Jeremy Grantham Exposes The Corporatocracy: America’s “Run By Those Guys For Their Own Interests”

america the corporatocracy

Have profit margins risen to a permanently higher plateau? Are average Americans better off than they were a generation ago? I had the opportunity to discuss those questions, which are centrally important to investing and economic policy, with Jeremy Grantham a couple of weeks ago.

The discussion took place as part of a larger interview about climate-change investing. Grantham is the co-founder and chief investment strategist of Boston-based Grantham Mayo Van Otterloo (GMO).

It’s been widely reported that over the last 20 years the number of publicly traded companies has decreased by about 50%. The common explanations center on the fact that the number of de-listings, mergers, acquisitions and bankruptcies have outstripped the initial public offerings (IPOs).

But I wanted to know if there was a deeper explanation related to the fact that corporate profit margins are at historical highs. Over the last dozen years, with the exception of the financial crisis, profit margins have been between 9% and 11% of GDP. Prior to that, the last time they were above 9% was in 1951.

The U.S. economy has become more concentrated in the service and technology sectors, which are inherently more profitable than the manufacturing businesses that dominated 50 years ago. Those business, like Amazon, Apple and Google have built incredibly strong, near-monopolistic franchises that should translate to higher margins.

If the market has become dominated with highly profitable, monopolistic franchises, then maybe that is why there are fewer companies and profit markets are no longer “the most mean-reverting series in finance,” as Grantham once claimed.

GMO has looked at this issue extensively. As Grantham noted, “profit margins and return on sales will vary much depending on whether you are in the supermarket business or whether you are in some software company. There is no average to which it moves.”

But that doesn’t necessarily mean that returns for equities will be greater going forward. As Grantham explained, higher margins will attract more capital and reduce the returns relative to other asset classes. “If your capital is returning more in this area than the other area then capital will flow and balance it out,” he said.

Higher margins have been offered as an explanation, by Grantham and others, for why the cyclically adjusted price-earnings (CAPE) ratio is higher than its historical average. But CAPE ratios depend on other factors, such as real interest rates, so margins only tell part of the story.

Grantham said that the monopoly factor has increased margins “a bit.” “Corporate power as exercised through Congress, particularly in the U.S., has clearly increased the total domination of regulatory boards by the industries. Regulations have gone from being concerning to laughable, and totally run by those guys for their own interests,” he said.

Grantham is far more concerned about the societal impacts of unchecked capitalism than he is with its effect on margins. “We are seeing a flowering of corporatism where government is designed to maximize the opportunities of giant influential companies and industries that spend a lot of money lobbying,” he said. “We continue down that primrose path today with yet another cycle of deregulating designed to help corporations.”

Grantham spoke about the “punishing consequences” that tax cuts and deregulation will have on the general public. He said that “maximizing the returns and the share of the pie going to corporations and the superrich is deplorable and has terrible effects on the economy in the long run. The average person in the street doesn’t have the buying power increments that they used to have.”

American prosperity

But is the average American really losing buying power? On this point, Grantham and I disagreed. Whether you go back 10, 20 or 40 years, I contend the standard of living for Americans has increased enormously.

Grantham, however, said that in terms of general well-being and happiness, Americans are worse off.`

“If you do your best to control for everything and measure happiness, this is not a particularly happy country,” Grantham said. “It is not entirely dependent on income by any means, and we have not improved.”

He acknowledged a couple areas where Americans are better off – entertainment, such as high-tech computer games, and medicine, where he said progress in drugs and technology are keeping people alive longer. To those I would add food, in light of the advances in the quality and variety of choices in cuisine, and transportation, considering the speed and safety at which we can travel by car, plane and other means.

But Grantham said that the average worker has not been paid more since 1974 for an hour’s work. “Does he feel more content, or does he feel extremely frustrated by his relative lack of progress compared to others?” he asked, rhetorically. “There is no doubt that he is more frustrated. The suicide rate in that group has gone way up. The drug addiction has gone way up.”

Indeed, he said there are all the indications of a “thoroughly miserable middle America.”

Read More: https://www.advisorperspectives.com/articles/2018/01/08/jeremy-grantham-on-profit-margins-and-american-prosperity

Bitcoin is the AOL of cryptos

Blockchain is the Future, but is Bitcoin the future of cryptocurrencies?

Bitcoin is not dead

The Blockchain Model T Ford

“If I had asked people what they wanted, they would have said faster horses.”

Henry Ford

Crypto-currency is gaining acceptance as a medium of exchange. The list of merchants who now accept bitcoin  includes Subway, Microsoft, Newegg.com, Whole Foods and Bloomberg. The Wall Street Journal noted (12/1/18) that PricewaterhouseCoopers in Hong Kong for the first time accepted payment for services in bitcoin (BTC $15,088 1/8/18). Ripple (XRP $2.41 1/8/18)  has signed up more than 100 banks to test its network. NEO (formerly Antcoin $101.95 1/8/18)  has the full backing of China’s government. The regulatory leader of the United States Federal Reserve  has called for more research into “limited purpose” digital money to help settle interbank transactions.

110 years ago, Ford began manufacturing the Model T, “a car for the great multitude.” Until then, horses were the accepted mode of personal transportation. But when Ford made a dependable, affordable vehicle powered by an internal combustion engine, even cowboys started driving them. Twenty-five years ago, America Online launched AOL Mail, and electronic messaging became available to anyone with a telephone line, computer and modem. “You’ve Got Mail,” announced the arrival of a geographically distant communication, delivered nearly instantaneously (if both sender and receiver were online) without the use of paper or mailman. Ten years ago someone, or some group named Satoshi Nakamoto, wrote the open-source software that most everyone knows as bitcoin (BTC). Talented computer operators became able exchange worth, as if in a barter transaction, without having been introduced or even knowing the names or locations of the parties involved.

Although Model T’s still exist, few are used for transportation, but the quarter-billion automobiles on the road today were produced using Henry Ford’s assembly line process. Everyday communication by email is more customary than by post, but users of AOL Mail are about as common as drivers of Model T’s. Karl Benz developed a gasoline-powered automobile in 1885, but it was Ford’s manufacturing process that put America on wheels. Email via  ARPANET was used by the United States Department of Defense beginning in 1969, but invitations to “Try American Online FREE” in the 1990’s got America to put down its paper and pen and latch onto a mouse.

Ralph Merkle  patented the “hash tree” in 1979, and in 1992, Dave Bayer, Stuart Haber and W. Scott Stornetta incorporated  Merkle trees, which allowed several documents to be collected into one “block.” But it was not until 2008 that Satoshi Nakamoto described the bitcoin as “A purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution.” On May 22nd, 2010 Laszlo Hanyecz  paid 10,000 bitcoin for two Papa John’s pizzas and the age of digital currency had begun.

According to Don and Alex Tapscot, in Blockchain Revolution: “The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” Bitcoin is a blockchain performing the most primitive of mathematical functions in a highly complex way. Bitcoin counts. What once is counted, cannot be uncounted. Bitcoin has counted more than 500,000 blocks without a break in the chain. The longer the chain, the harder to trace back to the start of its encrypted maze. Its length and strength are trusted more with each additional block. This simplest of arithmetic, repeated every ten minutes for nine years, has been trusted with over $250 billion. The more bitcoin secures, the more it is trusted.

But using blockchain as a currency is as artless as using an iPhone as a paperweight. Blocks in the chain can store any coded information. Bitcoin stores currency transactions, a common function that has been prevalent since the first  shekel was traded for food over two and a half millennia ago. Bitcoin is but a practical but rudimentary demonstration of what blockchain technology is capable. One of bitcoin’s problems which later-created coins attempted to address is the size of its blocks. Its one-megabyte capacity seemed immense when, in its infancy, each block was around eighty kilobytes. Now, because of its popularity, transactions are delayed waiting for the next block to be created as the previous was filled to capacity. The Bitcoin Cash (BCH $2408 1/8/18) “hard fork” in August of last year attempted to address that difficulty with an eight-megabyte capacity that is touted as expandable to thirty-two.

Another problem, which Ethereum (ETH $1362 1/10/18)  addressed with its launch 2014, is bitcoin’s inflexible programming. ETH enabled “smart contracts” with its  Turing complete programming language. Smart contracts allow agreements as well as transactions between anonymous parties without relying on a central authority. Ethereum’s ability to “scale” its programmed blocks to fit the needs of the parties in a transaction recently  became its “Achilles heel.” A recent project called “CryptoKitties” caused a slowdown on the ETH network and dramatically increased the volume of unprocessed transactions. Stakeholders” on the ETH network have not been able to agree on a fix for this problem, just as they could not agree after $50 million was lost in 2016. That led to a hard fork and the creation of ETH while Ethereum Classic (ETC $34.17 1/8/18) continued on the original blockchain.

Possibly the most serious issue crypto-currency miners will eventually face is the  law of diminishing returns because bitcoin and Ethereum both use a  proof of work (PoW) system in order to certify that only one new block is mined every ten minutes. Mining involves decrypting a long string of numbers, like solving a complex problem by attempting as many solutions as possible. Miners receive a transaction fee paid in the currency they have mined. Only those miners with the most computing power have a decent chance of winning the ongoing competitions among miners for the digital reward.

Computers that are able to compete in such a contest cost a great deal, but that is a fixed cost. Miners’ greatest expense is their ongoing need for electricity to accomplish such computational feats. In the United States, the lowest  cost of producing one bitcoin is $3224 in Louisiana. A miner in Hawaii would pay $9483 for that same amount of power. As the cost of producing bitcoin increases with increased competition among miners, so may the potential reward for each new coin decrease. Miners with less computing power may call it quits and leave the mining to those who can better afford the activity. That could eventually lead to a  tragedy of the commons where few miners control the majority of the industry, the supply of bitcoin, and the price.

Singapore-base  QTUM (QTUM $53.27 1/10/18) pursues solutions to the limited capacity of bitcoin, the Ethereum programming uncertainty, and the exorbitant cost of power of both with a hybrid of their key elements. QTUM is a fork off BTC that includes an ETH-like “virtual machine,” but uses an “x86” architecture optimized for mobile platforms. It resembles BTC but also includes an “Abstract Accounting Layer” to provide smart contract functionality. QTUM includes “protective clauses” that function like templates for business contracts and reduce the possibility of infestation by unwanted pests like CryptoKitties. Because Qtum uses an alternative known as proof of stake (PoS) as its method to validate transactions, computing power and cost of electricity are reduced as factors for mining success. A PoS miner may mine only the percentage of each transaction equal to the percentage of the crypto-currency the miner owns. A holder of 1% of all outstanding Qtum is limited to mining 1% of transactions in each new block. Instead of a race to solve a cryptographic puzzle that is usually won by the rider of the fastest digital horse, Qtum’s proof of stake method apportions the winnings among paid participants.

Blockchain is the future of all recordkeeping. Pity the poor middlemen who will be replaced by robots, just as will long-haul truck drivers be supplanted by autonomous 18-wheelers in the twenty-nine US states where theirs is the number one occupation. Title-insurance companies are making preparations to use blockchain for real estate transactions, records of which can now only be viewed by visiting a town clerk’s office. France has said it will allow use of blockchain technology in the issuance of stocks and bonds. Hyperledger, a Linux Foundation project,  seeks to allow multiple interconnected distributed ledger database projects under one umbrella of interoperability. In Estonia, the “digital republic”, a government data platform  called X-Road “links individual servers through end-to-end encrypted pathways.” In the event of another Russian invasion, Estonia’s elected leaders might scatter across the globe but continue running their country from their laptops.

Read More: https://www.zerohedge.com/news/2018-01-10/blockchain-model-t-ford

Median Family Net Worth Under 1989 Level: Debt-to-Money Worst Since 62

A greater share of Americans have more debt than money in the bank than at any point since 1962, according to Deutsche Bank economist Torsten Slok. And, in a note to clients yesterday, Slok said that, despite record stock market wealth and home price levels just shy of housing-bubble highs, Americans are poorer than at any point in nearly a quarter century.

Why it matters: The data suggest that the third-longest economic expansion in history, and the lowest jobless rate in 17 years, has benefited an exceedingly thin slice of the American public.

https://www.zerohedge.com/sites/default/files/inline-images/20180108_debt1.png

https://www.zerohedge.com/sites/default/files/inline-images/20180108_debt2.png

Sobering Stats

  1. A greater share of Americans have more debt than money in the bank than at any point since 1962, according to Deutsche Bank economist Torsten Slok.
  2. 30.4% of US families have negative net worth despite the recovery in housing and the stock market.
  3. Median net worth is below where it was in 1989.

But perhaps the most shocking stat of all is that, on an inflation adjusted basis, net worth may be the worst in history.

$78,000 is not worth what it was in 1989, to say the least.

Read More: https://www.axios.com/americans-owe-more-save-less-and-are-poorer-than-in-decades-1515262277-9a755b0c-edd1-4abe-a9e9-1f7d1b632978.html

How Our Status Quo Maintains the Illusion of Normalcy: Avoiding a Full Accounting of the Costs

The economy’s going great–but at what cost? “Normalcy” has been restored, but at what cost? Profits are soaring, but at what cost? Our pain is being reduced–but at what cost?
The status quo delights in celebrating gains, but the costs required to generate those gains are ignored for one simple reason: the costs exceed the gains by a wide margin. As long as the costs can be hidden, diluted, minimized and rationalized, then phantom gains can be presented as real.
Exhibit One: the US public debt. If you borrow and blow enough money, it’s not too difficult to generate a bit of “growth”–but at what cost?
Exhibit Two: opioid deaths. One of the few metrics that’s climbing as fast as the national debt is the death rate from prescription and synthetic opioids:
Exhibit Three: student loan debt. Here’s a chart of debt that is federally originated but paid by individual students: the infamous student loan debt that has shot up over $1 trillion in a few years.
You see the point: the cost are skyrocketing but the gains are diminishing. The costs of maintaining the illusion of “normalcy”–for example, that going to college is “still affordable”– are soaring, while the gains of a college education are declining as credentials and diplomas are is oversupply. (What’s scarce are the real-world skillsets employers actually need.)
Americans are in pain, and the cartel-sickcare “solution”–“non-addictive opioids”–is reaping a horrendous toll on all who trusted the sickcare system to deliver non-addictive painkillers. Should the newly addicted sufferer no longer be able to get the synthetic opioid prescribed, the option of choice is street smack (heroin), and this is why heroin deaths are soaring along with deaths caused by synthetic opioids.
Pain has been relieved–but at what cost?
The elites within the Big Pharma and higher education cartels are reaping enormous salaries, bonuses and benefits while these cartels wreak havoc on America’s vulnerable underclass (i.e. the bottom 90%). Monumental sums of cash are flowing from the many to the few while the many become addicted to opioids or enslaved to student loan debt.
The financial media is euphoric over the billions of dollars of profits reaped by smart phone manufacturers–every kid needs one, right? But at what cost, not just the financial cost, but the cost in addictive behaviors spawned by smart phones?
iPhones and Children Are a Toxic Pair, Say Two Big Apple Investors (WSJ.com) The iPhone has made Apple Inc. and Wall Street hundreds of billions of dollars. Now some big shareholders are asking at what cost.

This is how our entire status quo maintains the illusion of normalcy: by avoiding a full accounting of the costs of a system set to maximizing profits by any means available, a system of public-private pillage overseen by the protected few at the expense of the vulnerable many.

It’s as if we’ve forgotten that debt accrues interest, i.e. claims on future income. Debt is easy to ignore in the initial euphoria of spending the “free money,” but once the depreciated value of what was purchased and the interest starts weighing on the borrower, the borrowed money is revealed as anything but “free.”

Unhinged, Part 1: The GOP’s Fiscal Madness

Fragmented States of America

The watchword for 2018 is: UNHINGED!

That refers to Wall Street, Washington, the Dems and the GOP, and all the far and near corners of the planet which are implicated in their collective follies.

The latter begins with the fact that Imperial Washington has become so dysfunctional that the most powerful government on earth can’t seem to keep its doors open for more than a few weeks at a time.

The next continuing resolution (CR) deadline is January 19 and the route thereto resembles nothing less than kick-the-can-alley. It’s strewn with $100 billion of unfunded disaster aid, defense and nondefense sequester caps fixing to be busted by another $100 billion, 700,000 dreamers waiting to be deported, 9 million poor children (CHAPS) facing termination of medical care and millions more ObamaCare recipients who have been promised that cost abatement subsidies to insurance companies will be funded forthwith.

And along with those major bouncing cans are countless more articles of graft and booty cued-up on Capitol Hill looking for a legislative gravy train (i.e. CR) to hop aboard.

Likewise, the casino gamblers on Wall Street complacently attempt to tag another record at 2700 on the S&P 500. Yet that would represent a nosebleed 25X LTM earnings heading into a bond market rout that is certain to result from soaring treasury issuance and the Fed’s impending bond dump-a-thon.

Worse still, the Donald insouciantly unleashes tweet storms about the alleged Trumpian boom when the next recession is statistically just around the corner. After all, the current so-called recovery will pass the existing 118 month record, which occurred under the far more propitious circumstances of the 1990s, in April 2019.

But when it comes to Unhinged, nothing tops the GOP’s disgraceful plunge into fiscal turpitude. The once and former party of fiscal rectitude and a constitutionally required balanced budget has unleashed a torrent of red ink, which under the circumstances, makes Barack Obama’s profligacy pale by comparison.

What we mean is that circumstances matter, and that piling $800 billion of “shovel unready” stimulus on the recession-bloated Federal deficit in 2009 was bad enough. But 108 months on from the Obama Stimulus with the official unemployment rate at 4.1%, a huge discretionary leap into more red ink borders on madness.

Even the most incorrigible Keynesian stimulators have never argued that you inject massive amounts of borrowed money into the economy during the 8th inning of a business expansion. Instead, you are supposed to be shrinking any residual deficit from the last downturn, and, ideally, running a surplus in order to chip-away at the existing debt.

Yet the Trumpian-GOP has thrown every shred of fiscal rectitude to the winds at the absolute worse time in modern history. As we explained last week, the front-loaded tax bill will shrink the revenue base by $280 billion during FY 2019 to just $3.4 trillion.

At the same time, upwards of $200 billion in add-ons for defense, disaster relief, ObamaCare insurance bailouts, border control, veterans and law enforcement will drive spending to nearly $4.6 trillion or 20% above Obama’s outgoing budget of $3.85 trillion (FY 2016).

That’s right. These GOP clowns have left Big Spending Barry in the dust, and that’s before they get around to auctioning off votes for what the Donald is now flogging as a “bipartisan” infrastructure bill.

The latter will add hundreds of billions more to the borrowing tab. That’s because the White House can’t pass an infrastructure bill without a lot of Dem votes, and the latter will demand real pork in the appropriations barrel, not some kind of slight of hand tax-induced mobilization of so-called “private” capital (it’s not “private” when it get mobilized by a tax incentive bribe).

In short, what was already a structural deficit of $700 billion will erupt into new debt issuance of $1.2 trillion—-and perhaps well beyond that figure—-commencing in October. At that very time, of course, the Fed will be dumping old bonds into the market at a $600 billion annual rate.

Yet to our knowledge, there was not a single mention of this pending epic bond market collision during the perfunctory Congressional debt on a bill that had no hearings and had not been read by the overwhelming majority of legislators when it was jammed through on Christmas Eve.

And that’s why we describe the GOP’s fiscal policy—among others—as unhinged rather than merely reckless or hypocritical. That is, Imperial Washington has been house-trained for so long by central bank money printing that it has no clue that it has actually participated in a giant financial fraud.

To wit, the Fed balance sheet at the turn of the century was only $500 billion, meaning that in round terms upwards of $4 trillion of public debt has been monetized during the course of this century. And so doing, the Fed forced the other central banks of the world into aping its policy (or suffer soaring exchange rates), thereby causing even more of Uncle Sam’s massive debt emissions to be sequestered in central bank vaults around the world.

But now even Keynesian central bankers have realized that they must pivot toward interest rate normalization and balance sheet shrinkage (quantitative tightening or QT). Otherwise, they will be caught sucking their thumbs near the zero bound with no balance sheet dry powder when the next recession makes its inevitable appearance.

Moreover, from the Keynesian-statist point of view that would be an absolute political calamity and central bank franchise killer. That’s because the whole monstrosity of contemporary central banking rests on the false proposition that—save for the skillful (and “courageous”) ministrations of central bankers—-capitalism would never recover from recessionary slumps, and that it has some kind of depressionary death wish, to boot.

Needless to say, the GOP doesn’t even recognize the evil of present-day central banking and is so confused on the topic that its “low interest man” in the Oval Office chose an outright Keynesian statist and crony capitalist larcenist, Jerome Powell, as the next Fed Chairman.

Worse still, the Congressional GOP leaders persuaded the clueless Trump to also nominate Professor Marvin Goodfriend, whom House Financial Services Committee Chairman, Jeb Hensarling, described as an “impeccable conservative”.

But for crying out loud, Goodfriend wants to abolish cash (i.e. the ultimate protection from state seizure of wealth through control of bank deposits) so that the Fed can impose negative interest rates during an “emergency” declared by 12 central bankers.

That’s right. This whack job devotee of Milton Friedman wants to confiscate the liquid assets of savers if they fail to borrow and spend at the rate decreed by the monetary politburo in the Eccles Building.

So yes, when it comes to the state’s destructive propensity to borrow and print money, the GOP has simply become: Unhinged!

Worse, they have also become essentially innumerate. For instance, even as they are loading the public debt with another $1.2 trillion or more in the fiscal year just ahead, they have spent the Christmas break bloviating about the growth and jobs which will ostensibly issue from their asinine tax bill, thereby mitigating the added red ink—-if not eliminating it entirely.

Not on your life!

Even if the wallop of borrowed cash injected into the economy during FY 2019 adds a full 1% of extra growth, it would amount to just $190 billion of nominal GDP and therefore a mere $35 billion of incremental revenue. That is, the “reflow” would amount to a rounding error in the context of a $4.6 trillion spending orgy.

To be sure, tax bill apologists would argue just give it time. For instance, an extra point of growth (above CBO’s baseline of 1.7% per annum) for the next four years would result in a nominal GDP gain of $905 billion by FY 2022 and therefore an extra $160 billion of revenue.

Alas, the baseline deficit for that year with the enacted tax bill and the GOP spending spree would otherwise amount to $1.44 trillion. So getting the outyear deficit down to $1.2 trillion with “more time” does not exactly compute to a growth based rescue of the nation’s rapidly unraveling fiscal accounts.

Moreover, it is utterly unreasonable to assume that Washington has that much time in the wake of the jarring bond market collision that it now baked into the cake for the year just ahead. In fact, FY 2022 would constitute months #147-159 of the expansion which incepted in June 2009.

Needless to say, that’s terra incognito from a macroeconomic perspective: A place where the US economy has never been—even during LBJ’s “guns and butter” frolic of the 1960s and Greenspan’s irrationally exuberant technology and dotcom boom of the 1990s.

In this context, we have frequently referenced then Senate Majority Leader Howard Baker’s characterization of the giant Reagan tax cut as a “riverboat gamble”. Yet today’s fiscal and demographic circumstances are so infinitely worse than those of 1981 that the GOP’s current fiscal posture surely constitutes a Riverboat Gamble On Steroids.

Back then, the public debt was just $930 billion or 30% of GDP, the 78-million strong baby boom had not even fully entered the work force yet and Paul Volcker was at the Fed, where he was slamming the breaks on the printing presses—-thereby pegging the 10-year treasury note at 15%.

That is to say, there was running room on Uncle Sam’s relatively pristine balance sheet, an army of strong backs was headed for the job and taxpayer rolls and interest rates had nowhere to got except down—-and big time in that direction after the back of commodity and consumer inflation had been broken.

By contrast, the GOP tax bill and spending spree—when piled on top of the inherited baseline deficits—will result in nearly a $27 trillion public debt by the end of FY 2022 or more than 120% of GDP. And that assumes that the current business cycle does not roll-over from record old age and the crunch of soaring debt yields on an economy saddled with $67 trillion of public and private debt at this very moment.

More importantly, it ignores the demographic-fiscal time bomb of the retiring baby-boom. That is already evident in the projections through FY 2022 when combined spending for baby boomers (including much of Medicaid which goes to the poor elderly and nursing home care) will exceed $2.5 trillion or 63% of total Federal revenues after the GOP tax cut is factored in.

Medicare, Medicaid, and social security spending.png

But that’s not the half of it. By early in the 2030s, the number of OASDI beneficiaries will reach 95 million compared to 60 million at present, and then climb steadily higher into the triple digit millions from there.

In a word, the longer-term fiscal condition of the nation’s baby-boom driven entitlement monster is so forbidding that not a single dime can be responsibly added to the Federal debt—not for tax cuts, defense, Mexican walls, the rescue of people who choose to live in hurricane ally without setting aside their own stormy day funds—or anything else.

So in the face of bond market collision that is imminently pending, a recession that is not far down the road, and a baby-boom/entitlement eruption that is baked into the demographic and statutory cake, the GOP’s current feckless fiscal game plan is truly unhinged.

Moreover, the recent announcement by the Great Fiscal Fake who presides over the US House of Representatives, Paul Ryan, that the GOP will now turn to spending control and welfare reform is truly laughable. The $70 billion extra they are pumping down the Pentagon rat-hole this year is equal to the entire cost of the Food Stamp program and exceeds spending on family assistance by more than 2X.

Indeed, the heart of the $700 billion means-tested “welfare budget” is Medicaid ($430 billion) and the earned income, child care and similar tax credits. But the GOP has already punted entirely on the former during its failed attempt to repeal and replace ObamaCare and it has added tens of billions to the latter in the now enacted tax bill.

The recklessness of it is only surpassed by the bubble-blind casino gamblers and robo-machines, which, oblivious to the fundamentals and inexorable future realities, chase prices higher and higher only because they are going up.

Image result for projected number of social security recipients by 2045

In Part 2, we will consider: The RussiaGate Hysteria of the Dems. It has now become the great skunk in the woodpile that is separating Imperial Washington from even a tenuous connection to the facts, history and common sense realities of the non-existent security threats that result from Russia’s pipsqueak sized economy and midget military budget.

Moreover, the resulting rampant Russophobia means that the War Party is more ensconced in power than ever before. That is to say, the ultimate threat to domestic peace and prosperity is a $1 trillion annual Warfare State budget that is both utterly unnecessary based on the real facts of the world, and which was utterly unaffordable—even before the outbreak of the GOP’s latest bout of fiscal madness.

Read More: http://davidstockmanscontracorner.com/unhinged-part-1-the-gops-fiscal-madness/

Explaining Our Money System a 14 Month Old

His mother tries to get him to go to bed at 9 p.m. But the little boy’s internal clock is still on Baltimore time; it tells him it is much too early to go to sleep.

Grandpa takes over, drawing out the monetary system like a general spreading a map on a field table. “Here is the enemy,” he says gravely. “They have us completely surrounded. We’re doomed.”

He seems to understand…

…that money is not wealth; it just measures and represents wealth, like the claim ticket on a car in a parking garage.

…that our post-1971 money system is based on fake money that represents no wealth and measures badly.

…that this new money enters the economy as credit… and that the credit industry (Wall Street) has privileged access to it. The working man still has to earn his money, selling his work, by the hour. But Wall Street—and elite borrowers connected to the Establishment—get it without breaking a sweat or watching the clock.

…that a disproportionate share of this new money is concentrated in and around the credit industry—pushing up asset prices, raising salaries and bonuses in the financial sector, and making the rich (those who own financial assets) much richer.

…that this flood of credit helped the middle class raise its living standards, even as earnings stagnated. But it also raised debt levels throughout the economy.

…and that it allowed the average American family to spend American money that Americans never earned and buy products Americans never made…

Instead, Walmart’s shelves were stocked with goods “Made in China.” The middle class lost income as factories, jobs, and earnings moved overseas. Debt stayed at home.

“Okay so far?” we asked James as his eyeballs rolled backward and his breathing slowed.

But one thing must still puzzle him. How did the new dollar actually retard growth?

Maybe it didn’t make people richer… After all, how can you expect to make people better off by giving them fake money?

But how did it make them worse off?

The Ultimate Absurdity

We began with an attack en masse across a broad, philosophical front:

“As you sow, so shall ye reap,” we said. “And when you put a lot of fake money into a society, you end up with a fake economy.”

Just look at Argentina in 2001… or Zimbabwe in 2006… or Venezuela now…

Prices go wild as people try to figure out what the money is really worth. But the economy shrinks.

It was the same way in Germany during the Weimar hyperinflation. People stopped producing. You might have a billion marks in your pocket, but you couldn’t find a bar of soap for sale.

“But wait… I know what you’re thinking…” we imagined James pushing back. “Those are all hyperinflation stories. We don’t have that now. Instead, we have much less inflation… Prices are almost stable.”

Yes… for now. The inflation is in the asset sector… and in credit itself… not in consumer items. But the phenomenon is much the same.

Fake money is giving grossly distorted information to everyone. In Manhattan, we are told that an ordinary apartment is worth $2 million. But in Geneva—where interest rates have turned negative—we are told that $2 million is worth nothing… You will have to pay one of the banks to take it off your hands.

Without honest money, real savings, and true interest rates, businesses and investors have nothing to guide them. They are lost in the woods. Few want to do the hard work, and take the risks, of long-term, capital-heavy ventures. Instead, the focus shifts to speculation, gambling… and playing the game for short-term profits.

What’s more, artificially low interest rates provide fatal misinformation. They tell the world that we have an infinite supply of resources—time, money, energy, and know-how.

Then, without its back to the wall of scarcity, with no need to make careful choices, capitalism becomes reckless and irresponsible with its most valuable resource—capital itself. It is destroyed, wasted, misallocated, and malinvested. Growth rates fall and the world becomes poorer.

James is startled awake. He is disturbed.

“What kind of a world have I been born into…?” he seems to ask.

Editor’s Note: The feds know an epic crisis is brewing. And they want to trap your money before you have time to protect it. They know the coming crisis will hit everything—your portfolio, your bank account… even the cash in your wallet.

Of course, America has seen plenty of crises before. But this time is different. Bill’s team recently put together a book revealing how bad things could get and how you can start preparing yourself today. Learn more here.

Doug Casey on the Coming Financial Crisis

Yellen Says Raise the Rates

Doug Casey was one of earliest authors I read during my awakening. The ideas he laid out were shocking to me at the time, but they were compelling because they made sense after years of accepting ideas that didn’t make sense. …P.D.

Justin’s note: Earlier this year, Fed Chair Janet Yellen explained how she doesn’t think we’ll have another financial crisis “in our lifetimes.” It’s a crazy idea. After all, it feels like the U.S. is long overdue for a major crisis. Below, Doug Casey shares his take on this. It’s one of the most important discussions we’ve had all year.

(If you missed the first two interviews from this series, you can catch up here and here.)


Justin: Doug, I know you disagree with Yellen. But I’m wondering why she would even say this? Has she lost her mind?

Doug: Listening to the silly woman say that made me think we’re truly living in Bizarro World. It’s identical in tone to what stock junkies said in 1999 just before the tech bubble burst. She’s going to go down in history as the modern equivalent of Irving Fisher, who said “we’ve reached a permanent plateau of prosperity,” in 1929, just before the Great Depression started.

I don’t care that some university gave her a Ph.D., and some politicians made her Fed Chair, possibly the second most powerful person in the world. She’s ignorant of economics, ignorant of history, and clearly has no judgment about what she says for the record.

Why would she say such a thing? I guess because since she really believes throwing trillions of dollars at the banking system will create prosperity. It started with the $750 billion bailout at the beginning of the last crisis. They’ve since thrown another $4 trillion at the financial system.

All of that money has flowed into the banking system. So, the banking system has a lot of liquidity at the moment, and she thinks that means the economy is going to be fine.

Justin: Hasn’t all that liquidity made the banking system safer?

Doug: No. The whole banking system is screwed-up and unstable. It’s a gigantic accident waiting to happen.

People forgot that we now have a fractional reserve banking system. It’s very different from a classical banking system. I suspect not one person in 1,000 understands the difference…

Modern banking emerged from the goldsmithing trade of the Middle Ages. Being a goldsmith required a working inventory of precious metal, and managing that inventory profitably required expertise in buying and selling metal and storing it securely. Those capacities segued easily into the business of lending and borrowing gold, which is to say the business of lending and borrowing money.

Most people today are only dimly aware that until the early 1930s, gold coins were used in everyday commerce by the general public. In addition, gold backed most national currencies at a fixed rate of convertibility. Banks were just another business—nothing special. They were distinguished from other enterprises only by the fact they stored, lent, and borrowed gold coins, not as a sideline but as a primary business. Bankers had become goldsmiths without the hammers.

Bank deposits, until quite recently, fell strictly into two classes, depending on the preference of the depositor and the terms offered by banks: time deposits, and demand deposits. Although the distinction between them has been lost in recent years, respecting the difference is a critical element of sound banking practice.

Justin: Can you explain the difference between a time deposit and demand deposit?

Doug: Sure. With a time deposit—a savings account, in essence—a customer contracts to leave his money with the banker for a specified period. In return, he receives a specified fee (interest) for his risk, for his inconvenience, and as consideration for allowing the banker the use of the depositor’s money. The banker, secure in knowing he has a specific amount of gold for a specific amount of time, is able to lend it; he’ll do so at an interest rate high enough to cover expenses (including the interest promised to the depositor), fund a loan-loss reserve, and if all goes according to plan, make a profit.

A time deposit entails a commitment by both parties. The depositor is locked in until the due date. How could a sound banker promise to give a time depositor his money back on demand and without penalty when he’s planning to lend it out?

In the business of accepting time deposits, a banker is a dealer in credit, acting as an intermediary between lenders and borrowers. To avoid loss, bankers customarily preferred to lend on productive assets, whose earnings offered assurance that the borrower could cover the interest as it came due. And they were willing to lend only a fraction of the value of a pledged asset, to ensure a margin of safety for the principal. And only for a limited time—such as against the harvest of a crop or the sale of an inventory. And finally, only to people of known good character—the first line of defense against fraud. Long-term loans were the province of bond syndicators.

That’s time deposits.

Justin: And what about demand deposits?

Doug: Demand deposits were a completely different matter.

Demand deposits were so called because, unlike time deposits, they were payable to the customer on demand. These are the basis of checking accounts. The banker doesn’t pay interest on the money, because he supposedly never has the use of it; to the contrary, he necessarily charged the depositor a fee for:

  1. Assuming the responsibility of keeping the money safe, available for immediate withdrawal, and…
  2. Administering the transfer of the money if the depositor so chooses, by either writing a check or passing along a warehouse receipt that represents the gold on deposit.

An honest banker should no more lend out demand deposit money than Allied Van and Storage should lend out the furniture you’ve paid it to store. The warehouse receipts for gold were called banknotes. When a government issued them, they were called currency. Gold bullion, gold coinage, banknotes, and currency together constituted the society’s supply of transaction media. But its amount was strictly limited by the amount of gold actually available to people.

Sound principles of banking are identical to sound principles of warehousing any kind of merchandise—whether it’s autos, potatoes, or books. Or money. There’s nothing mysterious about sound banking. But banking all over the world has been fundamentally unsound since government-sponsored central banks came to dominate the financial system.

Central banks are a linchpin of today’s world financial system. By purchasing government debt, banks can allow the state—for a while—to finance its activities without taxation. On the surface, this appears to be a “free lunch.” But it’s actually quite pernicious and is the engine of currency debasement.

Central banks may seem like a permanent part of the cosmic landscape, but in fact they are a recent invention. The U.S. Federal Reserve, for instance, didn’t exist before 1913.

Justin: What changed after 1913?

Doug: In the past, when a bank created too much currency out of nothing, people eventually would notice, and a “bank run” would materialize. But when a central bank authorizes all banks to do the same thing, that’s less likely—unless it becomes known that an individual bank has made some really foolish loans.

Central banks were originally justified—especially the creation of the Federal Reserve in the US—as a device for economic stability. The occasional chastisement of imprudent bankers and their foolish customers was an excuse to get government into the banking business. As has happened in so many cases, an occasional and local problem was “solved” by making it systemic and housing it in a national institution. It’s loosely analogous to the way the government handles the problem of forest fires: extinguishing them quickly provides an immediate and visible benefit. But the delayed and forgotten consequence of doing so is that it allows decades of deadwood to accumulate. Now when a fire starts, it can be a once-in-a-century conflagration.

Justin: This isn’t just a problem in the US, either.

Doug: Right. Banking all over the world now operates on a “fractional reserve” system. In our earlier example, our sound banker kept a 100% reserve against demand deposits: he held one ounce of gold in his vault for every one-ounce banknote he issued. And he could only lend the proceeds of time deposits, not demand deposits. A “fractional reserve” system can’t work in a free market; it has to be legislated. And it can’t work where banknotes are redeemable in a commodity, such as gold; the banknotes have to be “legal tender” or strictly paper money that can be created by fiat.

The fractional reserve system is why banking is more profitable than normal businesses. In any industry, rich average returns attract competition, which reduces returns. A banker can lend out a dollar, which a businessman might use to buy a widget. When that seller of the widget re-deposits the dollar, a banker can lend it out at interest again. The good news for the banker is that his earnings are compounded several times over. The bad news is that, because of the pyramided leverage, a default can cascade. In each country, the central bank periodically changes the percentage reserve (theoretically, from 100% down to 0% of deposits) that banks must keep with it, according to how the bureaucrats in charge perceive the state of the economy.

Justin: How can a default cascade under the fractional reserve banking system?

Doug: A bank with, say, $1,000 of capital might take in $20,000 of deposits. With a 10% reserve, it will lend out $19,000—but that money is redeposited in the system. Then 90% of that $19,000 is also lent out, and so forth. Eventually, the commercial bank can create hundreds of thousands of loans. If only a small portion of them default, it will wipe out the original $20,000 of deposits—forget about the bank’s capital.

That’s the essence of the problem. But, in the meantime, before the inevitable happens, the bank is coining money. And all the borrowers are thrilled with having dollars.

Justin: Are there measures in place to prevent bank runs?

Doug: In the US and most other places, protection against runs on banks isn’t provided by sound practices, but by laws. In 1934, to restore confidence in commercial banks, the US government instituted the Federal Deposit Insurance Corporation (FDIC) deposit insurance in the amount of $2,500 per depositor per bank, eventually raising coverage to today’s $250,000. In Europe, €100,000 is the amount guaranteed by the state.

FDIC insurance covers about $9.3 trillion of deposits, but the institution has assets of only $25 billion. That’s less than one cent on the dollar. I’ll be surprised if the FDIC doesn’t go bust and need to be recapitalized by the government. That money—many billions—will likely be created out of thin air by selling Treasury debt to the Fed.

The fractional reserve banking system, with all of its unfortunate attributes, is critical to the world’s financial system as it is currently structured. You can plan your life around the fact the world’s governments and central banks will do everything they can to maintain confidence in the financial system. To do so, they must prevent a deflation at all costs. And to do that, they will continue printing up more dollars, pounds, euros, yen, and what-have-you.

Justin: It sounds like the banking system is more fragile than it was a decade ago…not stronger.

Doug: Correct. So, Yellen isn’t just delusional. As I said before, she has no grasp whatsoever of basic economics.

Her comments remind me of what Ben Bernanke said in May 2007.

We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.

A few months later, the entire financial system started to unravel. You would have actually lost a fortune if you listened to Bernanke back then.

Justin: I take it investors shouldn’t listen to Yellen, either?

Doug: No. These people are all academics. They don’t have any experience in the real world. They’ve never been in business. They were taught to believe in Keynesian notions. These people have no idea what they’re talking about.

The Fed itself serves no useful purpose. It should be abolished.

But people look up to authority figures, and “experts.” The average guy has other things on his mind.

Justin: So if Yellen’s wrong, what should investors prepare for? How will the coming crisis be different from what we saw in 2007–2008?

Doug: Well, as you know, the Fed has dropped interest rates to near zero. I used to think it was metaphysically impossible for rates to drop below zero. But the European and Japanese central banks have done it.

The other thing they did was create megatons of money out of thin air. This hasn’t just happened in the U.S., either. Central banks around the world have printed up trillions of currency units.

How many more can they print at this point? I guess we’ll find out. Plus, it’s not like these dollars have gone to the retail economy the way they did during the “great inflation” of the ’70s. This time they went straight into the financial system. They’ve created bubbles everywhere.

That’s why the next crisis is going to be far more serious than what we saw a decade ago.

Justin: Is there anything the Fed can do to stop this? What would you do if you were running the Fed?

Doug: I’ve been saying for years that I would abolish the Fed, end the fractional reserve system, and default on the national debt. But would I actually do any of those things? No. I wouldn’t. I pity the poor fool who allows the rotten structure to collapse on his watch. Perish the thought of bringing it down in a controlled demolition.

They would literally crucify the person who did this…even if it was good for the economy in the long run. Which it would be.

So, these people are going to keep doing what they’ve been doing. They’re hoping that, if they kick the can down the road, something magic will happen. Maybe friendly aliens will land on the roof of the White House and cure everything.

Justin: So, they can’t stop what’s coming?

Doug: The whole financial system is on the ragged edge of a collapse at this point.

All these paper currencies all around the world could lose their value together. They’re all based on the dollar quite frankly. None of them are tied to any commodity.

They have no value in and of themselves, aside from being mediums of exchange. They’re all just floating abstractions, based on nothing.

When we exit the eye of this financial hurricane, and go into the storm’s trailing edge, it’s going to be something for the history books written in the future.

Justin: Thanks for taking the time to speak with me about this today, Doug.

Doug: My pleasure.

Read More: https://www.caseyresearch.com/doug-casey-coming-financial-crisis/

The petro-yuan bombshell

by Pepe Escobar (cross-posted with the Asia Times by special agreement with the author)

The new 55-page “America First” National Security Strategy  (NSS), drafted over the course of 2017, defines Russia and China as “revisionist” powers, “rivals”, and for all practical purposes strategic competitors of the United States.

The NSS stops short of defining Russia and China as enemies, allowing for an “attempt to build a great partnership with those and other countries”. Still, Beijing qualified it as “reckless” and “irrational.” The Kremlin noted its “imperialist character” and “disregard for a multipolar world”. Iran, predictably, is described by the NSS as “the world’s most significant state sponsor of terrorism.”

Russia, China and Iran happen to be the three key movers and shakers in the ongoing geopolitical and geoeconomic process of Eurasia integration.

The NSS can certainly be regarded as a response to what happened at the BRICS summit in Xiamen last September. Then, Russian President Vladimir Putin insisted on “the BRIC countries’ concerns over the unfairness of the global financial and economic architecture which does not give due regard to the growing weight of the emerging economies”, and stressed the need to “overcome the excessive domination of a limited number of reserve currencies”.

That was a clear reference to the US dollar, which accounts for nearly two thirds of total reserve currency around the world and remains the benchmark determining the price of energy and strategic raw materials.

And that brings us to the unnamed secret at the heart of the NSS; the Russia-China “threat” to the US dollar.

The CIPS/SWIFT face-off

The website of the China Foreign Exchange Trade System (CFETS) recently announced the establishment of a yuan-ruble payment system, hinting that similar systems regarding other currencies participating in the New Silk Roads, a.k.a. Belt and Road Initiative (BRI) will also be in place in the near future.

Crucially, this is not about reducing currency risk; after all Russia and China have increasingly traded bilaterally in their own currencies since the 2014 US-imposed sanctions on Russia. This is about the implementation of a huge, new alternative reserve currency zone, bypassing the US dollar.

The decision follows the establishment by Beijing, in October 2015, of the China International Payments System (CIPS). CIPS has a cooperation agreement with the private, Belgium-based SWIFT international bank clearing system, through which virtually every global transaction must transit.

What matters in this case is that Beijing – as well as Moscow – clearly read the writing on the wall when, in 2012, Washington applied pressure on SWIFT; blocked international clearing for every Iranian bank; and froze $100 billion in Iranian assets overseas as well as Tehran’s potential to export oil. In the event Washington might decide to slap sanctions on China, bank clearing though CIPS works as a de facto sanctions-evading mechanism.

Last March, Russia’s central bank opened its first office in Beijing. Moscow is launching its first $1 billion yuan-denominated government bond sale. Moscow has made it very clear it is committed to a long term strategy to stop using the US dollar as their primary currency in global trade, moving alongside Beijing towards what could be dubbed a post-Bretton Woods exchange system.

Gold is essential in this strategy. Russia, China, India, Brazil & South Africa are all either large producers or consumers of gold – or both. Following what has been extensively discussed in their summits since the early 2010s, the BRICS are bound to focus on trading physical gold.

Markets such as COMEX actually trade derivatives on gold, and are backed by an insignificant amount of physical gold. Major BRICS gold producers – especially the Russia-China partnership – plan to be able to exercise extra influence in setting up global gold prices.

The ultimate politically charged dossier

Intractable questions referring to the US dollar as top reserve currency have been discussed at the highest levels of JP Morgan for at least five years now. There cannot be a more politically charged dossier. The NSS duly sidestepped it.

The current state of play is still all about the petrodollar system; since last year what used to be a key, “secret” informal deal between the US and the House of Saud is firmly in the public domain.

Even warriors in the Hindu Kush may now be aware of how oil and virtually all commodities must be traded in US dollars, and how these petrodollars are recycled into US Treasuries. Through this mechanism Washington has accumulated an astonishing $20 trillion in debt – and counting.

Vast populations all across MENA (Middle East-Northern Africa) also learned what happened when Iraq’s Saddam Hussein decided to sell oil in euros, or when Muammar Gaddafi planned to issue a pan-African gold dinar.

But now it’s China who’s entering the fray, following on plans set up way back in 2012. And the name of the game is oil-futures trading priced in yuan, with the yuan fully convertible into gold on the Shanghai and Hong Kong foreign exchange markets.

The Shanghai Futures Exchange and its subsidiary, the Shanghai International Energy Exchange (INE) have already run four production environment tests for crude oil futures. Operations were supposed to start at the end of 2017; but even if they start sometime in early 2018 the fundamentals are clear; this triple win (oil/yuan/gold) completely bypasses the US dollar. The era of the petro-yuan is at hand.

Of course there are questions on how Beijing will technically manage to set up a rival mark to Brent and WTI, or whether China’s capital controls will influence it. Beijing has been quite discreet on the triple win; the petro-yuan was not even mentioned in National Development and Reform Commission documents following the 19th CCP Congress last October.

What’s certain is that the BRICS supported the petro-yuan move at their summit in Xiamen, as diplomats confirmed to Asia Times. Venezuela is also on board. It’s crucial to remember that Russia is number two and Venezuela is number seven among the world’s Top Ten oil producers. Considering the pull of China’s economy, they may soon be joined by other producers.

Yao Wei, chief China economist at Societe Generale in Paris, goes straight to the point, remarking how “this contract has the potential to greatly help China’s push for yuan internationalization.”

The hidden riches of “belt” and “road”

An extensive report by DBS in Singapore hits most of the right notes linking the internationalization of the yuan with the expansion of BRI.

In 2018, six major BRI projects will be on overdrive; the Jakarta-Bandung high-speed railway, the China-Laos railway, the Addis Ababa-Djibouti railway, the Hungary-Serbia railway, the Melaka Gateway project in Malaysia, and the upgrading of Gwadar port in Pakistan.

HSBC estimates that BRI as a whole will generate no less than an additional, game-changing $2.5 trillion worth of new trade a year.

It’s important to keep in mind that the “belt” in BRI should be seen as a series of corridors connecting Eastern China with oil/gas rich regions in Central Asia and the Middle East, while the “roads” soon to be plied by high-speed rail traverse regions filled with – what else – un-mined gold.

A key determinant of the future of the petro-yuan is what the House of Saud will do about it. Should Crown Prince – and inevitable future king – MBS opt to follow Russia’s lead, to dub it as a paradigm shift would be the understatement of the century.

Yuan-denominated gold contracts will be traded not only in Shanghai and Hong Kong but also in Dubai. Saudi Arabia is also considering to issue so-called Panda bonds, after the Emirate of Sharjah is set to take the lead in the Middle East for Chinese interbank bonds.

Of course the prelude to D-Day will be when the House of Saud officially announces it accepts yuan for at least part of its exports to China. A follower of the Austrian school of economics correctly asserts that for oil-producing nations, higher oil price in US dollars is not as important as market share; “They are increasingly able to choose in which currencies they want to trade.”

What’s clear is that the House of Saud simply cannot alienate China as one of its top customers; it’s Beijing who will dictate future terms. That may include extra pressure for Chinese participation in Aramco’s IPO. In parallel, Washington would see Riyadh embracing the petro-yuan as the ultimate red line.

An independent European report points to what may be the Chinese trump card; “an authorization to issue treasury bills in yuan by Saudi Arabia”; the creation of a Saudi investment fund; and the acquisition of a 5% share of Aramco.

Nations under US sanctions such as Russia, Iran and Venezuela will be among the first to embrace the petro-yuan. Smaller producers such as Angola and Nigeria are already selling oil/gas to China in yuan.

And if you don’t export oil but is part of BRI, such as Pakistan, the least you can do is replace the US dollar in bilateral trade, as Interior Minister Ahsan Iqbal is currently evaluating.

A key feature of the geoconomic heart of the world moving from the West to Asia is that by the start of the next decade the petro-yuan and trade bypassing the US dollar will be certified facts on the ground across Eurasia.

The NSS for its part promises to preserve “peace through strength”. As Washington currently deploys no less than 291,000 troops in 183 countries and has sent Special Ops to no less than 149 nations in 2017 alone, it’s hard to argue the US is at “peace” – especially when the NSS seeks to channel even more resources to the industrial-military complex.

“Revisionist” Russia-China have committed an unpardonable sin; they have concluded that pumping the US military budget by buying US bonds that allow the US Treasury to finance a multi-trillion dollar deficit without raising interest rates is an unsustainable proposition for the Global South. Their “threat” – under the framework of the BRICS as well as the SCO, which includes prospective members Iran and Turkey – is to increasingly settle bilateral and multilateral trade bypassing the US dollar.

It ain’t over till the fat (golden) lady sings. When the beginning of the end of the petrodollar system – established by Kissinger in tandem with the House of Saud way back in 1974 – becomes a fact on the ground, all eyes will be focused on the NSS counterpunch.

Read More: http://thesaker.is/the-petro-yuan-bombshell/

Lacy Hunt on the Unintended Consequences of Federal Reserve Policies

Federal Reserve Logo
The Financial Repression Authority interviewed Lacy Hunt, Chief Economist at Hoisington Management on Fed policies.

The interview below first appeared on the FRA website along with a video. The emphasis in italics is mine.

FRA: Hi, welcome to FRA’s Roundtable Insight. Today, we have Dr. Lacy Hunt. He’s an internationally recognized economist and the Executive V.P. and Chief Economist of Hoisington Investment Management Company, a firm that manages over $4.5 billion USD and specializing in the management of fixed income accounts for large institutional clients. He also served in the past as Senior Economist for the Federal Reserve Bank of Dallas, where he was a member of the Federal Reserve System Committee on Financial Analysis. Welcome. Dr. Hunt.

Dr. Lacy Hunt: Nice to be with you, Richard.

FRA: Great. I thought we’d have a discussion on a variety of topics relating to the economy and the financial markets. You recently mentioned that you thought this was the worst economic expansion recovery in U.S. history since 1790. Wow. Can you elaborate?

Dr. Lacy Hunt: If you calculate the average growth rate in the expansions since 1790, this is a long-running expansion, but it’s the slowest and in the last 10 years the household sector lagged very, very badly. The rate of growth in real disposable household income per-capita is only 0.9 percent per year. And in the last 12 months, we’re up only 0.6 percent per year. So it’s a long-running expansion, but it’s been a poor expansion. There are certainly problems with some of the earlier data, but this appears to be the slowest expansion since the turn of the 18th Century and our households are the main problem for the growth rate lag.

FRA: And do you point a finger for this cause as primarily on the Federal Reserve or do you see structural changes happening to the economy?

Dr. Lacy Hunt: I think that the main element suppressing growth is the heavily leveraged U.S. economy. We have too much public and private debt, and this debt does not generate an income stream for the aggregate economy. As a result of the prolonged indebtedness, which is on the verge of going much higher because of problems in the governmental sector, the economy is now experiencing very poor demographics. We have a baby bust, a household formation bust, and the lowest birth rate since 1937. These demographics are exacerbating the problems because we have too much of the wrong type of debt and thus the velocity of money has been falling since 1997. Velocity this year is only 1.43 percent, which is the lowest since 1949. Furthermore, the debt creates a situation where monetary policy capabilities are asymmetric. In other words, a lot of action is needed to provoke even a muted impact on the economy, whereas the slightest monetary tightening goes a long way in depressing economic activity. So the root cause of this underperformance is extreme indebtedness.

FRA: And what about the Federal Reserve? How has it undermined the economy’s ability to grow?

Dr. Lacy Hunt: The Fed’s most serious mistake was made in the 1990s up until 2006 during which they allowed the private sector to become extremely over-indebted with the wrong type of debt. And, in essence, I think that quantitative easing, through the push for higher stock prices, created more problems than it has solved for the economy. QT caused the corporate executives to switch funds from real capital investments into financial investments through the paying of higher dividends, buying shares of their own companies, and buying back their shares from others. While this type of action does produce a higher stock market; it doesn’t generate a higher standard of living. And so, Federal Reserve policy has not improved the economy, although it certainly has well served components of the economy.

FRA: And due to that do you think that there’s been too much financial investment versus real economy investment in terms of diverting the economic financial resources away from the real economy?

Dr. Lacy Hunt: I think that’s the principal problem. Business debt last year reached a record high relative to GDP. As I said earlier, Fed policies have created a higher stock market but have not generated an improved standard of living. When the Reserve undertook quantitative easing, it was a signal to the corporate executives that the Fed preferred and would protect financial investments. But that meant financial assets were preferred over real side investments. And so QT is intermingling with the growth-depressing effects of too much debt. And the debt levels are getting ready to move substantially higher in our governmental sector. Government debt is already approaching 106 percent of GDP, a record high with the exception of a brief period during World War II. And by 2030, federal debt will be approximately 125 percent of GDP. For a long time, we’ve known about the issues that would inflate the entitlements — such as the prior-mentioned demographic problems — but there is an increasing likelihood that new federal programs with expenditure increases will further accelerate the growth in federal debt. I think there is clear evidence that increases in federal debt at these high levels relative to GDP over any measurable length of time, reduces economic activity. Thus, the multiplier is not a positive but negative figure, or otherwise exactly what economist David Ricardo hypothesized in his 1821 work. I have looked at the relationship between per capita changes in real GDP and government debt per capita and the relationship is negative, not positive. And so, we’re trying to solve an indebtedness problem by taking on more debt. You can get intermittent spurts of economic activity and inflation, but ultimately the debt is a millstone around the economy’s neck.

FRA: So would you say that we have migrated to a sort of financial economy?

Dr. Lacy Hunt: Let me give you a couple of examples. There’s so much liquidity in the financial markets, particularly the stock market, that a lot of the economic news is constructively interpreted even when it’s unconstructive. Virtually the world believes that the United States is experiencing large job gains and the idea that such productivity may be incorrect is hardly considered. But the rate of growth in payroll employment on a 12-month basis peaked at 2.4 percent in early 2015 and for the last 12 months, has sunk to 1.4 percent. What is even more critical — if you look at just the expansions and don’t include the recessions since 1968 – is that the average growth in employment in an expansion year was 1.9 percent. And in the last 12 months, we are half a percentage point under that figure. Yet, given these numbers, there is an erroneous perception that the employment gains are strong. And this view undermines the improvement in the standard of living. And because of the liquidity and the need of some investors to fully participate in the rising stock market, investors tend to overlook other important developments. If we go back to the 12 months ending November of 2015, real average hourly earnings were up about 2.5 percent. And in the latest 12 months, real average hourly earnings gained a miniscule 0.2 percent. The liquidity tends to push the focus away from the more realistic interpretation of the economy for certain types of assets.

However, the weak performance overall and the deceleration in some of the indicators that I just referred to is not unnoticed by the bond market. So, we have a dichotomy in which the stock market is strongly up but the long-term bond yields are down. Now, the short-term yields are up because they are under the control or heavy influence of the Federal Reserve. The Federal Reserve is in the process of raising the short-term rates and winding down their portfolio. They sold 20 billion dollars of government agency securities in October and November, pushing up the short-term rates. Erstwhile, the long-term rates — which look at some of the more important economic fundamentals — are actually declining.

Another element not in the public understanding, since the Federal Reserve no longer produces this sort of monetary analysis, is a very sharp slowdown in the money supply’s rate of growth, bank loans, and within important credit aggregates. Last year, the M2 money supply was up 7 percent. In the latest 12 months, it decelerated to less than 4.5 percent. The rate of growth in bank loans and commercial paper, which topped out on a 12- month basis about 9 percent, is now under 4 percent. So the Fed is raising the short-term rates, reducing the monetary base, and causing a tightening in the financial side of the economy. Some investors understand what is happening and yet it’s not in the general psyche because such monetary analysis is increasingly rare.

However, another more public indicator is the very dramatic flattening of the yield curve. And when the yield curve flattens in such a way, first of all, it’s a symptom that monetary restraint is beginning to bite. Now, the slowdown in money supply growth and the bank credit flattening of the yield curve will occur well before there is any noticeable impact on a broad array of economic indicators or long lags in monetary policy. But when the yield curve starts flattening, that intensifies the effect of the monetary tightening because it takes away or, at the very least, greatly reduces the profitability of the banks and all those that act like banks. Banks make a profit by borrowing short and lending long. When those spreads recede, bank profitability is hurt, particularly for the higher, riskier types of bank loans since not enough spread exists to cover the risk premium. So the banks begin to pull back, further intensifying the restraint pressing on economic growth. To the vast majority of investors, we have an economy that is apparently doing well, but in fact there are elements right beneath the surface that strongly suggest to me that the outlook for 2018 is considerably more guarded than conventional wisdom implies.

FRA: And do you see the potential for an inverted yield curve in the near future?

Dr. Lacy Hunt: I’m not sure that we will have to invert because the economy is so heavily indebted and the velocity of money is its lowest since 1949. Now, a number of people have pointed out that we typically invert before a recession and historically such inversions have been the case most of the time — but not always if you go back far enough in time — and you should since this is not a normal economy. For example, money supply growth since 1900 has averaged about 7 percent per annum, whereas, currently, the rate of growth in M2 is about 36 percent below the long-term average, indicating a very weak growth rate. And the velocity of money is lower than all of the years since 1942 — with the exception of 7 years — and the economy has never been this heavily indebted. And so the yield curve could possibly approach inversion, but it may or may not occur or stay there very long because at that stage of the game, the flattening of the yield curve will greatly intensify all the other effects — the reduction in the reserve, monetary, and credit aggregates, as well as the weakness in velocity. And when this reduction becomes apparent, the Federal Reserve will not be able to reverse gears quickly enough to ameliorate the impact produced upon future economic growth.

FRA: So do you still see a secular low in bond yields on the long into the yield curve remaining in the future sometime?

Dr. Lacy Hunt: The lows have not been seen. The path there will remain extremely volatile. We will have episodes in which the long yields rise. My attitude is that the long yields can go up over the short run for any number of causes. While many elements work out of the system in the long end, yields cannot stay up. When yields go up — especially now that the yield curve is flattening — this intensifies monetary restraint, which puts downward pressure on commodities. This puts upward pressure on the value of the dollar and cuts back on the lending operations. Something I think has been somewhat overlooked in general euphoria over the strength of economic indicators, is the that commercial and industrial loans for all of the banks in the United States are now only up one-tenth of one percent in the last 12 months. There are forward-looking elements that have historically been very important for signaling that change is ahead. They don’t tell us the timing — timing is always difficult — but they are flashing signals that should be observed.

FRA: And as this plays out, do you see monetary policy and fiscal policy is changing, like will we get fiscal policy stimulus? Will there be a change in monetary policy and how will that look like?

Dr. Lacy Hunt: Here’s my attitude: the new federal initiatives, whether tax cuts or infrastructure or otherwise will not provide a boost to the economy if they are funded with increases in debt — that’s where we’re at. And by the way, it’s been that way for some time. If you go back to 2009, we had a one-trillion-dollar stimulus package that was said to be inflationary and was going to boost economic growth, but yet we still had this very poor expansion and little inflation except for intermittent bouts here and there, largely from highly-priced inelastic goods. All the while, the inflation rate has trended lower.

For example, when President Reagan cut taxes, government debt was 31 percent of GDP and now that’s 106 percent on its way to 120-125 percent. And so if you go back and if you read Ricardo’s great article in 1821, he was asked whether it made a difference as to whether the Napoleonic wars were financed by taxes or by borrowing. Ricardo said that, theoretically, either way private sector activity was going to be suppressed. Now we have a lot of evidence, including some that I produced, that the government multiplier is negative, not positive, over a three-year period. Thus, the tax cuts may work for a very short while, but not on balance. And if the tax cuts were revenue-neutral and financed by reductions in government expenditures that would be a positive since the evidence shows tax multipliers are more favorable than expenditure multipliers. Such a theoretical proposal would provide greater efficiency for private sector spending and government spending. There’s also evidence that you would lower the cost of capital, but that’s not what we’re talking about is it? We’re talking about a debt-financed tax cut and we’re not talking about a revenue-neutral infrastructure plan, just as we were not talking about a revenue-neutral stimulus package in 2009. We’re talking about the debt-financed variety of tax cuts and at this stage of the game, this will make us more vulnerable, except for a few fleeting instances.

I will say this: when you have a debt-financed infrastructure program or tax cut, there will be pockets within the economy that will benefit, but the aggregate economic performance will not benefit and so fiscal policy, as I see it, is not really going to be helpful. The risk is that the debt buildup will add to the problems. There is extensive academic research indicating that when government debt rises above 90 percent of GDP for more than five years, this trend will reduce the economy’s growth rate by a third. Remember, we’re at 106 percent debt to GDP and there’s evidence these higher levels of debt have a non-linear effect. In other words, we use up growth at a faster pace. And there’s a lot of evidence from the available data that we’re even losing a half of our growth rate from the trend. For example, GDP has risen at 2.1 percent per capita since 1790. The latest 10 years produced a reduction to 1.0 percent. And so we should have lost only seven-tenths or come down at 1.3 over 1 but we didn’t and this is a consequence that we have to deal with. We’re not in a position to ignore the debt levels. Fiscal policy can be talked about, we can debate about it, and we can proclaim its benefits, but I don’t see them in the current environment just as I didn’t see them in 2009. I would change my tune if they were revenue-neutral, but that’s not the issue here.

To me, inflation is a money-price-wage spiral not a wage-price spiral as with the Phillips curve. The way inflations begin is by money supply growth acceleration not being offset by weakness in velocity, which shifts the aggregate demand curve inward. Remember, the aggregate demand curve is equal to money times the velocity by algebraic substitution as evidenced in all the leading textbooks on macroeconomics. So you have declines in the money supply and velocity, which will make the aggregate demand curve shift inward over time. This shift gives you a lower price level and a lower level of real GDP. It doesn’t happen every quarter or even every year, but it’s the basic trend. Thus, monetary policy is in the process not of decelerating money supply growth and by a significant amount. If the Fed adheres to their schedule of quantitative tightening, I calculate M2 will grow by the end of the first quarter – it’s currently running around four and a half percent – and the year over year growth rate will be down to less than 3 percent. And so monetary policy is taking steps to lower the reserve monetary and credit aggregates, and these actions will further flatten the curve because they can press the short rates upward. But I think the long-term investors will understand that the inflationary prospects on a fundamental basis are weakening not strengthening.

FRA: And do you see these trends as being exacerbated on the emerging government pension fund crisis? Could there be more debt used to solve that like for bailouts? Do you see that potentially happening?

Dr. Lacy Hunt: Well the main problem with government debt is that we’re going to have approximately one million folks a year reach age 70 in the next 14 to 15 years and we’ve known that this was coming, but we didn’t prepare for it. We’ve made a lot of promises under Social Security Medicare and the Affordable Care Act and government debt will have to be used to fund the entitlement benefits — I don’t see any other way around it. Another overlooked problem is that the actual federal fiscal situation is much worse than these surface numbers. For example, in the last three years, the budget deficit worsened each year. If you sum the budget deficits for 2015, 2016 and 2017, the sum is 1.2 trillion, but a lot of what was previously called “outlays” have been moved off budget — we call them investments (such as student loans) and there are other examples. The actual increase in federal debt in the last three years is 3.2 trillion. So the budget deficit is actually greatly understating what is happening to the level of federal debt which wasn’t always the case. Furthermore, the deficit was made worse by a 2015 bipartisan deal between Congress and the White House. And while neither party is blameless — they both agreed on the deal — yet it doesn’t change the fact that the federal situation is deteriorating and at a much worse rate than the deficit numbers themselves indicate.

FRA: And what about for state and local jurisdiction locales, in terms of their government pension funds? Could there be federal level bailouts at that level?

Dr. Lacy Hunt: Again, what are they going to bail them out with? You’re going to have to sell Federal Securities. And one of the multipliers on new sales of Federal debt is negative, not positive. Forget what was taught you in your macroeconomic class 30, 20, or even 15 years ago. When I was in graduate school, I was taught that the government multiplier was somewhere between four and five percent. Now, it looks like the multiplier is at best zero and even possibly slightly negative.

FRA: Great insight as always. How can our listeners learn more about your work, Dr. Hunt?

Dr. Lacy Hunt: We put out a quarterly letter as a public service. Write to us at hoisingtonmgt.com and we’ll put your name on the subscription list. We don’t spam you with marketing so please go ahead and subscribe.

FRA: Okay, great. Thank you very much for being on the Program, Dr. Hunt. Thank you.

Dr. Lacy Hunt: My pleasure Richard. Nice to be with you

Economics as Taught

Note Lacy’s comments on what he learned in graduate school. Lacy once told me that he had to “unlearn” nearly everything he was taught in school about economic.

Multiple generations of economists have been trained to believe inflation is a good thing, saving is bad, that there are no consequences for piling up debt.

Read More: https://www.themaven.net/mishtalk/economics/lacy-hunt-on-the-unintended-consequences-of-federal-reserve-policies-pkS9lRO0dUuFbK-J0ONqCQ

“It’s Not Politics, It’s Survival” – Bitcoin, Local Currencies Are Taking Over In Venezuela

btc marketing guru chapelle

Anybody who believes that central banks are essential pillars of economic stability that deserve the untrammeled authority to issue currencies, which they presently enjoy, should take a close look at what’s happening in Venezuela.

Central bankers have tended to dismiss the notion of private currencies as an idea embraced only by techno-libertarian wingnuts (they have invariably described bitcoin as a “store of value” that’s “not yet big enough to threaten the economy.”

But in Venezuela, the collapse of the bolivar has forced locals to turn to alternatives like bitcoin and local community-issued currencies with fixed exchange rates. The rapid erosion of the bolivar’s value made everyday transactions like buying groceries and paying cabbies untenable – customers had to pay with large, cumbersome stacks of bolivars that were difficult to transport.

Patricia Laya, a Venezuela-based reporter, tweeted a photo of the 5,000 bolivars – the maximum amount – she was able to withdraw from an ATM in Caracas. They’re worth around $0.05. Laya stated that she had waited 20 minutes in line to obtain $0.05 in hyperinflated currency worth little to no value, according to CCN.

Even though bitcoin transactions can take hours – even days – to settle, local merchants have readily embraced the digital currency.

Spent around 20 minutes in line at the ATM this morning to get a max of 5,000 Bolivars. That’s about $0.05

A Venezuelan student named John Villar said he uses bitcoin more than bolivars because it’s literally the only viable option.

“This is not a matter of politics. This is a matter of survival,” said Villar.

Villar said he has bought two plane tickets to Colombia, his wife’s medication, and paid his employees with bitcoin in the past month. Villar emphasized that he intends to continue utilizing bitcoin like the majority of Venezuelans, according to CCN.

In Venezuela, the majority of the population has lost trust in the government, the central bank and the banking system, which has clearly helped predispose Venezuelans to bitcoin.

In addition to bitcoin, communities are beginning to launch local currencies, the revival of an idea that the late Hugo Chavez became a proponent of late in life where Venezuela would adopt a series of 10 community currencies like the ones currently being issued by pro-government forces.

In one Caracas neighborhood, several shops have started accepting the panal, according to the Associated Press.

The panal, which means honeycomb in Spanish, can be spent in just a few stores. But residents of one neighborhood desperate for spending cash said they welcome the idea proposed by pro-government groups.

“There is no cash on the street,” said Liset Sanchez, a 36-year-old housewife who plans to use her freshly printed panals to buy rice for her family. “This currency is going to be a great help for us.”

Amid triple-digit inflation and a currency meltdown, there has been a run on cash in Venezuela.

Buying common items such as toilet paper, or paying a taxi driver, requires stacks of the official currency, called the bolivar.

To be sure, not everybody agrees that these alternative currencies are necessary or even helpful.

Jose Guerra, an opposition politician, knocked the idea of an alternative currency, arguing that having multiple currencies could add “monetary chaos” to the ongoing economic crisis. Perhaps Guerra has never been faced with the prospect of either starving or finding an alternative means of procuring food.

Indeed, President Nicolas Maduro inadvertently helped validate bitcoin – even though his government is cracking down on bitcoin miners – by announcing that the country would adopt a national digital currency called the petro, similar to bitcoin, to replace the bolivar. He has offered few additional details about the plan, however.

Read More: http://www.zerohedge.com/news/2017-12-19/its-not-politics-its-survival-bitcoin-local-currencies-are-taking-over-venezuela