International Man's Jeff Thomas points to the unprecedented financial & economic challenges & crises in the indebted developed world .. Thomas is very pessimistic about the retirement situation for Americans, Canadians, Europeans .. he thinks their investments in their pension funds will diminish dramatically in value or disappear .. for example, on U.S. social security, "Ergo, each year, those working will need to be taxed more heavily if the system is to continue. Unfortunately, at some point, we reach the tipping point and the concept itself is no longer viable. After that point, benefits will be reduced and, possibly, eliminated altogether." .. in regard to private pension funds like 401Ks, Thomas sees the risks of a stock market crash as bringing down the value of these funds, even if the funds are so-called "diversified" .. but there's more - there are now new risks from governments desperately in search of funds to keep their operations & public pensions going .. "When governments find themselves on the verge of insolvency, they invariably react the same way: go back to the cash cow for a final milking. Each of the jurisdictions that is in trouble at present, has, in its playbook, the same collection of milking techniques. One of those will have a major impact on pensions: the requirement that pension plans must contain a percentage of government Treasuries .. Legislation will be created to ensure that a percentage be in Treasuries, which are 'guaranteed' .. Sounds good. And people will be grateful. Unfortunately, the body that is providing the guarantee is the same body that has created the economic crisis. And if the government is insolvent, the 'guarantee' will become just one more empty promise. Recently, the U.S. Supreme Court ruled that employers have a duty to protect workers invested in their 401(k) plans from mutual funds that perform poorly or are too expensive. By passing this ruling, the US government has the power to seize private pension funds “to protect pensioners”. It also has the authority to dictate how funds may be invested. The way is now paved for the requirement that 401(k)s be invested heavily in US Treasuries."
Economist Satyajit Das sees increasing methods of financial repression being employed by governments as policy options become limited .. Introduced in 1973 by economists Edward Shaw & Ronald McKinnon, the term refers to measures implemented by governments to channel savings & funds to finance the public sector, lower its borrowing costs & liquidate debt .. Das sees new taxes, means testing, user pay surcharges all coming .. "Entitlement liabilities, such as retirement benefits, will be managed by increasing the allowable minimum retirement age, reducing benefit levels, linking to actual contribution by individuals over their working life, and eliminating inflation indexation. Many of these policies will be packaged as socially and ethically progressive initiatives, belying the financial imperatives." .. points out in a 2013 study, the McKinsey Global Institute found that between 2007 & 2012, interest rate & quantitative easing (QE) policies resulted in a net transfer to governments in the United States, Britain & the eurozone of $1.6 trillion (£1.03 trillion), through reduced debt-service costs & increased central bank profits - "The losses were borne by households, pension funds, insurers and foreign investors. Households in these countries together lost $630bn in net interest income, with the major losses being borne by older households with significant interest-bearing assets. Non-financial corporations in these countries also benefited by $710bn through lower debt service costs." .. Das also sees deliberate devaluation as another financial repression mechanism .. regulations are another mechanism: "Governments can legislate minimum mandatory holdings of government securities for banks, pension funds and insurance companies. New liquidity regulations already require increased holdings of government bonds by banks and insurers." .. wealth confiscation is yet another mechanism - seizing savings or pension fund assets like in 2013 when Spain drew €5bn (£3.5bn) from the state’s Social Security Reserve Fund, designed to guarantee pension payments in times of hardship .. nationalizations are yet another mechanism .. "Debt monetization and the resultant loss of purchasing power effectively represent a tax on holders of money and sovereign debt. They redistribute real resources from savers to borrowers and the issuer of the currency, resulting in diminution of wealth over time. This highlights the reliance on financial repression, explicitly seeking to reduce the value of savings. Ultimately, the policies being used to manage the crisis punish frugality and thrift, instead rewarding borrowing, profligacy, excess and waste."
Martin Armstrong: "The game is afoot to eliminate CASH .. Already we see the cancellation of such cards and the issuing of new debit cards. Why? The new cards cannot be used at an ATM outside of Germany to obtain cash. Any attempt to get cash can only be an advance on a credit card .. Little by little, these people are destroying everything that held the world economy together .. This will NEVER END NICELY for they can only think about their immediate needs with no comprehension of the future they are creating .. This is total insanity and we are losing absolutely everything that makes society function .. Once they eliminate CASH, they will have total control over who can buy or sell anything." It's financial repression gone mad.
Swiss Re video highlights the recent meeting they held with experts voicing concerns about the ongoing use of unconventional policies .. financial repression is causing financial market distortions & poses a serious risk to financial stability .. These unconventional policies have pushed institutional investors into holding government debt. As a result they have less money available for productive investment, such as infrastructure projects .. "It means that there's a global search for yield. That possibly leads to a misallocation of resources," says Douglas Flint, Group Chairman of HSBC .. Jean-Claude Trichet, Chairman of the Group of Thirty affirms the risks.
The First Chairman of the UK's Financial Services Authority Howard Davies writes an essay on financial repression .. "Maybe it is unreasonable for investors to expect positive rates on safe assets in the future. Perhaps we should expect to pay central banks and governments to keep our money safe, with positive returns offered only in return for some element of risk." .. Davies worries about the consequences of financial repression on the economy .. he sees distortions from the prudential regulation adopted in reaction to the financial crisis - "The question for regulators is whether, in responding to the financial crisis, they have created perverse incentives that are working against a recovery in long-term private-sector investment."
BCA Research's Chief Economist Martin Barnes sees financial repression as "here to stay" for the long-term, given the challenges of low economic growth & high debt globally .. Barnes has written a special report to explain why debt burdens are moe likely to rise than fall over the short & long run given demogaphic trends & the low odds of another economic boom .. BCA Research: "If governments cannot easily bring debt ratios down to more sustainable levels, then the obvious solution is to make high debt levels easier to live with. This can be done be keeping real borrowing costs down and by regulatory pressures that encourage financial institutions to hold more government securities. In other words, financial repression is the inevitable result of a world of low growth and stubbornly high debt. Martin argues that central banks are not overt supporters of financial repression, but they certainly are enablers because they have no other options other than to keep rates depressed if they cannot meet their growth and/or inflation targets. A world of financial repression is an uncomfortable world for investors as it implies continued distortions in asset prices, and it is bound to breed excesses that ultimately will threaten financial stability."
“Monetary policy does affect pricing in today’s market to such an extent that monetary policy itself has been a risk you have to watch .. Investors are focused more on monetary policy changes than has been generally the case, than at any time, as far as I can remember .. As anything that moves prices is a risk that has to be monitored, here the effects of monetary policy affect prices dramatically .. It’s of course always been the case with long rates, and now more significantly with the currency. That’s just a fact of the current market."
- Yngve Slyngstad, chief executive officer of Norway’s $890 billion sovereign-wealth fund
"Financial repression is not a conspiracy theory, it is rather a collective set of macroprudential policies focused on controlling and reducing excessive government debt through 4 pillars - negative interest rates, inflation, ring-fencing regulations and obfuscation - to effectively transfer purchasing power from private savings." - The Financial Repression Authority
FINANCIAL REPRESSION - Cashless Society Needed for Negative Rates
Macroeconomist Gordon Long says elite bankers want and need negative interest rates. How do they get them? Long says, “We need a cashless society in order to get negative interest rates. We have had negative real interest rates for some time. That’s the whole premise of paying down the government debt by effectively debasing it. But we have run up against a wall, and we have run up against that wall. Clearly, quantitative easing isn’t working.”
Long says the bankers are not through distorting the system, and a cashless society is the next step. Long explains, “We are still early in the second or third innings of what’s to come. We are trapped in a globalization trap. With quantitative easing . . . we are bringing demand forward. Debt is nothing but future demand. So, we are really pushing at demand, but we can’t bring anymore forward. In fact, real disposable income is falling. People don’t have money to spend, and jobs are not there. The issue now is not demand. . . .The issue is oversupply. Cheap money doesn’t just allow you to buy something, it also allows producers to produce.”
So, will a cashless society put off the next crash? Long says, “We have run out of runway, but never underestimate the ingenuity of a trapped politician and central bankers to come out with new policies and new ways to extend this. We are going to see some pretty violent volatility and corrections. We are going to be in there guaranteeing collateral because our issue is . . . there is a shortage of collateral. The Fed sucked all of the bonds out of the market. There is a shortage of them. So, we have a major liquidity problem. That’s the runway we are running out of, and flows are starting to slow dramatically. Now, that says it’s getting unstable, but that doesn’t mean the world is coming to an end. It does mean we are going to do something else, and one of those things is negative nominal rates and cashless society. That’s the reason why we are going to have a cashless society. You are going to see this (cashless society idea) accelerate in the next six months.”
Long predicts, “The next crisis is going to be in sovereign debt, and it’s going to be in the bond market. I think it will stem out of the insurance and pension problem where they can’t fund it. Credit is going to collapse around muni bonds, who are using this money to pay pensions. Yes, we are out of runway. . . . We have north of $200 trillion in debt structures. Right now, it’s paying on average 4% or $8 trillion a year. The global GDP is only $72 trillion. The debt is now consuming our seed corn, so to speak. We are not only eating the seed corn, we are borrowing the money; and at some point, somebody is no longer going to lend you money. That’s kind of where we are right now.”
So, is hyperinflation what is coming next? Long says, “It’s coming, but not next. Hyperinflation is a currency event. Hyperinflation is not about prices going up but your currency going down, which means things are more expensive to you. When hyperinflation happens, it is very quick and very short. It is a lack of confidence. What triggers a lack of confidence? All of a sudden, you have an alternative to the debasement in these developed countries. . . . I believe we are going to have more deflation. We are going to have both inflation and deflation, but we are going to have more deflation first because of this oversupply I talked about. Excess supply is going to start to collapse collateral values which are going to hurt assets (bonds held as collateral). I believe, very quickly, that governments will move to guarantee collateral. When that happens, then we get into the hyperinflation. So, there is a down, then a panic and then we go up. We could have a Minsky melt-up, but not
Long adds that it will be “2008 all over again, but on steroids.”
Join Greg Hunter as he goes One-on-One with financial expert Gordon T. Long.
(There is much, much more in the video interview.)
After the Interview:
Gordon Long adds he sees trouble coming with “September options expirations” this fall. He also expects a “big credit freeze coming that may last for two weeks before mid-2016,” but he’s quick to say that credit freeze could literally “happen at any time.” Long puts free commentary onGordonTLong.com. He also offers a paid subscription newsletter that you can see by clicking here. (Right now he’s running a two month free trial.)
Of all the peculiarities about human nature, one of the most interesting in my opinion is that we’re so resistant to change.
Humans simply don’t deal with it well. We tend to root. We find comfort in familiarity.
And, even when the familiar becomes unpleasant, we still put up with it. We prefer to suffer through something that we know rather than change things and risk the unknown.
This is why people stay in bad relationships. Or why they continue working for bosses they dislike at jobs they despise. It’s the fear of change.
But everyone… absolutely everyone… has a breaking point. It’s a point where the status quo becomes so uncomfortable, so painful, that we snap. And walk away.
It’s the same in finance. People stick with what they know, even if they have to endure a little pain and suffering.
Today’s current banking environment is the perfect example. In the US, interest rates for most bank accounts are so low that they fail to keep up with inflation.
You are doing very well if you can generate a whopping 0.5% interest. In Canada rates can be a bit higher.
But when you compare these rates to even the official rates of inflation, it’s clear that savers are guaranteed to lose money.
In Europe it’s even worse. Interest rates at many banks are negative… so savers are actually paying the banks.
In theory there’s nothing wrong with paying your banker, presuming that they’re providing a real service.
Traditionally, banks were no different than a secure storage facility: depositors would pay a fee in exchange for the bank safeguarding their savings.
These days a lot of people might pay 50 bucks a month at a U-Store-It place to store $10,000 worth of junk. So why not pay a small fee for a banker to store $10,000 worth of cash?
The reason is that banks don’t operate like a storage facility.
It’s not like the proprietor of the U-Store-It is loaning out your sofa to make a few bucks on the side. If he were, it would be called fraud, and he’d go to jail for it.
Banks, on the other hand, are actually ENCOURAGED to take your hard earned savings and make a few extra bucks on the side.
In fact they have a history of making often absurd loans and wild, overleveraged bets using your money. Not theirs.
So just consider how insulting this is to actually to pay them interest; paying for the privilege of them gambling with your savings. It’s obscene.
But like I said, we all have a breaking point. And there will reach a level where rates get so low (or negative) that no rational person would continue holding money at a bank.
Why bother? You could just withdraw most of your balance, then pay a small fee for a safety deposit box that you stuff full of cash. Cheaper. Easier. Better.
Cash in your hand might pay 0% interest… but at least it doesn’t cost you.
But there’s a huge problem with this approach: there’s very little physical cash in the system.
According to the Federal Reserve, the amount of physical US currency in circulation is about $1.3 trillion. Yet the amount of “M2” money supply is nearly ten times that amount.
So just imagine if even 10% of people hit their breaking points and withdrew their money in cash– there wouldn’t be enough cash in the system to support this demand. And the banks would subsequently collapse.
If governments have proven anything to us over the last seven years, it is that they will do anything to keep the banks from going down.
This is a major reason why they’re trying to get rid of cash, and in some cases even criminalize it under the ridiculous auspices of the war on terror.
In the US, some of the more prevalent names in finance have started calling for an outright ban of cash, including a prominent economist from Citigroup.
(This is a rather convenient position for Citigroup.)
Greece is another great example– they’ve already implemented a tax on cash withdrawals and wire transfers. And further restrictions will inevitably follow.
These measures are all different forms of capital controls, designed to prevent you from taking your money away from such a destructive system.
In fact, I expect the next round of capital controls will be designed to protect the banks… from you.
When a government is bankrupt, the central bank is nearly insolvent, the banking system is illiquid, and an entire population suffers from interest rates that are either negative or below the rate of inflation, capital controls are a foregone conclusion.
They’ll hit just as soon as enough people reach their breaking points… when they say ‘enough is enough’ and they take their money out of the banking system.
Governments have done it before: they’ll declare a ‘bank holiday’ and then impose some sort of freeze on withdrawals. Just like we saw in Cyprus in 2013. Or the US in 1933.
The data and history are very clear on what will likely happen. We just can’t pinpoint the date.
Very few people will guess correctly and withdraw their cash the day before capital controls are imposed.
That’s why it makes sense to take certain steps now.
Consider holding some physical cash, including some healthier currencies like the Swiss franc or Singapore dollar, as well as precious metals.
More importantly, consider moving a portion of your savings to a rainy day fund at a well-capitalized bank overseas in a jurisdiction that isn’t bankrupt.
After all, it’s hard to imagine that you’ll be worse off for having some savings at a strong, healthy bank that actually pays a reasonable rate of return.
FINANCIAL REPRESSION - War on Cash
LATEST NEWS - War-on-Cash
Europe Will Lead the Charge to Eliminate Cash,
The Next Step is Capital Controls
Martin Armstrong explains how Europe's euro zone is in a desperate fight to maintain power, they will do anything to keep the flawed euro currency, created by a bunch of European lawyers, going .. "This is why governments are still using the same line of thinking of negative interest rates and going to the next step. They cannot meet their budgets .. The smart money is trying to get out as fast as it can by buying rare art, coins, stamps, antiques, real estate, etc. This is the only way out, for when they eliminate cash, chances are they will impose CAPITAL CONTROLS and prevent the movement of money out of a country .. Governments are in a fight for their very existence. They will incite civil unrest, set to rise sharply between 3Q 2015.75 & 2017 .. Government are moving to control everything; you will not be able to buy or sell anything without government approval. The Economic Totalitarianism I have warned about is on the horizon .. The next step in the game will be CAPITAL CONTROLS. When the European government realizes that they cannot eliminate cash without the rest of the entire world doing so simultaneously, money will move out even faster from Europe, driving the dollar to excessive highs. They will most likely follow the same script as they did in Cyprus, imposing currency controls to prevent money from fleeing."
Martin Armstrong reports that Denmark appears to be the first country to abolish cash .. some stores, restaurants, petrol stations are being pushed to accept only everything except cash on their payments .. Armstrong sees capital flight for countries which do not abandon cash .. "We stand on the verge of Economic Totalitarianism that will lead to the total control of money by the state. No one will be able to buy or sell without government approval. The USA has already provided for the revocation of a passport if you owe the government more than $50,000. Passports in Rome were invented not to travel between nations, but to be able to travel to prove you did not owe money to the state and hence were free to travel. History simply always repeats – only the names change." link here to the article
When Cash Is Outlawed,The Bankers Have Won
Financial Survival Network interviews John Rubino argues how once cash is outlawed, the government will be in complete control of your financial decisions or so they think .. he rationalizes the law of unintended consequences will prevail - society will find some way to get around this - whether it is gold or gift cards or something elese .. 25 minutes LINK HERE to the podcast
There are no free lunches in economics. A cashless society is promising to have very tangible costs to our liberties and future prosperity.
Calls by various mainstream economists to ban cash transactions seem to be getting ever more louder.
Bills and coins account for about 10% of M2 monetary aggregates (currency plus very liquid bank deposits) in the US and the Eurozone. Presumably the goal of this policy is to bring this percentage down to zero. In other words, eliminate your right to keep your purchasing power in paper currency.
By forcing people and companies to convert their paper money into bank deposits, the hope is that they can be persuaded (coerced?) to spend that money rather than save it because those deposits will carry considerable costs (negative interest rates and/or fees).
This in turn could boost consumption, GDP and inflation to pay for the massive debts we have accumulated (leaving aside the very controversial idea that citizens should now have to pay for the privilege of holding their hard earned money in a more liquid form, after it has already been taxed). So at long last we can finally get out of the current economic funk.
The US adopted a policy with similar goals in the 1930s, eliminating its citizens’ right to own gold so they could no longer “hoard” it. At that time the US was in the gold standard so the goal was to restrict gold. Now that we are all in a “paper” standard the goal is to restrict paper.
However, while some economic benefits may arguably accrue in the short-run, this needs to be balanced in relation to some serious distortions that could rapidly develop beyond that.
Pros and Cons
To be most effective, banning cash would most likely need to be coordinated between the US and the EU. Otherwise if only one of the two Western economic blocks were to do it, the citizens of that block might start using the paper currency of the other, thereby circumventing the restrictions of this policy. Can’t settle your purchase in paper euros? No problem, we’ll take US dollar bills.
This is just one aspect that can give us a glimpse of the wide ranging consequences this policy would have. Let’s quickly consider some pros and cons, as we see them:
Enhance the tax base, as most / all transactions in the economy could now be traced by the government;
Substantially constrain the parallel economy, particularly in illicit activities;
Force people to convert their savings into consumption and/or investment, thereby providing a boost to GDP and employment;
Foster the adoption of new wireless / cashless technologies.
The government loses an important alternative to pay for its debts, namely by printing true-to-the-letter paper money. This is why Greece may have to leave the euro, since its inability or unwillingness to adopt more austerity measures, a precondition to secure more euro loans, will force it to print drachma bills to pay for its debts;
Paper money costs you nothing to hold and carries no incremental risk (other than physical theft); converting it into bank deposits will cost you fees (and likely earn a negative interest) and expose you to a substantial loss if the bank goes under. After all, you are giving up currency directly backed by the central bank for currency backed by your local bank;
This could have grave consequences for retirees, many of whom are incapable of transacting using plastic. Not to mention that they will disproportionately bear the costs of having to hold their liquid savings entirely in a (costly) bank account;
Ditto for very poor people, many of whom don’t have access to the banking system; this will only make them more dependent, in fact exclusively dependent, on government handouts;
We wonder if the banks would actually like to deal with the administrative hassle of handling millions of very small cash transactions and related customer queries;
Illegal immigrants would be out of a job very quickly – a figure that can reach millions in the US, creating the risk for substantial social unrest;
If there is an event that disrupts electronic transactions (e.g. extensive power outage, cyberattack, cascading bank failures) people in that economy will not be able to transact and everything will grind to a halt;
Of course enforcing a government mandate to ban cash transactions must carry penalties. This in turns means more regulations, disclosure requirements and compliance costs, potentially exorbitant fees and even jail time;
Banning cash transactions might even propel the demise of the US dollar as the world’s reserve currency. The share of US dollar bills held abroad has been estimated to be as high as 70% (according to a 1996 report by the US Federal Reserve). One thing is to limit the choices of your own citizens; another is trying to force this policy onto others, which is much harder. Foreigners would probably dump US dollar bills in a hurry and flock to whichever paper currency that can offer comparable liquidity.
In light of the foregoing does banning cash transactions make sense to you? Aren’t the risks at all levels of society just too large to be disregarded?
Paper money can be thought of as a form of interest-free government borrowing and therefore as a saving to the taxpayer. Given the dire situation of Western government finances, probably the very last thing we should do right now is to ban cash transactions.
Think about it. If the government prints bills and coins to settle its debts, rather than issuing bonds, it does not add to its snowballing debt obligations. Of course the counterargument is that this might result in significant inflation once politicians put their hands directly on the printing press. But isn’t this what the mainstream economists are so desperately trying to do to avoid deflation?
And it’s not like people in the West have tons of cash under the mattress. Let’s do the math. If only 30% of US paper money is held by residents, this is only about 2% of GDP, and probably unevenly distributed. It is therefore very dubious that any boost to economic activity will be that significant. In fact there is no empirical evidence that demonstrates this policy will work as intended (not that this has ever stopped a mainstream economist)
Moreover, an economy’s ability to create money would be even more impaired if its banking system were to crash – exactly at the time when it would need it the most. In reality it could be hugely deflationary because there would be no other currency alternatives. Talk about unintended consequences.
As to who could replace the US in providing paper liquidity to the world, we don’t need to think too hard. China will surely not ban cash transactions given that almost a billion of its citizens are still quite poor and most have no access to banking services (plus it seems that their own economic advisors are much more sensible). Replacing the US in offshore cash transactions would create substantial demand for the Chinese yuan, at that stage without any real competition from other major economies as presumably none would be using paper.
It is therefore doubtful that US political leaders would ever endorse such a policy; they would be effectively giving up on an incredible advantage – the US dollar ATM, to the benefit of their main geopolitical competitors. However, given the considerable influence of mainstream economists in financial and political circles this cannot be ruled out, especially during a crisis.
And it would be just the latest in a set of unprecedented economic policies:
“A depression is coming? Let’s put interest rates at zero. The economy is still in trouble? Let’s have the central bank print trillions in new securities. The banks are not lending? Let’s change the accounting rules and offer government guarantees and funds. People are still not spending? Let’s have negative interest rates. The economy is still in the tank? LET’S BAN CASH TRANSACTIONS!”
More Central Planning
The problem is that central planners never know how and where to stop. If a policy doesn’t work, they just find a way to tinker somewhere else – and with more vigor. Devolving the initiative back to the private sector is never an option.
Micromanagement of every single detail of our economic lives thus seems to be inevitable. And at that point there will be no more free markets. As pointed out by Friedrich von Hayek, “the more the state plans the more difficult planning becomes for the individual.”
Banning cash transactions seems like yet another excuse to postpone implementing real solutions to our financial problems. How can we have sustainable growth in the economy if:
The banks are not solid enough to lend?
Consumers are not solid enough to borrow?
Overindebted municipalities, states and governments seek ever more tax revenues?
An already overburdened private sector is underwriting the cost of every policy error?
The guys and gals who generate real wealth and employment need encouragement and support, not more penalties on how they choose to go about their business.
A cash ban does not address any substantive issues. What is needed is a sensible economic proposal and above all political courage to implement it, which so far seems to be lacking.
There are no free lunches in economics. A cashless society is promising to have very tangible costs to our liberties and future prosperity.
FINANCIAL REPRESSION - War on Cash
WHAT YOU NEED TO KNOW
"The only way to prevent the banking collapse is to prevent people from withdrawing cash. Hence, we see this trend is surfacing in all the mainstream press to get the people ready for what is coming – the elimination of cash. We are starting to even see this advocated in parts of Germany. We will not be able to buy or sell anything without government approval. That is where we are going ..."Martin Armstrong
1-We Can’t Rein In the Banks If We Can’t Pull Our Money Out of Them
Martin Armstrong summarizes the headway being made to ban cash, and argues that the goal of those pushing a cashless society is to prevent bank runs ... and increase their control:
The central banks are ... planning drastic restrictions on cash itself. They see moving to electronic money will
First eliminate the underground economy, but
Secondly, they believe it will even prevent a banking crisis.
This idea of eliminating cash was first floated as the normal trial balloon to see how the people take it. It was first launched by Kenneth Rogoff of Harvard University and Willem Buiter, the chief economist at Citigroup. Their claims have been widely hailed and their papers are now the foundation for the new age of Economic Totalitarianism that confronts us. Rogoff and Buiter have laid the ground work for the end of much of our freedom and will one day will be considered the new Marx with hindsight. They sit in their lofty offices but do not have real world practical experience beyond theory. Considerations of their arguments have shown how governments can seize all economic power are destroy cash in the process eliminating all rights.
Physical paper money provides the check against negative interest rates for if they become too great, people will simply withdraw their funds and hoard cash.
Furthermore, paper currency allows for bank runs. Eliminate paper currency and what you end up with is the elimination of the ability to demand to withdraw funds from a bank.
In many nations, specific measures have already been taken demonstrating that the Rogoff-Buiter world of Economic Totalitarianism is indeed upon us.
This is the death of Capitalism.
Of course the socialists hate Capitalism and see other people’s money should be theirs. What they cannot see is that Capitalism is freedom from government totalitarianism. The freedom to pursue the field you desire without filling the state needs that supersede your own.
There have been test runs of this Rogoff-Buiter Economic Totalitarianism to see if the idea works. I reported on June 21, 2014 that Britain was doing a test run.
A shopping street in Manchester banned cash as part of an experiment to see if Brits would accept a cashless society.
London buses ended accepting cash payments from July 2014.
Meanwhile, Currency Exchange dealers began offering debt cards instead of cash that they market as being safer to travel with.
The Chorlton, South Manchester experiment was touted to test customers and business reaction to the idea for physical currency will disappear inside 20 years.
France passed another Draconian new law that from the police parissummer of 2015 it will now impose cash requirements dramatically trying to eliminate cash by force.
French citizens and tourists will then only be allowed a limited amount of physical money.
They have financial police searching people on trains just passing through France to see if they are transporting cash, which they will now seize.
Meanwhile, the new French Elite are moving in this very same direction. Piketty wants to just take everyone’s money who has more than he does. Nobody stands on the side of freedom or on restraining the corruption within government. The problem always turns against the people for we are the cause of the fiscal mismanagement of government that never has enough for themselves.
In Greece a drastic reduction in cash is also being discussed in light of the economic crisis.
Now any bill over €70 should be payable only by check or credit card – it will be illegal to pay in cash.
The German Baader Bank founded in Munich expects formally to abolish the cash to enforce negative interest rates on accounts that is really taxation on whatever money you still have left after taxes.
Complete abolition of cash threatens our very freedom and rights of citizens in so many areas.
Paper currency is indeed the check against negative interest rates. We need only look to Switzerland to prove that theory. Any attempt to impose say a 5% negative interest rates (tax) would lead to an unimaginably massive flight into cash. This was already demonstrated recently by the example of Swiss pension funds, which withdrew their money from the bank in a big way and now store it in vaults in cash in order to escape the financial repression. People will act in their own self-interest and negative interest rates are likely to reduce the sales of government bonds and set off a bank run as long as paper money exists.
Obviously, government and bankers are not stupid. The only way to prevent such a global bank run would be the total prohibition of paper money. This is unlikely, both in Switzerland and in the United States because the economies are dominated there by a certain “liberalism” to some extent but also because their currencies also circulate outside their domestic economies. The fact that but the question of the cash ban in the context of a global conference with the participation of the major central banks of the US and the ECB will be discussed, demonstrates by itself that the problem is not a regional problem.
Nevertheless, there is a growing assumption that the negative interest rate world (tax on cash) is likely to increase dramatically in Europe in particular since it is socialism that is collapsing. Government in Brussels is unlikely to yield power and their line of thinking cannot lead to any solution. The negative interest rate concept is making its way into the United States at J.P. Morgan where they will charge a fee on excess cash on deposit starting May 1st, 2015. Asset holdings of cash with a tax or a fee in the amount of the negative interest rate seems to be underway even in Switzerland.
The movement toward electronic money is moving at high speed and this says a lot about the state of the financial system. The track record of the major financial institutions is nearly perfect – they are always caught on the wrong side when a crisis breaks, which requires their bailouts. The fact that we have already seen test runs with theory-balloons flying, the major financial institutions are in no shape to withstand another economic decline.
For depositors, this means they really need to grasp what is going on here for unless they are vigilant, there is a serious risk of losing everything. We must understand that these measures will be implemented overnight in the middle of a banking crisis after 2015.75. The balloons have taken off and the discussions are underway. The trend in taxation and reduction of cash seems to be unstoppable. Government is not prepared to reform for that would require a new way of thinking and a loss of power. That is not a consideration. They only see one direction and that is to take us into the new promised-land of economic totalitarianism.
The Financial Times argued last year that central banks would be the real winners from a cashless society:
Central bankers, after all, have had an explicit interest in introducing e-money from the moment the global financial crisis began…
The introduction of a cashless society empowers central banks greatly. A cashless society, after all, not only makes things like negative interest rates possible, it transfers absolute control of the money supply to the central bank, mostly by turning it into a universal banker that competes directly with private banks for public deposits. All digital deposits become base money.
2-Why Central Banks HATE Cash and Will Begin to Tax It Shortly
The reason for this concerns the actual structure of the financial system, that structure is as follows:
1) The total currency (actual cash in the form of bills and coins) in the US financial system is a little over $1.36 trillion.
2) When you include digital money sitting in short-term accounts and long-term accounts then you’re talking about roughly $10 trillion in “money” in the financial system.
3) In contrast, the money in the US stock market (equity shares in publicly traded companies) is over $20 trillion in size.
4) The US bond market (money that has been lent to corporations, municipal Governments, State Governments, and the Federal Government) is almost twice this at $38 trillion.
5) Total Credit Market Instruments (mortgages, collateralized debt obligations, junk bonds, commercial paper and other digitally-based “money” that is based on debt) is even larger $58.7 trillion.
6) Unregulated over the counter derivatives traded between the big banks and corporations is north of$220 trillion.
When looking over these data points, the first thing that jumps out at the viewer is that the vast bulk of “money” in the system is in the form of digital loans or credit (non-physical debt).
Put another way, actual physical money or cash (as in bills or coins you can hold in your hand) comprises less than 1% of the “money” in the financial system.
As far as the Central Banks are concerned, this is a good thing because if investors/depositors were ever to try and convert even a small portion of this “wealth” into actual physical bills, the system would implode (there simply is not enough actual cash).
Remember, the current financial system is based on debt. The benchmark for “risk free” money in this system is not actual cash but US Treasuries.
In this scenario, when the 2008 Crisis hit, one of the biggest problems for the Central Banks was to stop investors from fleeing digital wealth for the comfort of physical cash. Indeed, the actual “thing” that almost caused the financial system to collapse was when depositors attempted to pull $500 billion out of money market funds.
A money market fund takes investors’ cash and plunks it into short-term highly liquid debt and credit securities. These funds are meant to offer investors a return on their cash, while being extremely liquid (meaning investors can pull their money at any time).
This works great in theory… but when $500 billion in money was being pulled (roughly 24% of the entire market) in the span of four weeks, the truth of the financial system was quickly laid bare: that digital money is not in fact safe.
To use a metaphor, when the money market fund and commercial paper markets collapsed, the oil that kept the financial system working dried up. Almost immediately, the gears of the system began to grind to a halt.
When all of this happened, the global Central Banks realized that their worst nightmare could in fact become a reality: that if a significant percentage of investors/ depositors ever tried to convert their “wealth” into cash (particularly physical cash) the whole system would implode.
As a result of this, virtually every monetary action taken by the Fed since this time has been devoted to forcing investors away from cash and into risk assets. The most obvious move was to cut interest rates to 0.25%, rendering the return on cash to almost nothing.
However, in their own ways, the various QE programs and Operation Twist have all had similar aims: to force investors away from cash, particularly physical cash.
After all, if cash returns next to nothing, anyone who doesn’t want to lose their purchasing power is forced to seek higher yields in bonds or stocks.
The Fed’s economic models predicted that by doing this, the US economy would come roaring back. The only problem is that it hasn’t. In fact, by most metrics, the US economy has flat-lined for several years now, despite the Fed having held ZIRP for 5-6 years and engaged in three rounds of QE.
As a result of this… mainstream economists at CitiGroup, the German Council of Economic Experts, and bond managers at M&G have suggested doing away with cash entirely.
This is just the beginning. Indeed… we've uncovered a secret document outlining how the US Federal Reserve plans to incinerate savings
3-The Government Can Manipulate Digital Accounts More Easily than Cash
This may sound over-the-top … but remember, the government sometimes labels its critics as “terrorists“. If the government claims the power to indefinitely detain – or even assassinate – American citizens at the whim of the executive, don’t you think that government people would be willing to shut down, or withdraw a stiff “penalty” from a dissenter’s bank account?
If society becomes cashless, dissenters can’t hide cash. All of their financial holdings would be vulnerable to an attack by the government.
This would be the ultimate form of control. Because – without access to money – people couldn’t resist, couldn’t hide and couldn’t escape.
Why are governments rushing to eliminate cash? During previous recoveries following the recessionary declines from the peaks in the Economic Confidence Model, the central banks were able to build up their credibility and ammunition so to speak by raising interest rates during the recovery. This time, ever since we began moving toward Transactional Banking with the repeal of Glass Steagall in 1999, banks have looked at profits rather than their role within the economic landscape. They shifted to structuring products and no longer was there any relationship with the client. This reduced capital formation for it has been followed by rising unemployment among the youth and/or their inability to find jobs within their fields of study.
The VELOCITY of money peaked with our ECM 1998.55 turning point from which we warned of the pending crash in Russia.
The damage inflicted with the collapse of Russia and the implosion of Long-Term Capital Management in the end of 1998, has demonstrated that the VELOCITY of money has continued to decline. There has been no long-term recovery. This current mild recovery in the USA has been shallow at best and as the rest of the world declines still from the 2007.15 high with a target low in 2020, the Federal Reserve has been unable to raise interest rates sufficiently to demonstrate any recovery for the spreads at the banks between bid and ask for money is also at historical highs. Banks will give secured car loans at around 4% while their cost of funds is really 0%. This is the widest spread between bid and ask since the Panic of 1899.
We face a frightening collapse in the VELOCITY of money and all this talk of eliminating cash is in part due to the rising hoarding of cash by households both in the USA and Europe. This is a major problem for the central banks have also lost control to be able to stimulate anything.The loss of traditional stimulus ability by the central banks is now threatening the nationalization of banks be it directly, or indirectly. We face a cliff that government refuses to acknowledge and their solution will be to grab more power – never reform.
When interest rates are zero and it costs a bank to look after your money it becomes an unattractive asset. Banks in some jurisdictions (such as Switzerland, Denmark and Sweden) are even charging customers interest on cash and deposits. And if you go to your bank and withdraw large amounts in the form of folding notes to avoid these charges you will be lucky if you are not treated as a sort of pariah. For the moment, at least, these problems do not extend to sound money, in other words gold.
There are two distinct issues involved with government-issued currency: zero-to-negative interest rates, which all but eliminate any interest turn on deposits for the banks; and a systemic issue that arises if too many people withdraw their money from the banking system. The problems with the latter would become significant if enough people decide to effectively opt out of holding money in the banks.
Conversion of bank deposits into physical cash increases reserve ratios, restricting the banks’ ability to create credit. However, while the banks are contractually obliged to supply physical cash to anyone who wants it, a drawdown on bank deposits is a bad thing from a central bank’s point of view. A desire for physical cash is, therefore, discouraged. Instead, if the option of owning physical cash was removed and there was only electronic money, deposits would simply be transferred from one bank to another and any imbalances between the banks resolved through the money markets, with or without the assistance of a central bank. The destabilising effects of bank runs would be eliminated entirely.
In the current financial climate demand for cash does not originate so much from loss of confidence in banks, with some notable exceptions such as in Greece. Instead it is a consequence of ultra-low or even negative interest rates. The desire for cash is therefore an unintended consequence of central banks attempting to inject confidence into the economy. The rights of ordinary individuals to turn deposits into physical cash are therefore resisted by central banks, which are focused instead on managing zero interest rate policies and suppressing any side effects.
Central banks can take this logic one step further. Monetary policy is primarily intended to foster investor confidence, so any tendency for investors to liquidate investments is, therefore, to be discouraged. However, with financial markets getting progressively more expensive central bankers will suspect the relative attraction of cash balances are increasing. And because banks are making cash deposits more costly, this is bound to increase demand for physical notes.
Monetary policy has now become like a pressure cooker with a defective safety-valve. Central bankers realise it and investors are slowly beginning to as well. Add into this mix a faltering global economy, a fact that is becoming impossible to ignore, and a dash-for-cash becomes a serious potential risk to both monetary policy and the banking system.
There is an obvious alternative to cash, and that is to buy physical gold. This does not constitute a run on the banking system, because a buyer of gold uses electronic money that transfers to the seller. The problem with physical gold is a separate issue: it challenges the raison d’être of the banking system and of government currencies as well.
This is why we can still buy gold instead of encashing our deposits, for the moment at least.It can only be a matter of time before people realise that with the cash option closing this is the only way to escape an increasingly dysfunctional financial system.
Many commentators have noted that mainstream economists are calling to do away with cash entirely.
It would be easy to scoff at these proposals as completely insane if the Fed hadn’t published a paper back in 1999 suggesting the implementation of a “carry tax” or taxing actual physical cash using an expiration date if depositors aren’t willing to spend the money.
The author of this lunacy is a visiting scholar with the ECB, the Fed, the IMF, and the Swiss National Bank. The fact that two of those groups have already imposed negative interest rates (ECB and SNB) should give warning that these sorts of ideas are actually taken very seriously by Central Banks.
The paper, written 16 years ago, suggested that if the Fed were to find that zero interest rates didn’t induce economic growth, it could try one of three things:
1) A carry tax (meaning tax the value of actual physical cash that is taken out of the system)
2) Buy assets (QE)
3) Money transfers (literally HAND OUT money through various vehicles)
Regarding #1, the idea here is that since it costs relatively little to store physical cash (the cost of buying a safe), the Fed should be permitted to “tax” physical cash to force cash holders to spend it (put it back into the banking system) or invest it.
The way this would work is that the cash would have some kind of magnetic strip that would record the date that it was withdrawn. Whenever the bill was finally deposited in a bank again, the receiving bank would use this data to deduct a certain percentage of the bill’s value as a “tax” for holding it.
For instance, if the rate was 5% per month and you took out a $100 bill for two months and then deposited it, the receiving bank would only register the bill as being worth $90.25 ($100* 0.95=$95 or the first month, and then $95 *0.95= $90.25 for the second month).
It sounds like absolute insanity, but I can assure you that Central Banks take these sorts of proposals very seriously. QE sounded completely insane back in 1999 andwe’ve already seen three rounds of it amounting to over $3 trillion.
No one would have believed the Fed could get away with printing $3 trillion for QE in 1999, but it has happened already. And given that it has failed to boost consumer spending/ economic growth, I wouldn’t at all surprised to see the Fed float one of the other ideas in the coming months.
Indeed, JP Morgan has already begun implementing a similar scheme by forbidding the storage of cash in its safe deposit boxes.
As of March, Chase began restricting the use of cash in selected markets, including Greater Cleveland. The new policy restricts borrowers from using cash to make payments on credit cards, mortgages, equity lines, and auto loans. Chase even goes as far as to prohibit the storage of cash in its safe deposit boxes .
In a letter to its customers dated April 1, 2015 pertaining to its "Updated Safe Deposit Box Lease Agreement," one of the highlighted items reads: "You agree not to store any cash or coins other than those found to have a collectible value." Whether or not this pertains to gold and silver coins with no numismatic value is not explained.
Forcing everyone to spend only by electronic means from an account held at a government-run bank would give the authorities far better tools to deal with recessions and economic booms - Jim Leaviss
Gordon Brown promised to 'end boom and bust' but a cashless world would have given him far more chance to achieve it, academics suggest Photo: Getty Images
This story is part of our "Money Lab" series, in which respected figures from the world of finance put forward controversial ideas for improving our personal finances or the economy.
A proposed new law in Denmark could be the first step towards an economic revolution that sees physical currencies and normal bank accounts abolished and gives governments futuristic new tools to fight the cycle of “boom and bust”.
The Danish proposal sounds innocuous enough on the surface – it would simply allow shops to refuse payments in cash and insist that customers use contactless debit cards or some other means of electronic payment.
Officially, the aim is to ease “administrative and financial burdens”, such as the cost of hiring a security service to send cash to the bank, and is part of a programme of reforms aimed at boosting growth – there is evidence that high cash usage in an economy acts as a drag.
But the move could be a key moment in the advent of “cashless societies”. And once all money exists only in bank accounts – monitored, or even directly controlled by the government – the authorities will be able to encourage us to spend more when the economy slows, or spend less when it is overheating.
This may all sound far-fetched, but the idea has been developed in some detail by a Norwegian academic, Trond Andresen*.
In this futuristic world, all payments are made by contactless card, mobile phone apps or other electronic means, while notes and coins are abolished. Your current account will no longer be held with a bank, but with the government or the central bank. Banks still exist, and still lend money, but they get their funds from the central bank, not from depositors.
Having everyone’s account at a single, central institution allows the authorities to either encourage or discourage people to spend. To boost spending, the bank imposes a negative interest rate on the money in everyone’s account – in effect, a tax on saving.
Faced with seeing their money slowly confiscated, people are more likely to spend it on goods and services. When this change in behaviour takes place across the country, the economy gets a significant fillip.
The recipient of cash responds in the same way, and also spends. Money circulates more quickly – or, as economists say, the “velocity of money” increases.
What about the opposite situation – when the economy is overheating? The central bank or government will certainly drop any negative interest on credit balances, but it could go further and impose a tax on transactions.
So whenever you use the money in your account to buy something, you pay a small penalty. That makes people less inclined to spend and more inclined to save, so reducing economic activity.
Such an approach would be a far more effective way to damp an overheated economy than today’s blunt tool of a rise in the central bank’s official interest rate.
If this sounds rather fanciful, negative interest rates already exist in Denmark, where the central bank charges depositors 0.75pc a year, and in Switzerland.
At the moment it’s easy for individuals to avoid seeing their money eroded this way – they can simply hold banknotes, stored either in a safe or under the proverbial mattress.
But if notes and coins were abolished and the only way to hold money was through a government-controlled bank, there would be no escape.
Apart from the control over the economy, there would be many other advantages of a cashless society. Such a system is much cheaper to run than one based on banknotes and coins. Forgery is impossible, as are robberies.
Electronic money is an inclusive and convenient system, giving poor and rural sectors of an economy – where cash machines and bank branches may be few and far between and not all people have accounts – a tool for easy participation in the economy.
Finally, the “black economy” will be hugely diminished, and tax evasion made all but impossible.
Jim Leaviss is head of retail fixed interest at M&G Investments.
It’s official: the world has gone central-planner crazy.
Monetary policy, whether in the form of “conventional” methods such as the micromanagement of policy rates or so-called “unconventional” measures such as QE, has proven utterly ineffective when it comes to both “smoothing out” the business cycle and reigniting economic growth in the wake of severe downturns. If anything, recent history has shown the exact opposite to be true. That is, the Fed helped to engineer the housing bubble and has now succeeded in inflating a similar bubble in stocks and fixed income. Meanwhile, the Japanese experience with QE has plunged the country into what we have affectionately dubbed “The Kuroda Zone”, wherein the BoJ has cornered both the stock and bond markets while failing to promote wage growth or meaningfully raise inflation expectations. In China, the PBoC has taken to cutting policy rates at the first sign of weakness in the stock market, helping to sustain what will perhaps go down in history as the second coming of the tulip bulb mania, while the ECB has taken the insane step of adopting a trillion euro bond buying program while simultaneously demanding fiscal discipline, meaning the central bank’s bond monetization efforts are set against a backdrop of meager supply.
In sum, the collective actions of the world’s most influential central banks have done wonders when it comes to inflating asset bubbles but have done very little to revive robust economic growth. In fact, far from smoothing out the business cycle and resuscitating DM demand, post-crisis monetary policy has actually had the exact opposite effect: it has set the stage for an even more spectacular collapse while simultaneously creating a worldwide deflationary supply glut.
At this stage, a sane person might be tempted to call it a day on the monetary experiments, especially considering that at this point, the limits have been reached. That is, there are literally no more assets to buyand rates have hit the effective lower bound where rational actors will eschew bank deposits in favor of the mattress. But not so fast, say folks like Citi’s Willem Buiter and economist Ken Rogoff: the world could always ban cash because if you eliminate physical currency and force people to use a debit card linked to a government controlled bank account for all transactions, you can effectively centrally plan everything. Consumers not spending? No problem. Just tax their excess account balance. Economy overheating? Again, no problem. Raise the interest paid on account holdings to encourage people to stop spending. So with Citi, Harvard, and Denmark all onboard, we bring you the latest call for a cashless society, this time from German economist and member of the German Council Of Economic Experts Peter Bofinger.
Coins and bills are obsolete and only reduce the influence of central banks. This position represents the economy Peter Bofinger. The federal government should stand up for the abolition of cash, he calls in the mirror…
The economy Peter Bofinger campaigns for the abolition of cash. "With today's technical possibilities coins and notes are in fact an anachronism," Bofinger told SPIEGEL.
If these away, the markets for undeclared work and drugs could be dried out. In addition, it would have the central banks easier to enforce its monetary policy.The teaching in Würzburg economics professor called on the federal government to promote at the international level for the abolition of cash. "That would certainly be a good topic for the agenda of the G-7 summit in Elmau," he said. (Click here to read the full interview in the new mirror .)
Even the former US Treasury Secretary Larry Summers and economist pleaded for an end to the already cash . Likewise, the US economist Kenneth Rogoff . He also argued that the interest rates of central banks have less clout when banks or consumer credit rather than hoard cash.
Critics warn, however , such debates would only distract from the real problems of the current monetary policy.
Yes, the “real problems” with current monetary policy. Like the fact that by design it can't possibly work(but it can and will push stocks to unprecedented highs). Paging Mr. Weidmann, your countrymen are going Keynesian crazy.
... More to come through the day
CUSTODIAL RISK- There is Counterparty Risk PLUS Custodial Risk
QUESTION TO ANSWER: What do you really own when you buy an investment?
In our complex financial world of securities, derivatives, counterparty agreement and rehypothecation of the collateral of assets under management virtually no one has the actual physical share certificates of stocks or other assets held by their custodial financial investment firm.
"Custody Risk is one of the biggest, most important issues to consider if you want to maintain your wealth when the next round of systemic risk hits!" Graham Summers - Phoenix Capital
1- CUSTODIANS OFTEN DON'T KNOW WHERE YOUR ASSETS ARE HELD
The SEC recently performed a study of some 400 investment advisor firms. As the SEC itself stated in its report - approximately one-third (140) failed to meet custody rule requirements. What this says is custodians don't know where their clients funds are! Many didn't even know they themselves were legal custodians of their clients funds!
2- YOUR ASSETS WILL LIEKLY BE FROZEN WHEN YOU NEED THEM MOST
Even if an appropriate legal framework is in place to eliminate the risk of loss of value of the securities held by the custodian in the event of its failure, it can take weeks or even months to transfer the securities to new custodians. During that time, you cannot close out open positions .. they are effectively frozen.
In the case of MF Global, some investors were locked out of their accounts and couldn't trade their positions for weeks. As a result many of them incurred massive losses.
FINANCIAL REPRESSION - Net Bank Interest
Financial Repression, Central Banks, Credit Expansion, and the Importance of Being Impatient 04-06-15 John Mauldin
We live in a time of unprecedented financial repression. As I have continued writing about this, I have become increasingly angry about the fact that central banks almost everywhere have decided to address the economic woes of the world by driving down the returns on the savings of those who can least afford it – retirees and pensioners.
This week’s Outside the Box, from my good friend Chris Whalen of Kroll Bond Rating Agency, goes farther and outlines how a low-interest-rate and massive QE environment is also destructive of other parts of the economy. Counterintuitively, the policies pursued by central banks are actually driving the deflationary environment rather than fighting it.
To further Chris’s point I want to share with you a graph that he sent me, from a later essay he wrote. It shows that the cost of funds for US banks has dropped over $100 billion since the financial crisis, but their net interest income is almost exactly the same. What changed? Banks are now paying you and me and businesses $100 billion less. The Fed’s interest-rate policy has meant a great deal less income for US savers.
It is of the highest irony that Keynesians wanted to launch a QE policy that would increase the value of financial assets (like stocks), which they claimed would produce a wealth effect. I made fun of this policy some five years ago by calling it “trickle-down monetary policy.” Subsequent research has verified that there is no wealth effect from QE. Well, it did make our stocks go up, on the backs of savers. We’ve transferred interest income from savers into the stock market. We’ve made retirement far riskier for our older pensioners than it should be.
As Chris Whalen writes:
Indeed, in the present interest rate environment, to paraphrase John Dizard of the Financial Times, it has become mathematically impossible for fiduciaries [brokers, investment advisors and managers of pension funds and annuities] to meet the beneficiaries’ future investment return target needs through the prudent buying of securities.
Everywhere I go I talk with investment advisors and brokers who are scratching their heads trying to figure out how to create retirement portfolios that provide sufficient income without significantly moving out the risk curve at precisely the wrong time in their client’s lives. It is a conundrum that has been made for more difficult by Federal Reserve policy.
Economics Professor Larry Kotlikoff (Boston University) and our mutual friend syndicated financial columnist Scott Burns came by to visit me last week. I have talked with Larry on and off over the last few years, and Scott and I go back literally decades. A few years ago, Scott and Larry wrote a very good book called The Clash of Generations. Now, Larry has branched off on his own and written a really powerful manual on Social Security called Get What's Yours: The Secrets to Maxing Out Your Social Security.
I will admit I have not paid much attention to Social Security. I just assumed I should start mine when I’m 70, as so many columns I have read suggested. Larry and I recently spent an hour discussing the Social Security system (or perhaps it would be better to call it the Social Security Maze). Three thousand pages of law and tens of thousands of regulations and so many nuances and “gotchas” that it is really difficult to understand what might be best in your particular circumstances. Larry asked me questions for about two minutes and then proceeded to make me $40,000 over the next five years. It turns out I qualify for an obscure (at least to me) regulation that allows me to get some Social Security income for four years prior to turning 70 without affecting my post-70 benefits. There are scores of such obscure rules.
Larry says it is more often the case than not that he can sit down with somebody and make them more money than they thought they were going to get. As one reviewer says:
This book is necessary for three reasons:
Social Security is not intuitive, and sometimes makes no sense at all.
Two, Americans act against their best interests, leaving all kinds of money on the table.
Three, there is usually a “however” with Social Security rules. Worse, Social Security is now up to three million requests every week, but Congress keeps cutting back budget, staff, hours and whole offices. Combine that with the complexity factor, and the authors conclude you cannot trust what Social Security advises. Great.
If you or your parents are on Social Security or you are approaching “that age,” you really should get this book. Did you know that if you are divorced you can get a check for half of your former spouse’s Social Security income without affecting their income at all? But you can’t know whether this is a good strategy unless you look at other options.
How many retirees or those nearing retirement know about such Social Security options as file and suspend (apply for benefits and then don’t take them)? Or start stop start (start benefits, stop them, then restart them)? Or– just as important – when and how to use these techniques? Get What’s Yours covers the most frequent benefit scenarios faced by married retired couples, by divorced retirees, by widows and widowers, among others. It explains what to do if you’re a retired parent of dependent children, disabled, or an eligible beneficiary who continues to work, and how to plan wisely before retirement. It addresses the tax consequences of your choices, as well as the financial implications for other investments.
The book is written in Larry’s usual easy-to-read style, and you can jump to the sections that might be most relevant to you. The book is $11 on Kindle and under $15 at Amazon. This might be some of the better financial advice that you get from reading my letter: go get a copy of Get What’s Yours.
I can’t guarantee it will make you $40,000 in five minutes, but it can show you how to navigate the system. Larry also has a website with some inexpensive software to help you maximize your own Social Security. Seeing as how Social Security is the largest source of income for most US retirees, this is something everyone should pay attention to.
It is time to hit the send button. Quickly, we finalized the agenda for the 2015 Strategic Investment Conference. You can see it by clicking on the link. Then go ahead and register before the price goes up. This really is the best economic conference that I know of anywhere this year.
Your wondering how long they’ll pay me Social Security analyst,
John Mauldin, Editor
Outside the Boxsubscribers@mauldineconomics.com
Central Banks, Credit Expansion, and the Importance of Being Impatient
This research note is based on the presentation given by Christopher Whalen, Kroll Bond Rating Agency (KBRA) Senior Managing Director and Head of Research, at the Banque de France on Monday, March 23, 2015, for an event organized by the Global Interdependence Center (GIC) entitled “New Policies for the Post Crisis Era.”KBRA is pleased to be a sponsor of the GIC.
Investors are keenly focused on the Federal Open Market Committee (FOMC) to see whether the U.S. central bank is prepared to raise interest rates later this year – or next. The attention of the markets has been focused on a single word, “patience,” which has been a key indicator of whether the Fed is going to shift policy after nearly 15 years of maintaining extraordinarily low interest rates. This week, the Fed dropped the word “patience” from its written policy guidance, but KBRA does not believe that the rhetorical change will be meaningful to fixed income investors. We do not expect that the Fed will attempt to raise interest rates for the balance of 2015.
This long anticipated shift in policy guidance by the Fed comes even as interest rates in the EU are negative and the European Central Bank has begun to buy securities in open market operations mimicking those conducted by the FOMC over the past several years. Investors and markets need to appreciate that, regardless of what the FOMC decides this month or next, the global economy continues to suffer from the effects of the financial excesses of the 2000s.
The decision by the ECB to finally begin U.S. style “quantitative easing” (QE) almost eight years after the start of the subprime financial crisis in 2007 speaks directly to the failure of policy to address both the causes and the terrible effects of the financial crisis. Consider several points:
QE by the ECB must be seen in the context of a decade long period of abnormally low interest rates. U.S. interest rate policy has been essentially unchanged since 2001, when interest rates were cut following the 9/11 attack. The addition of QE 1-3 was an effort at further monetary stimulus beyond zero interest rate policy (ZIRP) meant to boost asset prices and thereby change investor tolerance for risk.
QE makes sense only from a Keynesian/socialist perspective, however, and ignores the long-term cost of low interest rate policies to individual investors and financial institutions. Indeed, in the present interest rate environment, to paraphrase John Dizard of the Financial Times, it has become mathematically impossible for fiduciaries to meet the beneficiaries’ future investment return target needs through the prudent buying of securities. (See John Dizard, “Embrace the contradictions of QE and sell all the good stuff,” Financial Times, March 14, 2015.)
The downside of QE in the U.S. and EU is that it does not address the core problems of hidden off- balance sheet debt that caused the massive “run on liquidity” in 2008. That is, banks and markets in the U.S. globally face tens of trillions of dollars in "off-balance sheet" debt that has not been resolved. The bad debt which is visible on the books of U.S. and EU banks is also a burden in the sense that bank managers know that it must eventually be resolved. Whether we talk of loans by German banks to Greece or home equity loans in the U.S. for homes that are underwater on the first mortgage, bad debt is a drag on economic growth.
Despite the fact that many of these debts are uncollectible, governments in the U.S. and EU refuse to restructure because doing so implies capital losses for banks and further expenses for cash- strapped governments. In effect, the Fed and ECB have decided to address the issue of debt by slowly confiscating value from investors via negative rates, this because the fiscal authorities in the respective industrial nations cannot or will not address the problem directly.
ZIRP and QE as practiced by the Fed and ECB are not boosting, but instead depressing, private sector economic activity. By using bank reserves to acquire government and agency securities, the FOMC has actually been retarding private economic growth, even while pushing up the prices of financial assets around the world.
ZIRP has reduced the cost of funds for the $15 trillion asset U.S. banking system from roughly half a trillion dollars annually to less than $50 billion in 2014. This decrease in the interest expense for banks comes directly out of the pockets of savers and financial institutions. While the Fed pays banks 25bp for their reserve deposits, the remaining spread earned on the Fed’s massive securities portfolio is transferred to the U.S. Treasury – a policy that does nothing to support credit creation or growth. The income taken from bond investors due to ZIRP and QE is far larger.
No matter how low interest rates go and how much debt central banks buy, the fact of financial repression where savers are penalized to advantage debtors has an overall deflationary impact on the global economy. Without a commensurate increase in national income, the elevated asset prices resulting from ZIRP and QE cannot be validated and sustained. Thus with the end of QE in the U.S. and the possibility of higher interest rates, global investors face the decline of valuations for both debt and equity securities.
In opposition to the intended goal of low interest rate and QE policies, we also have a regressive framework of regulations and higher bank capital requirements via Basel III and other policies that are actually limiting the leverage of the global financial system. The fact that banks cannot or will not lend to many parts of society because of harsh new financial regulations only exacerbates the impact of financial repression. Thus we take income from savers to advantage debtors, while limiting credit to society as a whole. Only large private corporations and government sponsored enterprises with access to equally large banks and global capital markets are able to function and grow in this environment.
So what is to be done? KBRA believes that the FOMC and policy makers in the U.S. and EU need to refocus their efforts on first addressing the issue of excessive debt and secondly rebalancing fiscal policies so as to boost private sector economic activity. Low or even negative interest rate policies which punish savers in order to pretend that bad debts are actually good are only making things worse and accelerate global deflation. Around the globe, nations from China to Brazil and Greece are all feeling the adverse effects of excessive debt and the related decline in commodity prices and overall economic activity. This decline, in turn, is being felt via lower prices for both commodities and traded goods – that is, deflation.
In the U.S., sectors such as housing and energy, the effects of weak consumer activity and oversupply are combining into a perfect storm of deflation. For example, The Atlanta Fed forecast for real GDP has been falling steadily as the underlying Blue Chip economic forecasts have also declined. The drop in capital expenditures related to oil and gas have resulted in a sharp decline in related economic activity and employment. Falling prices for oil and other key industrial commodities, weak private sector credit creation, falling transaction volumes in the U.S. housing sector, and other macroeconomic indicators all suggest that economic growth remains quite fragile.
To deal with this dangerous situation, the FOMC should move to gradually increase interest rates to restore cash flow to the financial system, following the famous dictum of Adam Smith that the “Great Wheel” of circulation is the means by which the flow of goods and services moves through the economy:
“The great wheel of circulation is altogether different from the goods which are circulated by means of it. The revenue of the society consists altogether in those goods, and not in the wheel which circulates them” (Smith 1811: 202).
Increased regulation and a decrease in the effective leverage in many sectors of banking and commerce have contributed to a slowing of credit creation and economic activity overall. And most importantly, the issue of unresolved debt, on and off balance sheet, remains a dead weight retarding economic growth. For this reason, KBRA believes that investors ought to become impatient with policy makers and encourage new approaches to boosting economic growth.
Analytical Contact: Christopher Whalen, Senior Managing Director email@example.com, (646) 731-2366
FINANCIAL REPRESSION - Negative, long-term effects of massive Money Printing
American Thinker posted essay emphasizes the negative, long-term effects of massive money printing through quantitative easing (QE) & of the zero interest rate policy (ZIRP) .. it's all about the financial repression of interest rates - the thinking being that if this were not done, the pain of allowing the free markets to determine interest rates would be unbearable -
"One need only imagine the bipartisan political panic were the interest paid by the U.S. federal government on its debt to double or triple, squeezing out hundreds of billions of dollars of spending on military and social programs. It is becoming ever more obvious to ever more people that sustaining these 'financial repression' policies is making economies ever more comatose; ever less dynamic. Exactly when the accumulating long-term economic damage becomes more onerous to central bankers and politicians than the short-term damage of ending QE and ZIRP can’t be known. But that inflection point will come, desired or not; willed or not. It is not avoidable."
If the world’s central bankers are successful in pursuit of their short-term goals by the use of Quantitative Easing (QE) and Zero Interest Rate Policy (ZIRP) -- winning the race to the bottom in currency devaluation to the cheers of economically dogmatic, faux-literate media -- these bankers can’t then avoid being failures over the intermediate and longer terms in the race to attract productive, job creating investment.
Global central banks cut their euro holdings by the most on record last year to help mitigate losses ahead of the European Central Bank's (ECB) QE. The euro now accounts for just 22% of global reserves, down from 28% before the EU's debt crisis five years ago, according to the International Monetary Fund (IMF). "As a reserve currency, the euro is falling apart," says SocGen's Daniel Fermon. The numbers may be music to (ECB Chairman) Mario Draghi's ears -- a cheaper currency is theoretically a more competitive one.
There is no argument now that what has been and is currently missing from the global economic recovery is private market investment in the means of production -- land, building, equipment, productivity-related technology, and software. Attempts in the last 7 years by governments to tax, print, borrow, and regulate their way to prosperity are ever more clearly the reason that this private market investment has been and is being delayed, deferred and cancelled.
No sane corporate manager invests long term into a currency that is being persistently undercut by official doctrines -- QE and ZIRP -- nor into an economy undermined by unpredictable waves of regulation and potentially confiscatory tax regimes.
This cause and effect is now being denied only by the most dogmatic of progressive ideologues and blindest “social economists”.
Despite the obvious, the central bank of every major country on the planet currently has one or both of these programs in force. The U.S. Fed has, to it credit, ended QE. It is clear, however, that ending ZIRP is going to be a difficult and painful process. And there are more than a few smart observers who think ZIRP will never voluntarily end in the U.S. -- nor in Japan, nor in Europe. Their judgment is that the pain of allowing the free markets to retake control of the level of interest rates of intermediate and long maturity bonds, called ending ‘financial repression’, will prove unbearable. One need only imagine the bipartisan political panic were the interest paid by the U.S. federal government on its debt to double or triple, squeezing out hundreds of billions of dollars of spending on military and social programs.
It is becoming ever more obvious to ever more people that sustaining these 'financial repression' policies is making economies ever more comatose; ever less dynamic.
Exactly when the accumulating long-term economic damage becomes more onerous to central bankers and politicians than the short-term damage of ending QE and ZIRP can’t be known. But that inflection point will come, desired or not; willed or not. It is not avoidable.
Michael Booth, often posting and commenting as Cato, lectured in finance and economics at the Univ. of Texas, and worked for 20 years as an independent contractor and managerial trainer on financial topics in the technology industry.
FINANCIAL REPRESSION -Swiss Re
FINANCIAL REPRESSION TAX TO SAVERS HAS BEEN ~$470B SINCE 2000
FINANCIAL REPRESSION IS ALSO AN "OPAQUE TAX" ON YOUR PENSION & INSURANCE POLICIES
FINANCIAL REPRESSION -NIRP Is A Flawed Economic Concept
The "Natural Interest Rate" Is Always Positive And Cannot Be Negative
Some economists have been arguing that the “equilibrium real interest rate” (that is the “natural interest rate” or the “originary interest rate”) has become negative, as a “secular stagnation” has allegedly caused a “savings glut.”1
The idea is that savings exceed investment, and that a negative real interest rate is required for bringing savings in line with investment. From the viewpoint of the Austrian school, the notion of a “negative equilibrium real interest rate” doesn’t make sense at all.2
To show this, let us develop the case step by step. To start with, one should make a distinction between two types of interest rates: There is the market interest rate, and there is the originary interest rate.
The market interest rate is the outcome of the supply of and demand for savings in the market place. It can be observed, for instance, in the deposit, bond, or loan market for different maturities and credit qualities.
The originary interest rate is a category of human action, saying that acting man values goods available at present more highly than goods available in the future. In other words: Future goods trade at a price discount relative to present goods. For instance, 1 US$ available today is preferred over 1 US$ available in one year’s time.
If 1 US$ to be received in one year’s time is valued at, say, 0.909 US$, the originary rate of interest is 10 percent. (1 US$ divided by 0.909 minus 1 gives you 0.10, or 10 percent, for that matter.) 10 percent is here the originary interest rate (disregarding any other premia).
The “Originary Interest Rate” Reflects a Value Differential
The originary interest rate is expressive of a value differential, which results from so-called time-preference.3The term time-preference denotes that acting man prefers an earlier satisfaction of wants over a later satisfaction of wants.
Time-preference is always and everywhere positive, and so is the originary interest rate. This is, first and foremost, what common sense would tell us.
If the originary interest rate was near-zero, it means that you prefer two apples available in, say, 1,000 years over one apple available today. A truly zero originary interest rate implies that the actor's planning horizon or “period of provision” is infinitely long, which is another way of saying that he would never act at all but would continually push the attainment of his goals into the future.
The notion that time-preference and the originary interest rate could be zero, does not only sound absurd, it is also a logical impossibility: Positive time-preference and a positive originary interest rate are logically implied in the irrefutably true “axiom of human action.”
Human action is purposive behavior, implying the use of means to achieve ends. Action requires time (it is impossible to think otherwise). Thus, time is an indispensable and scarce means for achieving ends. As such, it must be economized, which necessarily implies that an earlier satisfaction of wants is preferred over a later satisfaction of wants.
For (praxeo-)logical reasons, therefore, time preference and the originary interest rate cannot fall to zero, let alone become negative. The implications of a negative originary interest rate cannot even be conceived by the human mind: A zero originary interest rate already implies no action ever into eternity.
However, some argue that due to growing uncertainties related to longer life expectancy, people might increasingly prefer future consumption over present consumption; and that this could push time preference and the originary interest rate into negative territory.
No doubt, peoples’ time preference may decline over time, implying that savings out of current income increases while consumption declines. While time preference and thus the originary interest rate can fall, for logical reasons they cannot hit zero, though, let alone become negative.
Another argument refers to the issue of “saturation” and runs as follows: Let’s assume you have two apples, and you eat one of them. Your hunger is now saturated, so that you prefer eating the remaining apple tomorrow over eating it today. Doesn’t this prove that people may value future goods more highly than present goods, that time preference and the originary interest rate may be negative?
No it doesn’t. Non-consumption of the second apple today can easily be explained by the fact that the marginal utility of eating the apple now is lower than eating it tomorrow or the next day, even when the future marginal utility is discounted by a positive originary interest rate.
That said, the example above is misconstrued.4 It does not illustrate the relevant case, namely the case in which acting man considers alternative uses of one and the same good — and thus doesn’t prove at all that time preference and thus the originary interest rate can be negative.
The End of the Market Economy
What is the relationship between the market interest rate and the originary interest rate? In the loan market, for instance, the interest rate on loans is adjusted to the rate or originary interest. If, for instance, the originary rate of interest is 2 percent and the credit and inflation premia are 1 percent, respectively, the market interest rate would be 4 percent.
Market interest rates may become negative in real terms. In a “hampered market,” for instance, the central bank can push the real market interest rate into negative territory. However, this does not, and cannot, represent an equilibrium, as time preference and thus the originary interest rate cannot become negative.
Should a central bank really succeed in making all market interest rates negative in real terms, savings and investment would come to a shrieking halt: as time preference and the originary interest rate are always positive, “capitalistic saving” — the accumulation of goods designed for improving the production process — would come to an end. Capital consumption would ensue, throwing mankind back into poverty. It would be the end of the market economy.
It might be interesting to note in this context that, for instance, the German national socialists had called for the abolition, the prohibition of the interest rate. Now you know why: Without a positive (originary) interest rate, the market economy will cease to function.
The True Purpose of Negative-Interest-Rate Policy
For some reason, those who argue that the originary interest rate has become negative seem to overlook that the originary interest rate is a phenomena which is not confined to credit markets. It pervades all markets in which present goods are exchanged for future goods.5
For instance, the originary interest rate prevails at each stage of the economy’s time-consuming roundabout production. The originary interest rate also exists in the stock market, where investors exchange present money against a claim on future money (that is a firm’s dividend payment).
If they wanted to be consistent, the believers in a negative originary interest rate would have to call for a policy that does not only make interest rates negative in real terms in the credit market, but also in the markets for, say, stocks and housing.
However, a policy that advocates destroying firms’ values and peoples’ housing wealth wouldn’t be taken too kindly by the public at large; and those economists recommending it couldn’t expect being cheered.
The consequence of a policy of a negative real market interest rate should have become obvious by now: It is an actually perfidious policy for debasing the real value of outstanding debt; and it is a recipe for wreaking havoc on the economy.
2. For important readings about the "pure time-preference theory of interest," see Jeffrey M. Herbener, ed., The Pure Time-Preference Theory of Interest (Auburn, Ala.: Mises Institute, 2011).
3. For a thoroughgoing explanation, see Ludwig von Mises, Human Action: A Treatise on Economics, The Scholar’s Edition (Auburn, Ala.: Mises Institute, 2008), Chapter XIX: “The Interest Rate,” pp. 521 – 534.
4. The correct example would be as follows: You are hungry and have an apple. In this case, no doubt, you would prefer eating the apple today over eating it tomorrow. In other words: You value the apple readily available today more highly than an apple readily available tomorrow.
5. See Murray N. Rothbard, Man Economy, and State (Auburn, Ala.: Mises Institute,  2001), chapter 6 “Production: The Rate of Interest and Its Determination,” pp. 313 – 386.
FINANCIAL REPRESSION - Safety The Primary Reason For Going OFfshore
US Losing its Way
A wise and frugal government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned.
~ Thomas Jefferson
Every time you think the US establishment can do no more to threaten the freedom and livelihood of the very Americans who contribute the most to the prosperity of the country, they increase the heat in the furnace by a notch with
more cheap money and debt,
additional laws and
America, the land of the free, as it was rightfully referred to in the past, and certainly a beautiful place in so many ways, is in the process of destroying the very foundation it was built on.
It truly appears to have lost its way. The size of debt and unfunded liabilities in America is higher than in any other country in the world. No other country is plagued with the level of litigation that America faces. Nine out of ten lawsuits filed worldwide are filed in the US. The US tax code is so convoluted and extensive that even the highest paid and most qualified tax attorney in America can hardly ever give you a straight yes or no answer when asked for tax advice. Frankly, I sometimes wonder how even the most honest American taxpayer can stay out of jail.
Global relative litigation index, via cyberrisknetwork.com
It should not come as a surprise that wealthy Americans have learned to protect their wealth from this concentration of risk by jurisdictionally diversifying their assets. In other words, they set up
foundations or insurance structures
to legally protect and grow what is rightfully theirs elsewhere. However, in consideration of all the recent IRS scare tactics and the hype in the media, it may come as a surprise that the number of Americans looking offshore is on the rise.
The Government’s Desperate Drive for Tax Collection
The US government and its various agencies – with the IRS certainly in the lead – are desperately trying to keep their wealthy taxpayers in check, putting offshore constructions under their regulatory microscope in hope of maximizing tax revenues.
This hunt for tax cheats has been loudly publicized and employed to create the impression that every offshore account must be a scam.
The spin is simple: According to the IRS, Americans with assets offshore are trying to dodge taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others employ foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose. The IRS, in its battle for justice, is committed to do whatever it takes to hunt them down.
The IRS even goes so far as to list “offshore tax avoidance” as one of its “Dirty Dozen” tax scams for 2015. Clearly, by doing so, it is lying to the American people. Tax avoidance, contrary to tax evasion, is completely legal. And offshore tax avoidance is as legal as onshore tax avoidance.
FATCA, the ominous Foreign Account Tax Compliance Act, for instance, has been successfully deployed. In essence, it forces financial institutions around the world to become agents of the IRS (and without compensation, by the way). In fact, fiscally challenged states around the world are now more than happy to sign up on the principle and follow America’s lead. In the context of GATCA, which is the next level up from FATCA and where the ‘G’ stands for ”Global”, automatic exchange of taxpayer information between governments is on its way.
Citizen transparency is certainly en vogue, and not just in America. So far, outright capital controls have not been levied and don’t appear to be visible on the horizon. However, watching all this, one wonders how far governments are willing to go.
Relative to the total US population the number is small, but expatriation has nevertheless been in a steep uptrend for a while now
Jurisdictional Diversification – Looking for Safety, not Tax Evasion
In view of all the hype and pressure, one might expect wealthy Americans to be frightened and keep their assets in the US. However, that is not the case. Not at all. A rapidly growing number of Americans are trying to protect and invest their wealth outside of US territories. More and more Americans are looking for second passports and are renouncing their US citizenship.
Clearly, the stark increase of financial repression is recognized as such. Contrary to the outcome that authorities wish to achieve, Americans who have the possibility to do so, continue to look for good alternatives to protect and grow their possessions offshore.
This is nicely summarized in a research report by Wealth-X, which explains how the US government’s combat against offshore tax havens has actually led to an increase in demand by America’s Ultra High Net Worth Individuals (UHNWIs) for avenues that afford
higher wealth protection and
reduced tax exposure.
So, while the masses might be bamboozled into fearing offshore, rich American families look for safety abroad.
It is hard to obtain firm statistics on this. These matters are typically, and should be, handled in a very private manner. However, based on a variety of surveys conducted by leading legal, accounting and consultancy firms such as the Boston Consulting Group (BCG), the interest for offshore wealth management is growing. According to a US attorney I work with regularly,
the demand for offshore asset protection solutions has quintupled over the past ten years.
The most recent BCG Wealth Report projects annual growth of 6.8% until the end of 2018.
Financial wealth held offshore
Offshore wealth diversification, defined as assets deposited somewhere other than the investor’s home country, keeps rising, with Switzerland the most popular destination. BCG expects Switzerland to remain the largest single offshore center globally, with about 25% of total offshore wealth by the end of 2017. In particular, institutional investors and family offices look for the solidity of Switzerland. At BFI, we too have noticed an increase in demand, despite (or possibly because of) the IRS’ dogged determination to avert Americans from sending any of their wealth to a foreign jurisdiction.
The primary reason to go offshore is SAFETY. The clients and families I work with, almost entirely, are focused on mitigating US-centric litigation risk and political risk. That is where jurisdictional diversification can make a huge difference. The benefits of offshore diversification are substantial. There are many legitimate reasons for maintaining a portion of one’s wealth abroad. And contrary to popular opinion, the primary reason is not to save on taxes. In fact, there are plenty of tax shelters available in the US.
* * *
Beware of US Advisors Without a Passport
A few days ago, I received a call from a client who lives in Boise, Idaho. I will call him George for our purposes here. He was very concerned and informed me that he wanted to immediately undo the offshore trust structure and managed account he had set up with us only in 2013. In fact, he was quite upset with me and questioned whether my team and the legal counsel we had involved had given him ill advice.
I was surprised. The offshore plan implemented for George is solid. It was formulated and implemented carefully. It achieves several objectives. The structure – and I won’t bore you here with the details – affords strong asset protection, global investment flexibility and the legal avoidance of estate taxes upon the passing of George and his wife.
When I asked George why he changed his mind, I quickly understood the context. He had been given the (supposedly) professional advice by his local accountant to unravel his offshore structure. The accountant has been doing corporate accounting work for George for over a decade and has earned George’s trust with his good work. However, in this instance the trusted accountant told George that “it is that kind of offshore structure that gets people into trouble with the IRS”, and that he (the accountant) would not be willing to work with George anymore “unless he resolved this issue promptly”.
It is not the first time I run into this kind of nonsense. I’ve heard many similar stories over the years. It is, unfortunately, not uncommon for local attorneys, accountants and other so-called advisors to shy away from anything that does not originate in the United States of America. This is, of course, a direct result of the IRS’ propaganda and often times unqualified media coverage.
In George’s case, we were able to resolve the confusion and alleviate his – and his “advisor’s” – concerns promptly. No damage was done. George will, from now on, keep his local accountant focused on local matters, while coordinating his international accounting needs with a more knowledgeable professional. Nevertheless, this kind of professional ignorance is frustrating and even somewhat disgusting.
My piece of advice here: Make sure the advisors you let in on the details of your offshore planning have a passport, have left the boundaries of the US and, ideally, speak a second language. Yes, these are possibly not the most reliable indicators. But, seriously, it is paramount that you work with advisors that understand the rules of onshore AND offshore, and that they are active and experienced in the international sphere of wealth management. As Martin Luther King once said: “Nothing in all the world is more dangerous than sincere ignorance and conscientious stupidity”.
Granted, offshore planning may entail a few extra nuances and angles. And being compliant with the rules of reporting is paramount. But it is not rocket science. And it is certainly not illegal. Don’t allow ignorant professionals and the overzealous IRS to tell you otherwise!
For Americans looking for improved asset protection and interested in learning about solid and compliant planning options offshore, BFI is organizing an Inner Circle Wealth Forum.
For six years, we’ve been told that the US economy is in recovery.
This is a totally bogus narrative that was dreamt up by the Central Planners running the Fed. Remember the “green shoots” craze of 2009. It was BS. The US economy is a disaster and has been since 2009.
The bean counters in Washington fabricate a load of nonsense to “prove” otherwise, but telling someone who is 5’6” tall that they are actually 6” tall doesn’t change their height.
Similarly, telling Americans experiencing a REAL unemployment rate of 10+% and an underemployment rate in the high teens that the economy is “recovering” doesn’t change their real-world experience.
The U.S. is delivering at a staggeringly low rate of 44%, which is the number of full-time jobs as a percent of the adult population, 18 years and older. We need that to be 50% and a bare minimum of 10 million new, good jobs to replenish America’s middle class.
THE DISTORTIONAL TRICK
GIVEN UP - If you, a family member or anyone is unemployed and has subsequently given up on finding a job -- if you are so hopelessly out of work that you’ve stopped looking over the past four weeks -- the Department of Labor doesn’t count you as unemployed. That’s right. While you are as unemployed as one can possibly be, and tragically may never find work again, you are not counted in the figure we see relentlessly in the news -- currently 5.6%. Right now, as many as 30 million Americans are either out of work or severely underemployed.
ANY INCOME - There’s another reason why the official rate is misleading. Say you’re an out-of-work engineer or healthcare worker or construction worker or retail manager: If you perform a minimum of one hour of work in a week and are paid at least $20 -- maybe someone pays you to mow their lawn -- you’re not officially counted as unemployed in the much-reported 5.6%. Few Americans know this.
UNDER-EMPLOYED - Those working part time but wanting full-time work. If you have a degree in chemistry or math and are working 10 hours part time because it is all you can find -- in other words, you are severely underemployed -- the government doesn’t count you in the 5.6%.
BIRTH DEATH MODEL - a Plug number that shows dramatic job growth yet the net new enterprises added in America is Negative 70,000 over the last 6 years. Big corporations are still cutting (HP -58,000, America Express -4000) so the number is obviously a statistical "fix"
When the media, talking heads, the White House and Wall Street start reporting the truth -- the percent of Americans in good jobs; jobs that are full time and real -- then we will quit wondering why Americans aren’t “feeling” something that doesn’t remotely reflect the reality in their lives. And we will also quit wondering what hollowed out the middle class.
Only 15% of those entering working age population are finding jobs
As far as real economic growth goes, if you want a clear picture, you need to look at nominal GDP growth. The reason for this is that because the Fed greatly understates inflation, the official GDP numbers are horribly inaccurate.
By using nominal GDP measures, you remove the Feds’ phony deflator metric and the other accounting gimmicks created by the bean counters to overstate growth. With that in mind, consider the year over year change in nominal GDP that has occurred.
Historically, the level of economic growth post 2010 has been associated with recessions. Small wonder that this “recovery” actually feels like an economy that is not growing: when you take out the accounting gimmicks, GDP is flat lining.
Speaking of accounting gimmicks consider the massive divergence between corporate revenue growth and EPS growth (hat tip Lance Roberts). You cannot fake revenues: they represent real growth. EPS on the other hand, can be massaged a million different ways.
Notice that the un-massaged growth post-2009 is just 30%. The massaged “growth” is 250%. Bear in mind, executive stock options are linked to EPS… so guess who got rich in the process.
Again, this whole economic “recovery” and stock market boom is based on accounting gimmicks and outright fraud. It’s a giant house of cards that is primed to come crashing down… just as it did in 2000, 2007… and will today.
FIRST FATCA - Next GATCA
"This a modern day "Doomsday" Book, the same as William the Conqueror Implemented in 1066 after conquering England. He needed to know where the wealth was so he could tax it"
"This is Not Really About Tax There are Easier Ways to Solve Tax Tracking - Its about a Common Reporting Standard. Its about the ability to track Capital"
"FATCA is a decoy for the Common Reporting Standard"
"There is an incredibly aggressive urgency of implementation - an unprecedentedly quick agreement between 57 governments"
Either to Tax it , Expropriation it or Control Its Free Movement
"Era of Banking Secrecy is Over!"
"A Complete Misunderstanding by Banks"
NEW ACRONYMS IN THE ERA OF FINANCIAL REPRESSION
FATCA - Foreign Accounts Tax Compliance Act
GATCA - Global Account Tax Compliance "Acts"
CRS - Common Reporting Standard
IGAs - Inter Governmental Agreements on FATCA
AEOI - OECD's Automatic Exchange of Information
AML/KYC Procedures - The term “AML/KYC Procedures” means the customer due diligence procedures of a Reporting Financial Institution pursuant to the anti-money laundering or similar requirements to which such Reporting Financial Institution is subject.
There will also be considerable customer backlash to FATCA and the documentation it requires. In the age of social media this matters, if this sounds like hyperbole please have a look at this URL
At a most basic level FATCA, the IGAs and the CRS are about making tax part of standard KYC/AML procedures and then reporting, for tax purposes, to those jurisdictions, in which the account holder has tax residence or citizenship.
1) Those in charge of regulating the system will lie, cheat and steal rather than be honest to those who they are meant to protect (individual investors and the public).
2) Any financial problem that surfaces will be dealt with via fraud or lies rather simply allowing those who screwed up to be fired or go to jail.
3) When the inevitable collapse finally does hit, it will be individual investors and the general public who get screwed (not bank executives or politicians).
4) The problem will be prolonged as much as possible, likely fixed years down the road, if ever and individuals will have little or no say in how it pans out.
This is the template for what’s coming. The following is the proof:
EUROPE AS THE MODEL
Europe is ground zero for the whole debt bomb implosion, not because it has the most debt but because it’s politically and economically on the least sound footing.
Some 19 countries share the currency, all of them in varying degrees of socialism (the public sector accounts for roughly 1 in 3 employees in Germany’s allegedly “free market” economy), and varying shades of broke: even Germany a real Debt to GDP of over 200%.
In this regard, Europe gives the rest of us a front-row seat to learn how things will unfold when the real stuff hits the fan and the political and financial elite are at risk of losing their power and wealth.
We’ve been through this mess multiple times in the last three years. The most notable cases involved Spain and Cyprus. And the formula is as follows:
1) A problem first emerges.
2) Various political and financial officials state that the problem is contained and there’s nothing to worry about.
3) Months later, the market and mainstream media catch on… usually when the problem is already a massive crisis and a bank holiday needs to be declared.
4) Individual investors lose a LOT of money while the same folks who cause the problem A) are not fired, fined or jailed B) never come clean about the full scope of the problem and C) claim that they can solve the problem and have all the answers.
THE 'BANKIA" EXAMPLE
Bankia was formed by merging seven bankrupt regional Spanish banks in 2010.
The new bank was funded by Spain’s Government rescue fund… which received “preference shares” in return for over €4 billion in funding for the bank (all provided by taxpayers of course).
These preference shares were shares that A) yielded 7.75% and B) would get paid before ordinary investors if Bankia failed again. So right away, the Spanish Government was taking taxpayer money to give itself preferential treatment over ordinary investors (including said taxpayers).
Indeed, those investors who owned shares in the seven banks that merged to form Bankia lost their shirts. They were wiped out and lost everything when the new bank was created.
Bankia was taken public in 2011. Spanish investment bankers convinced the Spanish public that the bank was a fantastic investment. Over 98% of the shares were sold to Spanish investors.
One year later, Bankia was bankrupt again, and required the single largest bailout in Spain’s history: €19 billion. Spain took over the bank (again) and Bankia shares were frozen on the market (meaning you couldn’t sell them if you wanted to).
When the bailout took place, Bankia shareholders were all but wiped out and forced to take huge losses as part of the deal. The vast majority of these were individual investors, NOT Wall Street or its European equivalent (Bankia currently faces a lawsuit for over 140,000 claims of mis-selling shares).
So that’s two wipeouts in as many years.
The bank was taken public a second time in May 2013. Once again Bankia shares promptly collapsed, losing 80% of their value in a matter of days. And once again, it was ordinary investors who got destroyed.
Indeed, things were so awful that a police officer stabbed a Bankia banker who sold him over €300,000 worth of shares (the banker had convinced him it was a great investment).
Today Bankia is tied up in a massive compensation lawsuit whereby it is to pay out between 200 and 250 million Euros to investors who bought it during its initial IPO. Of course, this payout is based on accounting standards that are at best massaged and at worst likely outright fraudulent (this is, again a bank that has wiped out investors three in times in three years), so who knows what will happen?
While certain items relating to this story are unique, the morals to Bankia’s tale can be broadly applied across the board to the economy/ financial today.
GLOBAL RISK - How Financial Repression Leads to Mispriced Risk
HOW FINANCIAL REPRESSION LEADS TO
The Concept of "Real Risk Free" Total Returns
CULTURE OF RISK
The financial system is based on debt. US Treasuries, the benchmark for an allegedly “risk free” rate of return, is the asset against which all other assets are priced based on their relative riskiness. This “risk free” rate has been falling steadily for over 25 years.
The Wall Street Journal estimates that a third of traders have never witness a rate hike. However, the real problem is far greater than this. Bonds have been in a bull market for over 30 years. Forget rate hikes… an entire generation of investors and money managers (anyone under the age of 55) has been investing in an era in which risk has generally gotten cheaper and cheaper.
FINANCIALIZATION & RISE IN LEVERAGE
This, in turn, has driven the rise in leverage in the financial system. As the risk-free rate fell, so did all other rates of return. Thus:
investors turned to leverage or using borrowed money to try to gain greater rates of return on their capital.
The ultimate example of this is the derivatives market, which is now over $700 trillion in size. This entire mess is backstopped by about $100 trillion (at most) in bonds posted as collateral.
ASSETS CAN NO LONGER BE ALLOWED TO FALL - Deleveraging is Misinformation
This formula of ever increasing leverage works relatively well when the underlying asset backstopping a trade is rising in value (think of the housing bubble, which worked fine as long as housing prices rose). However, if the asset ever loses value, you very quickly run into trouble because you need to post more as collateral to backstop your trade. If you can’t do this easily, the margin calls start coming and you can find yourself having to unwind a massive position in a hurry. This is how crashes occur. This is what caused 2008.
Despite all of the rhetoric, the world has not deleveraged in any meaningful way. The only industrialized country to deleverage since 2008 is Germany.
This is not unique to sovereign nations either. As McKinsey recently noted, there has been no meaningful deleveraging in any sector of the global economy (the best we’ve got is households and financial firms which have basically flat-lined since 2008).
In the simplest of terms, the 2008 collapse occurred because of too much leverage fueled by cheap debt. This worked fine until the assets backstopping the leveraged trades fell in value, which brought about margin calls and a selling panic.
The practice by banks and brokers of using, for their own purposes, assets that have been posted as collateral by their clients.
In rehypothecation, securities that have been posted with a prime brokerage as collateral by a hedge fund are used by the brokerage to back its own transactions and trades. While rehypothecation was a common practice until 2007, hedge funds became much more wary about it in the wake of the Lehman Brothers collapse and subsequent credit crunch in 2008-09. That has all changed as has the re-emergence of Cov-Lite, PIK Loans et al.
Since the Financial Crisis everyone has become even MORE leveraged than they were in 2008. And they did this against an ever-smaller pool of quality assets (the Fed and other Central Banks’ QE programs have actually removed high grade collateral from the financial markets).
Thus, we now have a financial system that is even more leveraged than in 2007… backstopped by even less high quality collateral. And this time around, most industrialized sovereign nations themselves are bankrupt, meaning that when the bond bubble pops, the selling panic and liquidations will be even more extreme.
DEFINITION: Risk-free interest rate is the theoretical rate of return of an investment with no risk of financial loss. One interpretation is that the risk-free rate represents the interest that an investor would expect from an absolutely risk-free investment over a given period of time. Since the risk free rate can be obtained with no risk, any other investment will have additional risk. In practice to work out the risk-free interest rate in a particular situation, a risk-free bond is usually chosen that is issued by a government or agency where the risks of default are so low as to be negligible.
As the dollar soars, so does the real yield on bonds denominated in dollars.
As central banks rush to depreciate their currencies and push yields into negative territory, what's becoming scarce globally is real yield in an appreciating currency. Real yield is yield adjusted for inflation/deflation: if inflation is 3% and bonds yield 2%, the real yield is negative 1%. If inflation is negative 1% (i.e. deflation), and the yield on bonds is .1%, the real yield is 1.1%.
What's the real yield on a bond that earns 1% annually in a currency that loses 10% against the U.S. dollar in a year? Once the foreign-exchange (FX) loss/gain is factored in, the investor lost 9% of his investment.
Needless to say, the real yield must include the foreign-exchange loss/gain. An investor earning 10% in a currency that's losing 20% annually against other currencies is losing 10% annually, despite the apparent healthy nominal yield.
An investor earning 1% in a currency that's appreciating 10% annually against other major trading currencies is earning a yield of 11%.Clearly, the nominal yield is deceptive; the real yield can only be calculated by factoring in both inflation/deflation in the issuing economy and the appreciation/depreciation in the issuing currency against major tradable currencies.
Now we understand why what's scarce globally is real yield in an appreciating currency: the only major trading currency that's appreciating is the U.S. dollar. Any nominal yield on bonds issued in euros or yen turns into a loss when measured in U.S. dollars. Even the Chinese renminbi, which is pegged to the U.S. dollar, has slipped against the dollar as Chinese authorities have responded to the devaluation of the Japanese yen and other Asian-exporter currencies.
One result of the global scarcity for real yield is high demand for U.S. Treasuries, which are denominated in U.S. dollars. High demand pushes bond yields down, effectively replacing the Fed's quantitative easing (QE) bond-buying programs, which the Fed ended last year.
The U.S. gets the benefits of strong demand for its bonds (i.e. low interest rates) without having to issue new money (QE).
Another factor is the reduced issuance of new Treasury bonds as the U.S. fiscal deficit declines. This effectively reduces supply as demand remains strong.
This is a self-reinforcing feedback loop: as the U.S. dollar strengthens and the U.S. fiscal deficit declines, the Fed has no need to buy Treasury bonds (with freshly issued money) to keep interest rates low. Since the U.S. central bank isn't issuing new money while every other major central bank is printing massive amounts of new money to depreciate their currencies, this pushes the U.S. dollar even higher.
And as the dollar soars, so does the real yield on bonds denominated in dollars. That may not surprise everyone, but few can support a claim of predicting this a few years ago.
REAL RISK FREE TOTAL RETURN
This is THE trick of FINANCIAL REPRESSION in financing the US Government Debt
Savers lose but the US Government & International Banks win.
With Fed mouthpiece Jon Hilsenrath warning - in no lesser status-quo narrative-deliverer than The Wall Street Journal - that The ECB's actions (and pre-emptive collapse in the EUR) means the U.S. economy must deal with a rapidly strengthening dollar that will make American goods more expensive abroad, potentially slowing both U.S. growth and inflation; and Treasury Secretary Lew coming out his crypt to mention "unfair FX moves," it appears The Fed (and powers that be) are worrying about King Dollar. This suggests, as Mises Canada's Patrick Barron predicts, the Fed will start charging negative interest rates on bank reserve accounts as the final tool in the war on savings and wealth in order to spur the Keynesian goal of increasing “aggregate demand”. If savers won’t spend their money, the government will take it from them.
The European Central Bank’s launch of an aggressive program this week to buy more than €1 trillion in bonds poses important tests for the U.S. economy and the Federal Reserve.
Europe’s new program of money printing—and the resulting fall in the euro—means the U.S. economy must deal with a rapidly strengthening dollar that will make American goods more expensive abroad.
The stronger dollar could slow both U.S. growth and inflation, giving the Fed some incentive to hold off on its plan to raise short-term interest rates later this year from near zero.
A stronger dollar has three important implications for the U.S. economy, markets and policy makers.
First, it tamps down inflation just as the Fed is trying to raise inflation closer to 2%.
Second, it hurts exports and therefore economic growth.
Lastly, the attraction of U.S. financial assets could heat up markets just as regulators keep watch for dangerous asset bubbles.
U.S. officials have been playing down that scenario, and, more broadly, resisting talk of a global currency war—competitive devaluations by countries eager to keep their currencies as low as possible to protect exports; but “The Fed faces a challenge having to navigate some pretty intense cross currents,” said Bruce Kasman, chief economist for J.P. Morgan Chase.
The U.S., in effect, is importing some of the world’s downward inflation pressure through currency movements.
Treasury Secretray Lew pipes in...
*LEW SAYS UNFAIR FX MOVES TO DRAW SCRUTINY FROM U.S.
"As investors we are all now the subjects of a grotesque monetary experiment. This experiment has never been tried before, and its outcome remains uncertain. The unproven thesis, however, runs something like this: six years into a second Great Depression, the only 'solution' is for central banks to print ever greater amounts of money. Somehow, gifting free money to the banks that helped precipitate the crisis will lead to a ‘trickle down’ wealth effect. Instead of impoverishing those with savings, inflation will be some kind of miraculous curative, and it must be encouraged at all costs. It bears repeating: we are in an extraordinary financial environment.
In the words of the fund managers at Incrementum AG:
"We are currently on a journey to the outer reaches of the monetary universe."
The market – a quaint concept of a bygone age – has largely disappeared. It has been replaced throughout the West by bureaucratic manipulation of prices, in part known as QE but better described as financial repression."
A Global Wall Street Party?
The Daily Bell sees the mainstream meme of an economic recovery with rising interest rates, but thinks otherwise .. emphasizes the result of low interest rates globally has been "malinvestments" & the financial errors of the past have not been liquidated - this is bad for efficiency, productivity & sustainability
"The Federal Reserve has used
Insider buying and
... to boost what we call the Wall Street Party.
If we're correct, there are intentions to spread this party around the world, creating a kind of equity mania that may last far longer than one or two years.
One of the easiest ways to fuel a stock explosion is to print money. All great run-ups, from what we can tell, have involved the overprinting of currency and subsequent distortive asset expansion.
Given this determination to ensure a flow of easy money, you might not want to discount the Wall Street Party too soon. It may, as we've suggested before, be going global.'
New Findings Point to “Perfect Storm” Brewing
INET Economics posted essay on new research shedding light on how today’s advanced economies depend on private sector credit more than anything we have ever seen before .. the research work indicates that our economic future could be very different from our recent past, when financial crises were relatively rare
"Crises could become more commonplace, which will impact every stage of our financial lives, from cradle to retirement. Do we just fasten our seatbelts for a bumpy ride, or is there a way to smoothe the path ahead?"
more financial instability will introduce more uncertainty down the line
"Operating in this milieu, the central banks, the governments, the Bank for International Settlements (BIS), the International Monetary Fund (IMF), and other parts of the macro-financial policy world are now taking a much keener interest in what the pros and cons of different financial regulatory structures and various macroprudential tools (designed to identify and lessen the risks to the financial system) might be."
Macroprudential tools entail Financial Repression
Negative interest rates,
Ring fencing regulations &
India Squeezed by Financial Repression
KUNAL KUMAR KUNDU Writes from NEW DELHI - The least desirable outcome of the recently presented union budget of India was a complete undermining of the sanctity of the budget numbers. The cash strapped government had and continues to adopt various dubious means of keeping its official fiscal deficit number under check while continuing to spend its scarce resources on leaky social sector programs. (See Chidambaram shows dangerous budget skillsAsia Times Online, March 4, 2013). Funding expenditures of such magnitude in the face of revenue scarcity leads to what is called Financial Repression.
The term financial repression was introduced in 1973 by Stanford economists Edward S Shaw and Ronald I McKinnon. It was meant to include such measures as
Directed lending to the government,
Caps on interest rates,
Regulation of capital movement between countries and
A tighter association between government and banks.
In layman's term, it refers to the means by which the government expropriates savings of ordinary people or corporations. Clearly financial repression is a key ally of profligate governments.
In its crudest form, financial repression was visible in the recent budget exercise by Finance Minister P Chidambaram, which was resorted to to enable the government to show a lower fiscal deficit and, thereby impress the credit rating agencies.
The state-owned oil companies were forced to bear 40% of the total calculated oil subsidies, and even the remaining amount that is to be paid by the government is done so with an inordinate delay which will force the oil companies to go on a borrowing spree for sheer survival. This flexing of muscles by the government not only reduces its borrowing requirement but also provides some relief in its debt servicing requirement.
All of this, for a policy that:
Destroyed private competition (since subsidies are available only to the state-owned companies and hence private sector retailing of petrol, diesel and even cooking gas did not take off as the private companies were not in a position to sale their products at less than the cost price, which the state-owned companies did;
Is enjoyed mostly by the rich, as reported in an International Monetary Fund study. Even the government's recently released annual economic survey believes that more than half of rural rich corner almost the entire cooking gas subsidy, leaving practically nothing for the poor for whom it is earmarked.
Given the government's mindless spending on such schemes, many with questionable benefits, the government's borrowing requirements remain elevated. However, not much of the borrowing is done from lenders who are willing to lend. In fact, a good chunk of government bond issuance is forcibly placed with various financial entities. These include banks, insurance companies and pension funds.
Banks, for example, are forced to set aside 23% of their deposits in government bonds as statutory liquidity ratio as part of what is called prudential management. That apart, they have to maintain 4% (it was higher earlier) of their deposits as cash reserve ratio, on which the government has stopped paying any interest whatsoever since March 31, 2007. In all, the banking sector has to keep 27% of their deposits with the government.
The pension system operated by the Employee Provident Fund Organization (EPFO) is almost entirely invested in domestic government bonds. That apart, of the 12.11 trillion rupees (US$222 billion) invested by life insurance companies on March 31, 2012, 38.64% was invested in central government securities; a further 17.71% was invested in state government and other approved securities.
The Indian financial policy, therefore, ensures that the government gets roughly all EPFO assets, more than half of the assets of life insurance companies and more than a quarter of the assets of banks.
Not that financial repression is new in India. In fact, this is true for all developing economies. For a capital-scarce country like India, capital control was a natural outcome, since the idea was to direct savings toward investment in certain targeted sectors as part of a development plan.
Financial repression took the form of government's ownership of intermediaries, restrictions on interest rates, control of foreign exchange (especially outflow), credit schemes that are favorable to a few sectors and so forth. Regulation also stipulated (and this continues to be the case) that the banks hold a large share of their assets in public debt instruments. These debt instruments paid below-market rate interest and hence imposed an implicit tax on financial intermediation while providing cheap source of capital to the government.
Unfortunately, for India, the requirement to follow such policies has transcended the need to address various development objectives; it is now being resorted to simply because governments of various hues have failed to adhere to fiscal discipline. I believe that the fiscal deficit is but a natural consequence for a capital scarce developing economy like India that strives to move to a path of high and sustainable growth. The problem lies with the quality of the deficit, as wasteful expenditures and politically motivated populist measures contaminate the nature of the deficit, thereby leaving very little fiscal space to carry out the developmental activities.
Thus disinvestment efforts by the government are being bailed out by state-owned institutions like the State Bank of India and the Life Insurance Corporation of India (LICI). The government has arm-twisted the Insurance Regulatory Development Authority to allow LICI to exceed the cap of 10% that an insurance company can own in any listed company.
Even the cash rich state-owned companies are being made to use their funds to buy stakes in other companies whose shares the government plans to sell, irrespective of whether such acquisitions make sense for the acquiring companies. Without such support, the government's disinvestment program during the fiscal year 2012-13 would have been an utter failure.
What is even more galling is that, while the government's wasteful expenditure is on the rise, it is way behind other countries (even many poorer countries) in terms of the share of gross domestic product spent on health and education - higher spending on which is essential if India is to reap the demographic dividend of its young population.
So the government has, very recently, mandated that corporate entities with a net profit of 50 million rupees and turnover of 10 billion rupees should mandatorily spend 2% of their net profit on acts of "Corporate Social Responsibility" - a perfect example of how a government forces private sector entities to fill in the void created by their inability.
To conclude, financial repression engendered by systemic inefficiency has the potential to distort savings and investment activity in the economy and eventually impact growth. It's time India learned from the Chinese experience and finally showed the courage to take appropriate policy measures to right the wrong. However, given the way the political circus playing out in the country, that is a long shot.
FINANCIAL REPRESSION - Misplaced Central Banking Policies Lead to their Demise
Below are two articles by my Co-Host at MACRO ANALYTICS - Charles Hugh Smith that we will discuss in an upcoming MACRO ANALYTICS video.
OUR MESSAGE: How Central Banks Unknowingly Create Their Achilles Heel: Deflation
THE OIL SHOCK IS YOUR FIRST SIGN!
Central Banks by creating 'Excessive' INFLATION actually sow their eventual destruction by creating DEFLATION
'EXCESS' INFLATION: Inflation creation when the business cycle needs to contract. ie 2% targets during systemic deleveraging.
This is because the Prime Directive of central banks is to make it ever easier to service yesterday's debt.
Excessive inflation results from central banks being forced to push negative real interest rates too low (to protect debt holders) relative to real economic expansion and capital wealth creation.
DEFLATION: "Any increase in the purchasing power of nominal wages".
The rise of software, robotics and global wage arbitrage is resulting in wages not rising along with prices. As a result, everyone who depends on earned income is getting poorer.
For the actual real-world the result of central banks easing, money pumping and zero interest rates is Deflation.
Central bank easing and zero-interest rate policy (ZIRP) fuel over-capacity which leads to declining prices: deflation with a capital D.
Central bank easing and zero-interest rate policy (ZIRP) additionally fuels malinvestment which leads to over valued collateral and an eventual collateral collapse as NPL (non-performing loans) debt cannot to "rolled" (ie no one no longer wants to risk financing)
PURCHASING POWER: The store of Purchasing Power is true WEALTH which governments are trasnferring.
All the phantom collateral constructed with mal-invested free money for financiers will also implode.
EASY CREDIT CREATES EXCESS SUPPLY & DEMAND WHICH EVENTUALLY REACH EQUILIBRIUM
BROUGHT FORWARD DEMAND WHICH THEN LEAVES A DEMAND RATE VACUUM
INFLATION REDUCES REAL DISPOSABLE INCOME WHICH FURTHER REDUCES DEMAND
SHRINKING AGGREGATE DEMAND THEN REDUCES COMMODITY PRICES WHICH LEADS TO COLLAPSING COLLATERAL VALUES
Financial and risk bubbles don't pop in a vacuum--all the phantom collateral constructed with mal-invested free money for financiers will also implode.
If there's one absolute truism we hear again and again, it's that central banks are desperately trying to create inflation. Perversely, their easy-money policies actually generate the exact opposite: deflation.
I will leave the debate as to what constitutes deflation to my economic betters. My definition of deflation is simple: deflation is any increase in the purchasing power of nominal wages.
By nominal I mean unadjusted: $1 is simply $1. It is not seasonally adjusted or adjusted for inflation/deflation or anything else.
When your paycheck loses purchasing power--that is, it buys fewer goods and services-- that's inflation. When your paycheck gains in purchasing power--it buys more goods and services, even though you didn't get a raise--that's deflation in my terminology.
I find that purchasing power cuts through a lot of economic jargon and data-clutter: how much does your paycheck buy today, compared to last month or last year?
Since the economy is dynamic, purchasing power is constantly increasing or decreasing on a variety of goods and services. This bedevils any attempt to discern systemic inflation/deflation.
The Federal Reserve and other central banks desperately want inflation, even though it destroys the purchasing power of paychecks and savings, for one reason: in a system based on phantom collateral supporting ever-increasing mountains of debt, the Prime Directive of central banks is to make it ever easier to service yesterday's debt.
The only systemic way to make it easier to service existing debt is to inflate the nominal value of money by debasing the currency. The net result of inflated money is a debt of $100 stays $100, but the face value of newly issued money keeps rising.
If a person earns $10 an hour, it will take 10 hours to earn the money to pay off the $100 debt. But if central banks debase the money so that it takes $20/hour to buy the same goods and services that were once bought with $10/hour, then it only takes 5 hours to earn enough money to pay off the $100 debt.
The fact that the owner of the debt will suffer a 50% decline in the purchasing power of the $100 is of no concern to the central banks, as long as the decline is gradual enough that the hapless owner of the $100 doesn't notice the loss of purchasing power. Hence the central banks' favored inflation target of 2%, which destroys over 20% of the purchasing power of money every decade, but does so so gradually that everyone being robbed is not motivated to protest their impoverishment.
So now we understand why central banks are desperate for inflation: it's the only way to keep the Ponzi scheme of ever-expanding debt from collapsing in an era of stagnant wages. Since the vast majority of people aren't increasing their income, inflation is the only way to enable them to keep servicing their debts.
Unfortunately for the central banks, thanks to the rise of software, robotics and global wage arbitrage, wages are not rising along with prices. As a result, everyone who depends on earned income is getting poorer.
Japan is the leading example of this dynamic. Despite the Bank of Japan's failure to ignite 2% inflation, they've succeeded in undermining their currency (the yen) sufficiently to cause the purchasing power of wages in Japan to fall a catastrophic 9% in the past few years.
Everyone who depends on earned income, i.e. the bottom 95%, all get progressively poorer in inflation. Meanwhile, technology is deflationary, as the costs of producing anything digital decline to near-zero, and progressively cheaper software and robotics replace costly human labor and all the horrendously expensive labor overhead of healthcare, etc.
Central banks might want to ponder Woody Allen's famous quip, If you want to make God laugh, tell him about your plans, for the actual real-world result of central banks easing, money pumping and zero interest rates is deflation.
As my colleague Lee Adler explains, central bank easing and zero-interest rate policy (ZIRP) fuel over-capacity which leads to declining prices: deflation with a capital D. The current oil glut is a primary example of this dynamic: Why Oil Is Finally Declining, Which Could Lead to Disaster (Wall Street Examiner)
The central banks have been frustrated in their insane and misguided aim to increase inflation because QE and ZIRP actually foster the opposite of what central bankers expect. Central bankers and conomists think that to get inflation they only need to print more money, not recognizing that the inflation that does result from money printing, asset inflation, leads eventually to consumer goods deflation. ZIRP and QE cause malinvestment and overinvestment that leads to excess productive capacity.
That leads to overproduction and oversupply. Oversupply puts downward pressure on prices. That spurs a vicious cycle where the central banks print more money to try to create inflation. That puts more cash into the accounts of the leveraged speculating community and off we go again.
While ZIRP and QE encourage waves of excess speculation and malinvestment, they do so at the expense of investment in labor. Businesses become speculators in their own stocks and products rather than in costly and uncertain investments in labor. The value of labor falls in the marketplace. Mass wage and salary incomes fall. Consumption falls. Demand trends weaken, putting downward pressure on the prices of consumption goods.
That causes a vicious cycle in business where executives perpetually look for ways to shrink costs, exacerbating the economic decline of middle class working people. The "middle class" can increasingly no longer afford to buy the products of those who employ them. Thus we get the spectacle of things like WalMart holding charity food drives to benefit its workers, who are not paid enough money to feed their families.
The oil price experience is a perfect illustration of what happens when central banks promote over speculation in commodities and commodity production. A boom built on virtually free and unlimited financing becomes a ticking time bomb when the value of the collateral collapses.
Thank you, Lee. A collapse in the value of collateral is precisely what's happening as the value of oil has fallen by 40% in the past few months.
The retail sector is another poster child of the deflationary consequences of central bank-driven mal-investment. The astonishing expansion of retail space in the U.S. since the 2008 meltdown is increasingly divergent from the reality that sales and profits of bricks-and-mortar stores and chains are under siege from online retailers.
The market value of retail space is set to implode from the over-expansion of commercial real estate, which was entirely driven by the Fed's cheap-money policies that destroyed low-risk returns on cash and savings.
Central banks have driven investors into increasingly risky bets as investors seek some sort of return. The bubble is not just in stocks, bonds, and other assets--most importantly, it is in risk.
"Virtually unlimited cheap finance on a global basis has over recent years certainly spurred unprecedented capital investment. And, importantly, ongoing technological innovation and the “digital age” have played a momentous role in creating essentially limitless supplies of smart phones, tablets, computers, digital downloads, media and 'technology' more generally. Throw in the growth in myriad 'services', including healthcare, and we have economic structures unlike anything in the past."
In other words, this time it is truly different, but not in the way the conventional happy-story narrative would have it, i.e. financial-risk bubbles can keep expanding forever.
Financial and risk bubbles don't pop in a vacuum--all the phantom collateral constructed with mal-invested free money for financiers will also implode.
So go ahead, central bankers: tell God about your plans to generate inflation.
The 2% target is low enough that the household frogs in the kettle of hot water never realize they're being boiled alive because the increase is so gradual.
A comment by correspondent David C. suggested the importance of demonstrating the impoverishing consequences of central banks reaching their 2% inflation target. David observed: "That central bankers aren't all hanging by their necks from lamp posts everywhere is a testament to how scarce are those who grasp exponents and compounding."
Anyone with basic Excel skills can calculate the cumulative impoverishment caused by central banks' "modest" 2% annual inflation. Here is my worksheet:
Column 1: year
Column 2: index starting with 100
Column 3: annual inflation sum (2% of previous year's total index)
Column 4: cumulative total index
Ten years of modest 2% inflation robs households of nearly 20% of their purchasing power. What was $100 in year 1 costs about $122 after 10 years of "modest" 2% inflation. Put another way, $100 in year one is only worth $81 in year 10.
Two decades of "modest" 2% inflation robs households of one-third of their purchasing power. What was $100 in year 1 costs about $150 after 20 years of "modest" 2% inflation. Put another way, $100 in year one is only worth $66 in year 20.
Even when central banks fail to reach their 2% annual-thievery target, incomes decline across the entire spectrum. The middle class (however you define it) lost roughly 10% as of 2012. In Japan, famous for essentially no inflation, wages have fallen by 9% in real terms since 1997.
While wages go nowhere, costs continue lofting ever higher as central banks print and pump money and credit:
Imagine central banks overshoot their 2% theft per year target and reach 3% annual inflation. If 2% is good, 3% must be even better, right?
In one decade of 3% annual inflation, the purchasing power of $100 declines to $73, and after 20 years of central bank inflation, it drops almost in half to $54. The central banks' inflation is a steady transfer of wealth from households to the banking sector and those holding ballooning assets like stocks. This is why central banks cling to their target so vociferously: their reason to exist is to enrich the banking sector at the expense of the rest of us.
The 2% target is low enough that the household frogs in the kettle of hot water never realize they're being boiled alive because the increase is so gradual. The central banks assume their 2% plan to impoverish us all escaped our notice. Apparently it has.
FINANCIAL REPRESSION - Banks Remove the "Heart" of Dodd-Frank
Not only did Citigroup and the rest of the big Wall Street banks succeed in gutting the “push-out” requirements of Dodd-Frank, thereby extending their lease to gamble in the derivatives market with FDIC (i.e. taxpayer) guaranteed money. Crony Capitalism also got a huge bonanza in the form of a 10X increase in the contribution limit to party committees. Now the heavy hitters can actually give $230,000 annually to the GOP and Dem campaign committees.
Once again congress set itself up for the usual midnight scramble behind closed doors where the pork barrel overflows and sundry K-street lobbies stick-up the joint and then demand immediate passage—–sight unseen—–in the name of keeping the Washington Monument open on the morrow.
There have been Wall Street hissy fits each and every time a shutdown loomed or happened. We now have governance by the robo-traders and gamblers who light up the trading screens 24/7.Washington’s utter nonchalance about this dangerous condition is owning to the tyranny of the Fed’s free money fueled Wall Street casino.
The market’s blistering but wholly unwarranted rise has lulled both Washington and Wall Street into the same delusion that set in during the final days of the dotcom bubble and then again at the peak of the housing and credit bubble during 2006-2008. Namely, that the business cycle has been suspended or repealed by the purported magicians at the Fed, and that, accordingly, the nirvana of permanent full employment prosperity is just around the corner.
Rosy Scenario as now embedded in the CBO projections, of course, will never materialize. CBO is currently projecting, with no embarrassment at all, that:
The US will go without a recession between 2009 and 2024;
That 16 million new jobs will be created over the next ten years compared to 3 million during the last decade;
That real GDP will grow at better than a 3% rate until we hit permanent full-employment compared to just 1.7% per year since the turn of the century;
That wages and salaries will grow at a 5.3% rate during the next decade compared to 3% during the prior 10 years.
FINANCIAL REPRESSION -Banks Remove the "Heart" of Dodd-Frank
Banks Remove the "Heart" of Dodd-Frank
6 years of highly visible Dodd-Frank legislation and thousands of lines of regulation, with no public debate, was just quietly removed and "neutered" by the stealth of an "Ear-Mark".
To maintain government financing the banks have held Washington hostage.
Maintain our profit margins and have the public accept the risk of $3003 TRILLION or..... else!
The Bill (yet another 'Ear-Mark') allows financial institutions to trade certain financial derivatives from subsidiaries that are insured by the Federal Deposit Insurance Corp. — potentially putting taxpayers on the hook for losses caused by the risky contracts. Big Wall Street banks had typically traded derivatives from these FDIC-backed units, but the 2010 Dodd-Frank financial reform law required them to move many of the transactions to other subsidiaries that are not insured by taxpayers.
“It is because there is a lot of money at stake,” Johnson said. “They want to be able to take big risks where they get the upside and the taxpayer gets the potential downside,”
Decency, security, and liberty alike demand that government officials shall be subjected to the same rules of conduct that are commands to the citizen. In a government of laws, existence of the government will be imperiled if it fails to observe the law scrupulously. Our government is the potent, the omnipresent teacher. For good or for ill, it teaches the whole people by its example. Crime is contagious. If the government becomes a lawbreaker, it breeds contempt for law; it invites every man to become a law unto himself; it invites anarchy. To declare that in the administration of the criminal law the end justifies the means — to declare that the government may commit crimes in order to secure the conviction of a private criminal — would bring terrible retribution. Against that pernicious doctrine this court should resolutely set its face.
– Louis Brandeis, Supreme Court Justice, in 1928
While most Americans are busy Christmas shopping and making preparations for trips to see family, Congress remains hard at work doing what it does best. Giving gifts to Wall Street and trampling on citizens’ civil liberties.
Remember what Wall Street wants, Wall Street gets. Have a great weekend chumps.
Naturally, Wall Street got what it wanted. In fact, this provision was so important to the financial oligarchs that Jaime Dimon called around to encourage our (Wall Street’s) representatives to support it. The Washington Post reports that:
The acrimony that erupted Thursday between President Obama and members of his own party largely pivoted on a single item in a 1,600-page piece of legislation to keep the government funded: Should banks be allowed to make risky investments using taxpayer-backed money?
The very idea was abhorrent to many Democrats on Capitol Hill. And some were stunned that the White House would support the bill with that provision intact, given that it would erase a key provision of the 2010 Dodd-Frank financial reform legislation, one of Obama’s signature achievements.
But perhaps even more outrageous to Democrats was that the language in the bill appeared to come directly from the pens of lobbyists at the nation’s biggest banks, aides said. The provision was so important to the profits at those companies that J.P.Morgan’s chief executive Jamie Dimon himself telephoned individual lawmakers to urge them to vote for it, according to a person familiar with the effort.
The nation’s biggest banks — led by Citigroup, J.P. Morgan and Bank of America — have been lobbying for the change in Dodd Frank, which had given them a period of years to comply. Trade associations representing banks, the Financial Services Roundtable and the American Bankers Association, emphasized that regional banks are supportive of the change as well.
But the regulatory change could also boost the profits of major banks, which is why they are pushing so hard for passage, said Simon Johnson, former chief economist of the International Monetary Fund and a professor at the MIT Sloan School of Management.
“It is because there is a lot of money at stake,” Johnson said. “They want to be able to take big risks where they get the upside and the taxpayer gets the potential downside,” he said.
While that’s bad enough, the lame duck Congress clearly didn’t consider its job done without legislating away the 4th Amendment. Here is some of what one of the only decent members of Congress, Justin Amash, wrote on Facebook:
When I learned that the Intelligence Authorization Act for FY 2015 was being rushed to the floor for a vote—with little debate and only a voice vote expected (i.e., simply declared “passed” with almost nobody in the room)—I asked my legislative staff to quickly review the bill for unusual language. What they discovered is one of the most egregious sections of law I’ve encountered during my time as a representative: It grants the executive branch virtually unlimited access to the communications of every American.
On Wednesday afternoon, I went to the House floor to demand a roll call vote on the bill so that everyone’s vote would have to be recorded. I also sent the letter below to every representative.
With more time to spread the word, we would have stopped this bill, which passed 325-100. Thanks to the 99 other representatives—44 Republicans and 55 Democrats—who voted to protect our rights and uphold the Constitution. And thanks to my incredibly talented staff.
Block New Spying on U.S. Citizens: Vote “NO” on H.R. 4681
The intelligence reauthorization bill, which the House will vote on today, contains a troubling new provision that for the first time statutorily authorizes spying on U.S. citizens without legal process.
Last night, the Senate passed an amended version of the intelligence reauthorization bill with a new Sec. 309—one the House never has considered. Sec. 309 authorizes “the acquisition, retention, and dissemination” of nonpublic communications, including those to and from U.S. persons. The section contemplates that those private communications of Americans, obtained without a court order, may be transferred to domestic law enforcement for criminal investigations.
To be clear, Sec. 309 provides the first statutory authority for the acquisition, retention, and dissemination of U.S. persons’ private communications obtained without legal process such as a court order or a subpoena. The administration currently may conduct such surveillance under a claim of executive authority, such as E.O. 12333. However, Congress never has approved of using executive authority in that way to capture and use Americans’ private telephone records, electronic communications, or cloud data.
FINANCIAL REPRESSION - Wall Street Moves to Put Taxpayers on the Hook for Derivatives Trades
They would allow financial institutions to trade certain financial derivatives from subsidiaries that are insured by the Federal Deposit Insurance Corp. — potentially putting taxpayers on the hook for losses caused by the risky contracts. Big Wall Street banks had typically traded derivatives from these FDIC-backed units, but the 2010 Dodd-Frank financial reform law required them to move many of the transactions to other subsidiaries that are not insured by taxpayers.
Five years after the Wall Street coup of 2008, it appears the U.S. House of Representatives is as bought and paid for as ever. We heard about the Citigroup crafted legislation currently being pushed through Congress back in May when Mother Jones reported on it. Fortunately, they included the following image in their article:
Unsurprisingly, the main backer of the bill is notorious Wall Street lackey Jim Himes (D-Conn.), a former Goldman Sachs employee who has discovered lobbyist payoffs can be just as lucrative as a career in financial services. The last time Mr. Himes made an appearance on these pages was in March 2013 in my piece: Congress Moves to DEREGULATE Wall Street.
Fortunately, that bill never made it to a vote on the Senate floor, but now Wall Street is trying to sneak this into a bill needed to keep the government running. You can’t make this stuff up. From the Huffington Post:
WASHINGTON — Wall Street lobbyists are trying to secure taxpayer backing for many derivatives trades as part of budget talks to avert a government shutdown.
According to multiple Democratic sources, banks are pushing hard to include the controversial provision in funding legislation that would keep the government operating after Dec. 11.Top negotiators in the House are taking the derivatives provision seriously, and may include it in the final bill, the sources said.
The bank perks are not a traditional budget item. They would allow financial institutions to trade certain financial derivatives from subsidiaries that are insured by the Federal Deposit Insurance Corp. — potentially putting taxpayers on the hook for losses caused by the risky contracts. Big Wall Street banks had typically traded derivatives from these FDIC-backed units, but the 2010 Dodd-Frank financial reform law required them to move many of the transactions to other subsidiaries that are not insured by taxpayers.
Last year, Rep. Jim Himes (D-Conn.) introduced the same provision under debate in the current budget talks. The legislative text was written by a Citigroup lobbyist, according to The New York Times. The bill passed the House by a vote of 292 to 122 in October 2013, 122 Democrats opposed, and 70 in favor. All but three House Republicans supported the bill.
It wasn’t clear whether the derivatives perk will survive negotiations in the House, or if the Senate will include it in its version of the bill. With Democrats voting nearly 2-to-1 against the bill in the House, Senate Majority Leader Harry Reid (D-Nev.) never brought the bill up for a vote in the Senate.
Remember what Wall Street wants, Wall Street gets.
FINANCIAL REPRESSION - Must Protect Underfunded Pensions At Any Cost!
"The Weimar stock market rose to 36,000 marks, then 36,000,000, then 36,000,000,000, but not because of fundamentals."
Time for a 'melt-up': the coming global boom ... Get ready for a "melt-up." Back in mid-October, as stock markets around the world plunged faster than at any time since 2011, many investors and economists feared a meltdown. But with the U.S. economy steadily expanding, monetary and fiscal policies becoming more stimulative in other parts of the world and the autumn season for financial crises now over, a melt-up seems far more likely. – Reuters
Dominant Social Theme:
The market is dangerous but may be going higher, much higher.
We've been writing about the Wall Street Party for at least a year now, and our track record has been fairly accurate. We've pointed out this market is an entirely manipulated one and that all the manipulation runs to the "up" side.
This particular market is indeed manipulated, from what we can tell, almost entirely the result of
Obviously those behind these manipulations don't want them revealed and thus the concentration on "reasons" why the market is going higher. This Reuters editorial is a good example of this kind of directed history.
It makes a case for the upside based on four reasons. Here's more:
There are many fundamental reasons for believing that stock markets may have embarked on a long-term bull market comparable to those in the 1950s and 1960s, or the 1980s and 1990s, and that this process is nearer its beginning than its end.
Such arguments have been discussed repeatedly in this column over the past 18 months — ever since the Standard & Poor's 500, the world's most important stock-market index, broke out of a 13-year trading range and started scaling new highs in March 2013. Wall Street has been setting records ever since.
These are the four most important arguments for a structural bull market:
First and foremost, the worst financial and economic crisis in living memory has ended, and most parts of the world economy are enjoying decent, if unspectacular, growth. Second, economic and financial policies around the world, though far from perfect, are highly predictable and therefore unlikely to cause further market disruptions. Third, technology is continually advancing and innovation is creating new products, services and processes that stimulate both investment and consumer demand. Finally, inflation is almost nonexistent, at least in the advanced economies, meaning interest rates are guaranteed to stay low for a very long time.
Let's take these one at a time, beginning with the idea that this "bull" market can be dated to March 2013. In fact, the market has been climbing since 2009. That means this particular upward trend is six years old – a time span that almost no bull market in recent memory has ever exceeded.
We are told by this editorial that the worst financial crisis in living memory has ended. Well ... tell it to the G-20, which is so worried, collectively, about the "recovery" that it just committed in aggregate to US$2 trillion in additional stimulative economic measures.
The IMF is on record as applauding these programs because of similar worries. Japan and the EU certainly don't seem to be economic powerhouses at the moment and China is in the grip of yet another inflationary downdraft.
For some reason, we're supposed to be comforted that economic and financial policies around the world are "predictable." Excuse us for not noticing. We're busy watching the world bicker over Ukraine, Syria, Iraq, etc. The BRICs are supposedly trying to jettison the dollar and Russia and China are making various kinds of commodity pacts that leave the West out entirely.
Innovation and technology are supposedly racing ahead to create new, in-demand consumer items and further financial innovation. The financial innovation part we get, as the derivatives market now exceeds US$1000 trillion and is poised to wipe out the civilized world as we know it. As for innovation ... we notice it is mostly the US military-industrial complex that is forging new frontiers. Does that count?
Inflation is almost non-existent? Tell that to US consumers confronting rising prices and smaller quantities in a variety of foodstuffs. Additionally, inflation is anything but quiescent. We figure some US$50 trillion has been printed since the beginning of the "crisis." When it finally circulates ... look out!
The article goes on to make a variety of statements about the health of Europe, the economic leadership of Germany and the explosiveness of Japan, which if we are not mistaken just declared a new recession.
None of this matters! The point of this Reuters article is just probably to provide justifications for a further stock market rise next year. This is our prediction, too. We have long written that if the market survived October without a meltdown it might be poised to go a great deal higher next year.
Nothing is certain in life but those behind the monetary stimulation expanding this Wall Street Party seem determined to continue it. This Reuters article, providing a variety of faux reasons for the continuation of the current paper bull market is a pretty good indicator of elite intentions, in our view. The globalists have a lot of work to do and they're not about to let a pesky depression get in the way of it.
If we are reading this article correctly, the "party" may just be beginning.
So look out above ... as sky-high profits loom. And look out below. When this manipulated – monetary – bull market does end (in a year, or two, or three?), there will be hell to pay.
FINANCIAL REPRESSION - Central Banks Manipulating Markets
I have been an independent trader for 23 years, starting at the CBOT in grains and CME in the S&P 500 futures markets long ago while they were auction outcry markets, and have stayed in the alternative investment space ever since, and now run a small fund.
I understand better than most I would think, the "mechanics" of the markets and how they have evolved over time from the auction market to 'upstairs". I am a self-taught, top down global macro economist, and historian of "money" and the Fed and all economic and governmental structures in the world. One thing so many managers don't understand is that the markets take away the most amounts of money from the most amounts of people, and do so non-linearly. Most sophisticated investors know to be successful, one must be a contrarian, and this philosophy is in parallel. Markets will, on all time scales, through exponential decay (fat tails, or black swans, on longer term scales), or exponential growth of price itself. Why was I so bearish on gold at its peak a few years back for instance? Because of the ascent of non-linearity of price, and the massive consensus buildup of bulls. Didier Sornette, author of "Why Stock Markets Crash", I believe correctly summarizes how Power Law Behavior, or exponential consensus, and how it lead to crashes. The buildup of buyers' zeal, and the squeezing of shorts, leads to that "complex system" popping. I have traded as a contrarian with these philosophies for some time.
The point here is, our general indices have been at that critical point now for a year, without "normal" reactions post critical points in time, from longer term time scales to intraday. This suggests that many times, there is only an audience of one buyer, and as price goes up to certain levels, that buyer extracts all sellers. After this year and especially this last 1900 point Dow run up in October, and post non-reaction, that I am 100 percent confident that that one buyer is our own Federal Reserve or other central banks with a goal to "stimulate" our economy by directly buying stock index futures. Talking about a perpetual fat finger! I guess "don't fight the Fed" truly exists, without fluctuation, in this situation. Its important to note the mechanics; the Fed buys futures and the actual underlying constituents that make up the general indices will align by opportunistic spread arbitragers who sell the futures and buy the actual equities, thus, the Fed could use the con, if asked, that they aren't actually buying equities.
They also consistently use events through their controlled media, whether bad or good price altering news, to create investment behavior. The "ending" QE 3, and the immediate Bank of Japan QE news that night, and thus the ability to not quit QE using them as their front, and then propping our markets on Globex, like this is suppose to be good news, free markets totally dependent on QE, is one example. Last night, Obama passing the amnesty bill, and the more great news about how Europe and now China are also printing money out of thin air and "stimulating" their economies with QE too, which in turn prompts the Fed to prop up overnight futures markets on Globex to make that look like great news as well. I guess this is suppose to create a behavioral pattern for investors, that dependency on government gives us positive feedback and is good, much like Pavlov's dog and the ringing of the bell.
Why would the Fed prop up our stock market to begin with? Weren't they just supposed to "stimulate" the treasuries market only, to keep interest rates low, indirectly, by an eventual direct purchase in secondary markets, keeping them propped up (for five years now!)? Well, first of all as it relates to equities and utilizing the "Plunge Protection" mandate, why not just bypass the "plunge" altogether. Can't the definition of Plunge Protection be just that? Protection against a plunge instead of during a plunge? Doesn't propping the market equate to "Plunge Protection" since propping alleviates plunge and "protects" us? Does it depend on what the definition of "is" is? And really, doesn't the Fed buying futures directly alleviate those bankers who take their money in TARP or however means and then this money doesn't make its way into the very heart of what the public deems as its consumption motivator, higher stocks and real estate? Plus, buying futures is a means of then delivering fiat cash upon every expiration, therefore, "stimulus" to someone who receives it.
The Fed boasts about having a printing press, and I guess this allows them to "fix" everything. They "print money out of thin air" we keep hearing (which is true by the way) and with US taxpayer backing (fiat currency (always fails throughout history)), (perhaps post QE 3 there is an Executive Order for QE infinity), they sit on the actual bid and hold our treasury markets steady, and by buying out big sellers as they arise like Russia and China via their Belgium central bank franchise as an example, propping our dollar and then staying on that bid by other franchises, having constant bid flow into equity futures in real time hours and Globex overnite, all in order to retain US consumer confidence (since that is what we are suppose to continue to do) and the image of global strength to keep the dollar from losing its reserve status. Their obsession of stopping a deflationary depression, has headfaked people like Bill Gross, formerly of PIMCO, and known to have started hedging long bond positions five years ago with the assumptions that Fed printing would be inflationary, and rates would move higher, but without the assumption of the perpetual direct bid in the market place by the Fed creating, "price discovery". For now, that is.
In the end, which they know exactly when that is, the ultimate con is exposed through mass theft. Americans finally find out what those guys on CNBC are talking about when they mention "inflation" and how it destroys buying power over time. The end reflects the Fed stepping away from the bid in all markets. Prior to this, of course, they prep their offshore fund accounts to take the other side and short dollar, short global equities, and short fixed income, with mass leverage for maximum gain. I mean, why wouldn't they? They are a private entity and are composed of non-US citizens with no accountability or oversight and they seem to be globalist humanists with a depopulation bent (Rockefeller Foundation). Why wouldn't they use our money to prop, their money to take other side in a massive global short play, then let it all crash by simply stepping off the bid of these markets. They can then use the controlled talking heads who can relay the complexities of fiat money, index arbitrage, money velocity, currency and CDO swaps, with some geopolitical China worries, whatever, but really emphasize that the whole capitalistic system and constitution was flawed to begin with anyways, and that perhaps totalitarian fascism would be best for the country at this point since everyone's wealth is destroyed overnight and are literally hungry. Perhaps Obama is just that person! Maybe Dinesh D'souza was right about Obama. This is the way to destroy us, or "equal" the playing field globally by taking us down to third world status, is it not? Leverage the American people's money by trillions of dollars at the tops of capital markets, then bury them in a death spiral? Maybe Thomas Jefferson knew what he was saying' "If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered."
Why wouldn't anyone believe these words written here? Perhaps you can't imagine someone being so evil? Wasn't the Federal Reserve Bank concept initially funded by a Rothschild in the 1800s, who used the media to deceive the public and sway the London Stock Market down negatively, who then speculated against that panicking public's sell orders by taking long positions in stocks, then making a fortune when everyone found out that the news was wrong and positive? Then later another Rothschild founded our Federal Reserve in 1913, and others like JP Morgan who supposedly bought the US stock market in a banking panic and "saved" America in 1909? Aren't all of these Fed owners Fabian Socialists?
Details of this last market move:
This last 1900 point Dow Jones push upwards - and the Ebola events leading into it - it was so orchestrated and heightened at critical points but the ascent and push straight up in price, and sideways nonreaction after was completely unlike anything I've seen before. After going up for a record breaking amount of time the last five or so years, in a nonlinear exponential mania type of ascent, there should normally be tremendous volatility that follows. But, this isn't a tech-like mania! There aren't any buyers here other then the Fed. The shorts were all squeezed in 2009, 2010, 11, 12, and everyone who has ever wanted to buy stocks is in!
Modern Portfolio Theory has reached it's pinnacle, leading 55% of the American public who partake in that "diversified" portfolio theory off an eventual cliff. The market acts more like a penny stock that has been pumped up and is "boxed" (boxed, meaning, the whole float is buying and holding and held with the promoter, one broker dealer, and thus this one broker dealer can control price "discovery"(regardless of actual fundamentals and using "press releases" to sway and create order flow they want and need from naive clients)) , and less like a free market. The Dow runs up that much that quickly, then on Globex its down .02 percent at the most over night, multiple days in a row? No pullback? Are you kidding me!? Then the actual trading days have very little volume, and the peaks in price intraday also exhibit nonreactions sideways, just a couple of tics from the highs. This price manipulation reflects that they want to expunge all shorts on all time scales, to the point that there will be no point to try, and at the very end, there will be very few. This also reflects that a group of very smart prop trader types, experienced behavioralists, perhaps off of a prior prop desk like a Goldman, are controlling this game, and not some government treasury/cftc/sec "plunge protect" type who doesn't understand this game.
With the indoctrination of Modern Portfolio Theory, and the masses' epistemology from experience and from "experts" to never ever get out because "it always comes back", and from corporate buybacks, the actual intraday trading float has disappeared, thus, easier and cheaper to manipulate and find the perfect "price discovery" for every situation to control investor behavior, especially during off hours on Globex. This past situation, during the break and runup, there would be thousands of opportunities for the Fed insiders using different variations of ways to front run (without using the focus dump then pump futures contract itself), making the HFT guys front running for pennies look like complete chumps. Can you imagine all the different ways to bet the global markets at the height of the ebola scare, which just happened to be the height of the mass media hammering the public with fear about it(haven't heard a word since!), which happened to be the exact moment of a very large Dow Jones 600 points intraday range after falling 1000 points in 9 days, which also happened to be at the height of put option premiums expanding and call option premiums eroding quickly, by knowing that the Fed is now going to prop it back up, way back up, and quickly! Shorting put premium globally for expiration in 7 or 37 days? Buying way out of the money cheap calls, buying the underlying equities, shorting interest rates, buying inflation, buying emerging markets and all of their liquid securities, options plays etc... on and on. That prior knowledge ts worth trillions, is it not? We all know that investment bank broker dealer desks take the other side of trades, and inventory the other side opportunistically. Why wouldn't this "bank" too, especially now that they are intertwined with investment banks thus have gained their intellectual property in trading? And why wouldn't they influence our idiot sheepish politicians to mandate the Fed Reserve, to encourage the Fed Reserve, to stimulate, whereas our Fed could use that for "the people", while at the same time, for themselves take the other side based on their offshore opportunistic mandate? Today's current markets are completely manipulated, every market, all the time, with our money and political Keynesian (control) mandate doing the manipulation in order for their money to front run and profit from there opportunistic mandate.
So if I am right, and my 23 years of experience trading equities, during manias enables me to know with certainty that I am, that they are allowed to directly be involved and have a perpetual standing bid in the secondary derivatives markets, they can then take the other side when they want (no need to publicly announce this, but to justify in their own heads). So when they take the other side in the public markets upon themselves pulling the prior US citizen backed bids in all markets for the ultimate 80 year cyclical "end game" (btw, about 23 years past the Kondratief Cycle deadline which is one way to describe the inevitable delay in this ongoing natural economic system reset) of the US fiat backed paper print con capped off by mass leverage, wouldn't they make trillions on the bubble pop on the way down? Wouldn't they also end up eventually owning the whole US since commerce would halt immediately, everyone would lose their jobs causing mass deflation (and hyperinflation due to our currency being booted as reserve currency, and imports becoming expensive overnight) causing mass defaults on their home loan obligations? Where do our mortgages end up now post 2008, 2009 financial collapse? Our governments coffers via FHA, FNMA, GNMA? And who will place a lien on our government when they default on it's loans? Wouldn't they be able to foreclose on America?
The US mandate on allowing Plunge Protection enabling the Fed to stick their noses directly in the equities markets was written in 1988 and is public knowledge and found in the public forum. And the attached "memo" shows incentives from the Chicago Mercantile Exchange for Central Bankers to use their equity futures markets.
Write me if you have any questions or comments, or if you need me to join in your efforts help to expose this Ponzi scam.
Much has been made of the decision by the Japanese government to inject another $700 billion into their ailing economy. While some may see this as an earnest attempt to save Japan from further stagnation and deflation, even some of the mainstream media (e.g. Bloomberg) are questioning the wisdom of this reckless act.
Over the last few decades, since the crash of 1989,
Japan has injected billions into its banks and stock-market to help its economy but all of it has been a miserable failure.
America has, via the Federal Reserve, increased its national debt to formerly unthinkable numbers with almost no effect on its ailing economy.
Most of Europe has huge public debt as a result of bank bailouts, but still suffers from stagnating or shrinking economies.
In fact, any privately owned central bank that has undertaken monetization policies (creating more public debt) has failed to improve their nation’s economy and merely created a transfer of wealth from the general public to corporate hands.
Of course, government owned banks such as in China and Russia are and do take somewhat different actions given that they are owned by the public (state owned) and not private individuals or corporate entities. Therein lies the crux of the matter – private ownership means private interests, therefore the needs of the country and the populace are of no concern at all.
All that the Fed, BoJ (Bank of Japan), the Bank of England etc. have been concerned with is the preservation of private banks and the continued propping up of stock markets. None of these institutions really care about the real-world economy, real-world inflation or the ability of individuals to maintain their lives in a prolonged period of economic contraction.
While monetizing is all great news for the banks and stock-markets it is terrible news for any people that do not receive well over average earnings – this is because monetizing debt (printing money) causes inflation. As with everything else connected with the economy, governments cook the books on inflation to the extent that the CPI is a total fantasy designed to give falsely low inflation rates.
Even the most foolish of people can see that month by month food, fuel, utilities, clothing and just about everything is going up in price. Part of this is due to factors such as environmental/weather disasters and conflict that can affect production and therefore prices. However, the continual currency wars – a race to the bottom to expand and devalue the US dollar, Euro, Pound, Yen etc is the fundamental cause of runaway inflation that is affecting most households.
When you couple high real inflation with stagnation or reduction in wages over the years since the 2008 crash then real-world buying power of most individuals is drastically reduced. This doesn’t just make people depressed, it makes them angry – hardworking people do not expect or deserve to be thrust into poverty.
Governments press blindly on, printing money, propping up the financial sector and saddling their voters with more and more debt that must be paid for in taxes. They know that the public is unhappy, but they are more interested in placating their corporate partners than listening to a public that is
increasingly angry and
increasingly close to open revolt.
Stimulus has failed to produce any ‘green shoots’ simply because it has been directed to where it is of no benefit (except to the already rich) and not at where it desperately needs to go. Throwing good money after bad is not going to change anything unless it is redirected to the bottom and middle earners who are the lifeblood of any consumer society.
Quoting Raul Ilargi Meyer’s recent article: ‘Any stimulus must be directed at the bottom, or it must of necessity fail… it’s very simply that an economy cannot function without its poorer 90% of citizens spending.’
If this is true, which I believe it is, then more monetizing debt can only lead these ailing economies into further ruination and further beggaring of the masses. If this continues then the bulk of the population will become poor enough and angry enough to demand change on their own terms.
This will begin with mass protest and if it is ignored or suppressed then continued attempts to retain the status quo will lead to insurrections and possibly violent revolutions. One can only hope that governments will act soon in the interest of the people for once instead of lining the pockets of corporations and those that own them.
SPEAKING OUT ON FINANCIAL REPRESSION
Tim Price is Director of Investment at PFP Wealth Management in the UK, an independent asset management and financial planning practice. He was formerly Chief Investment Officer – Global Strategies at Union Bancaire Privée in London, and previously Chief Investment Officer at private bank Ansbacher & Co.
Tim has 18 years’ experience of both institutional and private client wealth management. A graduate of Oxford University, his focus is absolute return investing using multiple asset classes, including so-called alternative investments. Working with his prior employers he has been shortlisted for five successive years in the Private Asset Managers Awards program and is a previous winner in the category of Defensive Investment Performance. He was also shortlisted in the inaugural Spear’s Wealth Management Awards 2007 in the category of Asset Manager of the Year. An outspoken and sometimes irreverent commentator on financial markets and the asset management industry, Tim is also a regular columnist for Money Week magazine and maintains a weblog, The Price of Everything (http://thepriceofeverything.typepad.com/) and edits Price Value International.
"Financial Repression is government stealing from savers and the future!"
"The single biggest problem of our times economically, is that for the last 40 years there has been an unsustainable buildup of credit expansion throughout the developed world ... and we have reached the end of the road new. Every policy by governments and their agents (the central banks) is too a) Kick the Can Down the Road and B) to steal from savers to keep this bandwagon rolling!"
THREE ALTERNATIVE APPROACHES TO ATTEMPT A RESOLUTION:
Generate Sufficient Economic Growth to Keep Servicing the Debt,
Repudiation or Debt Default,
An Explicit Policy of State Sanctioned Inflationism.
Approach #1 and #2 or no longer realistically viable, leaving governments with only option #3. The last options has historically always been the option governments of fiat based systems have resorted to throughout the ages because of a lack of "political will and discipline".
Tim believes Japan is presently the 'dress rehearsal' and the rest of the world will be the main event.
A "FOUR LEGGED" INVESTMENT APPROACH
The pragmatic response - Ignore indices and concentrate on value.
“Investors do not make mistakes, or bad mistakes, in buying good stocks at fair prices. They make their serious mistakes by buying poor stocks, particularly the ones that are pushed for various reasons. And sometimes – in fact very frequently – they make mistakes by buying good stocks in the upper reaches of bull markets.”
High Quality Debt,
Deep Value Listed Equity,
Uncorrelated Assets and Systematic Trend Following (CTA),
"When you’re a distressed seller of an illiquid asset in a market panic, it’s not even like being in a crowded theater that’s on fire. It’s like being in a crowded theater that’s on fire and the only way you can get out is by persuading somebody outside to swap places with you .”
This is precisely what occurs when the regulatory pressures and un-natural forces of FINANCIAL REPRESSION finally ends
PODCAST - 26 Minutes
"WE'RE GOING TO BE FINANCIALLY REPRESSED FOR DECADES!"
Bill Gross, the 69-year-old billionaire co-founder of Pacific Investment Management Co., told Bloomberg Radio - AUDIO
Feeble returns on the safest investments such as bank deposits and fixed-income securities represent a “financial repression” transferring money from savers to borrowers,says Bill Gross.
Workers 65 and older, struggling with years of depressed yields, are the only group of Americans who are increasingly employed or looking for jobs, according to Labor Department participation-rate data.
Federal Reserve interest-rate policy that aims to cut borrowing costs. “I hate to be gloomy, but, yes, for the next 10 years, the oldsters, and I’m in that camp, are going to be disappointed in terms of the policy rate.” About 75 million baby boomers, born from 1946 to 1964, are starting to retire and face meager returns as a byproduct of the Fed’s decision to hold its benchmark rate near zero since December 2008. Policy makers also have quadrupled the central bank’s balance sheet to a record $4.22 trillion to drive down borrowing costs.
The $17.5trillion recognized federal government debt is one of the prime reasons why so many Americans, especially seniors, are having trouble making ends meet and why many of the young can't save.
What's happening is that since 2008, Washington has been aggressively engaged in a process called financial repression.
Financial repression is a deliberate policy by which deeply indebted governments, like ours, have historically used to discharge their otherwise unpayable debt. It's a combination of chronic inflation coupled with artificially imposed low interest rates. What this effectively does is transfer wealth from savers to government.
One of the beauties of financial repression from Washington's perspective is that it's complex enough that the average person doesn't understand how it works. This allows the government to keep taking vast sums of private wealth year after year without having to suffer any political consequences. That is, those in power stay in power.
Since the financial crisis of 2008, financial repression has been responsible for the yearly stealth transfer of hundreds of billions of dollars from the private sector to Washington.
The rationale is that it's better to take something from everyone to resolve the financial predicament which the government regards as a societal problem.
One of the negatives of this hidden tax is that the prudent saver is punished. Another drawback is that financial repression makes it very difficult for people to save and thus accumulate some wealth.
I have been following events since the 1970s, and one of the things that stand out for me is the cavalier and even reckless ways in which government spends money. No responsible person would ever run their household the way politicians have run the government. So now we're paying the piper for our collective spendthrift ways.
Peter Skurkiss, Stow
It Begins: German Bank 'Charging' Negative Interest To Its Retail Customers
Don Quixote is easily one of the most entertaining books of the Renaissance, if not all-time. And almost everyone’s heard of it, even if they haven’t read it.
You know the basic plot line- Alonso Quixano becomes fixated with the idea of chivalry and sets out to single-handedly resurrect knighthood.
His wanderings take him far across the land where he gets involved in comic adventures that are terribly inconvenient for the other characters.
He famously assaults a group of windmills, believing that they are cruel giants. He attacks a group of clergy, believing that they are holding an innocent woman captive.
All of this is based on Don Quixote’s completely delusional view of the world. And everyone else pays the price for it.
Miguel de Cervantes’ novel is brilliantly entertaining. But the modern-day monetary equivalent is not so much.
Central bankers today have an equally delusional view of the world. Just three months ago, Mario Draghi (President of the European Central Bank) embarked on his own Quixotic folly by taking certain interest rates into NEGATIVE territory.
Draghi convinced himself that he was saving Europe from disaster. And like Don Quixote, everyone else has had to pay the price for his delusions.
On November 1st, the first European bank has passed along these negative interest rates to its retail customers.
So if you maintain a balance of more than 500,000 euros at Deutsche Skatbank of Germany, you now have the privilege of paying 0.25% per year… to the bank.
We’ve already seen this at the institutional level: commercial banks in Europe are paying the ECB negative interest on certain balances.
And large investors are paying European governments negative interest on certain bonds.
Now we’re seeing this effect bleed over into retail banking.
It’s starting with higher net worth individuals (the average guy doesn’t have half a million euros laying around in the bank). But the trend here is pretty clear– financial repression is coming soon to a bank near you.
It almost seems like an episode from the Twilight Zone… or some bizarre parallel universe. That’s the investment environment we’re in now.
Bottom line: if you’re responsible with your money and set some aside for the future, you will be penalized. If you blow your savings and go into debt, you will be rewarded.
If we ask the question “cui bono”, the answer is pretty obvious: heavily indebted governments benefit substantially from zero (or negative) rates.
Case in point: the British government just announced that they would pay down some of their debt that they racked up nine decades ago.
In 1927, then Chancellor of the Exchequer Winston Churchill issued a series of bonds to consolidate and refinance much of the debt that Britain had racked up from World War I and before.
This debt is still outstanding to this day. And the British government is just starting to pay it down– about $350 million worth.
Think about it– $350 million was a lot of money in 1927. Thanks to decades of inflation, it’s practically a rounding error on government balance sheets today.
This is why they’re all so desperate to create inflation… and why they’ll stop at nothing to make it happen. (It remains to be seen whether they’ll be successful, but they are willing to go down swinging…)
What’s even more extraordinary is how they’re trying to convince everyone why inflation is necessary… and why negative rates are a good thing.
On the ECB’s own website, they say that negative interest rates will “benefit savers in the end because they support growth and thus create a climate in which interest rates can gradually return to higher levels.”
I’m not sure a more intellectually dishonest statement could be made; they’re essentially telling people that the path to prosperity is paved in debt and consumption, as opposed to savings and production.
These people either have no idea how economies grow and prosper, they’re outright liars, or they’re completely delusional.
I’m betting on the latter. Either way, this assault on windmills has only just begun.
As Don Quixote himself said, “Thou hast seen nothing yet.”
HONG KONG – A generation of development economists owe Ronald McKinnon, who died earlier this month, a huge intellectual debt for his insight – introduced in his 1973 book Money and Capital in Economic Development – that governments that engage in financial repression (channeling funds toward themselves to reduce their debt) hamper financial development. Indeed, McKinnon provided the key to understanding why emerging economies’ financial sectors were underdeveloped.
At the end of his life, McKinnon was working on a related – also potentially groundbreaking – concept: a dollar-renminbi standard. In his view, such a system would alleviate the financial repression and fragmentation that is undermining global financial stability and growth. The question is whether the powers that be – particularly in the United States, which has long benefited from the dollar’s global domination – would ever agree to such a cooperative system.
The notion that the dollar’s global dominance is contributing to financial repression represents a significant historical shift. As McKinnon pointed out, the dollar became a dominant international currency after World War II because it helped to reduce financial repression and fragmentation in Europe and Asia, where
Negative real interest rates, and
Excessive regulation prevailed.
By using the dollar to anchor prices and the Federal Reserve’s interest rate as the benchmark for the cost of capital, invoicing, payments, clearing, liquidity, and central-bank reserves all became more stable and reliable.
As long as the US remained competitive and productive, currencies that were pegged to the dollar benefited considerably. For economies in transition – such as Western Europe in the 1950s-1960s, Asia during the growth miracle of the 1970s-1990s, and China in 1996-2005 – the dollar provided an anchor for the macroeconomic stabilization efforts and fiscal and monetary discipline that structural transformation demanded.
But two disruptions undermined these benefits.
First, in 1971, the US terminated the dollar’s convertibility to gold, opening the way for the emergence of a new exchange-rate regime, based on freely floating fiat currencies.
Then came the period of “Japan-bashing” in the 1980s-1990s, which culminated in threats from the US to impose trade sanctions if Japan’s competitive pressure on American industries did not ease. With the subsequent sharp appreciation in the yen/dollar exchange rate, from ¥360:$1 to ¥80:1, the world’s second-largest economy has suffered through two decades of deflation and stagnation.
Throughout this period, McKinnon argued that, by forcing America’s trade partners to bear the burden of adjustment, the dollar’s predominance leads to “conflicted virtue”: surplus countries like Japan, Germany, and China faced pressure to strengthen their currencies, at the risk of triggering deflation. If they failed to do so, their “undervalued” exchange rates were criticized as unfair.
But McKinnon disagreed with the conventional wisdom that the best way to resolve this conflict would be to shift to flexible exchange rates. Instead, he recommended that Asian countries develop a regional currency that would provide macroeconomic stability in the face of dollar volatility. Long before the Bretton Wood institutions conceded that capital controls could be useful, McKinnon was asserting that, under certain circumstances, such controls might be necessary to supplement prudential banking regulation.
McKinnon has a particularly strong following among Chinese economists. China achieved its strongest growth when the renminbi was pegged to the dollar – a system that required steadfast reforms and strict fiscal discipline.
The renminbi’s steady appreciation against the dollar – at an annual rate of about 3%, on average, since 2005 – shrank China’s current-account surplus. In a weak global economic environment, China’s progress in addressing macroeconomic imbalances, while maintaining an annual growth rate of about 7%, was no small feat.
But the renminbi’s appreciation also attracted carry-trade speculators, who purchased renminbi assets in order to benefit from high interest rates (particularly after 2008) and exchange-rate gains. This is partly why China’s foreign-exchange reserves have swelled so rapidly, from $250 billion in 2000 to $4 trillion this year.
The problem, as McKinnon recognized, is that these speculative inflows of “hot” money have weakened China’s macroeconomic tools and fueled ever more financial repression. For starters, China’s leaders, recognizing that higher interest rates would draw even greater inflows, are increasingly wary of interest-rate – and even capital-account – liberalization.
Making matters worse, the Chinese authorities are tightening credit and regulating the money supply through sterilization and high reserve requirements for bank deposits – an approach that undermines real economic growth considerably. In order to stem this decline without raising interest rates too much, they have resorted to administratively targeted credit loosening.
More “China-bashing,” with the US demanding that the renminbi be allowed to appreciate further, is clearly not the answer. Instead, the US should focus on reducing its own fiscal deficit, thereby facilitating Chinese efforts to boost domestic consumption. If the Fed’s benchmark interest rate can be restored to historical trend levels, China would have more policy space to adjust interest rates in alignment with its growth pattern and pursue an orderly opening of its capital account.
Simply put, the world needs its two largest economies to work together to bolster global monetary stability. Together, China and the US can alleviate financial repression, avert protectionist tendencies, and help maintain a strong foundation for global stability. Unfortunately, McKinnon’s policy advice has not been popular among mainstream American economists and policymakers, who prefer the short-term political advantages afforded to them by free-market rhetoric.
It is time for US leaders to recognize that what former French Finance Minister Valéry Giscard d’Estaing called the “exorbitant privilege” that the dollar’s global dominance affords America also entails considerable responsibility. Global monetary stability is, after all, a public good.
Read more from Honoring Ronald McKinnon
Ronald McKinnon, a former professor at Stanford University and a renowned specialist on monetary policy and international trade and finance, passed away earlier this month. In his honor, Project Syndicate has compiled a list of commentaries that explore the impact of his work.
Read more at http://www.project-syndicate.org/commentary/us-dollar-dominance-burdens-china-by-andrew-sheng-and-geng-xiao-2014-10#BPTvVg1Yqk9iDk8V.99
Read more at http://www.project-syndicate.org/commentary/us-dollar-dominance-burdens-china-by-andrew-sheng-and-geng-xiao-2014-10#BPTvVg1Yqk9iDk8V.99
Financial Repression Forces Investors to Do Things They Wouldn't Naturally Do
Like Buy US Treasuries at a Minimal Rate from a Country with Exploding Debt & Reduced Abilities to Pay
This happens when the Fed Manipulates a Market Bubble thereby Reducing Stock Yields because of higher stock Prices - Then removes liquidity (TAPER) which triggers a flight to PERCEIVED SAFETY.
PRESTO - US Debt gets cheaper due to FEAR
NOW YOU UNDERSTAND FINANCIAL REPRESSION AS YOU HOLD PAPER THAT IS UNPAYBALE AND INEXTINQUISABLE, YIELDING LESS THAN INFLATION!!!!
What is the Real Risk in
Who WILL BE Left Holding the Bag?
Financial Repression v 5 Natural Truths
The Macroprudential Policy of FINANCIAL REPRESSION is the embodiment of a program fighting these 5 natural truths:
Many "in-the-know" have warned!
ATALS SHRUGGED - Financial Repression A Mirror Image
Sick of the overbearing regulation, taxation, and entitlement mentality in society—in the book Atlas Shrugged, John Galt went to one entrepreneur after another to convince them that they just didn’t need to put up with it anymore.
So one by one, these innovators and producers simply closed up shop, deciding to just “shrug” and abandon what they were providing thanklessly to the looters.
Today many companies are doing the same. They may not be abandoning their businesses altogether, but they are moving them out of the hands of the parasites by moving their tax bases abroad.
In Ayn Rand’s book, the Economic Planning Bureau dealt with this by legislating that no businesses could leave: “[a]ll the manufacturing establishments of the country, of any size and nature, were forbidden to move from their present locations, except when granted a special permission to do so.”
In real life today, we have a string of policies being proposed to similarly discourage companies from leaving, or failing that, to try to claw as much money as possible from them first.
Even the language used by these bill’s supporters is eerily similar to the novel, as politicians call for corporations to pay their “fair share” and bemoan that Americans have to “pick up the tax burden inverted companies shrug off.”
At the time, Rand might have thought that she was writing about an extreme, fictional society. But it seems that the Land of the Free is eager to exceed even her worst expectations.
When she wrote about the “Economic Emergency Law”, which forbade any discrimination “for any reason whatever against any person in any matter involving his livelihood”, she was likely thinking about criteria such as race, gender, and age.
She might have even considered they would try to prevent employers from making judgments based on a person’s ability, though I’m sure she would not have even imagined what politicians have actually come up with in the US.
H.R. 5278: No Federal Contracts for Corporate Deserters Act
First, take the H.R. 5278: No Federal Contracts for Corporate Deserters Act, which bars federal contracts for American companies that have gone overseas for tax purposes.
H.R. 5549: Pay What You Owe Before You Go Act
Then take the H.R. 5549: Pay What You Owe Before You Go Act, which seeks the seizure of unrepatriated corporate revenue.
S. 1972/ H.R. 3972: Fair Employment Opportunity Act
Try the S. 1972/ H.R. 3972: Fair Employment Opportunity Act that proposed to prohibit discrimination according to a person’s history of unemployment.
S. 1837: Equal Employment for All Act
Or even worse, the S. 1837: Equal Employment for All Act that would have prohibited employers from even looking at prospective employee’s credit ratings.
H.R. 4904: Vegetables Are Really Important Eating Tools for You (VARIETY)
The literary similarities don’t just stop with corporations either. Compare the fictional Project Soybean, designed to “recondition” people’s dietary habits to the actual H.R. 4904: Vegetables Are Really Important Eating Tools for You (VARIETY).
Tell me, which one sounds more ludicrous to you? With each new piece of legislation being proposed in the Land of the Free, Atlas Shrugged seems to be ever more prophetic.
While even the most terrifying elements of the book are coming true, so are the reactions. People and companies are leaving, refusing the put up with the looting of their efforts any longer.
Despite politicians’ desperate attempts to stop it, Atlas is already shrugging.
“John Galt is Prometheus who changed his mind. After centuries of being torn by vultures in payment for having brought to men the fire of the gods, he broke his chains—and he withdrew his fire—until the day when men withdraw their vultures.”
FED POLICY ADOPTION - Underpinnings of Financial Repression
In July, Janet Yellen remarked about what seems to be her preferred choice, a topic that has been central to her Chair.
.. efforts to promote financial stability through adjustments in interest rates would increase the volatility of inflation and employment. As a result, I believe a macroprudential approach to supervision and regulation needs to play the primary role.
We are, as Yellen proclaims, in the capable hands of regulators and their “macroprudential” systems and arcana:
The Federal Reserve is stepping up its oversight of high-risk leveraged loans, shifting to a deal-by-deal review after its previous industry-wide guidelines were largely ignored by banks.
Truer words have never been written, as if you were observing the leveraged loan market from afar with little prior experience you would come to the conclusion that there was no such thing as “guidelines” in leveraged loans.
Until now, supervisors collected loan data in an annual survey, and last year told banks they needed better adherence to standards they put forth in guidelines in March 2013. Over the past several weeks, they have shifted tactics and are examining loans as they are made, showing a new urgency in avoiding the kind of overly risky lending that was blamed for igniting the financial crisis.
To sum up: the leverage lending market had prior guidelines that were supervised (using that term loosely) via an annual loan survey leading to a surge in the kind of “overly risky lending” usually reserved for the bitter ends of cycle peaks; and now, long after all that behavior has been entrenched and hundreds of billions of loans made, macroprudential policy wishes to step up regulatory pressure.
Gordon T Long: Financial Repression Killing Middle Class & Capitalism Itself
WallStrForMainStr Interviews Gordon T Long:
"We have over 250 interviews with top guests in discussion. The Gordon T Long discussion is over an hour long and one of the best ones we've done all year."
FINANCIAL REPRESSION NOW TARGETING AMERICANS ABROAD
7.6M AMERICANS LIVING ABROAD are now being treated lke crooks by being cut off by banks and brokerages as a result of US FINANCIAL REPRESSION A U.S. crackdown on "money laundering and tax evasion" is the excuse for the blatant and punitive abuse.
Many registered firms are being forced to close accounts for Americans abroad or decline to open new ones, in order to avoid
Increased compliance costs,
The consequences for potential errors (punitive US regualtory fines).
Foreign Account Tax Compliance Act (Fatca).
Congress enacted it in 2010 after learning that foreign banks, especially in Switzerland, had profited by encouraging U.S. taxpayers to hide money with them abroad. The main provisions of Fatca took effect in July.
As a result, foreign financial firms must report to the Internal Revenue Service investment income and balances above certain thresholds for accounts held by U.S. customers.
Nearly 100,000 banks and other companies have registered with the IRS.
If they hadn't, all their customers would have 30% withheld from income received from U.S. sources, such as interest and dividends.
a bank official must sign a statement guaranteeing compliance with Fatca. "Banks look at this from a liability perspective," he said. "The less the bank has to report to the IRS, the less risk there is."
Theightened enforcement of rules against so-called illicit finance, such as money laundering or financial transactions that breach U.S. sanctions. Enforcement is again intensifying after a pause during the financial crisis, making it more expensive or difficult to move money from one country to another. Among those affected by the tightened policies are retirees of modest means
BEING INTENTIONALLY PUT IN PURGATORY
Americans abroad are also encountering troubles with U.S.-based investment accounts. In recent months, firms including Fidelity Investments, Charles Schwab Corp., T. Rowe Price and others have told overseas investors and advisers they may no longer buy or trade mutual funds.
Wealth taxes and Financial Repression as a solution to over-indebtedness?
“There is only one way to kill capitalism - by taxes, taxes, and more taxes."
Financial repression always consists of a combination of different measures, which lead to a significant narrowing of the universe of investable assets for investors. Money which in a more liberal investment environment would have flowed into other asset classes, is channeled in a different direction.
The goal of financial repression is an indirect reduction of government debt by means of the targeted manipulation of the cost of government debt, most of the time accompanied by steady inflation.
Financial repression is ultimately a government-imposed transfer of wealth.
A preferably “quiet debt reduction” is supposed to be achieved by the following measures:
Direct or indirect capping of interest rates (especially on government bonds)
Measures such as forcing domestic investors to invest in domestic capital markets, such as capital controls and regulations forcing institutional investors to hold portfolios with a “home bias”
Taxes that make alternative investments more expensive (e.g. transaction taxes)
measures that imply a direct or indirect influence of government on financial institutions (macro-prudential regulation)
Negative deposit interest rates, which increase the incentive for banks to invest in relatively risk-free assets. Banks are thus encouraged to monetize government debt – something that can rightly be called an inflation policy.
“If a policy is pursued over a long period which postpones and delays necessary
movements, the result must be that what ought to have been a gradual process of change becomes in the end a problem of the necessity of mass transfers within a short period.”
Friedrich August von Hayek
One of the most important goals of financial repression is to hold nominal interest rates below the rate of price inflation. This lowers the government's interest expenses and contributes to a reduction in the real value of the debt burden. Finders keepers, losers weepers: Worldwide savers thus lose approx. EUR 100 bn. per year. Savings are, however, extremely important for capital formation and future growth, especially in times of crisis.
The post-war period in the US is often cited as the standard example for the “history of success” of financial repression. At the time, liquid bonds with short maturities were exchanged for illiquid long-term bonds. One can see a parallel to the present in this, as the increase of maturities of outstanding bonds is a major component of financial repression.95 This can also be seen in the following charts.
Debts can never erase debts.
Debts erase wealth, or wealth erases debts.
“The decline of the value of each dollar is in exact proportion to the gain in the number of them.”
The maturity profile of the Fed's balance sheet has been dramatically expanded in recent years. Obviously, an increase of a bond portfolio's maturity profile vastly increases its interest rate sensitivity. Should interest rates increase quickly, exorbitant accounting losses would immediately accrue to central banks and their equity capital would turn negative.
Specific examples of repression measures imposed over the last year:
Federal Reserve officials are already discussing whether regulators should impose exit fees on bond funds to avert a potential run by investors. This underlines their concern about the vulnerability of the USD 10 trillion corporate bond markets.
retroactively to 1 February, Italy taxes incoming cross-border money transfers at a rate of 20%. Only if one can prove that one has not engaged in money laundering does one get one's money back. The onus of proof is thus with taxpayers.
In Poland, a radical step was taken. In order to lower the debt-to-GDP ratio by 8 percentage points, the expropriation of private pension funds was enacted. The background is that upon reaching a debt-to-GDP ratio of 55%, consolidation measures are automatically implemented. By expropriating AXA, ING and Generali, the debt-to-GDP ratio was lowered by 8 percent. According to finance minister Jacek, this creates the potential for the government to run up additional debt.
A revenue source for government that is currently one of the most popular debates, consists of more direct measures, including compulsory levies on all savings, securities and/or real estate. This debate has intensified following a publication by the IMF, an excerpt of which we provide below:
“The sharp deterioration of the public finances in many countries has revived interest in a “capital levy” - a one-off tax on private wealth - as an exceptional measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair).”
Germany's Bundesbank jumped on the bandwagon as well and said:
“With this special context in mind, the following outlines the various aspects of a one-off levy on domestic private net wealth, in other words, a levy on assets after liabilities have been deducted. From a macroeconomic perspective, a capital levy – and even more so a permanent tax on wealth – is, in principle, beset with considerable problems, and the necessary administrative outlay involved as well as the associated risks for an economy’s growth path are high. In the exceptional situation of a looming sovereign default, however, a one-off capital levy could prove more favorable than the other available alternatives......If the levy is referenced to wealth accumulated in the past and it is believed that it will never be repeated again, it is difficult for taxpayers to evade it in the short term, and its detrimental impact on employment and saving incentives will be limited – unlike that of a permanent tax on wealth.”
US economist Barry Eichengreen outlined already in a 1989 study entitled “The Capital levy in Theory and Practice” how such a compulsory levy must be implemented to be successful: without political debate, fast and above all the surprise factor is essential. Otherwise, capital flees across the border or into different asset classes.
“Capital will always go where it’s welcome and stay where it’s well treated.”
Wriston’s Law of Capital
The road toward wealth taxes is thus already being paved.
Even though the compulsory levy is often called a “millionaire's tax”, caution is advisable. Such a levy on wealth would have massive effects on saving behavior and thus also long term negative consequences for capital formation. The capital structure will be distorted and capital accumulation will become more difficult. When in the past, savings were invested in the capital markets, other ways will now be sought in order to evade the levy.
Since these new ways will only be sought as a result of the new wealth tax, they represent more inefficient forms of capital formation, as they would otherwise already have been used previously.
We expect that financial repression as well as wealth taxes in various facets will increasingly gain in importance in coming years.
We believe this to be a disastrous strategy, as the redistribution will merely buy time, while the structural problems remain unsolved.
“Either the State ends public debt, or public debt will end the State”
A NATION IN DECLINE
.. and Running Out of RUNWAY!
$6 Trillion of Budget Deficits
Fed Funds Rate at 0% for nearly 6 Years
$3.5 Trillion of Fiat Money Creation
$25 Trillion Expansion of Household Net Worth (thanks to QE)
We have managed to achieve this....
THE POWERS TO BE ARE GETTING DESPERATE!
Expect FINANCIAL REPRESSION to accelerate & become more aggressive.
How will these deficits be financed when the present budget debates causes such Congressional wrangling & gridlock?
FINANCIAL REPRESSION IN ACTION
"SAFEGUARDS" BLATENTLY CORRUPTED
The Federal Reserve, under pressure from lawmakers and state officials, is considering allowing banks to use certain types of municipal debt to satisfy a new postcrisis financing rule.
U.S. regulators are expected to finalize safeguards requiring that banks hold enough liquid assets—such as cash or those easily convertible to cash—to fund their operations for 30 days if other sources of funding aren't available. Municipal securities issued by states and localities wouldn't count as "high-quality liquid assets" under the rule, meaning such securities wouldn't qualify for use under the new funding requirements.
States and localities have warned that excluding their securities could cause banks to retreat from a $3.7 trillion market in which they have increasingly become an important player, which could driving up borrowing costs to finance roads, schools and bridges. Banks have nearly doubled their ownership in municipal securities over the past decade to more than 11%, according to Fed data.
Treasury Department officials are assembling a list of administrative options for Secretary Jacob Lew to consider for ways to deter or prevent U.S. companies from reorganizing overseas primarily to avoid paying federal taxes
Some Democrats in Congress believe lawmakers should pass a stopgap measure to deter companies from pursuing the deals, while some Republicans have said the only way to stop inversions is through an overhaul of the tax code.
others believe the White House has ample flexibility to step in and have raised different ideas for administrative actions, including
steps to address earnings stripping,
the taxation of interest and
the treatment of debt and equity
THIS IS WHY IT IS CALLED REPRESSIVE
FINANCIAL REPRESSION IS ABOUT REGULATIONS
Indebted Governments Will Resort To Capital Controls
Daily Reckoning commentary on how indebted, western-world governments will likely begin instituting draconian controls & regulations on restricting the movement of money, all with the goal of keeping itself alive & not going into default on its debt while at the same time maintaining a relatively strong currency
.. "The U.S. government, along with other Western countries and innumerable banking institutions, is starting to make it very difficult for regular citizens — you, me and the nice lady next door — to move money
.. In essence, capital controls enable governments to limit the flow of money coming in and out of their country in the hopes of manufacturing conditions that protect the value of their currency. As we reach a fiscal tipping point, we could very well see our government revert to making use of capital controls."
Lagarde joined Baker & McKenzie, a large Chicago-based international law firm, in 1981. She handled major antitrust and labor cases, was made partner after six years and was named head of the firm in Western Europe. She joined the executive committee in 1995 and was elected the company's first ever female Chairman in October 1999. In 2004, Lagarde became president of the global strategic committee.
Baker & McKenzie has overtaken DLA Piper to become the biggest law firm in the world by revenue, surpassing the $2.5bn barrier for the first time.
Bakers, which has a June 30 financial year-end, said revenues had risen 5 per cent to $2.54bn, while its equity partners took home $1.29m on average after profits per equity partner – a key metric of a law firm’s financial health known as PEP – rose 7 per cent over the past 12 months.
DLA Piper, which like most US-headquartered firms follows a calendar financial year, said this year its revenues for 2013 stood at $2.48bn and average PEP was $1.33m. It was hitherto the biggest firm in the world by revenue.
Bakers, which started in Chicago in 1949 and today has 4,245 lawyers in 76 offices around the world, said the past 12 months had been particularly strong for its banking and finance team, and its litigators and tax experts.
Like other large international law firms, Bakers is feeling the benefits of an uptick in mergers and acquisitions. The financial crisis had dried up the lucrative pipeline of advisory work on M&A and banking deals on which firms relied.
During the period Bakers advised Citic Metal, part of the Chinese consortium that bought Las Bambas copper project in Peru from Glencore for $5.85bn.
Bakers – whose alumni include Christine Lagarde, head of the International Monetary Fund – is known for its international footprint. It opened offices in markets including Myanmar in the last year.
“We have been passionately global since our founding 65 years ago, and that is reflected in our continued expansion into new markets,” said Eduardo Leite, chairman.
While Bakers will be pleased that its PEP is well above the $1m mark again – during the financial crisis it dipped to $992,000 – its equity ranks have thinned. It has 705 equity partners, down from 719 last year.
Other top-five global firms have higher PEPs – a statistic that is closely monitored by both a firm’s own lawyers and its rivals and recruiters – with Latham & Watkins’ equity partners on average taking home $2.49m a year, and the figure at Skadden Arps Slate Meagher & Flom standing at $2.73m.
Equity partners at London-headquartered magic circle firms, meanwhile, on average make at least £1.12m, which with a strong sterling pushes take-home pay near $2m, an important milestone in the competitive US recruitment market.
AIG, which received a $182bn government bailout during the financial crisis, is now regarded in the same manner as the big US banks
In July 2013, AIG and GE Capital were the first non-banks classed as systemic risks by the Financial Stability Oversight Council, which was formed after the 2008 financial crisis and is made up of the heads of the US regulatory agencies. The designation comes with Fed oversight and tougher regulatory standards.
The scrutiny of AIG and GE Capital, which are overseen by the Federal Reserve, is a preview of what other non-banks may face if they are also designated as systemic risks to the financial system.
Financial companies that could be in the FSOC’s sights wondered how the Fed would regulate non-banks, and some assumed the agency would view them differently than the biggest banks it already oversees. The treatment of AIG and GE Capital shows they are being regarded in the same manner as JPMorgan, Citigroup and Bank of America, according to people familiar with the process.
Life insurer MetLife is waiting to see if it will be designated this year, while its smaller rival
LARGEST ASSET MANAGERS: On July 31, FSOC decided for now to lift the threat of systemic risk designations for the largest asset managers, but said it would focus on the industry’s products and activities.
PRIVATE EQUITY & HEDGE FUNDS: The review of asset managers came after an FSOC-commissioned report on the industry, which also said it was reviewing private equity and hedge funds, prompting predictions that those sectors could be next on the council’s agenda.
Those companies can look to the experience of AIG, which received a $182bn government bailout amid the crisis, and GE Capital, which faced liquidity scares in 2008, to see what is in store for them. A handful of Fed officials now work at the companies alongside AIG and GE Capital employees, just as they do at the banks.
“AIG believes in strong regulatory oversight,” the company said. “AIG works closely with various regulators, including the Federal Reserve, and we believe that oversight of large financial firms, coupled with the state regulation to which insurers are already subject, can further strengthen the safety and security of the financial system and people’s confidence in it.”
Fed officials are also involving themselves in the kinds of decisions that company management or board directors usually make, including
whether employees should be fired or disciplined, which has been surprising, according to some people familiar with the process.
“The Fed is being very intrusive,” said one of these people. “It’s been much more intense than people expected.”
Another person familiar with the process said the Fed did not make employment decisions, but it did assess operations of non-banks in a variety of ways, such as whether the company had an adequate audit department. Those reviews, which focus largely on risk management, internal controls and governance, could be interpreted as indirect suggestions to discipline or fire an employee, the person said.
“The Fed serves a critical role in ensuring the stability and soundness of the financial system,” GE Capital said. “We have great respect for their expertise and counsel. And working closely with them, we have strengthened the safety and resiliency of our business.”
The non-bank companies designated as systemic risk fall under “enhanced prudential standards”, which also apply to the largest banks, such as JPMorgan, so it should be expected that they are treated in a similar manner, the person added.
The pressure on AIG and GE Capital will only intensify when the companies have to participate in the Fed’s
... which have tripped up the largest banks, most recently Citi. The results will determine whether the companies can increase dividends or share buybacks.
There is still uncertainty surrounding one of the biggest concerns non-banks designated as systemic risks have – what capital standards the Fed will use in its oversight.
The Fed has insisted that the Dodd-Frank financial reform bill forced it to apply bank capital standards to non-banks.
In response, the Senate recently passed a bill that would give the Fed the room to apply capital standards that are tailored for the insurance industry, while House lawmakers have urged FSOC designations to be put on hold until the capital standards are resolved.
COMING TO YOUR LOCAL BANK
BOE’s Carney Leads Push For Bail-Ins - China and Japan Against
Officials led by Mark Carney, the Bank of England governor, are attempting to bridge sharp differences among leading G20 countries as they prepare a landmark set of proposals aimed at tackling the problem of “too big to fail” banks according to the Financial Times today. Talks under the auspices of the global Financial Stability Board (FSB) over the summer are approaching a key stage as officials aim to clinch an agreement on bail-ins and the bailing in of creditors including depositors of banks.
The issue is of major consequence also to depositors who could see their savings confiscated as happened in Cyprus. Bail-ins are coming to banks in the western world with consequences for depositors. READ MORE
The real danger comes if central banks try to use macropru as a semi-permanent way to keep interest rates lower than normal, as Mr Napier fears. In this case investors will face a double setback: they will not be treated as part of the “real economy” deserving of funds, while state-directed allocation of assets has a terrible history of supporting duds, hurting growth.
The Bank of England has been flashing an amber light for months about the complacency shown by low market volatility, but in house-price obsessed Britain, mortgage excess is the focus of its worry. Last month it became the first of the major central banks to set out to try to control credit using non-monetary tools: in the jargon, “macroprudential measures”. Ms Yellen has been highlighting macropru as the first line of defence against bubbles for a while.
The problem SEEMS simple central bankers. Central bankers want money to lubricate the real economy, not to flow into pointless leverage of existing assets. Higher rates could reduce the incentives to leverage, but at the cost of damage to the real economy. Their solution is to set up barriers inside the banks to direct the flow.
If central bankers ever get serious about using macropru to control bubbles, it will mean limits on more than just mortgages. The obvious place to start is with the froth in junk bonds and the leveraged loans used by private equity houses. It is interesting, therefore, that the Fed’s monetary policy report last week emphasised that the central bank is “working to enhance compliance” with leveraged loan underwriting and pricing standards. If it becomes harder for private equity groups to gear up, they can afford to pay less to buy companies, cutting back one source of demand for shares. READ MORE
It is no secret that unlike other banks who, while directly intervening in the bond market only manipulate equity prices in relative secrecy (usually via HFT-transacting intermediaries such as Citadel), the Bank of Japan has historically had no problem with buying equities outright, traditionally in the form of REITs and equity-tracking ETFs. Which explains why overnight it was revealed that in order to boost the stock market, pardon, economy, the Bank of Japan is preparing to purchase exchange-traded funds based on the JPX-Nikkei Index 400 as an "option to boost the impact of unprecedented easing," according to people familiar with BOJ discussions.
Bloomberg reports that including funds that track the index would broaden the range of shares in the BOJ’s ETF purchases, and encourage companies to deploy cash for investment. That is the official storyline. It goes without saying that what the BOJ is really after is to generate further upside in the Nikkei225 which unlike other stock markets, is still notably in the red, because not only will the primary impetus behind QE - the wealth effect of the 1% - suffer, but also all those new billions in Japanese pension funds reallocated away from bonds and into stocks will continue to lose money. And the last thing the Abe cabinet, its popularity already flailing needs, is the realization that it has gambled the retirement funds of the locals on the biggest Ponzi scheme in Japanese history. READ MORE
Jim Rickards Financial Repression On Retirees & Savers
The Fed has resorted to repetitive bouts of cheap money for extended periods. This monetary ease has found its way into inflated asset values that in turn provided collateral for debt-driven consumption. These binges drove the economy until the inevitable asset bubble collapses caused a contraction in consumption and launched another cycle. At no time were savers rewarded for prudence."
"The principal victims of the Fed’s policies are those at or near retirement who face a Hobson’s Choice of gambling in the stock market or getting nothing at all. A summary of these deleterious effects on retirement income security, explained in more detail below, includes the following:
1. Increasing income inequality. Zero rate policy represents a wealth transfer from prudent retirees and savers to banks and leveraged investors. It penalizes everyday Americans and rewards bankers, hedge funds and high-net worth investors.
2. Lost purchasing power. Zero rate policy deprives retirees and those nearing retirement of income and depletes their net worth through inflation. This lost purchasing power exceeds $400 billion per year and cumulatively exceeds $1 trillion since 2007.
3. Sending the wrong signal. Zero rate policy is designed to inject inflation into the U.S. economy. However, it signals the opposite – Fed fear of deflation. Americans understand this signal and hoard savings even at painfully low rates.
4. A hidden tax. The Fed’s zero rate policy is designed to keep nominal interest rates below inflation, a condition called “negative real rates”. This is intended to cause lending and spending as the real cost of borrowing is negative. For savers the opposite is true. When real returns are negative the value of savings erodes – a non-legislated tax on savers.
5. Creating new bubbles. The Fed’s policy says to savers, in effect, “if you want a positive return invest in stocks.” This gun to the head of savers ignores the relative riskiness of stocks versus bank accounts. Stocks are volatile, subject to crashes, and not right for many retirees. To the extent many are forced to invest in stocks, a new stock bubble is being created which will eventually burst leaving many retirees not just short on income but possibly destitute.
6. Eroding trust and credibility. Economics has been infused in recent decades with the findings of behavioralists and social scientists. While this social science research is valid, the uses to which it is put are often manipulative and intended to affect behavior in ways deemed suitable by Fed policy makers. This approach ignores feedback loops. As retirees realize the extent of market manipulation by the Fed they lose trust in government more generally.
It's All About Financial Repression & Central Planning Of The Economy
Federal Reserve Vice Chairman Stanley Fischer delivered a speech last week on financial sector reform .. emphasizes the use of "macroprudential supervision" of specific sectors of the economy to try to deal with inflation, asset bubbles or employment .
"There are two uses of the term 'macroprudential supervision.'
The first relates to the supervision of the financial system as a whole, with an emphasis on interactions among financial markets and institutions.
The second relates to the use of regulatory or other non-interest-rate tools of policy to deal with problems arising from the behavior of asset prices. For instance, when central bank governors are asked how they propose to deal with the problem of rising housing prices at a time when the central bank for macroeconomic reasons does not want to raise the interest rate, they generally reply that if the need arises, they will use macroprudential policies for that purpose. By that they mean policies that will reduce the supply of credit to the housing sector without changing the central bank interest rate.
Sector-specific regulatory and supervisory policies in the financial sector were used extensively and systematically in the United States in the period following World War II until the 1990s and are now being used in other advanced and developing countries . Frequently, these policies were aimed at encouraging or discouraging activity in particular sectors, for example agriculture, exports, manufacturing, or housing; sometimes broad, non-interest-rate measures were used to try to deal with inflation or asset-price increases, for instance, the use of credit controls."
Read the speech & watch the video below of discussion between Rick Santelli & Yra Harris ..
INCREASED LOCAL PROPERTY TAXATION IS COMING AS FINANCIAL REPRESSION TRANSFERS DEBT TO RESIDENTIAL OWNERS
Municipal spending is rising alongside Inequality
Because most cities don’t have the power to tax income, they usually use property and sales taxes, which tend to hit all residents or fall more heavily on those who are middle class or lower income. As in Scandinavia, people are paying for their own increased services.
The increase in income inequality experienced by the typical city is associated with an $88 increase in expenditures per resident on top of the $900 per resident on local services spent by the typical city each year. The additional $88 of funds are allocated across the board to cover police services, fire protection, road maintenance, education, and more.
“Prices do mean that unless money is no object, you’ll need to modify expectations,” the piece advised. In Norway, a burger and fries at a fast food joint will set you back $23. A six-pack of warm grocery-store beer is nearly $30.
These hefty price tags are due, in part, to high wages for low-skilled service jobs. But high taxes play a role too.
Most products have a 25 percent value-added tax, which means that $5.50 of the cost of that burger goes to fund Norway’s generous social programs.
As a visitor, you get little for the added price. But, as a resident, your daily spending helps to fund an expansive package of benefits, including health care, child care, high-quality education, pensions, and unemployment insurance.
While many Americans admire European social safety net, what they may not appreciate is that these programs are typically paid for by a bundle of taxes that are much less progressive than taxes here. In large part, these benefits are not funded by high-income taxes on the rich.
Instead, the beneficiaries of the public services also pay for them, kroner by kroner, through high consumption taxes.
Could this system work to combat income inequality in the United States? Usually, the assumption is no, even though the most popular social insurance program in the country, Social Security, fits this template. We’ve recently published research that adds surprising support for the argument that the European model of progressive spending funded by broad-based taxes could work more widely here — by showing that it’s already happening at the local level.
With our co-author, Fernando Ferreira, we examined three decades worth of data from more than 5,000 American municipalities and school districts. We found that, as inequality rises, American cities and towns have been spending more on the poor and the middle class, funded by higher taxes on these groups.
Because most cities don’t have the power to tax income, they usually use property and sales taxes, which tend to hit all residents or fall more heavily on those who are middle class or lower income. As in Scandinavia, people are paying for their own increased services.
Our finding that municipal spending rose alongside inequality runs contrary to the view of many economists, who say that income inequality erodes support for essential public investments. We find that the increase in income inequality experienced by the typical city is associated with an $88 increase in expenditures per resident on top of the $900 per resident on local services spent by the typical city each year.
The additional $88 of funds are allocated across the board to cover police services, fire protection, road maintenance, education, and more. We document similar patterns for a large sample of school districts (although state involvement in school finance equalization complicates the picture somewhat).
Our study included large cities and small towns all over the country, which allowed us to make regional comparisons. We found that government responses to local inequality are stronger in some parts of the country than in others. The same increase in income inequality is associated with a hike of nearly $200 in spending per resident in Western states, but only $13 per resident in the South.
Racial divisions might explain why southern municipalities are less responsive to changes in income inequality — if, for example, better-off white residents are less willing to pay for services provided to poor minorities. At the same time, we find that the localities that have become more racially diverse over the past 30 years tend to spend more — not less — on public services. They also raise more revenue from state and federal sources, as well as their local tax base.
Another explanation for regional difference could be that southern mayors are more likely to run on a Republican ticket. However, we find that the propensity to spend more as inequality rises does not vary according to the political party of a city’s mayor.
This finding is consistent with other work, by Ferreira and Joseph Gyourko, showing that, despite large partisan differences in national politics, Democratic and Republican mayors spend similar amounts in similar ways. Likewise, rich and poor towns are equally likely to increase expenditures when inequality rises.
They do, however, use the money differently, with poor towns spending nearly all of the added revenue on police and fire services, while richer areas allocate the added funding across the board.
Two factors may explain why so many American municipalities spend more in times of rising inequality. First, like Social Security, local expenditures tend to be directed at broadly popular services like road maintenance and education, rather than aid to the poor. Second, as in Western Europe, the property and sales taxes that support these policies do not fall disproportionately on the rich.
Recently, both President Barack Obama and New York City Mayor Bill de Blasio have proposed funding new social programs by raising taxes on the super-rich. We have no problem with the idea of taxing the wealthy. But to reduce inequality, what matters is the combined progressivity of government taxing and spending — not the structure of the tax system alone.
Our findings suggest that a more sustainable path lies through shared taxation that pays for broad government investment. It doesn’t just work in Scandinavia. It’s happening in our own cities and towns.
FINANCIAL REPRESSION - Modern Financial Repression Grounded on a "State Controlled Fiat Currency System"
We had CAPITALISM: SAVINGS was reinvested as CAPITAL INVESTMENT
We have CREDITISM: CREDIT is created and spent on CONSUMPTION
Circulation credit means that banks lend money, and thereby expand money supply, without backing them by real savings (or reduction of consumption). This circulation credit is creation of money “ex nihilo”. Booms as well as busts are damaging because they slow down long-term investments with the consequence that resources in fluctuating economies are lacking.
According to Mises, the problem is not low consumption but low savings.
The Center for Financial Studies in Frankfurt reports on a recent talk given by Thorsten Polleit:
Thorsten Polleit on the “planned chaos” of money
What are the reasons for economic booms and busts and which reforms are necessary to create an economically viable monetary order? On 2 April, Thorsten Polleit addressed these questions in his lecture “Boom & Bust, or: Planned Chaos” referring to the Austrian school of economics. Polleit is Chief Economist of Degussa Goldhandel, President of the Ludwig von Mises Institut Deutschland and Honorary Professor at the Frankfurt School of Finance & Management.
Polleit identified the state-controlled fiat money system as a main cause of the international financial and economic crisis. This system, he said, is based on the ability of banks to create money literally out of nothing. It is, in principle, a “large-scale fraud system” because today’s money is “intrinsically worthless and not redeemable”. This has damaging consequences for the overall economic development.
Circulation credit reason for economic fluctuations
To prove this fundamental critique, Polleit referred to the theoretical principles of the Austrian School of Economics, in particular to Ludwig von Mises. According to Mises, the circulation credit is the cause of economic fluctuations. Circulation credit means that banks lend money, and thereby expand money supply, without backing them by real savings (or reduction of consumption). This circulation credit is creation of money “ex nihilo”. Booms as well as busts are damaging because they slow down long-term investments with the consequence that resources in fluctuating economies are lacking. According to Mises, the problem is not low consumption but low savings. This means that the countercyclical policy in the manner of Keynes is based on a wrong diagnosis. This policy prevents an early market-driven correction with the result of an even bigger bust.
Fiat money system creates failures
Polleit explained, on the basis of the interest theory of Mises, that the market interest rate in a fiat money system was chronically below the natural interest rate. The consequence of adherence to such a system with its too low interest rates is that economic and political mistakes during the bust phase are not completely corrected – and, thus, new failures will arise. One current example for the failure of the low interest rate policy in the industrial countries is the flow of foreign capital into the emerging markets with all its harming effects. Especially since the US Federal Reserve has announced to reduce bond purchases, many investors have withdrawn their money from the emerging markets. As a result, the exchange rates of the emerging market currencies strongly depreciated – with negative consequences for their previously booming economies.
This destabilization in emerging markets will, according to Polleit, result in an even closer cooperation among national central banks – with the objective to counteract the remaining currency competition. Central banks of emerging economies could be forced to join the network of liquidity-swap-agreements in order to receive credits from other central banks more easily. Thereby, they would basically give up their sovereignty over the national money supply. The result would be a world cartel of central banks led by the US Fed. This cartel would extend the boom phases, which are caused by the credit money system, and, as a consequence, amplify the inevitably following busts.
Against the background of this grim scenario, Polleit demanded a reform of the monetary system towards a market-oriented monetary order. This should include, inter alia, disempowering central banks and privatizing money supply.
PREVENT YOU FROM EXITING YOUR MONEY MARKETS (CASH) AT TIME OF TURMOIL
SEC Vote Could Come as Early as This Month
U.S. regulators are poised to complete long-awaited rules intended to prevent a repeat of the investor stampede out of money-market mutual funds that threatened to freeze corporate lending during the 2008 financial crisis.
The Securities and Exchange Commission is expected to vote on a plan as early as this month that would require certain money funds catering to large, institutional investors to abandon their fixed $1 share price and float in value like other mutual funds, these people said.
The plan also would allow money funds to temporarily block investors from withdrawing their money in times of stress, or require a fee to redeem shares. Other regulators, including members of the Financial Stability Oversight Council, have said such redemption restrictions could spur, rather than curb, investor stampedes.
The rules are aimed at making the $2.6 trillion money-fund industry less prone to investor runs during periods of market tumult by training investors to accept fluctuations in the value of their investments, and by ensuring funds could stop a trickle of outflows from turning into a flood.
SEC Chairman Mary Jo White is under pressure from U.S. and global regulators to fix structural vulnerabilities posed by the funds. Last week, Federal Reserve Chairwoman Janet Yellen said in a speech the pace of implementing tighter rules for short-term funding markets, including money funds, "has, at times, been frustratingly slow."
Ms. White's plan is expected to gain support from a majority of the agency's five commissioners, overcoming years of internal debate about how best to address money-fund vulnerabilities. Ms. White, Democrat Luis Aguilar and Republican Daniel Gallagher are expected to support the plan, these people said.
Money funds are cash-like instruments used by millions of individuals, businesses and municipalities to safely park cash. In 2008, Reserve Primary, a $62 billion fund, "broke the buck" by falling under the price of $1 a share that money funds seek to maintain. Exposure to the debt of bankrupt Lehman Brothers Holdings Inc. caused losses for Reserve Primary and sparked a run on other money funds that eased only after the U.S. government stepped in to backstop the industry.
The SEC implemented broad changes in 2010 designed to make the industry more resilient, including tighter rules on the kinds of securities that funds could hold. But the SEC left unresolved structural features that critics say encourage investors to bolt at the first sign of trouble.
Concerns about money funds have increased in recent years as regulators worry about a sudden rise in interest rates, which could depress the value of the funds' holdings. An International Monetary Fund report this spring outlined such a scenario and the Financial Stability Oversight Council, for the fourth year in a row, cited money funds as a source of systemic risk.
Ms. White's approach would combine two options the agency presented last summer when it voted to propose tighter rules: a floating share price for prime institutional funds, which are considered riskier than other money funds and invest in short-term corporate debt, coupled with redemption "gates" and fees.
Because floating share prices would apply only to prime institutional funds—which comprise about 37% of the industry—mom-and-pop retail investors aren't expected to be directly affected.
A date for the vote hasn't yet been made public and the contours of the plan could change.
Ms. White still is seeking support from a fourth commissioner, Democrat Kara Stein, who has expressed reservations about redemption limits but is developing her views, these people said. Commissioner Michael Piwowar, a Republican, doesn't support a combined approach, and isn't expected to support the plan, according to people familiar with the matter.
A deal is partly contingent on the Treasury Department agreeing to ease tax rules on the small gains and losses for investors in floating-rate funds, requirements that funds say would be too burdensome. A person familiar with the matter said Treasury is close to an agreement with the SEC on the issue. A Treasury spokeswoman declined to comment.
Ms. White's inclusion of redemption restrictions comes despite the concerns of other regulators who have said limits would encourage investors to bolt over fears they wouldn't be able to withdraw money.
SEC economists believe new disclosure requirements, including the amount of assets in funds that can be quickly turned into cash, will mitigate the risk of runs because investors will have information about the health of the funds. It remained unclear how broadly the SEC would authorize redemption limits. They could apply to all types of funds or to only a slice of the industry.
The SEC's move comes after a proposal championed by former SEC Chairman Mary Schapiro faltered two years ago amid industry lobbying and internal SEC bickering. Ms. Schapiro proposed requiring all money funds to either float their share price or post bank-like capital to ensure they could make good on redemptions when asset holdings suddenly drop in value.
Yngve Slyngstad, chief executive of Norway's $888bn oil fund, emphasised that it was "continuation of the strategy" but with numerous small changes.
All are in the same direction: we are incorporating as distinguishing characteristics firstly that we are very long-term investors…and secondly the very large scale and size of the fund.
The fund expects the number of companies it owns more than 5 per cent in to rise from 45 to 100 by 2016 and Mr Slyngstad said "the majority of those will be in European companies".
The oil fund already owns 2.5 per cent of every listed European company on average but going above 5 per cent will see it step up its responsible investor role by talking to chairmen and boards more.
"Why 5 per cent? We have put up explicitly higher demands on us in an ownership role," Mr Slyngstad explained. But he argued this would not lead to the fund becoming an activist but rather merely a "responsible investor".
But it's real estate where they are growing...
Another change will be a "very rapid growth in the number of employees", as Mr Slyngstad terms it, going from 370 at the end of last year to 600 by 2016.
However, 200 of those will be in its property arm and given only 38 currently are Mr Slyngstad said the build-up in the rest of the fund is not too speedy.
All those people are needed in property as the fund is struggling to reach its target of having 5 per cent of its assets in real estate; it currently has 1.2 per cent.
"The growth we are foreseeing in the real estate portfolio is such that we will have to manage some of these properties ourselves."
So there it is - the marginal buyer of property and stocks around the world (most especially Europe) is none other than the high-price-of-oil beneficiary Norway sovereign wealth fund.
Investors and speculators face some profound challenges today: How to deal with politicized markets, continuously “guided” by central bankers and regulators? To what extent do prices reflect support from policy, in particular super-easy monetary policy, and to what extent other, ‘fundamental’ factors? And how is all this market manipulation going to play out in the long run?
It is obvious that most markets would not be trading where they are trading today were it not for the longstanding combination of ultra-low policy rates and various programs of ‘quantitative easing’ around the world, some presently diminishing (US), others potentially increasing (Japan, eurozone). As major US equity indices closed last week at another record high and overall market volatility remains low, some observers may say that the central banks have won. Their interventions have now established a nirvana in which asset markets seem to rise almost continuously but calmly, with carefully contained volatility and with their downside apparently fully insured by central bankers who are ready to ease again at any moment. Those who believe in Schumpeter’s model of “bureaucratic socialism”, a system that he expected ultimately to replace capitalism altogether, may rejoice: Increasingly the capitalist “jungle” gets replaced with a well-ordered, centrally managed system guided by the enlightened bureaucracy. Reading the minds of Yellen, Kuroda, Draghi and Carney is now the number one game in town. Investors, traders and economists seem to care about little else.
“The problem is that we’re not there [in a low volatility environment] because markets have decided this, but because central banks have told us…” Sir Michael Hintze, founder of hedge fund CQS, observed in conversation with the Financial Times (FT, June 14/15 2014). “The beauty of capital markets is that they are voting systems, people vote every day with their wallets. Now voting is finished. We’re being told what to do by central bankers – and you lose money if you don’t follow their lead.”
That has certainly been the winning strategy in recent years. Just go with whatever the manipulators ordain and enjoy rising asset values and growing investment profits. Draghi wants lower yields on Spanish and Italian bonds? – He surely gets them. The US Fed wants higher equity prices and lower yields on corporate debt? – Just a moment, ladies and gentlemen, if you say so, I am sure we can arrange it. Who would ever dare to bet against the folks who are entrusted with the legal monopoly of unlimited money creation? “Never fight the Fed” has, of course, been an old adage in the investment community. But it gets a whole new meaning when central banks busy themselves with managing all sorts of financial variables directly, from the shape of the yield curve, the spreads on mortgages, to the proceedings in the reverse repo market.
Is this the “new normal”/”new neutral”? The End of History and the arrival of the Last Man, all over again?
The same FT article quoted Salman Ahmed, global bond strategist at Lombard Odier Investment Managers as follows: “Low volatility is the most important topic in markets right now. On the one side you have those who think this is the ‘new normal’, on the other are people like me who think it cannot last. This is a very divisive subject.”
PIMCO’s Bill Gross seems to be in the “new normal” camp. At the Barron’s mid-year roundtable 2014 (Barron’s, June 16, 2014) he said: “We don’t expect the party to end with a bang – the popping of a bubble. […] We have been talking about what we call the New Neutral – sluggish but stable global growth and continued low rates.”
In this debate I come down on the side of Mr. Ahmed (and I assume Sir Michael). This cannot last, in my view. It will end and end badly. Policy has greatly distorted markets, and financial risk seems to be mis-priced in many places. Market interventions by central banks, governments and various regulators will not lead to a stable economy but to renewed crises. Prepare for volatility!
Bill Gross’ expectation of a new neutral seems to be partly based on the notion that persistently high indebtedness contains both growth and inflation and makes a return to historic levels of policy rates near impossible. Gross: “…a highly levered economy can’t withstand historic rates of interest. […] We see rates rising to 2% in 2017, but the market expects 3% or 4%. […] If it is close to 2%, the markets will be supported, which means today’s prices and price/earnings are OK.”
Of course I can see the logic in this argument but I also believe that high debt levels and slow growth are tantamount to high degrees of risk and should be accompanied with considerable risk premiums. Additionally, slow growth and substantial leverage mean political pressure for ongoing central bank activism. This is incompatible with low volatility and tight risk premiums. Accidents are not only bound to happen, they are inevitable in a system of monetary central planning and artificial asset pricing.
Low inflation, low rates, and contained market volatility are what we should expect in a system of hard and apolitical money, such as a gold standard. But they are not to be expected – at least not systematically and consistently but only intermittently – in elastic money systems. I explain this in detail in my book Paper Money Collapse – The Folly of Elastic Money. Elastic money systems like our present global fiat money system with central banks that strive for constant (if purportedly moderate) inflation must lead to persistent distortions in market prices (in particular interest rates) and therefore capital misallocations. This leads to chronic instability and recurring crises. The notion that we might now have backed into a gold-standard-like system of monetary tranquility by chance and without really trying seems unrealistic to me, and the idea is even more of a stretch for the assumption that it should be excessive debt – one of elastic money’s most damaging consequences – that could, inadvertently and perversely, help ensure such stability. I suspect that this view is laden with wishful thinking. In the same Barron’s interview, Mr. Gross makes the statement that “stocks and bonds are artificially priced,” (of course they are, hardly anyone could deny it) but also that “today’s prices and price/earnings are OK.” This seems a contradiction to me. Here is why I believe the expectation of the new neutral is probably wrong, and why so many “mainstream” observers still sympathize with it.
1. Imbalances have accumulated over time. Not all were eradicated in the recent crisis. We are not starting from a clean base. Central banks are now all powerful and their massive interventions are tolerated and even welcome by many because they get “credited” with having averted an even worse crisis. But to the extent that that this is indeed the case and that their rate cuts, liquidity injections and ‘quantitative easing’ did indeed come just in time to arrest the market’s liquidation process, chances are these interventions have sustained many imbalances that should also have been unwound. These imbalances are probably as unsustainable in the long run as the ones that did get unwound, and even those were often unwound only partially. We simply do not know what these dislocations are or how big they might be. However, I suspect that a dangerous pattern has been established: Since the 1980s, money and credit expansion have mainly fed asset rallies, and central banks have increasingly adopted the role of an essential backstop for financial markets. Recently observers have called this phenomenon cynically the “Greenspan put” or the “Bernanke put” after whoever happens to lead the US central bank at the time but the pattern has a long tradition by now: the 1987 stock market crash, the 1994 peso crisis, the 1998 LTCM-crisis, the 2002 Worldcom and Enron crisis, and the 2007/2008 subprime and subsequent banking crisis. I think it is not unfair to suggest that almost each of these crises was bigger and seemed more dangerous than the preceding one, and each required more forceful and extended policy intervention. One of the reasons for this is that while some dislocations get liquidated in each crisis (otherwise we would not speak of a crisis), policy interventions – not least those of the monetary kind – always saved some of the then accumulated imbalances from a similar fate. Thus, imbalances accumulate over time, the system gets more leveraged, more debt is accumulated, and bad habits are being further entrenched. I have no reason to believe that this has changed after 2008.
2. Six years of super-low rates and ‘quantitative easing’ have planted new imbalances and the seeds of another crisis. Where are these imbalances? How big are they? – I don’t know. But I do know one thing: You do not manipulate capital markets for years on end with impunity. It is simply a fact that capital allocation has been distorted for political reasons for years. Many assets look mispriced to me, from European peripheral bond markets to US corporate and “high yield” debt, to many stocks. There is tremendous scope for a painful shake-out, and my prime candidate would again be credit markets, although it may still be too early.
3. “Macro-prudential” policies create an illusion of safety but will destabilize the system further. – Macro-prudential policies are the new craze, and the fact that nobody laughs out loud at the suggestion of such nonsense is a further indication of the rise in statist convictions. These policies are meant to work like this: One arm of the state (the central bank) pumps lots of new money into the system to “stimulate” the economy, and another arm of the state (although often the same arm, namely the central bank in its role as regulator and overseer) makes sure that the public does not do anything stupid with it. The money will thus be “directed” to where it can do no harm. Simple. Example: The Swiss National Bank floods the market with money but stops the banks from giving too many mortgage loans, and this avoids a real estate bubble. “Macro-prudential” is of course a euphemism for state-controlled capital markets, and you have to be a thorough statist with an iron belief in central planning and the boundless wisdom of officers of the state to think that this will make for a safer economy. (But then again, a general belief in all-round state-planning is certainly on the rise.) The whole concept is, of course, quite ridiculous. We just had a crisis courtesy of state-directed capital flows. For decades almost every arm of the US state was involved in directing capital into the US housing market, whether via preferential tax treatment, government-sponsored mortgage insurers, or endless easy money from the Fed. We know how that turned out. And now we are to believe that the state will direct capital more sensibly? — New macro-“prudential” policies will not mean the end of bubbles but only different bubbles. For example, eurozone banks shy away from giving loans to businesses, partly because those are costly under new bank capital requirements. But under those same regulations sovereign bonds are deemed risk-free and thus impose no cost on capital. Zero-cost liquidity from the ECB and Draghi’s promise to “do whatever it takes” to keep the eurozone together, do the rest. The resulting rally in Spanish and Italian bonds to new record low yields may be seen by some as an indication of a healing Europe and a decline in systemic risk but it may equally be another bubble, another policy-induced distortion and another ticking time bomb on the balance sheets of Europe’s banks.
4. Inflation is not dead. Many market participants seem to believe that inflation will never come back. Regardless of how easy monetary policy gets and regardless for how long, the only inflation we will ever see is asset price inflation. Land prices may rise to the moon but the goods that are produced on the land never get more expensive. – I do not believe that is possible. We will see spill-over effects, and to the extent that monetary policy gets traction, i.e. leads to the expansion of broader monetary aggregates, we will see prices rise more broadly. Also, please remember that central bankers now want inflation. I find it somewhat strange to see markets obediently play to the tune of the central bankers when it comes to risk premiums and equity prices but at the same time see economists and strategists cynically disregard central bankers’ wish for higher inflation. Does that mean the power of money printing applies to asset markets but will stop at consumer goods markets? I don’t think so. – Once prices rise more broadly, this will change the dynamic in markets. Many investors will discount points 1 to 3 above with the assertion that any trouble in the new investment paradise will simply be stomped out quickly by renewed policy easing. However, higher and rising inflation (and potentially rising inflation expectations) makes that a less straightforward bet. Inflation that is tolerated by the central banks must also lead to a re-pricing of bonds and once that gets under way, many other assets will be affected. I believe that markets now grossly underestimate the risk of inflation.
Some potential dislocations
Money and credit expansion are usually an excellent source of trouble. Just give it some time and imbalances will have formed. Since March 2011, the year-over-year growth in commercial and industrial loans in the US has been not only positive but on average clocked in at an impressive 9.2 percent. Monetary aggregate M1 has been growing at double digit or close to double-digit rates for some time. It presently stands at slightly above 10 percent year over year. M2 is growing at around 6 percent.
U.S. Commercial & Industrial Loans (St. Louis Fed – Research)
None of this must mean trouble right away but none of these numbers indicate economic correction or even deflation but point instead to re-leveraging in parts of the US economy. Yields on below-investment grade securities are at record lows and so are default rates. The latter is maybe no surprise. With rates super-low and liquidity ample, nobody goes bust. But not everybody considers this to be the ‘new normal’: “We are surprised at how ebullient credit markets have been in 2014,” said William Conway, co-founder and co-chief executive of Carlyle Group LP, the US alternative asset manager (as quoted in the Wall Street Journal Europe, May 2-4 2014, page 20). “The world continues to be awash in liquidity, and investors are chasing yield seemingly regardless of credit quality and risk.”
“We continually ask ourselves if the fundamentals of the global credit business are healthy and sustainable. Frankly, we don’t think so.”
1 trillion is a nice round number
Since 2009 investors appear to have allocated an additional $1trn to bond funds. In 2013, the Fed created a bit more than $1trn in new base money, and issuance in the investment grade corporate bond market was also around $1trn in 2013, give and take a few billion. A considerable chunk of new corporate borrowing seems to find its way into share buybacks and thus pumps up the equity market. Andrew Smithers in the Financial Times of June 13 2014 estimates that buybacks in the US continue at about $400bn per year. He also observes that non-financial corporate debt (i.e. debt of companies outside the finance sector) “expanded by 9.2 per cent over the past 12 months. US non-financial companies’ leverage is now at a record high relative to output.”
Most investors try to buy cheap assets but the better strategy is often to sell expensive ones. Such a moment in time may be soon approaching. Timing is everything, and it may still be too early. “The trend is my friend” is another longstanding adage on Wall Street. The present bull market may be artificial and already getting long in the tooth but maybe the central planners will have their way a bit longer, and this new “long-only” investment nirvana will continue. I have often been surprised at how far and for how long policy makers can push markets out of kilter. But there will be opportunities for patient, clever and nimble speculators at some stage, when markets inevitably snap back. This is not a ‘new normal’ in my view. It is just a prelude to another crisis. In fact, all this talk of a “new normal” of low volatility and stable markets as far as the eye can see is probably already a bearish indicator and a precursor of pending doom. (Anyone remember the “death of business cycles” in the 1990s, or the “Great Moderation” of the 2000s?)
Investors are susceptible to the shenanigans of the manipulators. They constantly strive for income, and as the central banks suppress the returns on many mainstream asset classes ever further, they feel compelled to go out into riskier markets and buy ever more risk at lower yields. From government bonds they move to corporate debt, from corporate debt to “high yield bonds”, from “high yield” to emerging markets – until another credit disaster awaits them. Investors thus happily do the bidding for the interventionists for as long as the party lasts. That includes many professional asset managers who naturally charge their clients ongoing management fees and thus feel obliged to join the hunt for steady income, often apparently regardless of what the ultimate odds are. In this environment of systematically manipulated markets, the paramount risk is to get sucked into expensive and illiquid assets at precisely the wrong time.
In this environment it may ultimately pay to be a speculator rather than an investor. Speculators wait for opportunities to make money on price moves. They do not look for “income” or “yield” but for changes in prices, and some of the more interesting price swings may soon potentially come on the downside, I believe. As they are not beholden to the need for steady income, speculators should also find it easier to be patient. They should know that their capital cannot be employed profitably at all times. They are happy (or should be happy) to sit on cash for a long while, and maybe let even some of the suckers’ rally pass them by. But when the right opportunities come along they hope to be nimble and astute enough to capture them. This is what macro hedge funds, prop traders and commodity trading advisers traditionally try to do. Their moment may come again.
As Sir Michael at CQS said: “Maybe they [the central bankers] can keep control, but if people stop believing in them, all hell will break loose.”
Recently Federal Reserve Governor Jeremy Stein commented on what has become obvious to many investors: the bond market has become too large and too illiquid, exposing the market to crisis and seizure if a large portion of investors decide to sell at the same time. Such an event occurred back in 2008 when the money market funds briefly fell below par and "broke the buck." To prevent such a possibility in the larger bond market, the Fed wants to slow any potential panic selling by constructing a barrier to exit. Since it would be outrageous and unconstitutional to pass a law banning sales (although in this day and age anything may be possible) an exit fee could provide the brakes the Fed is looking for. Fortunately, the rules governing securities transactions are not imposed by the Fed, but are the prerogative of the SEC. (But if you are like me, that fact offers little in the way of relief.) How did it come to this?
For the past six years it has been the policy of the Federal Reserve to push down interest rates to record low levels. In has done so effectively on the "short end of the curve" by setting the Fed Funds rate at zero since 2008. The resulting lack of yield in short term debt has encouraged more investors to buy riskier long-term debt. This has created a bull market in long bonds. The Fed's QE purchases have extended the run beyond what even most bond bulls had anticipated, making "risk-free" long-term debt far too attractive for far too long. As a result, mutual fund holdings of long term government and corporate debt have swelled to more $7 trillion as of the end of 2013, a whopping 109% increase from 2008 levels.
Compounding the problem is that many of these funds are leveraged, meaning they have borrowed on the short-end to buy on the long end. This has artificially goosed yields in an otherwise low-rate environment. But that means when liquidations occur, leveraged funds will have to sell even more long-term bonds to raise cash than the dollar amount of the liquidations being requested.
But now that Fed policies have herded investors out on the long end of the curve, they want to take steps to make sure they don't come scurrying back to safety. They hope to construct the bond equivalent of a roach motel, where investors check in but they don't check out. How high the exit fee would need to be is open to speculation. But clearly, it would have to be high enough to be effective, and would have to increase with the desire of the owners to sell. If everyone panicked at once, it's possible that the fee would have to be utterly prohibitive.
Irrespective of the rule's callous disregard for property rights and contracts (investors did not agree to an exit fee when they bought the bond funds), the implementation of the rule would illustrate how bad government regulation can build on itself to create a pile of counterproductive incentives leading to possible market chaos.
In this case, the problems started back in the 1930s when the Roosevelt Administration created the FDIC to provide federal insurance to bank deposits. Prior to this,consumers had to pay attention to a bank's reputation, and decide for themselves if an institution was worthy of their money. The free market system worked surprisingly well in banking, and could even work better today based on the power of the internet to spread information. But the FDIC insurance has transferred the risk of bank deposits from bank customers to taxpayers. The vast majority of bank depositors now have little regard for what banks actually do with their money. This moral hazard partially set the stage for the financial catastrophe of 2008 and led to the current era of "too big to fail."
In an attempt to reduce the risks that the banking system imposed on taxpayers, the Dodd/Frank legislation passed in the aftermath of the crisis made it much more difficult for banks and other large institutions to trade bonds actively for their own accounts. This is a big reason why the bond market is much less liquid now than it had been in the past. But the lack of liquidity exposes the swollen market to seizure and failure when things get rough. This has led to calls for a third level of regulation (exit fees) to correct the distortions created by the first two. The cycle is likely to continue.
The most disappointing thing is not that the Fed would be in favor of such an exit fee, but that the financial media and the investing public would be so sanguine about it. If the authorities consider an exit fee on bond funds, why not equity funds, or even individual equities? Once that Rubicon is crossed, there is really no turning back. I believe it to be very revealing that when asked about the exit fees at her press conference last week, Janet Yellen offered no comment other than a professed unawareness that the policy had been discussed at the Fed, and that such matters were the purview of the SEC. The answer seemed to be too canned to offer much comfort. A forceful rejection would have been appreciated.
But the Fed's policy appears to be to pump up asset prices and to keep them high no matter what. This does little for the actual economy but it makes their co-conspirators on Wall Street very happy. After all, what motel owner would oppose rules that prevent guests from leaving? The sad fact is that if investors hold bond long enough to be exposed to a potential exit fee, then the fee may prove to be the least of their problems.
One part Misguided Perception(typically extrapolating recent trends as if they are driven by some reliable and permanent mechanism), and often
One part Pure Delusion(typically in the form of a colorful hallucination with elves, gnomes and dancing mushrooms all singing in harmony that reliable valuation measures no longer matter).
This time is not different.
REALITY: The technology bubble was grounded in legitimate realities including:
The emergence of the internet and
A Great Moderation of stable GDP growth and
MISGUIDED PERCEPTION: But it also created
A misperception that it was possible for an industry to achieve profits while having zero barriers to entry at the same time (the end of that misperception is why the dot-com bubble collapsed),
A misperception that technology earnings would grow exponentially and were not cyclical (as we correctly argued in 2000 they would shortly prove to be), and
The outright delusion that historically reliable valuation measures were no longer informative.
Meanwhile, the same valuation measures we use today were projecting – in real time – negative 10-year nominal total returns for the S&P 500 over the coming decade, even under optimistic assumptions (see our August 2000 research letter).
The housing bubble was grounded in legitimate realities including a boom in residential housing construction and a legitimate economic recovery that followed the 2000-2002 bear market (which we responded to by shifting to a constructive stance in April 2003 despite valuations still being elevated on a historical basis).
But the housing bubble also created a misperception that mortgage-backed securities were safe because housing prices had, at least to that point, never experienced a major collapse.
The delusion was that housing was a sound investment at any price. The same delusion spread to the equity markets, helped by Fed-induced yield-seeking speculation by investors who were starved for safe return. Meanwhile, the same equity valuation measures we use today helped us to correctly warn investors of oncoming financial risks at the 2007 peak (see A Who’s Who of Awful Times to Invest).
2008 CREDIT CRISIS
The 2008 credit crisis, which we anticipated, was more challenging for us because the extent of employment losses and gravity of asset price collapse was greater than we had observed in the post-war data that underpinned our methods of assessing the market return/risk profile. Our valuation methods didn’t miss a beat, and correctly identified a shift to undervaluation after the late-2008 market plunge (see Why Warren Buffett is Right and Why Nobody Cares). But examining similar periods outside of post-war data, we found that measures of market action that were quite reliable in post-war data were heavily whipsawed in the Depression, and even the valuations we observed at the 2009 market lows were followed, in the Depression, by an additional loss of two-thirds of the market’s value. My resulting insistence on ensuring our methods were robust to that “two data sets” problem was necessary, but the timing could hardly have been worse, with an initial miss in the interim of that stress-testing, and an awkward transition to our present methods of classifying return/risk profiles.
THE 'QE' ERA
The present market environment is grounded in the legitimate reality that the labor market has recovered its losses, but not to the extent that creates resource constraints or clear interest rate pressures. Though broad measures of economic activity have actually eased to year-over-year levels slightly below those that have historically distinguished expansions from recessions, the economy seems to be treading water, and don’t observe a particularly negative tone.
The recent period has created a misperception that monetary easing itself will support financial markets regardless of their valuation. The error here is that we know from history that it does not. Indeed, the 2000-2002 and 2007-2009 collapses both progressed in an environment of aggressive and sustained monetary easing.
What’s actually true about monetary policy is that zero-interest rate policy has created a perception that investors have no alternative but to “reach for yield” in riskier assets.It’s entirely that reach for yield that investors must rely on continuing indefinitely, because there’s no mechanistic cause-effect relationship between the Fed balance sheet and stock prices, bank lending, or economic activity.
As usual, the delusion is that this Fed-induced reach for yield is enough to make equities a sound investment at any price. Ironically, the Fed itself is in the process of reversing course on this policy.
Meanwhile, based on the same valuation methods that correctly projected negative 10-year returns at the 2000 peak, correctly gave us room to shift to a constructive position in early 2003, correctly helped us warn of severe market losses at the 2007 peak, and correctly identified the shift to market undervaluation in late-2008 (which those who don’t understand our stress-testing narrative may not recognize), we currently estimate prospective S&P 500 nominal total returns of just 2% annually over the coming decade, and negative returns on every horizon shorter than about 7 years.
In short, investors who are reaching for yield in stocks as an alternative to risk-free assets are most likely reaching for a negative total return in stocks between now and about 2021.
THE FED's "MANAGED" ASSETS APPRECIATION STRATEGY
GOAL: Finance the Government Debt
OBJECTIVES: Increase Attractiveness of Debt
Manipulate Interest Rates which over time inevitably distorts Price Discovery and consequentially Mispricies Risk
Drive Up Financial Asset Prices (Stock Prices and Bond Prices) through Fed Buying,
The S&P 500 tried to pull back yesterday, but as usual the late day trading pushed the loss to just 65 bps. This has become the normal market. In 2012, volatility puttered at 12.77%. In 2013 it fizzled down to 11.07%. YTD we have crept up to 11.73%. These metrics tell you to expect daily gains and losses to be +/- .75%. Very Exciting.
What does this market remind me of? I would say the nearest example is 2004-2006 when volatility cycled between 10-11%. What do these two periods in time have in common? Extremely easy monetary policy provided by the Fed.
The most powerful chart to show you the impact of Fed provided liquidity plots realized volatility against the steepness of the yield curve as measured by the spread between the 10y and 2y treasury rates. As the fed keeps the front part of the curve low through the Fed Funds rate, the steepness is held high. A steep yield curve induces investors to borrow at cheap shorter rates and buy riskier assets to earn a spread. Party on while the Fed provides the punch bowl.
The current steepness of the yield curve is a great indicator for future market volatility
The red line above is the steepness inverted, so higher numbers represent the curve flattening or the Fed taking punch away from the party. Low numbers say party on. The blue is the trailing 90 day realized volatility of the S&P 500. When the Fed says to party, the volatility stays abnormally low.
Key point to make in this chart is that the red line is two years behind the blue line so the red line starts at 1/31/1977 while the blue line starts in '79. This implies that the tightening of monetary conditions or reduction in market liquidity takes about 2 years time in order for volatility to pick up. If the curve can remain steep for another two years, then how large will the volatility dislocation become when the Fed does ease off the gas pedal? Most punch bowls are provided for 2 years or less. Right now we are in the 6th year of zero interest rate policy with a strong indication that they will maintain it well into 2015. Maybe this time the volatility will come even before the Fed eases off the pedal?
When good decisions are no longer possible, bad decisions are inevitable.
If we had to summarize the response of the Federal government and the Federal Reserve to the structural financial crisis of 2008-2009, we could say that both institutions went all-in to obscure the real price of credit and capital.
The real cost of credit and capital is discovered by open, transparent markets. When a central bank sets the price of credit, it destroys the market's price-discovery process. When the government subsidizes certain types of credit, for example, home mortgages and "cash for clunkers" auto loans, it destroys the market's price-discovery process.
This distorts not just the price of credit, but the price of everything purchased with credit. This is the origin of bubbles, and of the resulting busts.
The state and central bank manipulate the price of money (credit and capital) to incentivize decisions that the state and bank want people to make. The state and central bank want people to consume more to prop up a dysfunctional economy, and since most people don't have the cash to consumer more, the state and Federal Reserve want people to go further into debt, as this is the only way people can buy more stuff.
These institutions are terrified of recession (translation: a reason for people to vote out the ruling party of bought-and-paid-for toadies) and the creative destruction of unfettered capitalism, which eventually wipes out leveraged speculation and all those who indulge in such risky gambles--for example, all the banker and financier cronies that the Fed protects.
When the real price of anything is subsidized, manipulated or obscured, people lack the information needed to make good decisions. Lacking the information of the real price, they can only make bad decisions. There is no way to make good decisions when the information is incomplete or misleading.
When a commodity--for example, water--is collected and piped at great expense to farms and cities and then given to consumers at a subsidized price well below the actual systemic costs of collection, purification and delivery, then the water is squandered, for it is priced as if it were forever free and abundant.
When credit (capital) is priced at near-zero by the central bank, people squander the "free money" on mal-investments and risky speculations. This is the rational response to anything that is nearly free and abundant; why bother conserving it or using it wisely?
Having access to nearly free money from the Fed is the equivalent of having no skin in the game. If you lose a speculative bet, just borrow more from the Fed. Since it costs almost nothing to borrow enormous sums, There is no need to put any real capital (i.e. your own money) at risk. And with no skin in the game, then there's no upper limit on leverage or risk: the money is nearly free, and the gains (if any) are yours to keep.
Obscuring the true price via subsidies or manipulation necessarily leads to bad decisions. And what are the consequences of serial bad decisions? Disaster.
This dynamic--that obscuring the real price necessarily leads to bad decisions--is scale-invariant. If a parent gives a child false price information or subsidizes the cost of a choice, the child cannot make good decisions based on the distorted data: their only choice is a spectrum of bad decisions.
The same is true of households, communities, enterprises, states and nations.
As a result of policies that explicitly distort the price of credit and capital, we are making bad decisions as individuals and as a nation. If the real cost of credit/capital is 7%, then the only way to make good decisions is to begin with the price of money being 7%. Lowering the price to 0% generates bad decisions.
When good decisions have been precluded by distorting the price of everything, only bad decisions are possible. If you wonder why the Status Quo is well and truly doomed, you can start with this: good decisions are impossible, and so bad decisions are inevitable.
"There is no freedom without noise - and no stability without volatility."
FINANCIAL REPRESSION - EU Developments
EU: Financial Repression
According to John Rubino in the latest MACRO ANALYTICS release, the EU is being penalized and disadvantaged for attempting a more prudently sound Monetary Policy. Unfortuanately the old adage of "Bad Money forcing out Good Money" is occurring and will force the ECB to soon succumb to the pressures of the other, even more monetary spendthrift, developed economies.
A positive current account and falling inflation has kept the Euro strong, which is now undermining further possible EU/ECB recovery efforts. Mario Draghi and the ECB have recently been very vocal that actions will soon need to be taken to weaken the Euro.
This has all the earmarks of escalating Currency Wars as Japan blatantly debases the Yen as a cornerstone of ABE-nomics and The Fed still prints at a rate of $55B/Month (Current TAPER rate).
With the "Baby Boomers" now retiring in Europe (much sooner than the US due to more generous entitlements), the massive unfunded and 'cash accounting' pension and entitlements programs in Europe are hitting fiscal operating budgets. There is little policy alternatives, without unprecedented social unrest, but to rapidly re-expand the money supply in an unsterilized fashion.
As a consequence, with little media coverage the EU is stepping up its policies of Financial Repression to combat the soon to explode "in budget" government debt levels which have previously been shrouded in government obfication and 'creative' accounting.
RACE TO DEBASE
We are now in a global "race to debase" as the developed nations debase their currencies to reduce debt burdens, while the emerging economies traditionally have debased their currencies to gain or maintain export led mercantilistic economic strategies.
We are left with the developed economies exporting inflation and the rest of the world exporting deflation. The balance is shifting and the question is which way will it tip?
The house lights dimmed and the bright American flag glistened in the background. The crowd hushed as a tall man in a strange costume strode confidently onto the stage.
Curly turned to Larry and Moe and exclaimed, "Oh my, that's our favorite—Uncle Sam, our boyhood hero." Moe put his finger to his lips as if to say "Shhh!"
Uncle Sam rapped the microphone with his fingernail and the sound echoed throughout the hall. He then bellowed out, "Hello, my fellow Americans!" and the crowd cheered wildly.
He continued, "Today I want to announce the deal of a lifetime. We all know that IRAs and 401(k)s are tools greedy rich people use to save for retirement. I'm here to announce a new retirement program for everyday, ordinary people. Everyone should have the right to retire safely and with dignity, and that is what we are going to do for you."
Uncle Sam paused until the applause died down.
"Today we have introduced a new retirement program called myRA. It's pretty simple. Your employer can withdraw as little as $5 from your paycheck, and it will be invested in a new government bond that will earn the same variable-rate interest as those available through the government Thrift Saving Plan Government Securities Investment Fund (G fund). If you change jobs, it is totally portable. You can take it with you.
"While the final details are still being worked out, you can invest your money into safe, interest-bearing bonds and let it grow tax free. And the best part is: when you take your distribution out, you don't have to pay taxes on it either.
"So, there you have it! You can have money taken out of your paycheck in small amounts. It will be invested in variable-interest government bonds paying a good return, and it will be there for your retirement along with Social Security, TAX FREE! Don't ever say Uncle Sam isn't looking out for you.
"I know everyone is anxious to get started, but I will answer some questions now. Please raise your hand."
Curly raised his hand and Uncle Sam pointed in his direction. "You, baldy, what's your question?"
Curly cleared his throat and asked, "It looks to me like the government is acting like an insurance company. We give you our money and you look after it for our retirement. Is that correct?"
"Exactly right," Uncle Sam responded. "Who else can keep money as safe as the US government?"
Curly, Larry, and Moe looked at each other quizzically.
Moe raised his hand. Uncle Sam spotted him and said, "You, mop head, what is your question?"
Moe said, "The national debt clock shows the government already has over $128 trillion in unfunded promises to others. How will our money be invested? Will it be used to make good on promises already made to other people?"
Uncle Sam paused for a moment and said, "Those details will be worked out. While that may happen, younger people will take part in this program too, so they will help pay for your retirement when the time comes."
Moe could barely contain himself. "Isn't that a Ponzi scheme? I thought they were illegal?"
Uncle Sam paused and said, "Ponzi schemes are illegal, unless they are run by the government. What's your problem? I mean, come on! Doesn't everyone trust the government?"
51% of the audience cheered wildly while the other 49% remained silent.
Larry, not wanting to be outdone by his friends, raised his hand.
"You, half-bald mop-head, what's on your mind?"
Larry replied, "I have a two-part question. Why not use a Roth IRA instead? Aren't they available to everyone? Also, can't all self-directed retirement plans invest in government bonds now if they want to?"
Uncle Sam's face grew red as he responded, "Obviously, you don't get it. Nothing is safer than a retirement program totally invested with the government. You earn a decent yield without any worry."
Larry shouted, "Wait a minute! The government has already made over $128 trillion in promises it cannot keep. Now you want us to invest our money with you, at an interest rate that you control? What's the catch?"
Uncle Sam's face grew bright red as he exclaimed, "Everyone knows the government can do a better job of looking after your money than you can. You guys are just a bunch of stooges. This program is so good, but you dummies are too stupid to see that!"
Curly turned to Larry and Moe and said, "When Uncle Sam calls it an myRA he is right. 'My' means it is his. We may be dumb, but we are not that stupid. This is a terrible idea. They are just trying to grab our money so they can keep buying votes in the next election. I am not touching it."
"I heard that!" Uncle Sam screamed. "You are the kind of people who have torn America apart—greedy, selfish, and without compassion for the little guy. Audience, you heard them. Don't you agree?"
51% jumped to their feet screaming wildly while the other 49% sat silent. Once the noise died down, Larry uttered through the microphone, "It sounds to me like another money grab. We might be better off just leaving the country."
Uncle Sam realized this was an argument he had to win. "Look, you un-American radicals! We don't want your kind in this country. Those values have no place in a modern society. Go ahead! Get the hell out of here! Just leave your money behind. Audience, don't you agree it is time to tell those greedy buggers to hit the road? If they don't want to share, let them go elsewhere. I am sick of their selfish ways."
Again, 51% jumped to their feet screaming wildly, glaring at Larry, Curly, and Moe. The screaming would not stop. 49% quietly headed to the exits with the three stooges leading the way. Moe, speaking in almost a whisper, commented, "It seems the real stooges are the ones who fall for the scheme." The 49% nodded their heads in silent agreement.
Personally, I am a registered independent and have been for over 50 years. Both political parties have pushed the government to make $128 trillion worth of promises—with our money—that it cannot afford to pay. What a terrible burden to place on future generations!
Our national debt clock shows government liabilities of $1.1 million per taxpayer. They spend our money to buy votes to stay in power. The system is beyond repair.
Humor is a good outlet to help work through issues that might otherwise drive my blood pressure—and yours—to an all-time high. Here's the scary part we cannot laugh away: myRAs are real.
My advice: Just say no to myRA and open up a Roth IRA instead. You receive the same tax benefits but more options to invest your money ahead of inflation so you can actually enjoy retirement. Snake oil is snake oil, no matter how you try to package it.
As a person who has spent the last several years trying to help people understand investing so they may retire comfortably, I become more frustrated with the government every day. No one needs a myRA when they can invest in a Roth IRA with the same benefits but greater flexibility.
There are many ways for folks to save for retirement without turning to the government. After all, most realize it isn’t prudent to seek financial help from the most broke person (or entity, in this case) around. My weekly column, Miller’s Money Weekly, offers insights into alternative ways to protect and build your nest egg. Best of all, it’s free. Sign up today to receive articles like the one you just read and other actionable advice.
And just like that, the MyRA propaganda goes full Goebbels retard. Unfortunately, due to time differences, neither Pravda, nor Izvestia or Moskovskij Komsomolets could reply with affirmative comments due to time constraints.
A Look At What They’re Saying About myRA Across the Country
By: Brandi Hoffine
Last month in the State of the Union, President Obama laid out specific executive actions he will take to put more Americans back to work and expand opportunity so that every American can get ahead. Speaking about the importance of securing a dignified retirement, the President announced that he would direct Treasury to create a new way for working Americans to start their own retirement savings. According to independent estimates, about half of all workers and 75 percent of part-time workers lack access to employer-sponsored retirement plans. That is why the Obama administration designed myRA (my Retirement Account) - a simple, safe, and affordable retirement savings account that will be offered through employers to help low- and moderate- income Americans begin to save for retirement.
Below is a look at what newspaper editorial boards and financial columnists across the country are saying.
FINANCIAL REPRESSION -The Government Has Targeted Your Retirement Savings Account
Last week in his State of the Union address, the President of the United States laid the groundwork for a new government program he calls “MyRA”.
As he explained to the American people, this program will allow US taxpayers the ability to loan their retirement savings to the federal government (which, according to POTUS, carries ZERO risk).
Given that US Treasury yields fall far below the rate of inflation, this is a big win for the government, and a big loser for the poor suckers who loan them the money.
The President then hit the road, touting his one-of-a-kind program. The Treasury Secretary hit the newspapers, encouraging Americans to enroll.
I can see this unfolding like a War Bonds campaign, appealing to Americans’ love of country to get them to loan their money to the government at sub-inflation yields.
In Italy they’ve already used football stars in patriotic appeals to get Italians to buy government bonds. In Japan they use teenage girl bands to entice wealthy Japanese businessmen to open their wallets for government bonds.
So let’s see how long it takes for George Clooney and Matt Damon to make the pitch for the MyRA program… and how long after that it becomes mandatory for all Americans.
Meanwhile, the IRS is doing its part.
One of the best solutions that we’ve discussed in the past to liberate your IRA from this destructive trend is to set up a particular type of self-directed IRA.
But the IRS has been intentionally making it more difficult to set up these structures over the past year. Now there’s even more roadblocks.
In order to set up this type of structure, it’s imperative to first obtain a tax ID number. But due to agency budget cuts, the IRS is no longer issuing tax ID numbers for domestic entities through its call center. They’re saying that now you HAVE to use the online system.
This is one website that the government actually got right. The tax ID application website is fairly straightforward, and it works great. EXCEPT if you are trying to set up this type of IRA.
So if you’re an individual trying to obtain a tax ID number for your new company, no problem. The online system works great.
But if you punch in that you are setting up a company to be owned by your IRA (or some other entity), then suddeny the system crashes and times out.
I had my staff ring up the IRS yesterday to demand an answer. After two phone calls, each with a 30+ minute wait time to reach a human being, we finally got an answer. Confirmation, actually.
The agent told us that yes, in fact, the online system has been programmed to intentionally reject tax ID number applications for companies that are owned by entities like an IRA.
So they have essentially eliminated the option to apply online. But they won’t let you apply over the phone either.
You can apply through the mail, but that will take 30-days, according to the agent. Or by fax, provided that you first cough up all sorts of other documentation.
It certainly begs the question– at a time when the President of the United States is whipping up excitement over this new program to loan the government your retirement savings, why is their tax agency putting up huge roadblocks for Americans who don’t want to become victims?
Simply put, the new myRA program put forward by Obama is at best a sucker's deal… or worse, it's a first step toward the nationalization of private retirement savings. (Note: If you haven't yet heard of myRA, I'd strongly suggest you read this excellent overview by my colleague Dan Steinhart.)
Even before the new myRA program was announced, there had been whispers about the need for the US government to assume some risk for US retirement accounts. That's code for forced conversion of private retirement assets into government bonds.
With foreigners not buying as many Treasuries and the Fed tapering, the US government has been searching for new buyers of its unwanted debt. And this is where the new myRA program comes in.
In short, it's ostensibly a new way for people to save for retirement. Of course, you can only invest in government-approved investments—like Treasuries—which probably won't even come close to keeping up with the real rate of inflation. It's like Jim Grant says: "return-free risk."
In reality, a myRA doesn't really provide any significant new benefits over existing options. To me it just looks like a way for the US government to pass the hot potato on to unsuspecting Americans in exchange for their retirement savings.
The net effect is the funneling of more capital to Treasury securities and thus helping the US government finance itself.
You'd be much better off using a precious metals IRA to save for retirement than participating in the government's latest Ponzi scheme.
There are other protective strategies as well, such as internationalizing your retirement savings into assets that are hard, if not impossible, to confiscate on a whim—like foreign real estate and physical gold held abroad. More on that below.
Retirement Savings Are Always Juicy Targets
As bad as it is to deceive naïve Americans into trading their hard-earned retirement savings for garbage (i.e., Treasury securities), the myRA program potentially represents something far worse… the first step toward the nationalization of existing private retirement accounts.
I believe myRA is a way to nudge the American people into gradually becoming more accustomed to government involvement in their private retirement savings.
It's incorrect to assume nationalization couldn't happen in the US or your home country. History shows us that it's standard operating procedure for a government in dire financial straits.
To me it's self-evident that most Western governments (including the US) have current debt loads and future spending commitments that all but guarantee that eventually—and likely someday soon—they will try to unscrupulously grab as much wealth as they can.
And retirement savings are a juicy target—low-hanging fruit for a desperate government.
Naturally, politicians will try to slickly sell the idea to the public as something "for their own good" or as "protection from market instability." This is how similar programs were sold to skeptical publics in the past.
In reality, governments take these actions not to "reduce the risk" to your retirement savings or whatever propaganda they happen to come up with, but rather to obtain financing—by forcefully dumping their unwanted debt onto seniors and savers.
Below are several ways it has happened or could happen. Of course, there could always be some sort of new, creative proposal that was previously unthinkable. No matter the method, however, the end result is always the same—the siphoning off of purchasing power from your retirement savings.
New Contribution Mandate: The government could mandate, for example, that 50% of new contributions to private retirement accounts must consist of "safe," government-approved investments, like Treasury securities.
Forced Conversions: This is where a government will forcibly convert existing assets held in retirement accounts into so-called "safer" assets, such as government bonds. For example, if the US government forcibly converted 20% of the estimated $20 trillion in retirement assets (401k plans, IRAs, defined benefit and contribution plans, etc.), it would net them $4 trillion. Not a bad score, considering the national debt is north of $17 trillion.
Special Taxes: The government could look into levying special taxes on distributions from retirement, especially those deemed to be "excessively large."
In order to be more effective, forced conversations probably wouldn't happen until after official capital controls have been instituted. Once in place, capital controls would make it very difficult, if not impossible, for you to avoid the wealth confiscation that is sure to follow… like a sheep that has just been penned in for a shearing.
Since FATCA and other regulatory burdens already amount to a soft form of capital controls, it's absolutely essential that you start implementing protective measures now.
It's like I have always said: internationalization is your ultimate insurance against the measures of a desperate government. In the case that the government makes a grab for retirement savings, it's much better to be a year or two early rather than a minute too late.
Internationalize Your Retirement Savings
It's much more difficult for the government to convert your retirement assets if they're outside of its immediate reach. If you have a standard IRA from a large US financial institution, it would only take a decree from the US government and Poof!: your dividend-paying stocks and corporate bonds could instantly be transformed into government bonds.
Obviously, this is much harder for the government to do if your retirement assets are sufficiently internationalized.
For example, you can structure your IRA to invest in foreign real estate, open an offshore bank or brokerage account, own certain types of physical gold stored abroad, and invest in other foreign and nontraditional assets.
In my view, owning an apartment in Switzerland and some physical gold coins stored in a safe deposit box in Singapore beats the cookie-cutter mutual funds shoved down your throat by traditional IRA custodians any day.
If and when there's some sort of decree to convert or otherwise confiscate the assets in your retirement account, your internationalized assets ensure that your savings won't vanish at the stroke of a pen.
There are important details and a couple of restrictions that you'll need to be aware of, but they amount to minor issues, especially when weighed against the risk of leaving your retirement savings within the immediate reach of a government desperate for cash.
After placing a juicy steak in front of a salivating German shepherd, it's only a matter of time before he makes a grab for it. The US government with its $17 trillion debt load is the salivating German shepherd, and the $20 trillion in retirement savings is the juicy steak.
Internationalizing your IRA has always been a prudent and pragmatic thing to do. And now that the US government has now officially set its sights on retirement savings, it's truly urgent.
You'll find all the details on how it to get set up, along with trusted professionals who specialize in internationalizing IRAs in our Going Global publication.
FINANICAL REPRESSION - Obama Introduces MyRA: The "No Risk, Guaranteed Return" Retirement Savings Bond
Presenting: the MyRA, and since it offers "guaranteed return and no risk" we now know where all the Fed's bond trades will go to work once QE ends.
From the president:
Let’s do more to help Americans save for retirement. Today, most workers don’t have a pension. A Social Security check often isn’t enough on its own. And while the stock market has doubled over the last five years, that doesn’t help folks who don’t have 401ks. That’s why, tomorrow, I will direct the Treasury to create a new way for working Americans to start their own retirement savings: MyRA. It’s a new savings bond that encourages folks to build a nest egg. MyRA guarantees a decent return with no risk of losing what you put in. And if this Congress wants to help, work with me to fix an upside-down tax code that gives big tax breaks to help the wealthy save, but does little to nothing for middle-class Americans. Offer every American access to an automatic IRA on the job, so they can save at work just like everyone in this chamber can...
Or put another way - if you like your retirement account you can keep your retirement account.
And just like that, the "automatic" continuity to the Fed's Quantitative Easing is ensured.
Here’s the deal he’s offering: you give Sam your hard-earned retirement savings. Sam will invest your funds, and pay you a rate of return.
Granted, the rate of return he’s promising doesn’t quite keep up with inflation. So you will be losing some money. But don’t dwell on that too much.
And, rather than invest your funds in productive assets, Sam is going to blow it all on new cars and flat screen TVs. So when it comes time to make interest payments, Sam won’t have any money left.
But don’t worry, he still has that good ole’ credibility. So even though his financial situation gets worse by the year, Sam will just go back out there and borrow more money from other people to pay you back.
Of course, he will be able to keep doing this forever without any consequences whatsoever.
I know what you’re thinking– “where do I sign??” I know, right? It’s the deal of the lifetime.
This is basically the offer that the President of the United States floated last night.
And like an unctuously overgeled used car salesman, he actually pitched Americans on loaning their retirement savings to the US government with a straight face, guaranteeing “a decent return with no risk of losing what you put in. . .”
This is his new “MyRA” program. And the aim is simple– dupe unwitting Americans to plow their retirement savings into the US government’s shrinking coffers.
We’ve been talking about this for years. I have personally written since 2009 that the US government would one day push US citizens into the ‘safety and security’ of US Treasuries.
Back in 2009, almost everyone else thought I was nuts for even suggesting something so sacrilegious about the US government and financial system.
But the day has arrived. And POTUS stated almost VERBATIM what I have been writing for years.
The government is flat broke.Even by their own assessment, the US government’s “net worth” is NEGATIVE 16 trillion. That’s as of the end of 2012 (the 2013 numbers aren’t out yet). But the trend is actually worsening.
In 2009, the government’s net worth was negative $11.45 trillion. By 2010, it had dropped to minus $13.47 trillion. By 2011, minus $14.78 trillion. And by 2012, minus $16.1 trillion.
Here’s the thing: according to the IRS, there is well over $5 trillion in US individual retirement accounts. For a government as bankrupt as Uncle Sam is, $5 trillion is irresistible.
They need that money. They need YOUR money. And this MyRA program is the critical first step to corralling your hard earned retirement funds.
At our event here in Chile last year, Jim Rogers nailed this right on the head when he and Ron Paul told our audience that the government would try to take your retirement funds:
I don’t know how much more clear I can be: this is happening. This is exactly what bankrupt governments do. And it’s time to give serious, serious consideration to shipping your retirement funds overseas before they take yours.
President Barack Obama directed the Treasury Department on Wednesday to create the “MyRA” retirement savings bond program mentioned in his State of the Union address Tuesday night to reach low- and middle-income workers and others not saving for retirement.
“This is a starter IRA,” said a senior administration official on a background press call.
Treasury officials said on the call that they will launch a pilot program by the end of 2014 with employers opting to participate. Employers would not administer or contribute to the accounts, and there would be “little to no cost” to them, administration officials said. The federal government will pay an agent selected through a competitive process to administer the program.
The savings account would be offered as
a Roth individual retirement account managed by a third party for the federal government.
The federal government would guarantee the principal as it does with savings bonds.
The interest rate would be based on the Thrift Savings Plan's G Fund, which uses rates based on a four- to 30-year average maturity.
Households with income of up to $191,000 can open accounts with just $25 and make contributions of as little as $5 through payroll deductions.
The MyRA accounts would also be portable among employers.
Contributions may be withdrawn tax-free at any time, and Treasury officials said they would not police that.
Once an account reaches $15,000 or 30 years, the money would have to be rolled over into a private-sector Roth IRA.
Balances may also be rolled over to a Roth IRA before the limit is reached.
“We currently have a system that is not doing what it is supposed to,” said a different senior administration official, who noted that 50% of all full-time workers and 75% of part-time workers are not saving for retirement. “The proposal today is very much pitched at bringing new people in and is based on economic research that what you need is something simple, safe, secure and easy to set up through an employer,” the official said.
A paper currency system contains the seeds of its own destruction. The temptation for the monopolist money producer to increase the money supply is almost irresistible. In such a system with a constantly increasing money supply and, as a consequence, constantly increasing prices, it does not make much sense to save in cash to purchase assets later. A better strategy, given this scenario, is to go into debt to purchase assets and pay back the debts later with a devalued currency. Moreover, it makes sense to purchase assets that can later be pledged as collateral to obtain further bank loans.
A paper money system leads to excessive debt.
This is especially true of players that can expect that they will be bailed out with newly produced money such as big businesses, banks, and the government.
A paper money system leads to Crony Capitalism
We are now in a situation that looks like a dead end for the paper money system. After the last cycle governments have:
Bailed out malinvestments in the private sector,
Boosted public welfare spending.
As a direct result:
Deficits and debts skyrocketed.
Central banks printed money to buy public debts (or accept them as collateral in loans to the banking system) in unprecedented amounts.
Interest rates were cut close to zero.
Deficits remain large.
No substantial real growth is in sight.
At the same time banking systems and other financial players sit on large piles of public debt.
A public default would immediately trigger the bankruptcy of the banking sector.
It looks like even the slowing down of money printing (now called “QE tapering”) could trigger a bankruptcy spiral.
A drastic reduction of government spending and deficits does not seem very likely either, given the incentives for politicians in democracies.
So will money printing be a constant with interest rates close to zero until people lose their confidence in the paper currencies? Can the paper money system be maintained or will we necessarily get a hyperinflation sooner or later?
There are at least seven possibilities:
1. Inflate. Governments and central banks can simply proceed on the path of inflation and print all the money necessary to bail out the banking system, governments, and other over-indebted agents. This will further increase moral hazard. This option ultimately leads into hyperinflation, thereby eradicating debts. Debtors profit, savers lose. The paper wealth that people have saved over their life time will not be able to assure such a high standard of living as envisioned.
2. Default on Entitlements. Governments can improve their financial positions by simply not fulfilling their promises. Governments may, for instance, drastically cut public pensions, social security and unemployment benefits to eliminate deficits and pay down accumulated debts. Many entitlements, that people have planned upon, will prove to be worthless.
3. Repudiate Debt. Governments can also default outright on their debts. This leads to losses for banks and insurance companies that have invested the savings of their clients in government bonds. The people see the value of their mutual funds, investment funds, and insurance plummet thereby revealing the already-occurred losses. The default of the government could lead to the collapse of the banking system. The bankruptcy spiral of overindebted agents would be an economic Armageddon. Therefore, politicians until now have done everything to prevent this option from happening.
4. Financial Repression. Another way to get out of the debt trap is financial repression. Financial repression is a way of channeling more funds to the government thereby facilitating public debt liquidation. Financial repression may consist of legislation making investment alternatives less attractive or more directly in regulation inducing investors to buy government bonds. Together with real growth and spending cuts, financial repression may work to actually reduce government debt loads.
5. Pay Off Debt. The problem of overindebtedness can also be solved through fiscal measures. The idea is to eliminate debts of governments and recapitalize banks through taxation. By reducing overindebtedness, the need for the central bank to keep interest low and to continue printing money is alleviated. The currency could be put on a sounder base again. To achieve this purpose, the government expropriates wealth on a massive scale to pay back government debts. The government simply increases existing tax rates or may employ one-time confiscatory expropriations of wealth. It uses these receipts to pay down its debts and recapitalize banks. Indeed the IMF has recently proposed a one-time 10-percent wealth tax in Europe in order to reduce the high levels of public debts. Large scale cuts in spending could also be employed to pay off debts. After WWII, the US managed to reduce its debt-to-GDP ratio from 130 percent in 1946 to 80 percent in 1952. However, it seems unlikely that such a debt reduction through spending cuts could work again. This time the US does not stand at the end of a successful war. Government spending was cut in half from $118 billion in 1945 to $58 billion in 1947, mostly through cuts in military spending. Similar spending cuts today do not seem likely without leading to massive political resistance and bankruptcies of overindebted agents depending on government spending.
6. Currency Reform. There is the option of a full-fledged currency reform including a (partial) default on government debt. This option is also very attractive if one wants to eliminate overindebtedness without engaging in a strong price inflation. It is like pressing the reset button and continuing with a paper money regime. Such a reform worked in Germany after the WWII (after the last war financial repression was not an option) when the old paper money, the Reichsmark, was substituted by a new paper money, the Deutsche Mark. In this case, savers who hold large amounts of the old currency are heavily expropriated, but debt loads for many people will decline.
7. Bail-in. There could be a bail-in amounting to a half-way currency reform. In a bail-in, such as occurred in Cyprus, bank creditors (savers) are converted into bank shareholders. Bank debts decrease and equity increases. The money supply is reduced. A bail-in recapitalizes the banking system, and eliminates bad debts at the same time. Equity may increase so much, that a partial default on government bonds would not threaten the stability of the banking system. Savers will suffer losses. For instance, people that invested in life insurances that in turn bought bank liabilities or government bonds will assume losses. As a result the overindebtedness of banks and governments is reduced.
Basically, taxpayers, savers, or currency users are exploited to reduce debts and put the currency on a more stable basis.
A one-time wealth tax, a currency reform or a bail-in are not very popular policy options as they make losses brutally apparent at once. The first option of inflation is much more popular with governments as it hides the costs of the bail out of overindebted agents. However, there is the danger that the inflation at some point gets out of control. And the monopolist money producer does not want to spoil his privilege by a monetary meltdown.
Before it gets to the point of a runaway inflation, governments will increasingly ponder the other options as these alternatives could enable a reset of the system.
Following research last week suggesting that HSBC has a major capital shortfall, the fact that several farmer's co-ops were unable to pay back depositors in China, and, of course, the liquidity crisis in China itself, news from The BBC that HSBC is imposing restrictions on large cash withdrawals raising a number of red flags. The BBC reports that some HSBC customers have been prevented from withdrawing large amounts of cash because they could not provide evidence of why they wanted it. HSBC admitted it has not informed customers of the change in policy, which was implemented in November for their own good: "We ask our customers about the purpose of large cash withdrawals when they are unusual... the reason being we have an obligation to protect our customers, and to minimise the opportunity for financial crime."
As one customer responded:
"you shouldn't have to explain to your bank why you want that money. It's not theirs, it's yours."
Some HSBC customers have been prevented from withdrawing large amounts of cash because they could not provide evidence of why they wanted it, the BBC has learnt.
Listeners have told Radio 4's Money Box they were stopped from withdrawing amounts ranging from £5,000 to £10,000.
HSBC admitted it has not informed customers of the change in policy, which was implemented in November.
The bank says it has now changed its guidance to staff.
"When we presented them with the withdrawal slip, they declined to give us the money because we could not provide them with a satisfactory explanation for what the money was for. They wanted a letter from the person involved."
Mr Cotton says the staff refused to tell him how much he could have: "So I wrote out a few slips. I said, 'Can I have £5,000?' They said no. I said, 'Can I have £4,000?' They said no. And then I wrote one out for £3,000 and they said, 'OK, we'll give you that.' "
He asked if he could return later that day to withdraw another £3,000, but he was told he could not do the same thing twice in one day.
Mr Cotton cannot understand HSBC's attitude: "I've been banking in that bank for 28 years. They all know me in there. You shouldn't have to explain to your bank why you want that money. It's not theirs, it's yours."
HSBC has said that following customer feedback, it was changing its policy: "We ask our customers about the purpose of large cash withdrawals when they are unusual and out of keeping with the normal running of their account. Since last November, in some instances we may have also asked these customers to show us evidence of what the cash is required for."
"The reason being we have an obligation to protect our customers, and to minimise the opportunity for financial crime. However, following feedback, we are immediately updating guidance to our customer facing staff to reiterate that it is not mandatory for customers to provide documentary evidence for large cash withdrawals, and on its own, failure to show evidence is not a reason to refuse a withdrawal. We are writing to apologise to any customer who has been given incorrect information and inconvenienced."
But Eric Leenders, head of retail at the British Bankers Association, said banks were sensible to ask questions of their customers: "I can understand it's frustrating for customers. But if you are making the occasional large cash withdrawal, the bank wants to make sure it's the right way to make the payment."
"the savings of the European Union's 500 million citizens could be used to fund long-term investments to boost the economy and help plug the gap left by banks since the financial crisis, an EU document says."
What is left unsaid is that the "usage" will be on a purely involuntary basis, at the discretion of the "union", and can thus best be described as confiscation.
The source of this stunner is a document seen be Reuters, which describes how the EU is looking for ways to "wean" the 28-country bloc from its heavy reliance on bank financing and find other means of funding small companies, infrastructure projects and other investment. So as Europe finally admits that the ECB has failed to unclog its broken monetary pipelines for the past five years - something we highlight every month (most recently in No Waking From Draghi's Monetary Nightmare: Eurozone Credit Creation Tumbles To New All Time Low), the commissions report finally admits that "the economic and financial crisis has impaired the ability of the financial sector to channel funds to the real economy, in particular long-term investment."
The solution? "The Commission will ask the bloc's insurance watchdog in the second half of this year for advice on a possible draft law "to mobilize more personal pension savings for long-term financing", the document said."
Mobilize, once again, is a more palatable word than, say, confiscate.
And yet this is precisely what Europe is contemplating:
Banks have complained they are hindered from lending to the economy by post-crisis rules forcing them to hold much larger safety cushions of capital and liquidity.
The document said the "appropriateness" of the EU capital and liquidity rules for long-term financing will be reviewed over the next two years, a process likely to be scrutinized in the United States and elsewhere to head off any risk of EU banks gaining an unfair advantage.
But wait: there's more!
Inspired by the recently introduced "no risk, guaranteed return" collectivized savings instrument in the US better known as MyRA, Europe will also complete a study by the end of this year on the feasibility of introducing an EU savings account, open to individuals whose funds could be pooled and invested in small companies.
Because when corporations refuse to invest money in Capex, who will invest? Why you, dear Europeans. Whether you like it or not.
But wait, there is still more!
Additionally, Europe is seeking to restore the primary reason why Europe's banks are as insolvent as they are: securitizations, which the persuasive salesmen and sexy saleswomen of Goldman et al sold to idiot European bankers, who in turn invested the money or widows and orphans only to see all of it disappear.
It is also seeking to revive the securitization market, which pools loans like mortgages into bonds that banks can sell to raise funding for themselves or companies. The market was tarnished by the financial crisis when bonds linked to U.S. home loans began defaulting in 2007, sparking the broader global markets meltdown over the ensuing two years.
The document says the Commission will "take into account possible future increases in the liquidity of a number of securitization products" when it comes to finalizing a new rule on what assets banks can place in their new liquidity buffers. This signals a possible loosening of the definition of eligible assets from the bloc's banking watchdog.
Because there is nothing quite like securitizing feta cheese-backed securities and selling it to a whole new batch of widows and orphans.
And topping it all off is a proposal to address a global change in accounting principles that will make sure that an accurate representation of any bank's balance sheet becomes a distant memory:
More controversially, the Commission will consider whether the use of fair value or pricing assets at the going rate in a new globally agreed accounting rule "is appropriate, in particular regarding long-term investing business models".
Forced savings "mobilization",
The introduction of a collective and involuntary CapEx funding "savings" account,
The return and expansion of securitization, and finally, tying it all together, is
A change to accounting rules that will make the entire inevitable catastrophe smells like roses until it all comes crashing down.
So, aside from all this, Europe is "fixed."
The only remaining question is: why leak this now? Perhaps it's simply because the reallocation of "cash on the savings account sidelines" in the aftermath of the Cyprus deposit confiscation, into risk assets was not foreceful enough?
What better way to give it a much needed boost than to leak that everyone's cash savings are suddenly fair game in Europe's next great wealth redistribution strategy.
Back in March 2011, author Carmen Reinhart wrote a comment in Bloomberg describing the term “financial repression.” She wrote:
“As they have before in the aftermath of financial crises or wars, governments and central banks are increasingly resorting to a form of “taxation” that helps liquidate the huge overhang of public and private debt and eases the burden of servicing that debt."
Such policies, known as financial repression, usually involve a strong connection between the government, the central bank and the financial sector. In the U.S., as in Europe, at present, this means consistent negative real interest rates (yielding less than the rate of inflation) that are equivalent to a tax on bondholders and, more generally, savers.”
In the FDIC data released this week, the financial repression imposed by Ben Bernanke, Janet Yellen and the rest of the Federal Open Market Committee over the past five years is very apparent. Chief among the data points to be noted is that net interest expense, which is the money paid to depositors at banks, continues to fall. While all banks earned about $118 billion in interest income last quarter, they paid just $13 billion to depositors, a graphic example of the “financial repression” used by the Fed to subsidize the US banking industry.
Notice that while the Fed has maintained the net interest income to banks, the earnings of depositors have fallen more than 90% since 2008. Via QE, the Fed is subsidizing all banks to the tune of over $100 billion per quarter in artificially depressed interest cost and income to depositors of all stripes. By robbing consumers and all savers of income, the FOMC is in fact feeding deflation and hurting growth and employment. The chart below using data from the FDIC shows the interest earnings, expenses and net interest income through the end of September 2013 for all US banks.
Prior to the 2007 financial crisis, total interest expense for all US banks was over $100 billion every three months and interest income was almost $200 billion. In order to maintain the net interest margin for banks at +/- $100 billion per quarter, the Fed is confiscating income of US savers, including companies, investors and the elderly, of almost the same amount each quarter. This badly needed income is transfered from savers to the banks and is not available to support consumption. This data graphically illustrates the deflationary nature of current Fed interest rate policies and why Janet Yellen and the Federal Open Market Committee need to raise interest rates soon. But when rates rise, the next phase of the economic crisis will begin.
In a paper published this month by Carmen Reinhart and Ken Rogoff, the authors argue that financial repression is a necessary part of the adjustment process for heavily indebted nations, even the advanced nations. The Guardian reports: “They say that if history is any guide countries will not be able to return to more sustainable levels of public debt through a combination of austerity and growth. They cite Europe, where the assumption is that normality can be restored by a combination of belt-tightening, forbearance and rising output, as an example of Panglossian thinking.”
Say Reinhart and Rogoff: "The claim is that advanced countries do not need to apply the standard toolkit used by emerging markets, including debt restructurings, higher inflation, capital controls and significant financial repression. Advanced countries do not resort to such gimmicks, policy makers say."
The Guardian: “Historically, this is poppycock according to Reinhart and Rogoff. Rich countries, when faced with high levels of debt in the past have been more than happy to default, inflate away their debts or indulge in financial repression (capping interest rates or putting pressure on savers to lend to the government).”
The current policy mix in the US certainly shows this tendency to resort to financial repression, but the real question is whether current Fed policy has not resulted in a deflationary trap, with falling income driving consumption, jobs and economic activity lower. Taking $100 billion in income away from savers each quarter does not seem to be a recipe for economic growth.
But as Reinhart and Rogoff document well, there is no easy solution available for the US, EU, Japan and other heavily indebted developed nations. Once interest rates start to rise, the necessity of debt restructuring in Europe, Japan and even the US will become more apparent. There is no free lunch. Either we kill growth via financial repression of savers or we embrace the painful process of debt restructuring for the major industrial nations.
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