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- In July 1944, just weeks after the successful Allied invasion of Normandy, hundreds of delegates from around the world gathered in Bretton Woods, New Hampshire to determine the future of the global financial system.
- The vision was simple: America would be the center of the universe, and every other nation would revolve around the US.
- This arrangement ultimately led to the US dollar being the world’s dominant reserve currency which still remains today.
- Whenever a Brazilian merchant pays a Korean supplier, that deal is negotiated and settled in US dollars.
- Oil. Coffee. Steel. Aircraft. Countless commodities and products across the planet change hands in US dollars, so nearly every major commercial bank, central bank, multi-national corporation, and sovereign government must hold and be able to transact in US dollars.
- This system provides a huge incentive for the rest of the world to hold trillions of dollars worth of US assets– typically deposits in the US banking system, or US government bonds.
- It’s what makes US government debt the most popular “investment” in the world, why US government bonds are considered extremely liquid “cash equivalents”.
- As long as this system continues, the US government can continue to go deeper into debt without suffering serious consequences.
- Just imagine being totally broke… yet every time you want to borrow money there’s a crowd of delighted lenders eager to replenish your wallet with fresh funds.
- This may be the US government’s #1 advantage right now.
- You’d think that they would be eternally grateful and take care to never abuse this incredible privilege.
- But no… not these guys.
- In fact, they’ve done the exact opposite. Over the last eight years the US government has gone out of its way to eliminate as much of this benefit and alienate as many allies as possible.
- They’ve abused the trust and confidence that the rest of the world placed in them by racking up record amounts of debt, waging indiscriminate wars in foreign lands, and dropping bombs on children’s hospitals by remote control.
- They’ve created absurd amounts of regulations and had the audacity to expect foreign banks to comply.
- Plus they’ve levied billions of dollars worth of fines against foreign banks who haven’t complied with their ridiculous regulations.
- (Last week, for example, New York state financial regulators fined a Taiwanese bank $180 million for not complying with NY state law.)
- And they’ve threatened to banish any foreign banks from the US financial system who don’t pay their steep fines.
- Abuse. Deceit. Extortion. Not exactly great ways to win friends and influence people.
- It’s as if Barack Obama pulled together the smartest guys he could find to make a list of all the ways the US government would have to screw up in order to lose its enormous financial privilege… and then he went out and did ALL of them.
- The US government is practically begging the rest of the world to find an alternative to the US dollar and US banking system.
- Even the government of France, a key US ally, called into question continued US dominance of the global financial system after the US government slammed French bank BNP Paribas with a $9 billion fine.
- There have already been some attempts to displace the United States in the financial system.
- China has been aggressively setting up its own competing financial infrastructure, something called the China International Payment System.
- It’s been a slow start for the Chinese, but they’re building momentum. Though I’m not sure China is the answer in the long run.
- While banks around the world may not care for the long and strong arm of the US government, the Chinese government doesn’t exactly inspire trust either.
- But now there really is an alternative. Technology.
- Ripple, a blockchain-style protocol that’s funded by Google Ventures (among others), is now being utilized by international banks to send and receive transactions directly.
- The way international bank transfers work now relies exclusively on the US financial system.
- Large foreign banks have what’s called a “correspondent account”, typically at a major US bank like JP Morgan, Citibank, etc.
- A correspondent account is essentially a bank account for other banks. Our company holds funds at a bank in Singapore, for example, whose US dollar correspondent account is at Bank of New York Mellon.
- Foreign banks’ US dollar correspondent accounts are typically at major Wall Street banks because that’s the epicenter of US dollar transactions.
- So when a bank in Australia sends US dollars to a bank in South Africa, that payment actually flows from the Australian bank’s correspondent account in the US to the South African bank’s correspondent account in the US.
- The entire transaction effectively takes place using the US banking system.
- Again, this gives the US government enormous power over foreign banks. Any foreign bank that doesn’t do what Uncle Sam commands can be excommunicated from the US banking system.
- And without access to the US banking system, a foreign bank will be unable to transact in US dollars, and hence unable to conduct any global business.
- This is a death sentence for a bank. The US government knows this and has been blackmailing global banks for years.
- But now technology is providing another option.
- Banks don’t have to use the US banking system anymore; they can send real-time payments internationally using the Ripple protocol.
- Two months ago a Canadian financial services company sent the first-ever institutional cross-border payment to a German bank.
- This isn’t some wild theory or conjecture. It’s actually happening.
- Just this morning a group of 15 banks in Japan signed up to start using Ripple, and dozens of banks plan to use the protocol within the next six months.
- The technology is cheaper. Faster. Superior. And it doesn’t come with any US government strings attached.
- So it seems Uncle Sam may have finally shot himself in the foot for the last time.
- Syria’s Foreign Ministry, which has the backing of Russia and as of last week, China, condemned Turkey’s military incursion against an Islamic State-held Syrian town near its border, aided by aircraft from a U.S.-led coalition, as a breach of its sovereignty, Syrian state television reported. It added that any counter terrorism operations inside its borders had to be conducted in coordination with Damascus and accused Ankara of launching the incursion to replace Islamic State with “other terrorist groups” a reference to rebels.
- There has already been speculation that Turkey’s latest incursion into Syrian territory has little to do with the stated purpose of cleansing ISIS forces close to its border following this weekend’s Gaziantep suicide bombing which was promptly blamed on ISIS, and is merely the latest escalation in Erdogan’s ongoing conflict with militant Kurdish forces located in the region.
- As reported earlier, Turkish special forces, tanks and jets backed by planes from the U.S.-led coalition launched their first co-ordinated offensive into Syria on Wednesday to try to drive Islamic State from the border and prevent further gains by Kurdish militia fighters. Turkish tank units and Syrian rebels backed by the NATO member crossed into northern Syria to push Islamic State out of the border town of Jarablus, military sources said.
- “Euphrates Shield”, named after the river running nearby, is Turkey’s first major military operation since the abortive coup. It was the first time warplanes from Turkey have struck in Syria since November, when Turkey downed a Russian warplane near the border, and the first significant incursion by Turkish special forces since a brief operation to relocate the tomb of Suleyman Shah, a revered Ottoman figure, in February 2015. The operation comes four days after a suicide bomber suspected of links to the group killed 54 people at a wedding in the southeastern city of Gaziantep.
- Turkey’s President Tayyip Erdogan said the operation was targeting Islamic State and the Kurdish PYD party, whose gains in northern Syria have alarmed Turkey. Ankara views the PYD as an extension of Kurdish militants fighting an insurgency on its own soil, putting it at odds with Washington, which sees the group as an ally in the fight against Islamic State.
- Kurdish fighters have captured large areas of territory since the start of the Syrian conflict in 2011, and Ankara has long declared the Euphrates river, which runs just east of Jarablus, a red line which it does not want them to cross. Foreign Minister Mevlut Cavusoglu said Kurdish fighters must return east of the Euphrates or Turkey would “do what is necessary”.
- According to Reuters, Turkey and the United States hope that by removing Islamic State from the border, they can deprive it of a smuggling route which long saw its ranks swollen with foreign fighters and its coffers boosted by illicit trade. Which, of course, is ironic since for over a year Turkey was allegedly the main provider of financial support for ISIS in exchange for the Islamic State’s oil “exports.”
- * * *
- White and gray plumes of smoke rose from the rolling hills around Jarablus, visible from the Turkish town of Karkamis across the border. The boom of artillery rounds was audible as advancing Turkish tanks opened fire.
- Turkish military sources said the air strikes had hit 12 Islamic State targets, while artillery fire hit 70 targets. “The aim of the operation is to ensure border security and Syria’s territorial integrity while supporting the U.S.-led coalition against Islamic State,” one military source said, adding work to open a passage for ground forces was under way.
- Erdogan said Turkey was determined that Syria should retain its territorial integrity and would take matters into its own hands if required to ensure that was the case.
- But Saleh Muslim, head of the Kurdish PYD, wrote in a tweet that Turkey was entering a “quagmire” in Syria and faced defeat there like Islamic State. Considering historical anecdotes about “land wars” in Asia, he may have a point.
- * * *
- Coincidentally, the invasion takes place just as U.S. Vice President Joe Biden has arrived in Turkey hours after operations began on a pre-planned trip, the most senior U.S. official to visit since a failed July 15 coup shook confidence in Turkey’s ability to step up the fight against Islamic State.
- Biden – whose visit has been panned by some as an attempt at appeasement of the Turkish ruler – is likely to repeat U.S. concerns about Turkey’s crackdown on free speech and political opponents, while Turkish President Recep Tayyip Erdogan is sure to repeat demands that the United States extradite a Muslim cleric living in Pennsylvania who Erdogan claims masterminded the failed military coup. Fethullah Gulen, 75, has denied any involvement with the July 15 coup attempt. State Department deputy spokesman Mark Toner announced Tuesday that Turkey formally submitted an extradition request for the cleric. Toner said the request doesn’t relate to the recent coup attempt, but he declined to provide further details. “We are considering the merits of the request,” Toner said.
- A senior administration official traveling with Biden said the United States wanted to help Turkey to get Islamic State away from the border, and was providing air cover and “synching up” with the Turks on their plans for Jarablus. He also appears to have lied, when he said the shelling was hitting Islamic State, not Kurdish forces.
- Biden, while in Ankara, will emphasize Washington’s “ongoing strong support” of Turkey, the White House said this week. He also will meet with Prime Minister Binali Yildirim.
- However, in the latest sign of strains between the two countries, Turkish news media reported that Erdogan plans to visit Iran on Wednesday, possibly to forge new ties. The trip follows Erdogan’s visit to Moscow this month to improve relations.
- Furthermore, today’s invasion has noticeably complicated Ankara’s relations with Washington, political analyst Bulent Aliriza told Radio Sputnik. “After the suicide attack in Gaziantep the Turkish government said that they will no longer tolerate the presence of Daesh on the border,” the director of the Turkey Project at the Center for Strategic and International Studies in Washington, DC said.
- “Clearly President Erdogan is sending a message by getting closer to Russia and Iran that he’s unhappy with the attitude of the West,” Bulent Aliriza, a Turkey analyst at the Center for Strategic and International Studies, told the Associated Press. “Turkey’s still going to remain a NATO member and aspire for EU membership, but the atmosphere is worse” than before the coup.
- “If Turkish artillery hit Manbij, it was hitting mostly Kurdish elements. So it hit both Daesh and the YPG. This of course created massive complications in Turkey’s relationship with the US because the US has been backing the YPG against Daesh,” the analyst said.
- “Washington’s hope was that after the capture of Manbij, the SDF would move to the town of al-Bab, which is further west, 20-30 kilometers away from the Turkish border and ultimately that these forces would move to Raqqa,” the capital of Daesh’s caliphate, he added.
- * * *
- Meanwhile, as CBS correspondent Mark Knoller writes on Twitter, “Sr US Official says there are strains in the US/Turkey relationship but denies it’s on the brink of a rupture” and adds that “Sr official says @VP objective in Turkey is to make sure US-Turkey relations remain rock solid… says US can’t afford any friction in relations with Turkey. Cites importance of Turkish role against ISIS in Syria.”
- The biggest friction between the two countries remains over the extradition of Gulen: “Biden to stress to Erdogan that US taking seriously s request for extradition of cleric Fethullah Gulen. DOJ lawyers pouring over evidence. But official says Turkey wouldn’t be satisfied unless Gulen had been brought over with Biden on Air Force Two.”
- * * *
- Finally, in a separate meeting, Russian Foreign Minister Sergei Lavrov and U.S. Secretary of State John Kerry will hold talks in Geneva on Friday focusing on the conflicts in Syria and Ukraine, Reuters reported. The two men also discussed Syria by phone on Wednesday, the Russian foreign ministry said in a statement.
- U.S. and Russian officials, whose countries back opposite sides in the five-year Syrian war, have been meeting to agree on military cooperation in the fight against their common enemy there, the Islamic State militant group. Kerry said earlier this week the talks were nearing an end, with technical teams still meeting to discuss details. Earlier, a U.S. official said that Kerry, who was in Abuja, Nigeria, would meet Lavrov in Geneva on Aug. 26 to discuss the conflict in Syria and the Ukraine crisis.
- The Russian foreign ministry said the two men discussed Syria on Wednesday, “including the situation around Aleppo where the (Syrian) government forces, with the support of the Russian military, have been carrying a humanitarian operation.”
- No progress has been reported on a 48-hour humanitarian pause sought by the United Nations in Aleppo to allow aid deliveries and evacuation of wounded from the divided city of 2 million that lacks food and water.
- Russia also said that the two ministers had talked about the need to separate “Washington-oriented” Syrian opposition groups from the “terrorist groups” that are not covered by a regularly broken ceasefire.
- It was unclear how today’s unexpected military campaign by Turkey in Syria targeting the very group, YPG, that the US has been allegedly protecting from ISIS attacks, would impact the ongong peace talk impasse.
- Truthstream Media outlines the history of elitist run regime change and cultural overthrow in the past century. As Alt-Market’s Brandon Smith notes, Truthstream thankfully acknowledges what some in the Liberty Movement refuse to see; namely thatthe strategy of engineered collapse of nations perpetrated by the CIA and globalist NGOs is now being perpetrated against the U.S. Yes, that’s right, America is just as expendable to the elites as any other nation in their quest to create “order out of chaos”, or a New World Order…
“These revolutions are portrayed in the western media as popular democratic revolutions, in which the people of these respective nations demand democratic accountability and governance from their despotic leaders and archaic political systems. However, the reality is far from what this utopian imagery suggests. Western NGOs and media heavily finance and organize opposition groups and protest movements, and in the midst of an election, create a public perception of vote fraud in order to mobilize the mass protest movements to demand ‘their’ candidate be put into power. It just so happens that “their” candidate is always the Western US-favoured candidate, whose campaign is often heavily financed by Washington; and who proposes US-friendly policies and neoliberal economic conditions. In the end, it is the people who lose out, as their genuine hope for change and accountability is denied by the influence the US wields over their political leaders.“
- Via TruthStream…
- Economists and the like often get highly academic and granular in their discussions of the economy and markets. It needn’t be so… with the idea of KISS (keeping it simple, stupid)…here’s a look at the US housing market which has almost regained it’s 2007 bubble valuations.
- US Housing Valuation Index
- What Factors Drive Housing?
- Since 1980 (and even before), there has been a stable ratio of new homes built vs. core population growth (15-64yr/olds), and net new full time job growth. Historically homes are purchased by those with good incomes (full time jobs) and in their prime working years (15-64yrs/old). The fact the Federal Reserve has driven it’s federal funds rate down 97% resulting in a decline in 30yr mortgage rates of 80%+ is probably noteworthy in the rising prices of homes (and rising need for homebuyers to take on greater debt and leverage).
- This isn’t to say 65+yr/olds don’t buy homes, but they typically already own a house that they are also selling on the other side of the transaction. 65+yr/olds are typically net downsizing at this point in their lives. However, since ’08 a wealthier minority have opted out of bonds and into rental RE for the cash flow. Still, to support greater demand for housing…you need a younger population of buyers with the income to support the market growth.
- The chart below is an overview since 1981 of new home creation, core population growth, and net new full time job growth per period.
- ——>1 new home per 1.5 net new full time jobs
——>1 new home per 2.1 persons growth among working age population
•9.5 million new homes added
•21 million increase, 15-64yr/old population
•15 million net new Full Time jobs
—>30yr mortgage 17.8% to 9.1% (-49%)
- ——>1 new home per 1.5 net new full time jobs
——>1 new home per 2 persons growth among working age population
•14.5 million new homes added
•30 million increase, 15-64yr/old population
•23 million net new Full Time jobs
—>30yr mortgage 9.1% to 6.6% (-28%)
- ——>1 new home per 0.5 net new full time job (RED FLAG)
——>1 new home per 2 persons growth among working age population
•5 million new homes added
•10 million increase, 15-64yr/old population
•2.6 million net new Full Time jobs
—>30yr mortgage 6.6% to 3.4% (-47%)
- And based on the Census population growth data and linked trends…the chart below represents the rate of population growth and natural rate of new homes over the next decade.
- •1.6??? million new homes will be added???
•3.2 million increase in the 15-64yr/old population (includes anticipated immigration)
•? million net new Full Time jobs
—>30yr mortgage 3.4% to 2%? (-40%???)
- In the ’16–>’25 period, we already know the working age population will grow the least since prior to WWII…only adding 3.2 million 15-64yr/olds.
- If homes are added at the same historic pace to core population growth, only about 1.6 million homes will be needed and added over the next decade and the negative impact on GDP will be severe absent all the secondary activity new housing drives.
- However unlikely it may seem, if the nearly 4 decade interest rate tailwind is ceasing or turning to an outright headwind, the lack of further cuts or rate hikes would likely slow home buying and exacerbate a demographic driven housing slowdown. The implications of rising rates would go far beyond housing, including CRE, cost of leverage in the markets, and consumer credit (cars, colleges, credit cards) not to mention the derivatives market (most of which are interest rate “insurance” absent capital to pay for the losses)…even a 1% upturn would trigger all these avalanches which would cause rates to collapse to new lows.
- Another very worrisome trend since 2000 is the fast full time job growth among the 55+yr/old population vs. declining full time employment among the 25-54yr/old population (charts below). There are now a half million fewer 25-54yr/old full time employees than in ’00 vs. 11 million more 55+yr/old full time employees. Simply said, the population of elderly (who generally already own homes) will soon be looking to sell. They will be selling to a marginally growing number of potential younger buyers that among them have a declining number of potential buyers with means?!? Outlined HERE.
- The chart below highlights the slowing growth of the 25-54yr/old population and employment from ’00 corresponding with the rise in mortgage leverage. As available core population buyers and buyers with means ceased growing, cheaper credit was substituted to maintain “growth”…and since the peak of ’07 core population… ZIRP has been the double edged sword to cheapen credit and simultaneously drive primarily older investors out of bonds and into rental RE.
- Then again, perhaps the Fed can arrange a negative 10yr Treasury yield (as the BoJ and ECB have) to achieve a 2% 30yr/mortgage (a 40% decline from current rates) to incent the biggest speculative bubble yet??? The trend (below) seems to support this direction.
- The declining debt service (as shown in the below chart) has allowed the same $1426/mo payment that was necessary to control $100k in mortgage debt @17% to control $322k now @ 3.4%…and if mortgage rates get to 2%, the same monthly payment will be able to control nearly $400k or four times the debt.
- Given central banks are all in and have no credible ideas (or credibility period), a NIRP driven speculative new housing bubble (for a population that is barely growing…hello China?) seems most likely. If you haven’t already, get busy front running the next moral hazard moonshot and then stay tuned. Because as you read this, central bankers are already devising their next (even more destructive) “plan”.
- And just in case it’s not clear, the chart below shows what central banks are fighting in a system premised on perpetual growth…
- And below, what it looks like from presidential term perspective (all based on 2 terms except Carter & Bush)…and why the next president (assuming 2 terms) will govern in the worst demographic period in US history.
James Grant, Wall Street expert and editor of the investment newsletter «Grant’s Interest Rate Observer», warns of a crash in sovereign debt, is puzzled over the actions of the Swiss National Bank and bets on gold.
From multi-billion bond buying programs to negative interest rates and probably soon helicopter money: Around the globe, central bankers are experimenting with ever more extreme measures to stimulate the sluggish economy. This will end in tears, believes James Grant. The sharp thinking editor of the iconic Wall Street newsletter «Grant’s Interest Rate Observer» is one of the most ardent critics when it comes to super easy monetary policy. Highly proficient in financial history, Mr. Grant warns of today’s reckless hunt for yield and spots one of the biggest risks in government debt. He’s also scratching his head over the massive investments which the Swiss National Bank undertakes in the US stock market.
- Jim, for more than three decades Grant’s has been observing interest rates. Is there anything left to be observed with rates this low?
Interest rates may be almost invisible but there is still plenty to observe. I observe that they are shrinking and that the shrinkage is causing a lot of turmoil because people in need of income are in full hot pursuit of what little of yields remains.
- What are the consequences of that?
It reminds me of the great Victorian English journalist Walter Bagehot. He once said that John Law can stand anything but he can’t stand 2%, meaning that very low interest rates induced speculation and reckless investing and misallocation of capital. So I think Bagehot’s epigraph is very timely today.
- John Law was mainly responsible for the great Mississippi bubble which caused a chaotic economic collapse in France in the early 18th century. How is the story going to end this time?
It will turn out to be very bad for many people. If Swiss insurance and reinsurance executives are reading this right now they might be rolling their eyes and they might be frustrated to hear an American scolding from a distance of 3000 miles about the risk of chasing yield. After all, if you’re in the business of matching long term liabilities with long term assets you have little choice but to wish for a better, more sensible world. But you have to take the world as it is and today’s world is barren of interest income. The fact is, that these are very risk fraught times.
- Where do you see the biggest risks?
Sovereign debt is my nomination for the number one overvalued market around the world. You are earning nothing or less than nothing for the privilege of lending your money to a government that has pledged to depreciate the currency that you’re investing in. The central banks of the world are striving to achieve a rate of inflation of 2% or more and you are lending certainly at much less than 2% and in many cases at less than nominal 0%. The experience of losing money is common in investing. But where is the certitude of loss even before your check clears? That’s the situation with sovereign debt right now.
- On a worldwide basis, more than a third of sovereign debt is already yielding less than zero percent.
There is not quite a bestseller, but a very substantial book called «The History of Interest Rates». It was written by Sidney Homer and Richard Sylla. Sidney Homer is no longer with us, but Richard Sylla is alive and well at New York University. So I called him and said: « Richard, I’ve read many pages but not every single page in your book which traces the history of interest rates from 3000 BC to the present. Have you ever come across negative bond yields?» He said no and I thought that would be kind of a major news scoop: For the first time in at least 5000 years we have driven interest rates below the zero marker. I thought that was an exceptional piece of intelligence. But I notice however that nobody seems to have picked up on it.
- It’s now already two years ago since the ECB was the first major central bank to introduce negative rates.
There are some other historical settings: In Europe, ??Monte dei Paschi di Siena, this 500 and plus year old bank in Italy, is struggling and as broke as you can be without being legally broke. Monte dei Paschi has survived for half a millennium and now it is on the ropes. Meanwhile, the Bank of England is doing things today that it has never done in its history which is 300 plus years. So I suggest that these are at least interesting times and in many respects unprecedented ones.
- So what’s the true meaning of all this?
In finance, mostly nothing is ever new. Human behavior doesn’t change and money is a very old institution and so are our markets. Of course, techniques evolve, but mostly nothing is really new. However, with respect to interest rates and monetary policy we are truly breaking new ground.
- Now central baners are even talking openly about helicopter money. Will they really go for it?
I already hear the telltale of beating rotor blades in the sky. I also hear the tom-toms of fiscal policy being pounded. There seems to be some kind of a growing consensus that monetary policy has done what it can do and that what me must do now – so say the «wise ones» – is to tax and spend and spend and spend. That seems to be the new big idea in policy. In any case, it is not good for bondholders.
- Interestingly, nobody seems to be talking about the growing government debt anymore. Also, budget politics are just a side note in the ongoing presidential elections.
The trouble with this election is that somebody has to win it. I have no use for Donald Trump but I have equally no use for Hillary Clinton. The point is that one of those two is going to win. That is the tragedy! So we at Grant’s regret that one of them is going to win.
- The financial crisis and the weak economic recovery likely have spurred the rise of Donald Trump. Why isn’t the US economy in better shape after all those monetary programs?
I wonder how it would have been if markets had been allowed to clear and if prices had been allowed to find their own level in real estate in 2008.Central banks have intervened to quell financial panics for at least 200 years. For instance, in 1825 the bank of England lent without stint and was not – as they said – overnice about the kind of collateral. That was a very dramatic intervention. So it’s not as if we have never before seen the lender of last resort at work. But what is new is the medication of markets through this opiate of quantitative easing year after year after year following the financial crisis. I think that this kind of intervention has not only not worked but it has been very harmful. Around the world, the economies are not responding despiteradical monetary measures. To some degree, I believe, they are not recovering because of radical monetary measures.
- What’s exactly the problem with the US economy?
There is another side of what we are seeing now: In America certainly the Federal Reserve and bank regulators generally are very heavy handed in their interventions. I’m sure they have every good intention. But with their regulatory charges they are suppressing the recovery in credit that takes place in a normal economic recovery and in this particular case after a depression or after a liquidation.
- Then again, a revisit of the financial crisis would be catastrophic.
The new rules with respect to financial reform have absorbed not only forests worth of paper but also the time and attention of legions of lawyers. If you talk to a banking executive what you hear is that the banks have been overwhelmed by the need to hire compliance and regulatory people. This is especially bearing on the smaller banks. I think that’s part of the story of the lackluster recovery: Monetary policy has been radically open in the creation of new credit. But it has been radically restrictive with regard to risk taking in the private world.
- So what should be done to get the economy back on track?
There are guides in history on how to do this. For more than a hundred years in Britain, in the United States and probably as well in Switzerland, the owners of the equity of a bank themselves were responsible for the solvency of the bank. If the bank became impaired or insolvent they had to stump up more capital to pay off the liability holders, including the depositors. But over the past hundred years collective responsibility in banking has gradually replaced individual responsibility. The government, with the introduction of deposit insurance, new regulations and interventions has superseded the old doctrine of the responsibility of the owners of a property. That’s why I think we need to go away from government intervention and go more towards market oriented solutions such as the old doctrine of responsibility of the bank owners.
- At least in the US, the Fed is trying to go back to a more normal monetary policy. Do you think Fed chief Janet Yellen will make the case for another rate hike at the Jackson Hole meeting next week?
Janet Yellen is by no means an impulsive person. According to the « Wall Street Journal», she arrives for a flight at the airport hours early – and that’s plural! So this is a most deliberative and risk averse person. Also, as a labor economist, she’s a most empathetic person. She believes what most interventionist minded economists believe: They have very little faith in the institution of markets and they don’t believe that the price mechanism is anything special. They want to normalize rates and yet they can always find an excuse for not doing so. We have been hearing for years now that the next time, the next quarter, the next fiscal year they will act. So I believe what I’m seeing: None of these days the Federal Funds Rate will go higher than 0.5%. I can’t see that happening.
- Wall Street seems to think along the same lines. So far, many investors don’t take the renewed chatter of a rate hike too seriously.
The Fed is now hostage to Wall Street. If the stock market pulls back a few percent the Fed becomes frightened. In a way I suppose, the Fed is justified in that belief because it is responsible to a great degree for the elevation of financial asset values. Real estate cap rates are very low, price-earnings-ratios of stocks are very high and interest rates are extremely low. One can’t be certain about cause and effect. But it seems to me that the central banks of the world are responsible for a great deal of this levitation in values.So perhaps they feel some responsibility for letting the world down easy in a bear market. It has come to a point where the Fed is virtually a hostage of the financial markets. When they sputter, let alone fall, the Fed frets and steps in.
- Obviously, the financial markets like this cautious mindset of the Fed. Earlier this week, US stocks climbed to another record high.
Isn’t that a funny thing? The stock market is at record highs and the bond market is acting as if this were the Great Depression. Meanwhile, the Swiss National Bank is buying a great deal of American equity.
- Indeed, according to the latest SEC filings the SNB’s portfolio of US stocks has grown to more than $60 billion.
Yes, they own a lot of everything. Let us consider how they get the money for that: They create Swiss francs from the thin alpine air where the Swiss money grows. Then they buy Euros and translate them into Dollars. So far nobody’s raised a sweat. All this is done with a tab of a computer key. And then the SNB calls its friendly broker – I guess UBS – and buys the ears off of the US stock exchange. All of it with money that didn’t exist. That too, is something a little bit new.
- Other central banks, too, have become big buyers in the global securities markets. Basically, it all started with the QE-programs of the Federal Reserve.
It is a truism that central banks do this. They’ve done this of course for generations. But there is something especially vivid about the Swiss National Bank’s purchases of billions of Dollars of American equity. These are actual profit making, substantial corporations in the S&P 500. So the SNB is piling up big positions in them with money that really comes from nothing. That’s a little bit of an existential head scratcher, isn’t?
- So what are investors supposed to do in these bizarre financial markets?
I’m very bullish on gold and I’m very bullish on gold mining shares. That’s because I think that the world will lose faith in the PhD standard in monetary management. Gold is by no means the best investment. Gold is money and money is sterile, as Aristotle would remind us. It does not pay dividends or earn income. So keep in mind that gold is not a conventional investment. That’s why I don’t want to suggest that it is the one and only thing that people should have their money in. But to me, gold is a very timely way to invest in monetary disorder.
- There is the greatest conspiracy of all time. The corrupt politicians have completely corrupted mainstream media. They even organized the overthrow at Fox News because that was the only station they could not take over. Everything from CNN, ABC, NBC, CBS, and countless newspapers are all out for a coronation of Hillary at the complete expense of the free press. We may never again be able to trust anything they say or print and this is becoming so blatant and in your face, even the New York Post, long on the fringe, has come out with the bold headline: American journalism is collapsing before our eyes. They are too greedy for power to know what they do, but that is no excuse for the treason they are carrying out against the American people.
- Indeed, this is part of the end times. Government is turning against the people and the free press, which was suppose to defend our liberty, has join the conspiracy and are now on the side of government against the people. That peak in the Economic Confidence Model 2015.75 was the peak in government. They now know they are losing control and in the process, they will burn down the barn to get a mouse that roars. There is no future left as we knew it. There will be no freedom or liberty to leave our children and grandchildren. The slide downward from 2015.75 will be marked with more Draconian measures and nothing but lies. They are fighting now to retain control and the press has joined forces with government and the neoconservatives who want only to wage war and engage in their dream of nation building, which has been a complete failure. They do not care about the people. We are the great unwashed in whose blood they feast and wash their hands all for the glory of power.
- They are bringing back meaning to Patrick Henry’s most famous quote: “give me liberty or give me death.” You do reach a point when they just go too far. They can threaten to kill you. If you reach that point when you can say go ahead because living as your slave is a fate worse than death, you disarm them. There is nothing else they can threaten you with. Then, and only then, do you comprehend the deep meaning behind the words of Patrick Henry.
- It is a sad day for journalism. It has never been so manipulative than it is today. This is truly the end of everything that made America the beacon of liberty for the world. It is just a hollow shell. To think that the parents of these journalists worked hard to make sure their children had a better life. They have disgraced their parents. They have condemned their own children. They have made a mockery of our liberty, and they are working hard to further the oligarchy, which always destroys every Republic known to history. When the rule of law collapses as we have seen with Hillary, and the press becomes the pawn of the establishment, all that is left is the monetary system collapse. Game over. Turn out the lights. It becomes only the next step in a series of steps down that road of destruction why no Republic has ever survived. The circle of life of government is nearly complete. We must simply crash and burn with hope to survive and rise from the ashes with a different system altogether. To quote Patrick Henry:
- “I know of no way of judging the future but by the past”
- The critics of Obamacare have been proven right. The Obama administration promised that health insurance premiums would go down. Instead, they have absolutely skyrocketed. The Obama administration promised that Obamacare would not kill jobs. Instead, firms are hiring fewer workers because of suffocating health care costs. As you will see below, even the Federal Reserve is admitting this. The Obama administration also promised that the big health insurance companies would love the new Obamacare plans and would eagerly compete with one another to win customers in the new health insurance marketplaces. Instead, many of the big health insurance companies are now dropping Obamacare plans altogether.
- We witnessed the latest stunning example of this phenomenon just a few days ago. It turns out that Aetna has been losing hundreds of millions of dollars on plans sold through the health exchanges, and now they plan to pull out of the program almost entirely…
Earlier this week, Aetna, which covers about 900,000 people through the health exchanges created under Obamacare, announced that it would dramatically reduce its presence those exchanges. Instead of expanding into five new states this year, as the insurer had previously planned, the company said that it would drop out of 11 of the 15 states in which it currently sells under the law.
Aetna’s decision follows similar moves from other insurers: UnitedHealth announced in April that it would cease selling plans onmost exchanges. Shortly after, Humana pulled out of two states, Virginia and Alabama. More than a dozen of the nonprofit health insurance cooperatives set up under the law—health insurance carriers created using government-back loans in order to spur competition—have failed entirely. While some insurers are entering the exchanges, even more are leaving.
- Another one of “the big five”, UnitedHealth, is going to lose more than half a billion dollars on Obamacare plans. So just a few months ago they also announced that they would be dramatically scaling back their participation in the program.
- Because of the ridiculous costs, health insurance companies are either going to have to abandon the exchanges completely or they will have to raise rates substantially.
- Needless to say, the people that are going to ultimately feel the pain from all of this are consumers…
Customers who are now forced to obtain insurance or pay a hefty fine that grows more costly over time are being left in a difficult position. Americans are essentially stuck between a rock and hard place, either losing coverage entirely, or having to cough up money for a plan they can’t afford.
“Something has to give,” said Larry Levitt, a healthcare law expert at the Kaiser Family Foundation. “Either insurers will drop out or insurers will raise premiums.“
- On the low end of the spectrum, tens of millions of poor Americans benefit from government programs that provide health care at little or no cost.
- On the other end of the spectrum, the very wealthy can afford to pay the ridiculously high health insurance premiums that we are seeing under Obamacare.
- So what this means is that the people that are being hurt the most by Obamacare are those that belong to the middle class.
- As I mentioned above, employers are now hiring less workers because of Obamacare, and that is very bad news for the middle class. One recent study conducted by the Federal Reserve Bank of New York discovered that nearly one out of every five firms is “employing fewer workers” because of this insidious law…
According to a new survey by the Federal Reserve Bank of New York, 20.9% of manufacturing firms in the state said they were employing fewer workers because of the Affordable Care Act, the healthcare law known as Obamacare, while 16.8% of respondents in the service sector said the same.
- And middle class Americans that have to pay for their own health insurance are being hit with much higher bills these days. According to one recent study, it is being projected that the average Obamacare premium will go up 24 percent in 2016…
Now, courtesy of a new study by independent analyst Charles Gaba – who has crunched the numbers for insurers participating in the ACA exchanges in all 50 states – we can also calculate what the average Obamacare premium increase across the entire US will be: using proposed and approved rate increase requests, the average Obamacare premium is expected to surge by a whopping 24% this year.
- Even NBC News, which is about as pro-Obama as you can get, is reporting on the crippling premium increases that are devastating the middle class…
Millions of people who pay the full cost of their health insurance will face the sting of rising premiums next year, with no financial help from government subsidies.
Renewal notices bearing the bad news will go out this fall, just as the presidential election is in the home stretch.
“I don’t know if I could swallow another 30 or 40 percentwithout severely cutting into other things I’m trying to do, like retirement savings or reducing debt,” said Bob Byrnes, of Blaine, Minnesota, a Twin Cities suburb. His monthly premium of $524 is already about 50 percent more than he was paying in 2015, and he has a higher deductible.
- All over the nation people are getting hit like this.
- Personally, my health insurance company wanted to nearly double the rate I was paying when Obamacare fully kicked in. So I searched around and found another plan that was only about a 30 percent increase, but at least it wasn’t nearly double what I had been paying before.
- But when the time came to renew that plan, they wanted to jump my premium up another 50 percent per month.
- Those of us that are in the middle are being crushed by Obamacare. We aren’t poor enough to qualify for government assistance, and we aren’t wealthy enough for these ridiculous health insurance premiums not to matter.
- Just about everything that Barack Obama promised us about Obamacare has turned out to be a lie.
- So where in the accountability?
- This is one of the big reasons why nearly one out of every five U.S. adults lives with their parents or their grandparents these days. Many young adults cannot afford the basics of life such as health insurance, and so they have got to find a way to cut back expenses somewhere. If that means moving back in with Mom and Dad, that is what some of them are going to do.
- I am astounded that our system of health care has become so messed up. But this is just more evidence of how our society is falling apart in thousands of different ways, and I am not optimistic that things will be turned around any time soon.
- For the first time since the end of the Cold War, the German government plans to tell citizens to stockpile food and water in case of an attack or catastrophe, the Frankfurter Allgemeine Sonntagszeitung newspaper reported on Sunday.
- Following Angela Merkel’s proclamation that Islamic terrorism is not a function of the massive influx of muslim immigrants into Germany thanks to he immigration policy, we could not help but be a little surprised that, as TagesSchau reports, the federal government, according to a newspaper report wants to encourage the population to begin stockpiling food and water again, so that they temporarily can take care of themself in the case of a disaster or an armed attack. As Reuters details,
- Germany is currently on high alert after two Islamist attacks and a shooting rampage by a mentally unstable teenager last month. Berlin announced measures earlier this month to spend considerably more on its police and security forces and to create a special unit to counter cyber crime and terrorism.
- “The population will be obliged to hold an individual supply of food for ten days,” the newspaper quoted the government’s “Concept for Civil Defence” – which has been prepared by the Interior Ministry – as saying.
- The paper said a parliamentary committee had originally commissioned the civil defense strategy in 2012.
A spokesman for the Interior Ministry said the plan would be discussed by the cabinet on Wednesday and presented by the minister that afternoon. He declined to give any details on the content.
- People will be required to stockpile enough drinking water to last for five days, according to the plan, the paper said.
- …the precautionary measures demand that people “prepare appropriately for a development that could threaten our existence and cannot be categorically ruled out in the future,” the paper cited the report as saying.
- A further priority should be more support of the armed forces by civilians, it added.
- Germany’s Defence Minister said earlier this month the country lay in the “crosshairs of terrorism” and pressed for plans for the military to train more closely with police in preparing for potential large-scale militant attacks.
So apart from stockpiling enough food and water for 10 days; supporting the military; protecting yourself from “a threat to our existence,” everything is awesome and Merkel’s immigration policy has helped?
- We ask – what do they know? Or is this simply more scare-mongering since “A nation in fear is even better influenced and controlled.”
- In August of 1991, members of the Soviet Union’s government — who were also hard-line members of the Communist Party of the Soviet Union (CPSU) — attempted to take control of the country. What many call a coup attempt failed in just two days.
- This month marks the 25th anniversary of the failed effort. During a conversation with Interfax, former Soviet Union president Mikhail Gorbachev spoke openly about the situation of the Soviet Union at the time. But he also seized the opportunity to take a stab at what many in America believe to be one of their country’s worst traits: foreign interventionism.
- When the collapse of the Soviet Union seemed imminent, Gorbchev told Interfax,
- “I told the Americans: you are trying to impose your democracy on the people of different countries, spreading it around like coffee in bags, but we must give the people a chance to make their own choice.”
The “one-legged solutions” imposed by American governments against other nations, Gorbachev added, are inevitable and beyond the president’s power. “Even President Obama,” the former Soviet president said, “democratically elected and enjoying in this regard a significant authority in the country, could not change this course.”
- His discontent seems to be rooted in how America reacted to the collapse of the Soviet Union, noting “[t]hey did not want the Soviet Union to become a powerful democratic state.”
- According to Gorbachev, reforms and changes were already underway, and decentralization of the Soviet Union was only a matter of time. At the time, U.S. officials feared their country’s “policy of unilateral measures … [or] the policy of US domination in global affairs” would not work, Gorbachev added, prompting U.S. officials to push for a total collapse as opposed to letting the country take its own course.
- He continued:
- “And then, when they made a bid for Boris Yeltsin, their goal was the same – to prevent the emergence of Russia as a powerful democratic state. Remember, when the [Soviet] Union collapsed, what was the West’s reaction to this tragic event? They said, ‘this is a gift from God.’ And when Russia was on its back, the US president openly applauded the Russian leadership of the time.”
During the interview, RT confirms, Gorbachev admitted that the union’s downfall was not mainly due to foreign intervention. Instead, he declared, “the country’s authorities and he himself were late with reforms which were strongly needed.” Said reforms included the replacement of “the centralized government planning that had been a hallmark of the Soviet system with a greater reliance on market forces.”
- But Gorbachev defended his position by saying that, once the country was getting ready “to launch [reforms], reshaping the entire system of managing the [Soviet] Union … our opponents also knew that tomorrow would be too late” — meaning members of the Western world, including the United States. The former Soviet leader claimed they knew “there were contradictions, that the old shape of the Union no longer” met the needs of the country, and that the USSR “had to be reformed, decentralized, but not destroyed.”
- He also added that, by then, he thought “only a fool would try to break it all.” But once he allowed confidence to grow into arrogance, Gorbachev told reporters, things got out of his control.
- Twenty-five years after the failed coup, Gorbachev appears to admit that domestic intervention is just as bad as foreign intervention, providing those who are listening with a great opportunity to learn from his own mistakes as a statesman.
- While the Soviet Union had a long history of perpetrating crimes against humanity that are often hard to compare to any other brutal dictatorship in history due to their devastating outcome, it’s also important to consider that many may have learned from this tragic episode in history. As a result, many now have a better grasp of human nature and voluntary exchange.
- Hopefully, his words on the dangers of intervention — domestic or abroad — will resound with the Russian people, and maybe even with Americans.
- In both the United States and the United Kingdom, conservative and libertarian viewpoints have endured censorship on the Internet and on college campuses.
- This has given rise to a new generation of animated and impassioned students keen on partaking in what’s been aptly described as the “cultural libertarian” movement.
- Young millennials engaged in this movement come from a variety of backgrounds but are able to unite based on a fervent disdain for those that believe there are boundaries to what’s deemed “acceptable” speech – a hatred of authority; and a love of freedom and mischief.
- As a conservative writer and student at King’s College London, I have been actively campaigning against political correctness.
- I was recently temporarily suspended from Facebook for announcing a series of speeches I wanted to give at universities in London questioning the place of Islam in the modern world.
- I believe social media companies like Twitter and Facebook actively seek to censor those who talk about the link between Islam and the behavior of jihadists, those who want to put a halt to immigration and those who criticize the Black Lives Matter and feminist movements.
- The victims of their failure to entertain nuance are solely of one political persuasion. My public support of Donald Trump at college was an exercise in differentiating between those who cared about freedom of expression and those who were willing to discard it in favor of a feeling-based approach to learning.
- I think being provocative and adopting a contrarian-like demeanor to intellectual discourse is mistakenly associated with populism and a lack of integrity in our culture.
- Pushing the boundaries is an integral part of upholding the pillars that help maintain a healthy civilization—so long as my university infantilizes students by no- platforming politicians like Boris Johnson, condones the harassment of those who support the Israeli state, and perpetuates the idea that safe spaces are necessary.
- I will continue to make my voice heard.
- KASSY DILLON:
- As a free-speech activist, journalist and student. I felt obliged to join the fight to reinstate Milo Yiannopoulos after his permanent ban from Twitter. I did this by highlighting the partiality of his ban and seeking support from others through keeping the “FreeMilo” hashtag alive.
- This resulted in me being harassed and receiving death threats from accounts that were reported by dozens of people yet escaped suspension.
- As reported by Heat Street, shortly after Yiannopoulos’ ban, I sought to reveal the implicit bias of political correctness on Twitter by re-posting the hateful tweets by Leslie Jones, the actress from the new Ghostbusters who is credited with getting Yiannopoulos suspended.
- Twitter temporarily suspended me within hours, and decided to take no action against Jones. Both Harith and I are students at overwhelmingly liberal schools, and we’ve encountered professors and students who dismiss our opinions by virtue of our political affiliation. The majority of lecturers and academics view the world through the prism of one ideology.
- I remain hopeful that universities will eventually begin to promote intellectual diversity. The increased presence of organizations supporting conservative and libertarian students such as Right2Debate, Leadership Institute, Young Americans for Freedom and Young Americans for Liberty will act as a voice for those students facing discrimination.
- By having these organizations offer training, conferences and financial support, students are now equipped to challenge the misrepresentations by the left.
- I carried out a social experiment last semester at my school, Mount Holyoke College, that showed how much freedom of speech has diminished as a principle worth defending by young students on the left. I hung a Trump campaign sign on my door, it was thrown into the garbage bin. After hanging the Trump sign back up, it was yet again thrown in the garbage, but this time ripped to shreds.
- This illustrated not only the deep political divide on my campus, but the reactionary and juvenile behavior of my fellow students.
- JOINT CONCLUSION:
- Uniting to give a voice to those students facing censorship or discrimination for holding respectable views is the way forward. The internet remains a place where young “cultural libertarians” have a chance to speak out against the hypocrisy of the left. News websites have provided us with the opportunity to expose the way in which freedom of expression has been curtailed to appease the liberal-majority.
- We both realize that university administrations cave to the will of those who are most organized. This is what gives us both hope and encouragement. Conservatives and libertarians need to unite to win this culture war.
- We vow to do all we can to challenge the authoritarians at universities in the UK and USA. If we continue fighting, we’ll eventually become the majority.
- History testifies that freedom always prevails.
- As the stock market reached its lunatic peak near 2200 in August, the certainty that the Fed is out of dry powder and that the so-called economic recovery is out of runway gave rise to one more desperate pulse of hopium.
- Namely, that the central banks of the world were about to embark on outright ‘helicopter money’, thereby jolting back to life domestic economies that are sliding into deflation and recession virtually everywhere – from Japan to South Korea, China, Italy, France, England, Brazil, Canada and most places in-between.
- That latter area especially includes the United States. Despite Wall Street’s hoary tale that the domestic economy has “decoupled” from the rest of the world, the evidence that the so-called recovery is grinding to a halt is overwhelming.
- After all, the real GDP growth rate during the year ending in June was a miniscule 1.2%. It reflected the weakest 4-quarter rate since the Great Recession.
- And even that was made possible only by an unsustainable build-up in business inventories and the shortchanging of inflation by the Washington statistical mills. Had even a semi-honest GDP deflator been used, the US economy would have posted real GDP on the zero-line, at best.
- So the stock market’s 19% melt-up from the February 11 interim low of 1829 on the S&P 500 was positively surreal. There was not an iota of sustainability to it. In fact, “interim” was exactly the right word for a low that is going a lot lower, and soon.
- Indeed, the spring-summer rebound was the work of eyes-wide-shut day traders and robo-machines surfing on a thinner and thinner cushion of momentum. What must come next, in fact, is exactly what happens when you stop peddling your bicycle. To wit, momentum gets exhausted, gravity takes over and the illusion of stability is painfully shattered.
- But these revelers are going to need something stronger than the hope for “helicopter money” to avoid annihilation when the long-running central bank con job finally collapses. Indeed, that denouement lies directly ahead because helicopter money is a bridge too far and valuations are literally perched in the nosebleed section of history.
- As to the latter point, the S&P 500 companies posted Q2 2016 earnings for the latest 12 month period at $86.66 per share. So at the August bubble high the market was being valued at a lunatic 25.1X.
- Even in a healthy, growing economy that valuation level is on the extreme end of sanity. But actual circumstances are currently more nearly the opposite. That is, earnings have now been falling for six straight quarters in line with GDP growth that has slumped to what amounts to stall speed.
- In fact, reported earnings for the S&P 500 peaked at $106 per share in the 12 months ended in September 2014. That means that earnings had fallen by 19% since then, even as the stock market moved from 1950 to nearly 2200 or 13% higher.
- This is called multiple expansion in the parlance of Wall Street, but it’s hard to find a more bubblicious example. Two years ago the market was trading at just 18.4X, meaning that on the back of sharply falling earnings the PE multiple had risen by 36%!
- Valuation multiples are supposed to go up only when the economic and profits outlook is improving, not when it’s unmistakably deteriorating as at present. But during the spring-summer melt-up these faltering fundamentals were blithely ignored on the hopes of a second half growth spurt and, failing the latter, that the Fed would again pull the market’s chestnuts out of the fire.
- The growth spurt absolutely has not happened, and the recent sharp decline in in-bound containers at the West Coast ports means that the US retail sector is not provisioning for any rebound in sales during the coming fall and holiday seasons.
- And that is why the Wall Street gamblers are so desperately hoping for helicopter money. The fact is, the Fed is out of dry powder via the “extraordinary” measures it has employed since the financial crisis.
- To wit, in the event the economy is visibly drifting into recession, it cannot go to sub-zero interest rates without triggering a Donald Trump led domestic political conflagration. Nor can it abruptly shift to a huge new round of QE without confessing that $3.5 trillion of the same has been for naught.
- Yet “helicopter money” isn’t some kind of new wrinkle in monetary policy, at all. It’s an old as the hills rationalization for monetization of the public debt—–that is, purchase of government bonds with central bank credit conjured from thin air.
- It’s the ultimate in “something for nothing” economics. That’s because most assuredly those government bonds originally funded the purchase of real labor hours, contract services or dams and aircraft carriers.
- As a technical matter, helicopter money is exactly the same thing as QE. Nor does the journalistic confusion that it involves “direct” central bank funding of public debt make a bit of difference.
- Suppose Washington issues treasury bonds to the 23 primary dealers on Wall Street in the regular manner. Further, assume that some or all of these dealers stick the bonds in inventory for 3 days, 3 months or even 3 years, and then sell them back to the Fed under QE (and most likely at a higher price).
- So what!
- The only thing different technically about “helicopter money” policy is the suggestion by Bernanke and others that the treasury bonds could be issued directly to the Fed. That would just circumvent the dwell time in dealer (or “investor”) inventories but result in exactly the same end state. In that event, of course, Wall Street wouldn’t get the skim.
- Why Helicopter Money Is The Ultimate Beltway Scam
- But that’s not the real reason why helicopter money policy is so loathsome. The unstated essence of it is that our monetary politburo would overtly conspire and coordinate with the White House and Capitol Hill to bury future generations in crushing public debts.
- They would do this by agreeing to generate incremental fiscal deficits—-as if Uncle Sam’s current $19 trillion isn’t enough debt—–which would be matched dollar for dollar by an increase in the Fed’s bond-buying or monetization rate. That amounts not only to teaching children how to play with matches; it’s tantamount to setting fiscal forest fires across the land.
- There are a few additional meaningless bells and whistles to the theory, but its essential crime against democracy and economic rationality should be made very explicit. To wit, it would amount to a central bank power grab like no other because it insinuates our unelected central bankers into the very heart of the fiscal process.
- Needless to say, the framers delegated the powers of the purse—spending, taxing and borrowing—–to the elected branch of government, and not because they were wild-eyed idealists smitten by a naïve faith in the prudence of the demos.
- To the contrary, they did so because the decision to spend, tax and borrow is the very essence of state power. There is no possibility of democracy—-for better or worse—-if these fundamental powers are removed from popular control.
- Yet that’s exactly what helicopter money policy would do. Based on the Keynesian gobbledygook we debunked in Chapter 4 about the purported gap between full-employment or “potential GDP” and actual output and employment, the Fed would essentially set a target for the Federal deficit.
- In practice, it would also likely throw-in some gratuitous advice about its composition between tax cuts, infrastructure spending and social betterment. The recommended mix would arise from an FOMC whim as to whether in their wisdom its 12 members thought household consumption or fixed asset investment needed to be goosed more.
- At one level, of course, it is to be expected that the peoples’ elected representatives would relish this “expert” cover for ever bigger deficits and the opportunity to wallow in the pork barrel allocation of the targeted tax cuts and spending increases.
- There is surely not a single hard core New Dealer turning in his grave who could have imagined a better scheme for priming the pump.
- Yet helicopter money turns the inherently dangerous idea of fiscal borrowing in a democracy into an outright monetary fraud, and that prospect is sure to kindle vestigial fears of the public debt even among the politicians.
- Indeed, there is a long history on exactly that point. For example, even New Dealer FDR worried about the rising public debt and “Fair Dealer” Harry Truman positively loathed it.
- Likewise, the power-mad Lyndon Johnson essentially voluntarily vacated the oval office when he finally agreed to a substantial tax hike in early 1968 order to stem the deficit hemorrhage from his guns and butter policies.
- Even the greatest deficit spender of his time—–Ronald Reagan—-thought the resulting explosion of the public debt was half Jimmy Carter’s fault and half due to defense spending increases, which didn’t count in his unique way of reckoning the national debt.
- Likewise, the clueless George W. Bush thought the Greenspan housing boom would last forever and thereby cause the nation’s fiscal accounts to come back into balance on their own. Similarly, Obama has insisted that the $8 trillion of new public debt on his watch to date was owing to the Great Recession—– a one-time impact that his policies have purportedly remedied.
- By contrast, the deliberate, wanton addition of trillions to the public debt just so that the Fed can print an equivalent amount of new credit out of thin air is a fish of an altogether different kettle. When push comes to shove even today’s beltway politicians are likely to find the underlying theory of helicopter money to be beyond the pale.
- And that’s especially true owing to the Bernanke fillip.
- It goes without saying, of course, that the Bernank is no hero whatsoever—–notwithstanding his self-conferred glorification for the courage to print. In fact, he is a demented paint-by-the-numbers Keynesian who has a worse grasp on the real world than the typical astrologer.
- That’s why the crucial element in his helicopter money scheme, as he explained in a recent Washington Post op ed, will leave them scratching their heads even in the always credulous Capitol Hill hearing rooms.
- According to Bernanke, the secret sauce of helicopter money is an explicit and loud announcement by the Fed that the incremental public debt will be permanent. It will never, ever be repaid——not even in the fictional by-and-by of the distant future.
- But the reason for it is downright lunatic.
- To wit, unless current taxpayers are assured that future taxes will not rise owing to Washington’s helicopter money handouts and tax breaks, says the Bernank, they won’t spend the government gifts they find strewn along the path of flight!
- That’s right. When a road building boom from helicopter money appropriations results in surging demand at the sand and gravel pits, the small-time businessman involved won’t buy any additional trucks or hire any additional drivers until Washington assures them that they won’t pay higher taxes 25 years hence!
- Only in the Eccles Building puzzle palace does such drivel not elicit uncontainable guffaws. Only in Sweden do they give Nobel Prizes for the academic obscurantism called “rational expectations theory” that is the basis for Bernanke’s whacky theories.
- Why Helicopter Money Will Be A Giant Dud If Tried In The US
- So at the end of the day, “helicopter money” is just a desperate scam emanating from the world’s tiny fraternity of central bankers who have walked the financial system to the brink, and are now trying to con the casino into believing they have one more magic rabbit to pull out of the hat.
- They don’t. That’s because helicopter money will not pass the laugh test even in the Imperial City, and, more importantly, because it takes two branches of the state to tango in the process of implementation.
- Unlike ZIRP and QE, helicopter money requires the peoples’ elected representatives to play and on an expedited basis. That is, the Congress and White House must generate large incremental expansions of the fiscal deficit—so that the central bankers can buy it directly from the US treasury’s shelf, and then credit the government’s Fed accounts with funds conjured from thin air.
- But this assumes there is still a functioning government in Washington and that politicians have been 100% cured of their atavistic fears of the public debt.
- Alas, what is going to cause helicopter money to be a giant dud—-at least in the US——is that neither of these conditions are extant.
- Regardless of whether the November winner is Hillary or the Donald, there is one thing certain. There will be no functioning government come 2017. Washington will be the site of a political brawl of deafening and paralyzing aspect—–like none in modern US history, or ever.
- At the same time, the existing budget deficit is already reversing, and will end the current year at more than $600 billion. That’s baked into the cake already based on the recent sharp slowdown in revenue collections, and means that the FY 2016 deficit will be one-third higher than last year’s $450 billion.
- Moreover, when the new Congress convenes next February the forward budget projections will make a scary truth suddenly undeniable. As we showed in Chapter 9, the nation is swiftly heading back toward trillion dollar annual deficits under existing policy and even before the impact of a serious recessionary decline.
- The reality of rapidly swelling deficits even before enactment of a massive helicopter money fiscal stimulus program will scare the wits out of conservative politicians, and much of the electorate, too. And the prospect that the resulting huge issuance of treasury bonds will be purchased directly by the Fed will only compound the fright.
- What fools like Bernanke haven’t reckoned with is that sheer common sense has not yet been extirpated from the land. In fact, outside of the groupthink of few dozen Keynesian academics and central bankers, the very idea of helicopter money strikes most sensible people as preposterous, offensive and scary.
- Even if Wall Street talks it up, there will be massive, heated, extended and paralyzing debate in Congress and the White House about it for months on end. There is virtually no chance that anything which even remotely resembles the Bernanke version of helicopter money could be enacted into law and become effective before CY 2018.
- So Then Comes The Crash
- Will the boys and girls still in the casino after the current election gong show is over patiently wait for their next fix from a beltway governance process that is in sheer pandemonium and stalemate?
- We think the odds are between slim and none. As we indicated previously, if Trump is elected the fiscal process will lapse into confrontation and paralysis for an indefinite spell.
- And if Hillary is elected, the Republican House will become a killing field for almost anything she proposes, and most especially the rank Keynesian apostasy of outright and massive debt monetization…
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