governments and central banks have postponed and ameliorated the consequences, but the mounting long-term costs are staggering. Now, the end run is no longer possible.

A phrase used to sell the Federal Reserve Act in the early 1900s—“an elastic currency”—denotes its foundation in fantasy. When money is left to private actors, choices, and markets, it is neither elastic or inelastic. Just like other goods and services, it’s acquisition and use is governed by the dynamic forces of supply, demand, and the price mechanism. Money has obvious functions and usefulness, so there is a demand for it. It will be, if government has no role, something tangible that requires resources to produce, probably a precious metal, or something directly convertible to that intrinsically valuable medium (see “Real Money”). Its supply will be governed by the same factors that determine the supply of other tangible items. Its price is its exchange value relative to other goods and services. In a system where government has no monetary role, debt is not money, although it may sometimes fulfill monetary functions, and is tethered to production. Its quantity can not long outrun the means to repay it.

The welfare state—theft from those with productive ability to the government and those it deems “in need”—is a self-evident attempt to abridge reality. Ability and its fruits are limited, needs are not. Governments now meet “needs” for income, pensions, shelter, medical care, child care, weaponry, military bases, corporate subsidies, bailouts, mass transit, crop price supports, education, and anything else those running the governments judge necessary, or more correctly, politically expedient. In most if not all welfare states, the “needy” now outnumber the able. Not surprisingly, economic performance has deteriorated for decades. Economies are sputtering around the zero growth line, depending on the abstruse calculations underlying seasonal adjustments and price indexes, on their way to destinations well below zero.

Debt delays reality and its attendant pain. Both public and private sectors have been going deeper into debt. The growing debt service burden bears a significant share of the responsibility for deteriorating economic performance. Debt is the last refuge of the delusional, but now each additional dollar, yen, yuan, and euro of debt exacts a cost greater than any putative benefit. Debt expansion has slowed and may have stopped altogether. If it hasn’t it soon will, on its way to contraction, because the benefits of reducing debt are now greater than the benefits of additional debt.

The debt overhang—not just stated, on-the-books debt, but governments’ unfunded pension and medical promises—is the salient feature of the global economy; everything else pales in significance. Governments and central banks are engaging in absurd stratagems: monetizing government fiat debt with central bank fiat debt, negative interest rates, and perhaps helicopter money drops, to force already over-indebted individuals and businesses to spend more and take on additional debt. These stratagems are distractions, totems on which financial markets can affix whatever optimism they can still muster.

Financial markets are exercises in crowd psychology. Extremes in either optimism or pessimism give way to reactions the other way. Governments and central banks fighting debt deflation with more debt and low interest rates have delayed the deflation but are, by increasing debt, making it worse. Deflation is everywhere. Despite a weak rebound in some prices propelled by overly exuberant shorts covering ill-timed bets, the collapse in commodities continues, with markets glutted and demand shrinking as economies shrink. Commodities are no longer a leading edge anomaly; gluts and weak prices characterize much of the rest of the global economy: intermediate and finished goods, transportation, retail, and services. Most of the remaining pockets of inflation and supposed economic activity reflect the inefficient hand of government: housing, medical insurance and care, and education.

The reality of debt contraction and deflation has not changed since commodities heralded their arrival in 2014, and will not change until a huge chunk of the world’s $225 trillion in debt is paid down, repudiated, or written off. Even those who focus only on financial markets and pronouncements and statistics from Wall Street and Washington must notice that something is amiss. While central bank machinations have a lot to do with negative interest rates, they couldn’t get away with it in anything but a deflationary environment. With occasional interruptions credit spreads have been widening and bank and other financial companies’ share prices have been declining for months. Legitimate, GAAP-compliant S&P 500 earnings peaked in the third quarter of 2014 and are down 18.5 percent since then. Incidentally, the gap between GAAP-earnings and companies’ dressed up, “adjusted” earnings reached an all time high this latest quarter. The Atlanta branch of the Federal Reserve is predicting just 6 tenths of 1 percent annualized growth in the first quarter, a seasonal adjustment or inflation index tinker away from outright contraction.

The resolutely bullish must ignore the real economy and the growing list of financial and statistical indicators, leaving only central bank faith, hope, and pixie dust, which has been in full florescence since early February. Debt contraction and deflation are exponential decay functions. They start slowly, gather steam, reach a point of inflection, and drop dramatically, approaching or reaching zero. Recall in the last crisis that the housing market topped out about a year-and-a-half before the headline stock market indices did in October of 2007, and most of the financial damage came in a few-month span a full year after that.

The train has left the station. Asset values have been reduced, mountains of IOUs await rescheduling and write-offs, debt-based wealth shrinks, economic activity deteriorates, and reverberations multiply throughout the extensive interlinkages of the global economy. Fools will pay attention to the stratagems and pixie dust. The rest of us don’t have that luxury. The inflection point looms: the unavoidable can no longer be avoided.

This is Crisis Progress Report 17. For the first 16 CPRs, see the Debtonomics Archive.

EXPONENTIAL PROGRESS:

ROBERT GORE’S NOVEL OF THE INDUSTRIAL REVOLUTION

TGP_photo 2 FB

AMAZON

KINDLE

NOOK

 

4 Comments

Posted in Business, Collapse, Debt, Debtonomics, Economics, Economy, Government

Tagged ,

Exposed – How Two Janet Yellen Phone Calls Saved The World, by Tyler Durden

Posted on April 2, 2016 | Leave a comment

From Tyler Durden at zerohedge.com:

Thanks to the just released February diary of Fed chief Yellen, we now know exactly when she called Bank of England Governor (and former Goldman Sachs employee) Marc Carney and ECB President (and former Goldman Sachs employee) Mario Draghi.

Can you guess when?

The answer:

This marked the exact bottom in the market. As someone suddenly decide to panic-buy stocks right as Carney’s 40 minute conversation was over – and all amid spiking CDS, collapsing bank stock prices, a Deutsche Bank which even the “serious” media outlets said was near bankruptcy, surging Yuan vol, and “real” crashing earnings expectations:

And that is how, with just two phone calls, Janet Yellen saved the world.

Unrigged, efficient markets for all:

Did we just get the closest glimpse of Keyser Soze the global Plunge Protection Team communication by phone call? Only the NSA knows…

http://www.zerohedge.com/news/2016-04-01/inside-janet-yellens-diary-stunning-discovery-two-phone-calls-saved-world

Leave a comment

Posted in Cronyism, Financial markets

Tagged ,

It Takes a Village to Raise a Debt Slave, by Robert Gore

Posted on March 9, 2016 | 6 comments

Historically, you’ve been able to tell everything you need to know about a government by the quality of its money.

Deacon Bainbridge, The Golden Pinnacle, by Robert Gore

Debt represents moral issues that transcend its economic role. The heart of debt is a promise: to pay the agreed upon interest and repay the principle at an agreed upon date in the future. The name of one class of debt—bonds— carries an unmistakable moral connotation: one’s word is one’s bond. Creditors must assess character—the willingness to repay—before they evaluate borrowers’ incomes, assets, and future prospects—the ability to repay. That formulation looks quaintly anachronistic, which tells you all you need to know about contemporary morality. As debt has become the centerpiece of global economics, so too has it become emblematic of global ethics, or more properly, their absence.

In 1913, a perceptive few recognized the political and economic dimensions of the new income tax and central banking legislation; fewer still recognized the philosophical and moral implications. Under a real money standard (money defined as: a medium of exchange, a store of value, and a unit of account, with intrinsic value, and not a liability of an individual or entity, e.g., a gold standard), the creation of debt hinges on the supply of real money and its value relative to goods and services. So limited, most debt will be incurred for productive uses that have a prospective return greater than the cost of debt service.

When governments and central banks are not so limited, they can create fiat debt at will. In 1971, President Nixon completed the transition begun in 1913 away from the convertibility of dollars for gold. Since then, the dollar has been a fiat debt unit. The government and the Federal Reserve can produce an unlimited amount of fiat debt units, not just Federal Reserve Notes, but member banks’ reserve balances at the Fed, and Treasury bills, notes, and bonds.

Deacon Bainbridge, a fictional character, was right on the money, so to speak. The quality of a government’s money is an infallible moral bellwether. A moral government would not be involved in the monetary system at all. Production of fiat debt amounts to fraud and counterfeiting. Its only “backing,” implicit at that, is the government’s ability to steal from its productive citizens. General acceptance of such intrinsically valueless debt requires legal compulsion. Fiat debt depreciation and devaluation steals from creditors for the benefit of debtors, which invariably includes the government doing the depreciating and devaluing.

When debt becomes a government-administered shell game relying on fraud, theft, and compulsion, the ethics of debt break down throughout the society. Neither the coercive welfare state nor the imperial warfare state would be possible without fiat debt. If the government had to extract its funding from a real money economy, with a finite and limited supply of currency, every dollar taken from that economy for income redistribution or bombs would be a dollar that could not be spent for private investment, production, or consumption. The real cost of government spending, and the real burden it placed on the economy, would be direct and clear. Long before governments reached the roughly 40 percent of the GDP they currently spend (combined federal, state, and local governments) their parasitic load on the economy would kill the host. The unethical means of funding the welfare and warfare states indict their ends; intellectual and moral bankruptcy precede fiscal bankruptcy.

Any entity that continuously spends more than it takes in will inevitably go bankrupt. Governments do so with monotonous frequency; insolvency has probably eliminated more of them than wars and revolutions. Such a fate looms for a host of governments that have made promises to their citizens they cannot keep. The mounting spending and debt loads these promises entail have exerted an ever-increasing drag on the economically productive and have shrunken opportunities. Less-than-bright future prospects has led to shrinking birth rates, which negatively feed back into economic drag.

The above characterization obviously applies to most of Europe, Japan, and China, where debt has funded not welfare benefits in the Western sense, but massive and often unnecessary infrastructure spending, factories, and other commercial projects that keep the population employed and docile. The US has its welfare state, but it also tries to militarily maintain its version of “order” in the world, a confederated empire. A mini welfare state resides within the warfare state. An appreciable portion of the trillions the US has spent on the military-industrial-intelligence complex has been dictated by domestic political considerations, unnecessary to achieve policy objectives, even if one holds that Pax Americana is a legitimate objective. A military limited to an actual defensive mission would shrink the warfare state and its embedded welfare state dramatically.

Debt has become a lifestyle in most of the developed world, the foundation of the modern economy, devoid of moral considerations. Impressively credentialed economic “experts” hold that expanding debt is the essential propellant of economic growth. Obtaining one’s first credit card—and consequently a credit score—is now an important rite of passage, with the ultimate ascension into full creditworthy consumer-hood marked by one’s first mortgage.

Republicans, long holding themselves out as a bastion of morality, look set to nominate a man for president whose corporations filed for bankruptcy four times, and who claims that stiffing creditors is a legitimate business tactic. Democrats look set to nominate a woman who wrote a book that supposedly demonstrates her solicitude for future generations, but whose proposed spending will only add to the government’s mountain of debt and unfunded promises it cannot pay. It takes a village to raise a debt slave.

An aviary of canaries in the credit coal coal mine face a mass die off, models all of responsiveness to something-for-nothing political “demand” and exemplars of contemporary economic theory. Which one expires first? Europe’s Mediterranean spendthrifts? America’s walking dead municipalities, with their underfunded pensions and medical plans? Japan, where debt is over four times the GDP and adult diapers now outsell baby diapers? China, as its staggering debt refuses to heed the commands of the commanders of its command economy? Oil exporting nations, revenues slashed by 70 percent? South America, in a reprise of its historical role as the deadbeat continent? It doesn’t really matter, because with today’s inextricably intertwined financial system, where virtually every financial asset is someone else’s debt or equity, when the first ones go the rest follow in short order.

Ethics are in harmony with reality. Living within our means is a requirement of survival, not a quaint homily. Perpetually living beyond our means is as impossible as perpetual motion, meaning our multiply mortgaged future is indeed bleak. Impending default has been preceded by a wholesale default of morality and reason. When the financial collapse arrives, the protestations of “good intentions” will be as phony and useless as the scrip currencies and debt littering the globe.

QUALITY MONEY, QUALITY READING

TGP_photo 2 FB

AMAZON

KINDLE

NOOK

 

6 Comments

Posted in Currencies, Debt, Government, Morality

Tagged

If Zero Interest Rates Fixed What’s Broken, We’d Be in Paradise, by Charles Hugh Smith

Posted on February 17, 2016 | Leave a comment

From Charles Hugh Smith at oftwominds.com:

Rather than fix what’s broken with the real economy, ZIRP/NIRP has added problems that only collapse can solve.

The fundamental premise of global central bank policy is simple: whatever’s broken in the economy can be fixed with zero interest rates (ZIRP). And the linear extension of this premise is equally simple: if ZIRP hasn’t fixed what’s broken, then negative interest rates (NIRP) will.

Unfortunately, this simplistic policy has run aground on the shoals of reality: if zero or negative interest rates actually fixed what’s broken in the economy, we’d all be living in Paradise after seven years of zero interest rates.

The truth that cannot be spoken is that zero interest rates (ZIRP) and negative interest rates (NIRP) cannot fix what’s broken–rather, they have added monumental quantities of risk that have dragged the global financial system down to crush depth:

Crush depth, officially called collapse depth, is the submerged depth at which a submarine’s hull will collapse due to pressure. This is normally calculated; however, it is not always accurate.

Indeed, the risk that has been generated by ZIRP and NIRP cannot be calculated with any accuracy. The sources of risk arising from NIRP are well-known:

1. Zero interest rates force investors and money managers to chase yield, i.e. seek a positive return on their capital. In a world dominated by central bank ZIRP/NIRP, this requires taking on higher risk, as higher yields are a direct consequence of higher risk.

The problem is that the risk and the higher yield are asymmetric: to earn a 4% return, investors could be taking on risks an order of magnitude higher than the yield.

To continue reading: If Zero Interest Rates Fixed What’s Broken, We’d Be in Paradise

Leave a comment

Posted in Business, Debt, Economy, Financial markets, Money

Tagged , ,

Europe’s ‘doom-loop’ returns as credit markets seize up, by Ambrose Evans-Pritchard

Posted on February 10, 2016 | Leave a comment

For much of last year, Ambrose Evans-Pritchard warned of inflation and economies overheating. Now he’s writing of doom-loops and a credit crisis. Oh well, one shouldn’t expect consistency, or much in the way of insight, out of journalists or politicians. From Evans-Pritchard at telegraph.co.uk:

‘We all know that QE2 is not really going to work but the market says “I’m a smoker, I know it kills me, but so long as I can get cigarettes, I’m happy”‘

Credit stress in the European banking system has suddenly turned virulent and begun spreading to Italian, Spanish and Portuguese government debt, reviving fears of the sovereign “doom-loop” that ravaged the region four years ago.

“People are scared. This is very close to a potentially self-fulfilling credit crisis,” said Antonio Guglielmi, head of European banking research at Italy’s Mediobanca.

“We have a major dislocation in the credit markets. Liquidity is totally drained and it is very difficult to exit trades. You can’t find a buyer,” he said.

The perverse result is that investors are “shorting” the equity of bank stocks in order to hedge their positions, making matters worse.

Marc Ostwald, a credit expert at ADM, said the ominous new development is that bank stress has suddenly begun to drive up yields in the former crisis states of southern Europe.

“The doom-loop is rearing its ugly head again,” he said, referring to the vicious cycle in 2011 and 2012 when eurozone banks and states engulfed in each other in a destructive vortex.

It comes just as sovereign wealth funds from the commodity bloc and emerging markets are forced to liquidate foreign assets on a grand scale, either to defend their currencies or to cover spending crises at home.

Mr Ostwald said the Bank of Japan’s failure to gain any traction by cutting interest rates below zero last month was the trigger for the latest crisis, undermining faith in the magic of global central banks. “That was unquestionably the straw that broke the camel’s back. It has created havoc,” he said.

To continue reading: Europe’s ‘doom-loop’ returns as credit markets seize up

Leave a comment

Posted in Debt, Economy, Financial markets

Tagged , ,

With EMs And SWFs Pushing Markets Lower, Here Are The Three Dramatic Conclusions, by Tyler Durden

Posted on January 25, 2016 | Leave a comment

The second of two important articles from Tyler Durden at zerohedge.com, citing Citi’s analyst Matt King:

Earlier today we showed an amazing schematic courtesy of Citi’s Matt King: if one includes the reserve liquidation by various EMs and SWF, and nets it against liquidity injections by DM central banks (and the PBOC), one gets a perfect quantitative, not just qualitative, walk-thru on how to trade markets: in other words one can measure, using high frequency data in real-time, just where markets should trade based on liquidity flows, and promptly profit from any arbitrage opportunities.

But aside from the potential for substantial profits, there are more profound implications. Matt King lays them out as follows:

If this relationship were to continue to drive markets, it would point to three conclusions.

First, if outflows from EM continue to be “worse than previously thought”, as the IIF put it this week, that may continue to weigh also on developed markets. We recommend the IIF’s monthly ‘portfolio flows tracker’ as the best high-frequency indicator as to how those flows are developing; we also use data from those EM central banks that promptly publish reserves information as a guide to the broader universe.

Second, the relationship suggests individual central banks are considerably less in control of their own destinies than they might have hoped. Our rates strategists have already pointed out that long-term inflation expectations in Europe and the US have more in common with a global – Chinese – factor than with domestic wage and price developments. With the current magnitude of EM outflows seemingly entirely offsetting ongoing ECB and BoJ QE, it seems fair to wonder whether the sorts of increases likely from the BoJ next week and the ECB in March will have as great an effect as investors seem to be hoping.

Third, the fact that just one variable, with nothing in common with credit or equity fundamentals at all, does such a good job of explaining changes in market prices is in itself disturbing. It points to just the sort of herding effects we have argued were in play all along, and suggests that recent complaints of illiquidity, and sudden bouts of volatility, are being driven by more than just regulatory constraints on dealer balance sheets. Such a relationship leaves little room for heterogeneous market views.

To continue reading: With EMs and SWFs Pushing Markets Lower, Here Are The Three Dramatic Conclusions

Leave a comment

Posted in Currencies, Debt, Debtonomics, Economics, Economy, Financial markets, Governments

Tagged

The One Chart Which Explains “Why Markets Are All Falling Down” by Tyler Durden

Posted on January 25, 2016 | Leave a comment

This article and the next one, both by Tyler Durden at zerohedge.com citing analyst Matt King at Citigroup, are  important.   From Durden:

Yesterday we felt like a brief moment of gloating was deserved, when we noted that, based on the WSJ’s reporting, the somber mood among Davos “prominent investors” and billionaires was “irritated, bordering on affronted, with what they say has been central-bank intervention that has gone on too long…. from this anecdotal sampling, at least, that has created growing distortions in nearly all asset prices—from stocks to bonds to real estate.”

In other words, precisely what we have said all along. But there is much more work to do before the victory lap, most importantly in explaining what happens next.

Well, since it is now common knowledge that it is all about central bank and rigged markets, the next logical step is to predict what happens to markets when looking at “asset prices” from a purely central bank liquidity standpoint, aka the Austrian money flow perspective.

Here, we remind readers that in early 2013, just as the BOJ was preparing to unleash an epic QE episode in order to offset the lost liquidity injections which the Fed’s upcoming taper would lead to, we explained that instead of looking at central banks as standalone entities operating within their own liquidity domains, one has to look at global liquidity as a coordinated whole, one in which every central bank is now an integral cog and where inside money liquidity is not only globally fungible, but transferable from point A to point B at the push of a buy or sell button.

And while for the longest time many, including us, were focused on DM central banks, over the past year a new market participant emerged: Emerging Markets, whose $7 trillion in reserve assets had become a source of reverse liquidity, or “quantitative tightening” as dubbed here over the summer, as numerous nations have been forced to liquidate USD-denominated assets to compensate for the loss of trade exports and oil revenue in the aftermath of the death of the Petrodollar which initially was noticed on this site alone and subsequently everywhere else.

Which brings us to the topic of this post, namely “why are markets all falling down?” and the answer by Citigroup’s iconic, and one of Wall Street’s very best, analyst Matt King who adds that “many investors have been struggling to explain the magnitude and violence of the recent sell-off. Why are EM and commodity price weakness proving such negatives for DM as a whole?”

To continue reading: The One Chart Which Explains “Why Markets Are All Falling Down:

Leave a comment

Posted in Currencies, Debt, Debtonomics, Economics, Economy, Financial markets, Governments, Uncategorized

Tagged

Davos, Dalio, and a Depression?! by Bill Tilles and Len Hyman

Posted on January 24, 2016 | Leave a comment

From Bill Tilles and Len Hyman at wolfstreet.com:

When Ray Dalio, founder of the world’s largest hedge fund, Bridgewater Associates, referred to a possible economic depression as he was being interviewed at the World Economic Forum at Davos, it does not mean what most people think it means.

Most of us think about recessions and depressions in a linear way. That is, a depression is a really, really bad recession featuring even higher levels of unemployment and lower overall levels of economic activity.

But for Mr. Dalio, recessions are kind of normal, business-cycle related economic events that regularly occur every 5-10 years or so. The economy begins to overheat, the Fed raises rates in response (the removal of the “punch bowl”), business activity slows perhaps a bit too much in response, and voila! A recession results.

Depressions on the other hand are secular or long term, occurring much less frequently. That’s because according to Mr. Dalio, it takes a long time (perhaps decades) to accumulate the excess levels of corporate and government debt that end up triggering this type of economic event. A depression is a condition where more debt cannot be added to the system and instead it must be reduced, or as we say, deleveraging must occur. A depression always threatens systemic solvency.

There are several hallmarks of a systemic deleveraging or depression if you will:

  1. Various asset classes begin to be sold (like oil and gas wells today for example)
  2. As a result of these widespread asset sales, prices decline
  3. Equity levels decline as a result
  4. This triggers more selling of assets
  5. Since there is less worthwhile collateral available credit levels contract.
  6. Overall economic activity declines. In short, there isn’t enough cash flow being generated to service all the accumulated debt. As a result assets have to be sold, bankruptcies become more common

What makes this such a pernicious process is that it is a self-reinforcing cycle of economic negativity.

To continue reading: Davos, Dalio, and a Depression?!

Leave a comment

Posted in Business, Debt, Debtonomics, Economics, Economy, Government

Tagged ,

The Apple Will Drop, by Robert Gore

Posted on January 20, 2016 | 14 comments

If two-thirds of a group of conspirators avoid prosecution, trial, and imprisonment, but the other third does not, has justice been served? That’s a question raised by the movie The Big Short’s treatment of the 2007-2009 financial crisis. The movie is a dramatization of Michael Lewis’s non-fiction book, The Big Short: Inside the Doomsday Machine.

This is not a review of The Big Short, which was entertaining and amusing, with clever writing and strong performances by Christian Bale, Ryan Gosling, and Steve Carell. The movie did not, however, feature a viable explanation of the causes of the financial crisis. Yes, bankers offered mortgages to people who could not afford them, bundled them into junky mortgage-backed securities and more complicated debt instruments, and with the help of asleep-at-the-switch ratings agencies, regulators, and government-blessed mortgage finance agencies, sold them to speculators and investors whose due diligence extended no further than the triple-A rating.

So The Big Short justifiably prosecutes and would like to put in jail the bankers and ratings agencies, but aside from light slaps on the wrists (a heavily leveraged, pole-dancing real estate speculator and a regulator-regulated revolving door vignette), the two other major conspirators—feckless, often dishonest mortgagees and the government—get off scot-free. However, even if the movie had figuratively hauled them off to the hoosegow, it missed entirely the real cause of the financial crisis: financial and political gravity. Gravity doesn’t make for very good cinema, but it’s an appropriate subject for an SLL piece. (SLL doesn’t have a $100 million production and advertising budget to cover, will never be in contention for an Academy Award, and only needs to appeal to an audience that’s maybe one-day’s tally of Big Short viewers at a typical Megaplex.)

Regulatory capture is the first law of political gravity. Reformers set up a regulator for a perceived social ill, pat themselves on the back, and move on to the next cause, while the regulated sabotage the scheme and turn it to their own ends. The regulated have every incentive to do so—it’s often a matter of economic survival—and everybody else, including the supposed beneficiaries of the regulation, have little incentive to engage in the constant bureaucratic, legislative, and judicial infighting necessary to force the regulators to adhere to the stated purposes of the enabling legislation. So all regulation, without exception, devolves into the cynical charade we’ve come to know and loath: lobbying, influence peddling, legal and illegal bribes, revolving doors, use of the regulatory process to cripple competitors and competition, cartelization, and an identity of interests between the regulator and regulated.

It’s no surprise, then, that the banks and their regulators, particularly the Federal Reserve, are in bed together, and have been for over a century now. There is a free market, highly effective regulator of bank behavior: bank runs. In fractional reserve banking, banks will never have enough immediately available money if a large enough percentage of depositors all want their deposits back at the same time. That possibility keeps bankers honest. They extend loans to borrowers who can pay, maintain a prudent level of cash on hand, are selective about the banks with which they establish correspondent relationships, and do their best to appear as sober, solid, confidence-inspiring members of their communities. Such bankers usually weather the inevitable financial squalls, building reputations for probity, while their intemperate, grasping brethren do not. Over time, customers, the smart ones at least, gravitate towards the former and shun the latter.

Bank regulation has replaced this highly effective free market regulatory mechanism—actually making it the enemy—with a highly ineffective, corrupt, and captured panoply of laws, regulations, and agencies. The Fed’s lender of last resort function, deposit insurance, extensive regulation, and the too-big-to-fail doctrine enshrine the political impetus to banish bank runs and their potentially destabilizing, albeit salutary, effects. The government has become the guarantor of the banking system. A second law of gravity: set up a system whereby heads, the bankers win, tails the government (and taxpayers) lose, and the banks and bankers will win and the government (and taxpayers) will lose, repeatedly, until that system is eliminated.

A third law of gravity: governments establish central banks to benefit governments. Fiat money (actually fiat debt, see “Real Money”) gives the government the first user advantage; it gets to spend it and command resources before its fiat money depreciates. That depreciation benefits debtors at creditors’ expense, and governments are invariably debtors. As debtors, governments benefit from lower, central bank-suppressed interest rates. Finally, governments realize political benefits from central bank debt promotion. An increase in debt can produce a short-term, constituent-pleasing bump in economic activity.

A fourth law of gravity: government and central bank debt divorced from the underlying economy will invariably grow faster than the economy as debt’s marginal impact diminishes, and suppressed interest rates and abundant debt-based liquidity will promote malinvestment and increase consumption and speculation at the expense of savings and investment, leading to unsustainable standards of living, indebtedness, and asset bubbles. The fifth and final law of gravity: that which is unsustainable will not be sustained; the system collapses.

These laws of gravity—not ignorant, foolish, or greedy homeowners and house flippers; not greedy, unscrupulous bankers, ratings agencies, and investors in securitized, subprime garbage; not the government’s and the housing finance agencies’ incompetent and corrupt promotion of home ownership and mortgage finance—are the “cause” of the last financial crisis. Or more correctly, the crisis was the inevitable consequence of gravity’s inexorable operation. A reliable facet of any collapse is that its leading edge will be the financial and economic sector towards which the most credit—relative to that’s sector’s ability to service debt—has been channeled. In 2000 that was the technology sector; in 2007 it was housing and mortgage finance.

SLL noted over a year ago that this crisis’s leading edge was commodities (“Oil Ushers in the Depression”), towards which superabundant credit had been channeled based on a fallacious belief in the perpetual growth of the Chinese economy at double-digit rates. That reality is still not generally grasped, even as credit and economic contraction, falling prices, and gluts have spread around the world, from commodities to transportation, production, distribution, wholesale, and retail. General recognition will leave the current, already battered levels of equity indexes as distant specks in the rear-view mirror.

There could be silver linings. After the ultimate crash, market-based money may replace worthless fiat scrip. Bank risk may be “unsocialized”: banking without government and central bank safety nets. And somebody, perhaps Michael Lewis, may write a book about the religious beliefs in the China growth story and the ability of central bankers to control the global economy; the insanity of negative interest rates; the opacity of balance sheets produced by banks allowed to mark asset values to their own assumptions and models, not to market prices, and the travesty of economic policies that reward leverage, speculation, and a small coterie of crony insiders while penalizing savings, investment, integrity, and honest economic effort. If we’re lucky, that book will serve as the source for a movie as entertaining as The Big Short.

TGP_photo 2 FB

From Daniel Durand, speaking in 1913 from the novel The Golden Pinnacle:

What the government gains from monetary debasement, the wage earner loses. Adjustments to his wage won’t keep up with money inflation. As for promoting economic stability, look at the railroads. Every line upon which the government has laid its ‘benevolent’ hand has come to ruin. You want to make it responsible for the entire economy? The Wall Street moneyed class will a field day with elastic money and financial instability. It’s your average wage-earning American who will be hurt the most.

AMAZON

KINDLE

NOOK

14 Comments

Posted in Business, Capitalism, Collapse, Debt, Economics, Economy, Entertainment, Financial markets, Government, History, Money, Movies

Tagged , ,