Tag: Money

While the Nation Fragments Socially, the Financial Aristocracy Rules Unimpeded

If there is one central irony in American history, it is this: the citizenry that broke free of the chains of British Monarchy, the citizenry that reckoned everyone was equal before the law, the citizenry that vowed never to be ruled by an aristocracy that controlled the government and finance as a means of self-enrichment, is now so distracted by social fragmentation that the citizenry is blind to their servitude to a new and formidably informal financial aristocracy.

From this juncture, ironies abound: the so-called Socialist demands for Medicare for All, “free” college for all and Universal Basic Income (UBI) are encouraged (or perhaps orchestrated) by the financial aristocracy, which rakes in tens of billions of dollars in profits from its banking, healthcare, national defense and higher education cartels: throwing more trillions down the ratholes of Medicare and higher education will only further enrich and empower the financial elites.

As for Universal Basic Income (UBI), the financial aristocracy is cheering loudly for UBI, which would enable debt-serfs to keep servicing their debts. (Is anyone so naive to think that UBI won’t have a clause which enables the deduction of debt payments from the monthly “free money”? Does anyone think the financial aristocracy is going to give $1,000 a month to debt-serfs and then let them default on their debt? Get real!)

The demands for social justice, i.e. that everyone be allowed to be treated the same before the law and enjoy the same rights as other citizens, is a core tenet of American culture. Long before the Constitution was even ratified, the calls to end slavery were becoming louder. Long before women won the the right to vote, the calls to treat women equally before the law were gaining ground.

In the long sweep of U.S. history, the rights of gays to marry and other contemporary social justice issues are of a piece with all previous drives to eliminate disparities between the way individuals are treated before the law. This is of course as it should be: this was a core value of the revolutionaries, as limited as it was in that era, and this drive is largely what makes America America.

Equally important was the cultural drive to never be ruled by a neofeudal aristocracy or let an aristocracy form in America. Yet this is precisely what has come to pass: we are ruled by an informal but oh-so neofeudal aristocracy.

As social justice controversies fragment the increasingly economically precarious populace, a financial aristocracy has arisen that rules the nation behind the screens of “meritocracy” and “equal rights.” No one is more in favor of equal rights and the abolition of social privilege that the members of the financial aristocracy, who have no need for social privilege since they control the real source of power in America: proximity to credit and newly issued money.

(Look at the liberal leanings of the Silicon Valley, L.A., Boston and NYC elites. They all love whatever distracts everyone from scrutinizing their power, and love recruiting fresh talent to slave away for their private empires.)

With this wealth, the financial aristocracy buys political influence for piddling sums and scoops up most of the low-risk productive assets of the private sector.

The core structure of the financial aristocracy is the state-cartel, the cartels that are funded and enforced by the central state: higher education, healthcare, national defense, banking, mortgages, student loans, etc.

For the financial aristocracy, the federal government is their personal enrichment machine, collecting trillions in taxes and borrowing additional trillions which are funneled through the state-cartels.

The number of seats in the American aristocracy is extremely limited, and so the top 5% are willing to go to extreme lengths to get in the first class lifeboat as the Titanic takes on water. This manifests in all sorts of ways, including the elite college admissions scandal.

While social justice proponents focus on divisive distractions, the financial aristocracy is tightening its control of the nation’s economy and political order.As everyday life, civil liberties and economic security all become increasingly precarious for the bottom 90%, the divisive focus on social privilege becomes a useful distraction for the financial aristocracy, which also controls the mainstream media.

America’s aristocracy is chuckling with great amusement as society is torn to pieces by media-circus sideshows. America’s aristocracy doesn’t need any titles or overt class distinctions as the aristocracy of old had; this would only call attention to their dominance. The ideal arrangement is a society shredded by social-media-driven fabricated divisions and a profound apathy to the actual structures of power, wealth and control.

America’s aristocracy is not formalized, and that’s the secret of its success.The power and control are exercised behind the formal machinery of governance and finance, and this structure protects the aristocracy from scrutiny.

So by all means demand Medicare for All and UBI: the aristocracy is heavily promoting these expansions of its wealth and power. Just as the Roman elites favored distributing free bread to the disenfranchised masses and the staging of Netflix binge TV watching–oops, I mean circuses– so too does America’s aristocracy favor UBI, Medicare for All and a fragmented society in thrall to disunity.

 

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print, $13.08 audiobook): Read the first section for free in PDF format.

My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)

My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format. 

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The Coming Crisis the Fed Can’t Fix: Credit Exhaustion

Having fixed the liquidity crisis of 2008-09 and kept a perversely unequal “recovery” staggering forward for a decade, central banks now believe there is no crisis they can’t defeat: Liquidity crisis? Flood the global financial system with liquidity. Interest rates above zero? Create trillions out of thin air and use the “free money” to buy bonds. Mortgage and housing markets shaky? Create another trillion and use it buy up mortgages.

And so on. Every economic-financial crisis can be fixed by creating trillions of out thin air, except the one we’re entering–the exhaustion of credit. Central banks, like generals, always prepare to fight the last war and believe their preparation insures their victory.

China’s central bank created over $1 trillion in January alone to flood China’s faltering credit system with new credit-currency. Pouring new trillions into the financial system has always restarted the credit system, triggering renewed borrowing and lending that then powered yet another cycle of heedless consumption and mal-investment–oops, I meant development.

The elixir of new central bank money isn’t working as intended, and this failure is now eroding trust in the central bank’s fixes. Central banks can issue new credit to the private sector and it can can buy bonds, empty flats and mortgages, but no central bank can force over-indebted borrowers to borrow more or force wary lenders to lend to uncreditworthy borrowers.

Let’s be honest: the entire global “recovery” since 2009 has been fueled by soaring debt. The output of more debt is declining, that is, every additional dollar of debt is no longer generating much in the way of positive returns. As with any stimulant, increasing the stimulant leads to diminishing returns.

Then there’s the issue of debt saturation and debt exhaustion: those who are creditworthy no longer want to borrow more and those who are not creditworthy cannot borrow more, unless lenders want to eat the losses of default a few months after they issue the new loan.

The evidence is plain enough: defaults of student loans and auto loans are already at monumental levels, and the recession hasn’t even started. Zero-percent financing for vehicles is a thing of the past, and those borrowers with average credit ratings are paying 6% or more for a new vehicle loan.

Coupled with the ever-higher prices of vehicles, this is leading to auto loans of $600 and $700 a month and lenders extending the duration of the loans from 5 to 7 years. Just how badly do households need a new vehicle at these rates and prices?

As for housing–unless the buyer just sold a house in a bubblicious market and has hundreds of thousands of dollars in cash, housing is out of reach of the bottom 95% in many markets. This raises the other dynamic of credit exhaustion: the whole exercise of buying a home or dumping more money in stocks is ultimately based on greater fools arising who will pay substantially more that the buyer paid today.

Greater fools generally depend on credit to finance their purchase, and so the erosion of creditworthy borrowers means the pool of greater fools willing and able to pay $1.2 million for the old bungalow someone paid $1 million for today is drying up fast.

Only a fool buys an asset that is poised to lose value as the pool of future buyers dries up. No wonder insiders are selling stocks like no tomorrow, and housing markets have become decidedly sluggish: the pool of qualified borrowers who are willing to bet on another decade of central-bank goosed “growth at any cost” is shrinking rapidly.

The next crisis won’t be one of liquidity that central banks can fix by emitting additional trillions; it’s a crisis that’s impervious to central bank manipulation.The credibility of central banks is already evaporating like spilled water in July-baked Death Valley.

Central banks cannot magically make uncreditworthy borrowers creditworthy or magically force those who have forsworn adding more debt to borrow more at high rates of interest, and as a result they are powerless to stop the tide of credit from ebbing.

Thus will end the central banks’ bombastic hubris and the public’s faith in central banks’ godlike powers, the “global growth” story, the China story, and all the other fairy tales that have passed as policies for the past decade rather than what they really were: politically expedient cover for the greatest expansion of inequality in modern history.

 

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print, $13.08 audiobook): Read the first section for free in PDF format.

My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)

My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format. 

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

Show Me the Money!

by Chris Marcus, Miles Franklin: I’ll show you the real money. It looks like this: Those circulating dollar bills, euros, pounds, and yen are DEBTS (notes) issued by central banks to extract wealth from citizens and the economy, dilute the purchasing power of the currency, and nourish the banking cartel. From Graham Summers: “The problem of […]

The post Show Me the Money! appeared first on SGT Report.

Trade Isn’t China’s Only Worry

China’s enormous successes–raising hundreds of millions out of poverty, landing a rover on the dark side of the moon, etc.–are well known. Less appreciated is China’s increasing vulnerability to financial instability arising from asymmetries that cannot be resolved by tweaking trade policies.

As this article explains, The China Story That Is Far Bigger Than Apple, China’s trade balance–trade surpluses for decades– is close to slipping into trade deficits.

At the same time, China’s once-mighty pool of savings has diminished as consumption has risen. As a result, China now needs foreign investment more than it did in the previous era.

Chinese businesses have borrowed around $2 trillion in US dollar-denominated debt in the past few years, requiring the acquisition of dollars to service the debt.

So far this sounds like a typical case of a fast-growth economy maturing into a trade-deficit, debt-dependent consumption economy.

What the article misses the staggering rise in the cost of living in China over the past two decades. Some services are still dirt-cheap–subway fares are extremely cheap–and private healthcare is a mere fraction of healthcare costs in the U.S.

But other costs–housing, food, clothing, etc.–have shot up to the point that our on-the-ground correspondents report that living expenses aren’t much different than in the U.S.

Officially, inflation is low in China, but the reality is not so cheery: “Domestic sentiment is definitely very bad, perhaps even worse than during the 2008 global financial crisis,” said Fred Hu.

Recall that wages for college graduates are around $1,100 per month (7600 RMB), with $1,500 per month (10,000 RMB) being an above-average salary.

While white-collar wages are $13,000 annually, apartments in first and even second tier cities are similar in cost to desirable U.S. cities. Rent for a small flat is $800 USD in Shanghai, more than half the average salary, and typically cost hundreds of thousands of dollars to buy.

As I’ve noted before, roughly 3/4 of all household wealth in China is tied up in real estate, where it is effectively dead-money, earning no yield and largely illiquid outside of Beijing and Shanghai.

Reflecting a broad malaise, China’s stock market has dropped by 25% in 2018 while its currency weakened against the USD (by official design, of course).

One question no one is asking seems glaringly obvious: if everything is going great in China’s economy, why did President Xi feel compelled to declare himself president for life? Why is China rushing to install an Orwellian system of monitoring of behavior, online activity, etc., with heavy penalties for those who violate official norms?

Here’s another obvious question: what is it saying about China’s future prospects that those who know China best (i.e. insiders) are fleeing the yuan and moving their capital overseas?

We might also ask why critics of official policy are censored or even swept out of view. Are these the actions of a secure, confident ruling elite? The short answer is no, and some of that insecurity is undoubtedly the result of the increasingly fragile nature of China’s growth story.

Simply put, trade is only one manifestation of much deeper economic insecurities and imbalances.

 

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print, $13.08 audiobook): Read the first section for free in PDF format.

My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)

My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format. 

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

Retail Apocalypse Worsens: Some Major Stores Are On “DEATHWATCH”

Just two months into 2019, many more retail stores have announced their closures amid a slowing in consumer spending. The retail apocalypse is worsening and there are some major stores on “deathwatch;” which would mean going out of business forever.

According to Money.com, in a single 24-hour period last week, Gap, J.C. Penney, and Victoria’s Secret announced they would be closing more than 300 stores combined. These announced store closures come soon after retail companies made the difficult decisions to shut down all Payless ShoeSource and Gymboree stores throughout the U.S., and in the middle of Sears’ dramatic struggle to survive. (Sears closed out 2018 by filing for bankruptcy and closing roughly 140 Sears and Kmart stores. The company owns both retailers).

Some of these companies are restructuring debt and refiguring their business models in order to fight to stay alive in today’s fast-moving ultra-competitive retail world. They must be able to stay competitive and every store must offer a compelling alternative to Amazon in order to win over shoppers. Other retailers have already lost the battle, are hosting liquidation sales right now, and will soon disappear entirely, like Toys “R” Us and Bon-Ton before them.



Sears is still alive and kicking, but barely.  There are only 425 Sears and Kmart stores remaining compared to 2000 just five years ago.  Remaining employees are skeptical about their future with the company and rightfully so. Victoria’s Secret, JC Penny, and Payless are all closing several stores. Gymboree, GAP, and Ann Taylor are also on “deathwatch.”

Ascena, the company that owns retailer brands like Ann Taylor, Loft, and Lane Bryant, has been on death watch for at least a year, reported Money.com. It is in the middle of the process that began back in 2017 to close about 250 stores. Ascena said it operated about 5,000 stores as of 2016, and it was down to 4,600 stores at the end of 2018. Ascena’s stock price has also taken a beating. It plummeted over this time period when stores were closing, dropping from over $10 per share in 2016 to around $2.25 in early 2019.

The retail apocalypse is happening right before our eyes, as brick and mortar stores are going away quickly.

 

When The Winter Of Our Discontent Meets Fyre Festival

Authored by Jim Quinn via The Burning Platform blog,

“When a condition or a problem becomes too great, humans have the protection of not thinking about it. But it goes inward and minces up with a lot of other things already there and what comes out is discontent and uneasiness, guilt and a compulsion to get something–anything–before it is all gone.” ― John Steinbeck, The Winter of Our Discontent

Sometimes I wonder about strange coincidences. In an email exchange with Marc (Hardscrabble Farmer) in the Fall, he mentioned he had begun reading Steinbeck’s Winter of Our Discontent and planned to write an article about it. Coincidentally, I had just bought a used copy of the same novel at Hooked on Books in Wildwood. I didn’t plan on buying it, but I’ve read most of Steinbeck’s brilliant novels and felt compelled by the title and our national state of discontent to select it from among the thousands of books in the store.

Marc had posted his Steinbeck-esque article in December, but I didn’t read it until I had finished the novel. Marc’s perspective on the value of money and his diametrically opposite path from Ethan Hawley, the discontented anti-hero of Steinbeck’s final novel, was enlightening and thought provoking. I’m sure it impacted my consciousness as I wrote this article.

Steinbeck’s title was taken from Shakespeare to reflect the unhappiness of Ethan Hawley at the outset of the novel. The quote, “Now is the winter of our discontent / Made glorious summer by this sun of York”, is the first line of Shakespeare’s Richard III, written in 1594. Shakespeare was using the summer/winter weather as a metaphor for the fortunes of the English House of York and its rivalry with the Plantagenets for the English throne. The ‘sun of York’ was a comment on the ‘son of York’ Edward IV, a harbinger of better times ahead. This theme of discontent was true in 1594, in 1961 when Steinbeck published his final novel, and is true today, as discontent blows across the land like a deadly polar vortex. At this point, it is difficult to see better times ahead.

The reason Steinbeck’s Nobel Prize winning novel still resonates today is because humans do not change. The human condition, our frailties, foibles, moral shortcomings, greed, avarice, narcissism, ability to forgive and seek redemption has remained constant through the ages. Steinbeck wrote the novel to address the moral degeneration of American culture during the 1950s and 1960s. The game show scandals, nativism and plagiarism of the 1950’s was representative of the decay.

Twenty-two years before, in 1939, Steinbeck addressed man’s inhumanity to man and the greed of evil men creating the suffering of the common man during the Great Depression in his classic novel Grapes of Wrath. Steinbeck’s characters have biblical aspects, as the battle between good and evil is always a subplot. If Steinbeck thought American culture had degenerated in 1961, I wonder what he would think today.

The definition of discontent is dissatisfaction with the prevailing social or political situation. If ever a word defined the current state of our world, it would be discontent. And it so happens, we are also in the depths of a bleak tumultuous winter season. The social and political discontent is reflected in the epic struggle between far-left treasonous Deep State operatives and the deplorables supporting Trump’s battle to retain the presidency.

An open coup has been in progress for two years as the Obama/Clinton surveillance state cronies, fully supported by the left-wing fake news propaganda outlets, attempt to remove a democratically elected president. This is truly a dark moment in our history and could mark a turning point in the demise of our Republic.

“It’s so much darker when a light goes out than it would have been if it had never shone.” ― John Steinbeck, The Winter of Our Discontent

Steinbeck’s story about the moral decline of Ethan Hawley was a parable about the human condition set in the 1950s, but applicable throughout human history, and as relevant today as it was then. Ethan was a war hero whose integrity and honesty were the noble standards he lived by every day. His father recklessly lost the family fortune and he was left as a lowly grocery store clerk working for a foreigner.

It is a story of how easy it is for a good man to be corrupted through societal expectations, the opinions of prominent people, and the disapproval of family for their status in the community. The love of money is the root of all evil, as presented by Steinbeck. Ethan Hawley’s fall from grace was self-imposed as he allowed his darker nature to control his actions in order to regain his once prominent station in the community. The opinions of others considering him a failure led to his fall from grace.

“Men don’t get knocked out, or I mean they can fight back against big things. What kills them is erosion; they get nudged into failure.” ― John Steinbeck, The Winter of Our Discontent

He sacrificed his self-respect, life long friendships, and the lives of two men, in order to climb the social ladder and regain the wealth and influence his father had squandered. Ethan’s ego and sense of self worth led him down a path paved with evil intentions. He had his boss deported, provided the means for his best friend to commit suicide, planned to rob a bank, and eventually came to the realization his own disregard for morality had been passed on to his son, who saw no problem with cheating to get what he wanted in life.

Ethan knew right from wrong. He was well read. He had killed Germans fighting for his country. He willfully chose to manipulate, lie and scheme in order to achieve his materialistic ambitions. The difference between Ethan and the materialistic, delusional, dishonest masses inhabiting our country today, is his sense of guilt impelled him to take his own life. But the unwavering love of his daughter convinced him to soldier on and redeem himself.

Our society is now infinitely more materialistic, narcissistic, and greedy than it was in the 1950s. Moral degeneration has reached new lows, unthinkable during the relatively innocent 1950s. But the common theme is human failings, foibles, and fallacies. Whatever a culture values you get more of. Our culture values achievement, wealth and power, at any cost.

Achieving success through hard work, intellectual accomplishment, or a superior product is antiquated and passé. Success is achieved through regulatory capture, bribing politicians, financial engineering schemes, monopolization of markets, and the power of propaganda. As Ethan cynically expounded, strength and success, even if achieved through criminal means, is all that matters in the end. The victors write the history books.

“To most of the world success is never bad. I remember how, when Hitler moved unchecked and triumphant, many honorable men sought and found virtues in him. And Mussolini made the trains run on time, and Vichy collaborated for the good of France, and whatever else Stalin was, he was strong. Strength and success—they are above morality, above criticism. It seems, then, that it is not what you do, but how you do it and what you call it. Is there a check in men, deep in them, that stops or punishes? There doesn’t seem to be. The only punishment is for failure. In effect no crime is committed unless a criminal is caught.” ― John Steinbeck, The Winter of Our Discontent

A modern-day parable of moral degeneration presented itself to me shortly after finishing the Steinbeck novel. I happened to stumble across a documentary about the Fyre Festival fraud on Netflix. The protagonist of this illustration of discontent and delusion was Billy McFarland. He is representative of the modern-day Ethan Hawley, except with no redeeming qualities or conscience.

He conned investors, entertainers, super models, the media, employees, and gullible millennials. His ultimate purpose was no different than Ethan Hawley’s, to be wealthy and admired by his peers. His outrageously criminal exploits were detailed in the documentary as he lied, falsified, and conducted a ponzi scheme until it all blew up in a shocking display of hubristic folly. The story is a reflection of our shallow, narcissistic, gullible, low IQ society.

What leaps off the screen is how businesses are created out of thin air delivering no value to society. It’s all smoke, mirrors, and superficial virtue signaling designed to lure intellectual lightweights to pretend they are a mover and shaker in their social media driven world. The entire festival was designed to promote some ridiculous music booking app. These frivolous social media-based companies are built upon false narratives, self-absorbed millennials, easy money, and celebrity worship. They have zero value.

After watching how easily young people could be lured into handing over tens of thousands of dollars to this shyster because he paid some super models to do a bikini video and tweet falsehoods about the fake festival, you realize how they can believe socialism can work. Alexandrea Ocasio-Cortez is a perfect role model for these dullards and sycophants. Young people appear incapable of thinking for themselves, critically assessing situations, or going against the crowd. They want to be told what to believe and what to do.

Of course, this sickness is not confined to only young people. Our entire society is permeated with greed, narcissism and lemming-like behavior. Keeping up with the Kardashians has replaced keeping up with the Joneses. Ethan Hawley’s desire for status and respect among his peers in small town America during the 1950s is no different than the social climbing happening in our high-tech social media crazed world of today. Human nature does not change.

The Netflix documentary brought a term to my attention I had not heard before – “influencers”. The shallowness and trivial nature of our culture is captured perfectly by the essence of the importance of “influencers” to marketing products and events.  The Fyre Festival was promoted on Instagram by “social media influencers” including socialite and model Kendall Jenner, Bella Hadid, and model Emily Ratajkowski, who did not disclose they had been paid to do so.

“In business and in politics a man must carve and maul his way through men to get to be King of the Mountain. Once there, he can be great and kind–but he must get there first.” ― John Steinbeck, The Winter of Our Discontent

Rather than make up our own minds about what we like, what we wear, where we eat, or what entertainment we enjoy, we need to be influenced into our decisions by famous people who are famous for being famous. These “influencers” generate their influential power through the number of social media followers they have accumulated by posting pictures of themselves in their underwear, leaked sex tapes, nude selfies, or generally being attractive.

Most of them are low IQ mouth breathers who can’t do basic math or write a comprehensible paragraph. But those 36DD breasts and pouty lips classify them as a grade A influencer. I can’t decide whether these narcissistic icons are more pathetic or the feeble-minded wretches who are actually influenced by these vacuous bimbos. Moral degeneration of society seems to have reached a new low.

Billy McFarland used any means necessary to maul his way to the top. He figured if he pulled off this spectacular social media extravaganza, his new music app demand would skyrocket and he would become a superstar music business mogul like Jay-Z. As his lies and debt continued to pile up, he double downed and used his dynamic personality to convince naïve rich women into “investing” millions into his doomed to failure venture.

Ultimately, thousands of suckers landed on a Caribbean island expecting luxurious accommodations and dozens of A list entertainers, but experienced mass confusion, flimsy tent accommodations with soaked mattresses, little to no food, and a canceled concert as unpaid bands pulled out. The disaster was reported in real time through the same social media that promoted this festival farce.

“In poverty she is envious. In riches she may be a snob. Money does not change the sickness, only the symptoms” ― John Steinbeck, The Winter of Our Discontent

In the case of Billy McFarland we know the consequences of his actions. Lawsuits totaling $100 million were filed against him. He was charged with the Federal crime of wire fraud and convicted. He is currently serving six years in a Federal prison and was ordered to forfeit $26 million. Based on the warped personality I witnessed in the documentary, he will resume scamming people the second he walks out of that prison, and more suckers will eagerly hand him their money. You can’t cure stupid.

The future of fictional character Ethan Hawley is left to your imagination. He had been a moral upstanding citizen who faced a crisis of conscience and fell prey to the darker side of his nature. His boss had been deported and his best friend was dead. At the end of the novel he was left with ill-gotten wealth, a loving wife, a son who felt no guilt in cheating, and a daughter who saved his life.

I want to believe Ethan spent the rest of his life redeeming himself through his actions by doing good for the town, helping his friends achieve success, teaching his son right from wrong, using his wealth to benefit humanity, and proving to his daughter his life was worth saving. Ethan’s struggle is the existential crisis we all face as human beings. The love of money is the root of all evil. Whether we are poor, middle class or rich, when our priorities become warped by greed, narcissism, envy, or worldly desires, it only leads to discontent.

We see the discontent revealed by the billionaire crowd who rig markets to pillage more of the nation’s wealth. We see it among corrupt politicians being bought off by crooked corporate CEOs. We see it when media pundits broadcast fake news to push their agenda. We see it exhibited by the blatant coup attempt against a duly elected president by arrogant treasonous men who consider themselves above the law. We see it play out in office politics all over America. We see it with cheating on our taxes or lying to our spouses. We see our youth plagiarizing and cheating on tests. It seems we are a society of scammers, liars, and dishonest discontents.

Steinbeck was not one for happy endings. He pondered morality and the human condition and found it wanting. A battle between the good and evil is fought within the conscience of every human being. An inner dialogue takes place regarding every moral decision we make. The continuation of a civilized society is dependent upon more human beings choosing the path of good versus the path of evil.

We can be the most technologically advanced civilization in history, but if we allow moral degeneration to dominate our culture, our civilization will be doomed. It feels as if our society is leaning towards the dark side and this realization is leading to an epic showdown between good and evil. We are truly experiencing a winter of discontent. The winner of this battle will determine the future course of our country.

“We can shoot rockets into space but we can’t cure anger or discontent.” ― John Steinbeck, The Winter of Our Discontent

Let’s Face It: The U.S. Constitution Has Failed

Authored by Charles Hugh Smith via OfTwoMinds blog,

Elections provide the bread-and-circuses staged-drama that is passed off as democracy.

Despite the anything-goes quality of American culture, one thing remains verboten to say publicly: the U.S. Constitution has failed. The reason why this painfully obvious fact cannot be discussed publicly is that it gives the lie to the legitimacy of the entire status quo.

The Constitution was intended to limit 1) the power of government over the citizenry 2) the power of each branch of government and 3) the power of political/financial elites over the government and the citizenry, as the Founders recognized the intrinsic risks of an all-powerful state, an all-powerful state dominated by one branch of government and the risks of a financial elite corrupting the state to serve their interests above those of the citizenry.

The Constitution has failed to place limits on the power of government, on the emergence of unaccountable states-within-a-state agencies and on the political power of financial elites.

How has the Constitution failed? It has failed in three ways:

1. Corporations and the super-wealthy elite control the machinery of governance. The public interest is not represented except as interpreted / filtered through corporate/elite interests.

2. The nation’s central bank, the Federal Reserve, has the power to debauch the nation’s currency and reward the wealthy via issuing new currency and buying Treasury bonds in whatever sums it deems necessary at the moment. The Fed is only nominally under the control of the elected government. It is in effect an independent state-within-a-state that dominates the financial well-being of the entire nation.

3. The National Security State–the alphabet agencies of the FBI, CIA, NSA et al.–are an independent state-within-a-state, answerable only to themselves, not to the public or their representatives. Congressional oversight is little more than feeble rubber-stamping of the Imperial Project and whatever the unelected National Security leadership deems worthy of pursuit.

The Constitution’s core regulatory element–the balancing of executive, legislative and judicial power–has broken down. The judiciary’s independence is as nominal as the legislative branch’s control of the central bank and National Security state: the gradual encroachment of corporate and state power is rubber-stamped and declared constitutional.

The secret power of the National Security agencies was declared constitutional early in the Cold war, when unleashing unaccountable and secret agencies was deemed necessary.

The bizarre public-private Federal Reserve was deemed constitutional at its founding in 1913, and the Supreme Court famously declared that corporations have the same rights to free speech (including loudspeakers that cost millions of dollars) as living citizens.

The powers of the Imperial Presidency also continue expanding, regardless of which party is in office or the supposed ideological tropisms of Supreme Court justices.

Every step of this erosion of public representation and the elected government’s power is declared fully constitutional, in classic boiled-frog fashion. The frog detects the rising temperature of the water but isn’t alarmed as the heat is increased so gradually.

Since the rise of unaccountable states-within-a-state are constitutional, as is the dominance of corporate / private-wealth elites, on what grounds can citizens protest their loss of representation?

Elections provide the bread-and-circuses staged drama that is passed off as democracy. The key goal of the corporate/state media coverage, of course, is to foster the illusion that elections really, really, really matter, when the reality is they don’t. The National Security State grinds on, the Federal Reserve grinds on and the dominance of corporate-wealth elites grinds on regardless of who’s in office.

Every emergency is met by the ceding of more power to unelected elites in positions to serve their own interests. The Cold War, financial panics, Cold War Redux–every crisis is an excuse to expand the powers of the unaccountable, opaque states-within-a-state.

The media is already gearing up with 24/7 coverage of the 2020 elections. The constant churn of drama-trauma serves to mask the impotence and powerlessness of the citizenry and the unaccountability of the states-within-a-state that rule the nation.

*  *  *

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print, $13.08 audiobook): Read the first section for free in PDF format. My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF).  My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format. If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

Sometimes the Best Solution Is To Leave Things As They Are

I recently received an insightful email from a reader who had come across my archives of free-lance articles and essays on home and urban design. I wrote dozens of articles for S.F. Bay Area newspapers from 1988 to 2006, and a handful are listed here.

The one the reader is responding to is Best Remodel Might Be None At All (2006). Here are the reader’s comments:

“I thoroughly enjoyed the articles you penned for the SF Examiner that you’ve linked to on your website, these being written close to two decades ago.

Especially noteworthy was your response to the homeowner inquiring about a kitchen remodel where you recommended that the best course of action might be no course of action. This was an wonderful response and it caught my attention because it belies the common sales oriented suggestions generally offered by those writing about remodeling, and especially about kitchens. Usually you see writers busy extolling the gutting and replacement of a kitchen with wild zeal talking about how wonderful it will be to pour coffee or to butter toast once the kitchen area has been refurbished… and how in the sheer pleasure of a new kitchen you might even choose to drink two cups of coffee just for the fun of it!

In the old craftsman style house or bungalow it would mean new plumbing and upgrading the electrical wiring to go with new appliances and new cabinetry. In the era when that house was constructed the cabinets were typically built on site, matching the cabinetry to the design and work flow of the kitchen.

Kitchen cabinetry today is highly decorative with expensive hardware and finishes, but hardly as suitable as kitchen cabinets were once intended; that being to provide an unobtrusive and utilitarian storage and work area for the laborious processes involved in the preparation of food. Areas for preparing food were never intended to be decorative with expensive countertops and as a show-off space for the espresso machine, it was rather the equivalent of a laundry room or a home workshop, a place to do work on surfaces that were large and solid enough to take some abuse and that could be easily cleaned.

Instead of suggesting a complete remodel you appealed to the homeowners aesthetic appreciation for the unique design elements in maintaining the symmetry of the older house that would be destroyed with a new fashioned kitchen. That is the best advice I have ever read offered to someone that was apparently under the thralls of the renderings of the soulless antiseptic modern kitchen most of which are only suitable for microwave cookery or a place to unpack the delivery of fast food. Hopefully this individual took your advice to heart.”

Thank you, Dear Reader, for the high compliment. It seems to me that this advice–appreciate what is, and leave it as it is rather than seek a frenzied make-over as a “solution”–can be applied to far more of life than remodeling.

As the reader so eloquently observes, mindless herd-like pursuit of the fashion of the day drives out practicality as well as destroying the integrity and aesthetics of the structure.

Ours is a commerce-and-credit society and economy. In an economy whose lifeblood is borrowing money to squander on consumerist pursuits of status, the tropism is always to rip out and demolish the old in favor of a faddish make-over.

We must distinguish between the oft-lauded creative destruction of what is obsolete and destruction in pursuit of fleeting fashion: how much of irreplaceable value has been demolished in favor of low-quality, brazenly superficial and instantly dated “new designs”?

The default “solution” in America now is to 1) borrow immense sums of money and 2) squander it heedlessly on self-serving cliches and false assumptions.Corporations, governments and entire populaces hurry after a chimera of “transformation” that transforms nothing of importance or value, but that generates vast revenues for lenders, profiteering shucksters and the government that depends on a frenzied pursuit of commerce-based status for its revenues and power.

 

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print): Read the first section for free in PDF format. 

My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)

My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format. 

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

State Proposes Bill to Treat Gold and Silver as Money to Directly Fight Federal Reserve Monopoly

from The Free Thought Project: Lawmakers have proposed a bill that will directly undermine the Federal Reserve’s monopoly on money by treating gold and silver as legal tender. NASHVILLE, Tenn. (TAC) – Bills introduced in the Tennessee legislature would define gold and silver specie as legal tender and eliminate sales taxes levied on it. Passage of these bills […]

The post State Proposes Bill to Treat Gold and Silver as Money to Directly Fight Federal Reserve Monopoly appeared first on SGT Report.

2019: The Three Trends That Matter

Among the many trends currently in play, Gordon Long and I discuss three that will matter as 2019 progresses: 2019 Themes (56 minutes)

1. Final stages of the debt supercycle

2. Decay of the social order/social contract

3. Social controls: Surveillance capitalism, China’s Social Credit system, social globalization

The basic idea of the debt supercycle is simple: resolving every crisis of over-leveraged speculative excess, evaporation of collateral and over-indebtedness by radically increasing debt eventually leads to an implosion of the entire credit-based financial system.

The final stages of the current debt supercycle are manifesting all sorts of interesting cross-currents: de-dollarization and the unprecedented expansion of debt in China to name just two.

De-dollarization describes the efforts of many nations to reduce their dependence on U.S. dollars for trade and reserves. Since the USD remains the largest reserve currency in both trade and reserves, this trend threatens to reorder the entire global financial system, with potentially disruptive consequences not just to the USD but to a variety of institutions and norms.

China’s total systemic debt has soared from $7 trillion in 2008 to $40 trillion in 2018. This is of course only a rough estimate, as China’s enormous Shadow Banking System is famously opaque, as are many of its institutional and corporate balance sheets.

China has embraced the narrative of “growing our way out of stagnation by quintupling debt,” but the banquet of consequences of this speculative orgy is finally being served: China’s dramatic slowdown in 2018 is just the appetizer course of the banquet of consequences.

This excerpt of a recent (and immediately censored) talk given by a Chinese economist illuminates the result of debt-fueled mal-investment and speculation on a grand scale:

A Great Shift Unseen Over the Last Forty Years:

Look at our profit structure. To put it plainly, China’s listed companies don’t really make money. Then who has taken the few profits made by China’s more than 3,000 listed companies? Two-thirds have been taken by the banking sector and real estate. The profits earned by 1,444 listed companies on the SME board and growth enterprise board are not even equal to one and half times the profit of the Industrial and Commercial Bank of China. How can this kind of stock market become a bull market?

When we buy stocks, we are buying the profits of the company, not hype and rumors. I recently read a report comparing the profits of China’s listed companies with those in the U.S. There are many U.S. public companies with tens of billions dollars in profits. How many Chinese tech and manufacturing companies are there that have accomplished this? There is only one, but it’s not listed, and you all know which one that is. [Xiang is referring to Huawei, the Chinese tech company.]

What does this tell us? As Yale professor Robert Shiller said: stock market performance may not work as a barometer of the economy in the short run, but it does for sure in the long run. So I think that the terrible stock performance only demonstrates one thing, which is that the real economy in China is in quite a mess. Where is the stock market rebound? I think it’s obvious that investor confidence has yet to recover.”

Look no further than Brexit in Britain, the yellow vests in France and the Deplorables in the U.S. for manifestations of a broken social contract and decaying social order. The politically invisible / financially vulnerable have declared we’re still here to their globalized elite aristocrats, and this rebellion against elite domination and profiteering is being demonized by the corporate-state media as populism rather than what it really is: a full-blown revolt of the working class.

In response, the ruling elites have instituted social controls via ramped up official propaganda, Social Credit Scoring in China and private-sector Surveillance Capitalism in the U.S.

All these forms of social control seek to marginalize, suppress and censor dissent, alternative sources of information, alternative narratives and financial independence: hence the sudden elitist interest in Universal Basic Income (UBI) and similar central-state dependency programs: nothing suppresses a working class revolt quite like free money for keeping quiet, passive and obedient.

But some sectors of the working class are not willing to accept the bribes; they’re holding out for actual political power, and this is why the ruling elites of France have responded to the yellow vest movement with such savagery.

Gordon and I discuss these trends and much more in our podcast 2019 Themes(56 minutes).

 

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print): Read the first section for free in PDF format. 

My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)

My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format. 

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

China’s S-Curve of Expansion, Stagnation and Decline

Natural and human systems tend to go through stages of expansion, stagnation and decline that follow what’s known as the S-Curve. The dynamic isn’t difficult to understand: an unfilled ecological niche is suddenly open due to a new adaptation; a bacteria evolves to exploit a new host, etc. Expansion is rapid until the niche is fully occupied, and then growth matures and stagnates; the low-hanging fruit has all been picked, and it’s much more costly to reach what little is left.

Human economies starved of capital, credit, access to markets and freedom are akin to unexploited ecological niches. Lacking capital, credit and the freedom to innovate, experiment and advance, economies wallow in a self-reinforcing stagnation.

Should capital, credit, access to markets and freedom become available, the economic expansion can be breath-taking. This is the basic script of postwar Japan and the Asian Tiger economies: economies with either minimal or war-damaged infrastructure, limited capital/credit and stifling status quo power structures that limited the freedom of the populace to access markets and innovations were suddenly open to credit, markets and innovation.

This territory of opportunity was quickly exploited in the Boost Phase: all the low-hanging fruit could finally be picked.

In the Boost Phase, policies that open the economy to credit and innovation generate virtuous cycles of expanding credit, markets, capital, employment and development. In the Boost Phase, everyone’s a genius; everyone joining the land rush can get a piece of the action.

In this expansive phase, everyone extrapolates this rapid growth into the future, as if the Boost Phase can last essentially forever. Thus all sorts of pundits predicted that Japan’s late-bubble GDP of 1989 would soon surpass the GDP of the U.S.

A year later, Japan’s bubble burst and it has wallowed in stagnation since. The policies of the Boost Phase all work because any loosening of limits works wonders in economies with an abundance of low-hanging fruit. But once the easy fruit’s been picked, those policies no longer have the same efficacy. In fact, policies that worked wonders are now active impediments, as they were designed for an era that has passed: all the low-hanging fruit is long gone.

We cling to whatever seems to have worked so gloriously in the past, long after the virtuous cycles have turned into self-defeating cycles that only deepen the stagnation and rot. Japan’s core policies remain fixed in 1955, or 1965 if one wants to be generous. Other than Softbank, no major Japanese corporations have emerged since 1955. The central state / central planning model of state agencies coordinating the expansion of exports with major corporations is now crippling Japan; that model worked wonders from 1955 to 1989 and then its internal limits became apparent.

The heavy cost of corruption that was offset by growth in the boost phase becomes destructive in the stagnation phase. Stripped of growth, the economy is sapped by institutionalized corruption: bribes, sweetheart deals, poor quality being ignored, accounting fraud–all become embedded and institutionalized, to the detriment of organic growth.

As a result of one disastrous policy after another–The Great Leap Forward, The Cultural Revolution–China’s 1989 economy was mired in 1949. Once the leadership enabled modest reforms that opened access to credit and markets, and the central planning machinery started building infrastructure at a scale unseen in world history, China’s Boost Phase took off.

But just as trees don’t grow to the moon, no Boost Phase lasts beyond the depletion of the low-hanging fruit. Rational investments in infrastructure and housing inevitably give way to speculative gambles, the classic recipe for mal-investment and excessive leverage that guarantee a collapse of the resulting credit and asset bubbles.

China entered 2008 with $8 billion in officially counted debt; 10 years later that debt is $40 trillion, plus unknown trillions more in the shadow banking system which expanded the options for risky speculation and massive expansions of credit.

Like all the other stagnating economies, China’s “solution” to stagnation was to expand debt-funded speculation and “investments” with little to no actual return.

The high water mark of China’s financialization orgy was 2018. From now on, adding debt simply adds more drag on the underlying economy, as income is diverted to service speculative debt and defaults start hollowing out both the official banking system and the shadow banking system.

All the policies that worked in the Boost Phase no longer work. the policy tool chest is empty, and so China’s leadership is doing more of what’s failed: burying bad debt off the visible balance sheets, re-issuing new loans to pay off defaulted debt, and all the usual tricks of a failed banking/credit system.

Japan has papered over its systemic rot and decline for 30 years by using a financial Perpetual Motion Machine: the state borrows and spends trillions by selling bonds to the central bank, which in effect prints “free money” for the state to burn propping up a sclerotic, corrupt, failed status quo.

If that’s policy makers’ idea of success, they are delusional. Credit/asset bubbles all deflate, and central bank buying of assets only gives the lie to the illusion of stability and market liquidity.

Simply put, there is no indication China’s leadership has any plan to manage the inevitable stagnation and decline of China’s economy that is now painfully obvious to anyone with the slightest willingness to look beneath the flimsy propaganda of official statistics. They are not alone, of course; every other major economy is equally bereft of policies and equally dependent on bogus statistics and debt to paper over the decline.

 

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print): Read the first section for free in PDF format. 

My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)

My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format. 

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

Wyoming Passes Bill to Recognize Cryptocurrencies as Money

by Miranda Karanfili, Coin Telegraph: In the United States, the state of Wyoming passed a bill that will allow for cryptocurrencies to be recognized as money on Jan. 31, according to the state legislature website. On Jan. 18, Wyoming legislation presented the bill, which would help to clarify the classification of cryptocurrency. As reported by Cointelegraph earlier this month, the bill will place crypto assets into […]

The post Wyoming Passes Bill to Recognize Cryptocurrencies as Money appeared first on SGT Report.

France, Germany, UK Launch a New ‘Non-Dollar’ Mechanism to Trade with Iran, but Will it Work?

Money talks, and no one knows this better than the current occupant of 1600 Pennsylvania Avenue. It’s how the Trump Administration communicates with its enemies, as well as with its allies – through the application powerful long-range financial instruments. But …

The post France, Germany, UK Launch a New ‘Non-Dollar’ Mechanism to Trade with Iran, but Will it Work? appeared first on Global Research.

10 Investing Axioms Every Investor Should Learn

Authored by Lance Roberts via Real InvestmentAdvice.com,

Martin Tarlie of GMO just recently wrote a great piece on the issue of the current U.S. Stock Market Bubble asking the question of whether or not it has finally burst. To wit:

“A new model explains this dichotomy between price action and fundamentals by suggesting that a bubble in the U.S. stock market started inflating in early 2017, and continued to inflate through the third quarter of 2018. In the fourth quarter, however, indications were that the bubble had started to deflate. And when bubbles deflate, they generally do so with a volatility bang.” 

The primary premise is one of “mean reversions” particularly from elevated levels of valuations. These reversions are simply the liquidation of the excesses built up during the previous bull market cycle. The chart below shows the secular cycles of the market going back to 1871 adjusted for inflation. As Martin notes, current valuations, while lower than the 2000 peak, are still at levels seen only rarely in history. As I discussed just recently, new “secular” bull markets are not launched from such lofty levels.

As Martin concludes:

“The Bubble Model teaches us that bubbles form when times are good – high valuation – and expected to get even better – changes in sentiment are positive. Bubbles burst when changes in sentiment – not level out – turn negative. 

Given that valuation is still high, our advice, consistent with our portfolio positions, is to continue to own as little U.S. equity as career risk allows.”

Since Martin is most likely correct in his assumptions, here are 10-basic investment rules which have historically kept investors out of trouble over the long term. These are not unique by any means but rather a list of investment rules that in some shape, or form, has been uttered by every great investor in history.

1) You Are A “Saver” – Not An Investor

Unlike Warren Buffet who takes control of a company and can affect its financial direction – you are speculating that a purchase of a share of stock today can be sold at a higher price in the future. Furthermore, you are doing this with your hard earned savings. If you ask most people if they would bet their retirement savings on a hand of poker in Vegas they would tell you “no.” When asked why, they will say they don’t have the skill to be successful at winning at poker. However, on a daily basis, these same individuals will buy shares of a company in which they have no knowledge of operations, revenue, profitability, or future viability simply because someone on television told them to do so.

Keeping the right frame of mind about the “risk” that is undertaken in a portfolio can help stem the tide of loss when things inevitably go wrong. Like any professional gambler – the secret to long term success was best sung by Kenny Rogers; “You gotta know when to hold’em…know when to fold’em.”

2) Don’t Forget The Income

An investment is an asset or item that will generate appreciation OR income in the future. In today’s highly correlated world, there is little diversification left between equity classes. Markets rise and fall in unison as high-frequency trading and monetary flows push related asset classes in a singular direction. This is why including other asset classes, like fixed income which provides a return of capital function with an income stream, can reduce portfolio volatility. Lower volatility portfolios will consistently outperform over the long term by reducing the emotional mistakes caused by large portfolio swings.

3) You Can’t “Buy Low” If You Don’t “Sell High”

Most investors do fairly well at “buying,” but stink at “selling.” The reason is purely emotional driven primarily by “greed” and “fear.” Like pruning and weeding a garden; a solid discipline of regularly taking profits, selling laggards and rebalancing the allocation leads to a healthier portfolio over time.

Most importantly, while you may “beat the market” with “paper profits” in the short term, it is only the realization of those gains that generate “spendable wealth.”

4) Patience And Discipline Are What Wins

Most individuals will tell you they are “long-term investors.” However, as Dalbar studies have repeatedly shown investors are driven more by emotions than not. The problem is that while individuals have the best of intentions of investing long-term, they ultimately allow “greed” to force them to chase last year’s hot performers. However, this has generally resulted in severe underperformance in the subsequent year as individuals sell at a loss and then repeat the process.

This is why the truly great investors stick to their discipline in good times and bad. Over the long term – sticking to what you know, and understand, will perform better than continually jumping from the “frying pan into the fire.”

5) Don’t Forget Rule No. 1

As any good poker player knows – once you run out of chips you are out of the game. This is why knowing both “when” and “how much” to bet is critical to winning the game. The problem for most investors is that they are consistently betting “all in, all of the time.”

The “fear” of missing out in a rising market leads to excessive risk buildup in portfolios over time. It also leads to a violation of the simple rule of “sell high.”

The reality is that opportunities to invest in the market come along as often as taxi cabs in New York City. However, trying to make up lost capital by not paying attention to the risk is a much more difficult thing to do.

6) Your Most Irreplaceable Commodity Is “Time.”

Since the turn of the century, investors have recovered, theoretically, from two massive bear market corrections. After 15 years, investors finally got back to where they were in 2000,.

Such is a hollow victory considering that 15-years to prepare for retirement are now gone. Permanently.

For investors getting back to even is not an investment strategy. We are all “savers” that have a limited amount of time within which to save money for our retirement. If we were 15 years from retirement in 2000 – we are now staring it in the face with no more to show for it than what we had over a decade ago. Do not discount the value of “time” in your investment strategy.

7) Don’t Mistake A “Cyclical Trend” As An “Infinite Direction.”

There is an old Wall Street axiom that says the “trend is your friend.”  Unfortunately, investors repeatedly extrapolate the current trend into infinity. In 2007, the markets were expected to continue to grow as investors piled into the market top. In late 2008, individuals were convinced that the market was going to zero. Extremes are never the case.

It is important to remember that the “trend is your friend.” That is as long as you are paying attention to it and respecting its direction. Get on the wrong side of the trend, and it can become your worst enemy.

8) Success Breeds Over-Confidence

 Individuals go to college to become doctors, lawyers, and even circus clowns.  Yet, every day, individuals pile into one of the most complicated games on the planet with their hard earned savings with little, or no, education at all.

For most individuals, when the markets are rising, their success breeds confidence. The longer the market rises; the more individuals attribute their success to their own skill. The reality is that a rising market covers up the multitude of investment mistakes that individuals make by taking on excessive risk, poor asset selection or weak management skills.  These errors are revealed by the forthcoming correction.

9) Being A Contrarian Is Tough, Lonely & Generally Right.

Howard Marks once wrote that:

“Resisting – and thereby achieving success as a contrarian – isn’t easy. Things combine to make it difficult; including natural herd tendencies and the pain imposed by being out of step, since momentum invariably makes pro-cyclical actions look correct for a while. (That’s why it’s essential to remember that ‘being too far ahead of your time is indistinguishable from being wrong.’)

Given the uncertain nature of the future, and thus the difficulty of being confident your position is the right one – especially as price moves against you – it’s challenging to be a lonely contrarian.”

The best investments are generally made when going against the herd. Selling to the “greedy,” and buying from the “fearful,” are extremely difficult things to do without a very strong investment discipline, management protocol, and intestinal fortitude. For most investors the reality is that they are inundated by “media chatter” which keeps them from making logical and intelligent investment decisions regarding their money which, unfortunately, leads to bad outcomes.

10) Comparison Is Your Worst Investment Enemy

The best thing you can do for your portfolio is to quit benchmarking against a random market index that has absolutely nothing to do with your goals, risk tolerance or time horizon.

Comparison in the financial arena is the main reason clients have trouble patiently sitting on their hands, letting whatever process they are comfortable with work for them. They get waylaid by some comparison along the way and lose their focus.

If you tell a client that they made 12% on their account, they are very pleased. If you subsequently inform them that ‘everyone else’ made 14%, you have made them upset. The whole financial services industry, as it is constructed now, is predicated on making people upset so they will move their money around in a frenzy. Money in motion creates fees and commissions. The creation of more and more benchmarks and style boxes is nothing more than the creation of more things to COMPARE to, allowing clients to stay in a perpetual state of outrage.

The only benchmark that matters to you is the annual return that is specifically required to obtain your retirement goal in the future.  If that rate is 4%, then trying to obtain 6% more than doubles the risk you have to take to achieve that return. The end result of taking on more risk than necessary will be the deviation away from your goals when something inevitably goes wrong.

It’s All In The Risk

Robert Rubin, former Secretary of the Treasury, changed the way I thought about risk when he wrote:

“As I think back over the years, I have been guided by four principles for decision making.  First, the only certainty is that there is no certainty.  Second, every decision, as a consequence, is a matter of weighing probabilities.  Third, despite uncertainty we must decide and we must act.  And lastly, we need to judge decisions not only on the results, but on how they were made.

Most people are in denial about uncertainty.  They assume they’re lucky, and that the unpredictable can be reliably forecast.  This keeps business brisk for palm readers, psychics, and stockbrokers, but it’s a terrible way to deal with uncertainty.  If there are no absolutes, then all decisions become matters of judging the probability of different outcomes, and the costs and benefits of each.  Then, on that basis, you can make a good decision.”

It should be obvious that an honest assessment of uncertainty leads to better decisions, but the benefits of Rubin’s approach goes beyond that.  For starters, although it may seem contradictory, embracing uncertainty reduces risk while denial increases it.  Another benefit of “acknowledged uncertainty” is it keeps you honest.  A healthy respect for uncertainty, and a focus on probability, drives you never to be satisfied with your conclusions.  It keeps you moving forward to seek out more information, to question conventional thinking and to continually refine your judgments and understanding that difference between certainty and likelihood can make all the difference.

The reality is that we can’t control outcomes; the most we can do is influence the probability of certain outcomes which is why the day to day management of risks and investing based on probabilities, rather than possibilities, is important not only to capital preservation but to investment success over time.

The Recession Will Be Unevenly Distributed

Authored by Charles Hugh Smith via OfTwoMinds blog,

Those households, enterprises and organizations that have no debt, a very low cost basis and a highly flexible, adaptable structure will survive and even prosper.

The coming recession will be unevenly distributed, meaning that it will devastate many while leaving others relatively untouched. A few will actually do better in the recession than they did in the so-called “recovery.”

I realize many of the concepts floated here are cryptic and need a fuller explanation: the impact of owning differing kinds of capital, fragmentation, asymmetry, opacity, etc. ( 2019: Fragmented, Unevenly Distributed, Asymmetric, Opaque).

These dynamics guarantee a highly uneven distribution of recessionary consequences and whatever rewards are generated will be reaped by a few.

One aspect of the uneven distribution is that sectors that were relatively protected in recent recessions will finally feel the impact of this one. Large swaths of the tech sector (which is composed of dozens of different industries and services) that were devastated in the dot-com recession of 2000-02 came through the 2008-09 recession relatively unscathed.

This time it will be different. The build-out of mobile telephony merging with the web has been completed, social media has reached the stagnation phase of the S-Curve and many technologies that are widely promoted as around the corner are far from profitability.

Then there’s slumping global demand for mobile phones and other consumer items that require silicon (processors) and other tech components: autos, to name just one major end-user of electronics.

The net result will be mass layoffs globally across much of the tech sector.Research is nice but it doesn’t pay the bills today or quiet the restive shareholders as profits tank.

The public sector is also ripe for uneven distribution of recessionary impacts.Local government and its agencies in boomtowns such as the SF Bay Area, Seattle, Los Angeles, NYC, etc. have feasted on soaring tax revenues and multi-billion dollar municipal bonds.

The Powers That Be in these boomtowns are confident that the good times will never end, and so the modest rainy-day funds they’ve set aside are widely viewed as immense bulwarks against recession when in reality they are mere sand castles that will melt away in the first wave.

A $1 billion reserve looks impressive in good times but not when annual deficits soar to $10 billion. Local governments depend on various revenue streams, and most rely on a mix of property, sales and income taxes, both wages (earned) and capital gains (unearned). All of these will be negatively impacted in the next recession.

Local governments are especially prone to The Ratchet Effect, the dynamic in which expenses move higher as revenues climb but the organization is incapable of shrinking, i.e. it only knows how to expand. This defines government as an organizational type.

Inefficiencies (including low-level corruption and fraud) pile up and are offset with higher revenues. When revenue crashes, the system is incapable of eliminating the inefficiencies or reducing benefits and headcount.

I call the endgame of The Ratchet Effect the Rising Wedge Model of Breakdown:

The Ratchet Effect is visible in organizations of all scales, from households to sprawling bureaucracies. The core of the Ratchet Effect is the ease with which the cost basis of an organization rises and the extreme resistance to any reduction in funding.

The psychology of this resistance is easy to understand: everyone hired in the expansion will fight to keep their job, regardless of the needs of the organization or the larger society. Every individual, department and division will fight with the fierceness of a cornered animal to retain their share of the budget, for their self-interest trumps the interests of the organization or society.

Since each “ratchet” will fight with desperate energy to resist being cut while those attempting to do the cutting are simply following directives, the group that has pulled out all the stops to resist cuts will typically win bureaucratic battles.

Broad-based cuts trigger Internecine Warfare Between Protected Fiefdoms as entrenched vested interests battle to shift the cuts to some politically less favored fiefdom. Bureaucracies facing cuts quickly shift resources to protecting their budget, leaving their mission on auto-control. (The Lifecycle of Bureaucracy December 2, 2010)

These dynamics create a rising wedge in which “minimum” costs continue to rise over time even if modest cuts are imposed from time to time. The eventual consequence is a cost basis that is so high that even a modest reduction collapses the organization.

In other words, incremental reductions and reforms have zero impact on the endgame. The organization has become so brittle that any structural reform triggers a breakdown.

Those households, enterprises and organizations that have no debt, a very low cost basis and a highly flexible, adaptable structure will survive and even prosper. Those with high debt loads, high fixed expenses and inflexible responses will find incremental reductions and reforms will have little impact on the endgame of breakdown and collapse.

This is one of the core topics of my latest book, Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic.

Here’s a household example of the type of organization that won’t just survive but thrive in the recession: a household with $100,000 in revenues from multiple income sources and fixed expenses of $35,000, no debt and a management team (the spouses/adults) that’s willing to implement radical changes in lifestyle, expenses and work at the first disruption of revenues. The household that doesn’t just survive but thrives sees crisis / disruption as an opportunity, not a disaster to be mitigated with denial and wishful thinking.

*  *  *

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print): Read the first section for free in PDF format. My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF). My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format. If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

The Recession Will Be Unevenly Distributed

The coming recession will be unevenly distributed, meaning that it will devastate many while leaving others relatively untouched. A few will actually do better in the recession than they did in the so-called “recovery.”

I realize many of the concepts floated here are cryptic and need a fuller explanation: the impact of owning differing kinds of capital, fragmentation, asymmetry, opacity, etc. ( 2019: Fragmented, Unevenly Distributed, Asymmetric, Opaque).

These dynamics guarantee a highly uneven distribution of recessionary consequences and whatever rewards are generated will be reaped by a few.

One aspect of the uneven distribution is that sectors that were relatively protected in recent recessions will finally feel the impact of this one. Large swaths of the tech sector (which is composed of dozens of different industries and services) that were devastated in the dot-com recession of 2000-02 came through the 2008-09 recession relatively unscathed.

This time it will be different. The build-out of mobile telephony merging with the web has been completed, social media has reached the stagnation phase of the S-Curve and many technologies that are widely promoted as around the corner are far from profitability.

Then there’s slumping global demand for mobile phones and other consumer items that require silicon (processors) and other tech components: autos, to name just one major end-user of electronics.

The net result will be mass layoffs globally across much of the tech sector.Research is nice but it doesn’t pay the bills today or quiet the restive shareholders as profits tank.

The public sector is also ripe for uneven distribution of recessionary impacts.Local government and its agencies in boomtowns such as the SF Bay Area, Seattle, Los Angeles, NYC, etc. have feasted on soaring tax revenues and multi-billion dollar municipal bonds.

The Powers That Be in these boomtowns are confident that the good times will never end, and so the modest rainy-day funds they’ve set aside are widely viewed as immense bulwarks against recession when in reality they are mere sand castles that will melt away in the first wave.

A $1 billion reserve looks impressive in good times but not when annual deficits soar to $10 billion. Local governments depend on various revenue streams, and most rely on a mix of property, sales and income taxes, both wages (earned) and capital gains (unearned). All of these will be negatively impacted in the next recession.

Local governments are especially prone to The Ratchet Effect, the dynamic in which expenses move higher as revenues climb but the organization is incapable of shrinking, i.e. it only knows how to expand. This defines government as an organizational type.

Inefficiencies (including low-level corruption and fraud) pile up and are offset with higher revenues. When revenue crashes, the system is incapable of eliminating the inefficiencies or reducing benefits and headcount.

I call the endgame of The Ratchet Effect the Rising Wedge Model of Breakdown:

The Ratchet Effect is visible in organizations of all scales, from households to sprawling bureaucracies. The core of the Ratchet Effect is the ease with which the cost basis of an organization rises and the extreme resistance to any reduction in funding.

The psychology of this resistance is easy to understand: everyone hired in the expansion will fight to keep their job, regardless of the needs of the organization or the larger society. Every individual, department and division will fight with the fierceness of a cornered animal to retain their share of the budget, for their self-interest trumps the interests of the organization or society.

Since each “ratchet” will fight with desperate energy to resist being cut while those attempting to do the cutting are simply following directives, the group that has pulled out all the stops to resist cuts will typically win bureaucratic battles.

Broad-based cuts trigger Internecine Warfare Between Protected Fiefdoms as entrenched vested interests battle to shift the cuts to some politically less favored fiefdom. Bureaucracies facing cuts quickly shift resources to protecting their budget, leaving their mission on auto-control. (The Lifecycle of Bureaucracy December 2, 2010)

These dynamics create a rising wedge in which “minimum” costs continue to rise over time even if modest cuts are imposed from time to time. The eventual consequence is a cost basis that is so high that even a modest reduction collapses the organization.

In other words, incremental reductions and reforms have zero impact on the endgame. The organization has become so brittle that any structural reform triggers a breakdown.

Those households, enterprises and organizations that have no debt, a very low cost basis and a highly flexible, adaptable structure will survive and even prosper. Those with high debt loads, high fixed expenses and inflexible responses will find incremental reductions and reforms will have little impact on the endgame of breakdown and collapse.

This is one of the core topics of my latest book, Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic.

Here’s a household example of the type of organization that won’t just survive but thrive in the recession: a household with $100,000 in revenues from multiple income sources and fixed expenses of $35,000, no debt and a management team (the spouses/adults) that’s willing to implement radical changes in lifestyle, expenses and work at the first disruption of revenues. The household that doesn’t just survive but thrives sees crisis / disruption as an opportunity, not a disaster to be mitigated with denial and wishful thinking. 

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print): Read the first section for free in PDF format. 

My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)

My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format. 

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

The Matrix Revealed: Cartels That Run The World

by Jon Rappoport, No More Fake News: The following information comes from insider interviews with Ellis Medavoy and Richard Bell, two people I interview extensively in my collection, The Matrix Revealed. This is just a brief taste of what they have to say… Major institutions on this planet that control Military, Money, Energy, Government, Medical, Corporate, […]

The post The Matrix Revealed: Cartels That Run The World appeared first on SGT Report.

Circling The Drain

Authored by Pater Tenebrarum via Acting-Man.com,

Drain, drain, drain…

“Master!”, cried the punters,

“we urgently need rain!

We can no longer bear

this unprecedented pain!”

“I’m sorry my dear children,

you beg for rain in vain.

It is I who is in charge now

and mine’s the put-less reign.

The bubble dragon shall be slain,

by me, the bubble bane.

That rustling sound? That’s me…

as I drain and drain and drain.”

[ed note: cue evil laughter with lots of giant cave reverb]

– a public service message by the Fed chieftain, rendered in rhyme by yours truly

Money from thin air going back whence it came from – circling the drain of a ‘no reinvestment’ black hole strategically placed in its way by the dollar-sucking vampire bat Ptenochirus Iagori Powelli.

Our friend Michael Pollaro recently provided us with an update of outstanding Fed credit as of 26 December 2018. Overall, the numbers appear not yet all that dramatic, but the devil is in the details, or rather in the time frames one considers.

The pace of the year-on-year decrease in net Fed credit has eased a bit from the previous month, as the December 2017 figures made for an easier comparison – but that is bound to change again with the January data. If one looks at the q/q rate of change, it has accelerated rather significantly since turning negative for good in April of last year.

Below are the most recent money supply and bank lending data as a reminder that   “QT” indeed weighs on money supply growth rates. It was unavoidable that the slowdown in money supply growth would have an impact on asset prices and eventually on economic activity.

Note that in the short to medium term, the effects exerted by money supply growth rates are far more important than any of the president’s policy initiatives, whether they are positive (lower taxes, fewer regulations) or negative (erection of protectionist trade barriers). The effects of changes in money supply growth are also subject to a lag, but in this case the lag appears to be over.

Any effects seemingly triggered by “news flow” are usually only of the very short term knee-jerk variety, and they are often anyway the opposite of what one would normally expect – particularly in phases when news flow actually lags market action (see the recent case of disappointingly weak PMI and ISM data). The primary trend cannot be altered by these short term gyrations.

TMS-2 growth (y/y); 12-month moving average of TMS-2 growth; total US bank lending growth (y/y). Current growth rates are at levels last seen at the onset of the 2001 and 2008 busts.

TMS-2, total stock: between October and November, month-on-month growth has ceased entirely.

Instead of total Fed assets, we show a chart of securities held outright this time – which include the “QE” portfolio. The data in the chart are up to 02 January, so this is a slightly more up-to-date figure than the one shown in the table.

Securities held outright by the Fed: interestingly, these peaked only in 2017 – almost three years after the official end of QE3 – total Fed assets already peaked in January 2015.

For a while the S&P 500 Index kept rising while the monetary base was essentially flat-lining with a downward bias (note: portions of the liabilities side of the Fed’s balance sheet are included in base money and inter alia reflect the QE portfolio, mainly in the form of excess reserves).

This has changed again in the course of the recent downturn in stocks, which have now “caught up” with the decrease in base money. Normally one would not expect this correlation to be overly tight, but in this case it actually makes sense, since QE and QT have a direct effect on money supply growth rates. In light of the fact that inflationary bank lending growth remains anemic, QT is currently a major driver of money supply growth (or rather, the lack thereof).

Monetary base vs. SPX

Lastly, here is a potentially useful table from a Nomura research report which we pinched from Zerohedge: it shows the estimated weekly USD amounts of QT drains in 2019. It may be worth paying attention to these dates in order to find out to what extent these drains impact risk asset prices and whether they do so with a lag or immediately.

2019 QT schedule. This may prove useful to traders.

Conclusion

As long as the Fed keeps draining excess liquidity from the system, money supply growth rates are unlikely to recover. Expect elevated market volatility to persist over the medium term, with a downward bias.

 

The Crisis Of 2025

Authored by Charles Hugh Smith via OfTwoMinds blog,

his is the predictable path because it’s the only one that’s politically expedient and doesn’t cause much financial pain until it’s too late to stave off collapse.

While many fear a war between the nuclear powers or the breakdown of civil order, I tend to think the Crisis of 2023-26 is more likely to be financial in nature.

War and civil breakdown are certainly common enough in history, global/nuclear war has been avoided in recent history, largely because wars are typically launched by those who reckon they can win the war. Launching a nuclear strike against a nation with the ability to launch a counterstrike (from submarines, for example, and missiles that survived the first strike) guarantees the destruction of whatever concentrations of population and assets the attacker may have.

The breakdown of civil order has not occurred in developed-world nations for quite some time, as central states can marshal military forces to restore order and issue / borrow money to buy the compliance of the restive populace.

Financial crises, in contrast, remain a constant feature of the modern era, and developed-world nations are perhaps even more vulnerable to financial disorder than developing nations.

As I’ve often noted, systems tend to follow an S-Curve of rapid expansion followed by slower growth during maturity and culminating in stagnation, decline or collapse.

Successful economies generate a double-bind once they reach the stagnation-decline phase: the populace (and capital) both expect strong permanent growth as a birthright, and they see the previous boost-phase and maturity phase as evidence that the economy “should” continue delivering outsized returns on capital and widespread prosperity essentially forever.

They are willing to accept a temporary slowdown/decline as part of the process of prosperity, but their patience quickly runs out if outsized returns and general prosperity aren’t forthcoming.

The stagnation phase has many causes: a reduction in resources or depletion of soil/water resources; a sustained shortage of energy or a sharp rise in the cost of energy; stagnating productivity, and the rise of parasitic elites, insiders who feather their nests at the expense of the many.

All of these factors act as friction in the system, and eventually the system is unable to sustain the parasitic elites, high returns on capital and general prosperity.

Any political elite that delivers the bad news that prosperity is over risks being overthrown or voted out of office, and so the ruling elites seek to extend high returns on capital and general prosperity by any means available.

Since they are the parasitic elites, eliminating that source of friction is off the table. Restoring depleted soil/water/energy resources is not possible, and wresting control of others’ resources to exploit is problematic: using force might trigger a wider war, so buying others’resources is the safer answer.

Modern states create new currency by either digital “printing” or borrowing the money into existence. There is little political resistance to creating new money to buy others’ resources, generate high returns on capital and deliver direct transfers of cash to the populace via “make work” employment, social welfare, Universal Basic Income, etc.

You see the double-bind: the ruling class must deliver outsized returns on capital and general prosperity, and the only way they can do so is to create new money rather than new wealth, something that is beyond their power.

Depending on the wealth and productivity of the existing economy, the world may accept this new money as having value for a time. But as the need for more currency increases, ruling elites start to “print” or borrow new currency in excess of what the economy actually generates in income and value.

Eventually the world catches on to the stealth devaluation of the money, and trust in the value of the currency drops, slowly at first and then precipitously.

In developed economies, the ruling elites protect their own incomes and power, and those of capital, as the owners of capital are part of the ruling elite. The net result of this is rising income/wealth inequality as the few increase their share at the expense of the many. (Thomas Piketty characterized this process as a higher rate of return on capital than on labor.)

The political “solution” to stagnation and inequality is QE for the People:increased infrastructure and social welfare spending, benefits that are now costly being subsidized by the state (healthcare, higher education) and Universal Basic Income.

Proponents rarely (if ever) question the bloated cost structure of these protected industries, which benefit entrenched elites (i.e. parasitic elites) at the expense of the overall economy.

Proponents of QE for the People have convinced themselves that essentially unlimited sums of new money can be created and distributed without generating inflation, since all the newly created trillions will be boosting “aggregate demand,” i.e. more consumer demand for more of everything, including resources that are depleted/scarce.

This belief that creating and distributing trillions in new money isn’t inflationary is necessary to suppress the common-sense view that inflation is inevitable once money-creation (and broad distribution of the new money) kicks into high gear.

Since the ruling elites have no other choice, they will embrace QE for the People and generate new money with abandon.

I am guessing the political movement demanding QE for the People will come to power by 2021. The money creation will begin in earnest and a few years later, inflation will start rising, much to the surprise of proponents of QE for the People.

At that point the proponents and the ruling elites will be trapped: they won’t be able to withdraw all the benefits (“free money”) of QE for the People, nor can they reverse runaway inflation without drastically reducing the creation of currency.

Various politically expedient policies will be tried–wealth taxes, the issuance of a new currency, perhaps even a state cryptocurrency–but none of these can reverse the underlying dynamic.

The currency devalues and then collapses, along with the “wealth” that it represented.

This is the predictable path because it’s the only one that’s politically expedient and doesn’t cause much financial pain until it’s too late to stave off collapse.

This essay was drawn from Musings Report 52. The Musings Reports are sent weekly to patrons and subscribers ($50/year or $5/month).

*  *  *

My new book Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic is discounted ($5.95 ebook, $10.95 print): Read the first section for free in PDF format. My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF). My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format. If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

The Crisis of 2025

While many fear a war between the nuclear powers or the breakdown of civil order, I tend to think the Crisis of 2023-26 is more likely to be financial in nature.

War and civil breakdown are certainly common enough in history, global/nuclear war has been avoided in recent history, largely because wars are typically launched by those who reckon they can win the war. Launching a nuclear strike against a nation with the ability to launch a counterstrike (from submarines, for example, and missiles that survived the first strike) guarantees the destruction of whatever concentrations of population and assets the attacker may have.

The breakdown of civil order has not occurred in developed-world nations for quite some time, as central states can marshal military forces to restore order and issue / borrow money to buy the compliance of the restive populace.

Financial crises, in contrast, remain a constant feature of the modern era, and developed-world nations are perhaps even more vulnerable to financial disorder than developing nations.

As I’ve often noted, systems tend to follow an S-Curve of rapid expansion followed by slower growth during maturity and culminating in stagnation, decline or collapse.

Successful economies generate a double-bind once they reach the stagnation-decline phase: the populace (and capital) both expect strong permanent growth as a birthright, and they see the previous boost-phase and maturity phase as evidence that the economy “should” continue delivering outsized returns on capital and widespread prosperity essentially forever.

They are willing to accept a temporary slowdown/decline as part of the process of prosperity, but their patience quickly runs out if outsized returns and general prosperity aren’t forthcoming.

The stagnation phase has many causes: a reduction in resources or depletion of soil/water resources; a sustained shortage of energy or a sharp rise in the cost of energy; stagnating productivity, and the rise of parasitic elites, insiders who feather their nests at the expense of the many.

All of these factors act as friction in the system, and eventually the system is unable to sustain the parasitic elites, high returns on capital and general prosperity.

Any political elite that delivers the bad news that prosperity is over risks being overthrown or voted out of office, and so the ruling elites seek to extend high returns on capital and general prosperity by any means available.

Since they are the parasitic elites, eliminating that source of friction is off the table. Restoring depleted soil/water/energy resources is not possible, and wresting control of others’ resources to exploit is problematic: using force might trigger a wider war, so buying others’resources is the safer answer.

Modern states create new currency by either digital “printing” or borrowing the money into existence. There is little political resistance to creating new money to buy others’ resources, generate high returns on capital and deliver direct transfers of cash to the populace via “make work” employment, social welfare, Universal Basic Income, etc.

You see the double-bind: the ruling class must deliver outsized returns on capital and general prosperity, and the only way they can do so is to create new money rather than new wealth, something that is beyond their power.

Depending on the wealth and productivity of the existing economy, the world may accept this new money as having value for a time. But as the need for more currency increases, ruling elites start to “print” or borrow new currency in excess of what the economy actually generates in income and value.

Eventually the world catches on to the stealth devaluation of the money, and trust in the value of the currency drops, slowly at first and then precipitously.

In developed economies, the ruling elites protect their own incomes and power, and those of capital, as the owners of capital are part of the ruling elite. The net result of this is rising income/wealth inequality as the few increase their share at the expense of the many. (Thomas Piketty characterized this process as a higher rate of return on capital than on labor.)

The political “solution” to stagnation and inequality is QE for the People:increased infrastructure and social welfare spending, benefits that are now costly being subsidized by the state (healthcare, higher education) and Universal Basic Income.

Proponents rarely (if ever) question the bloated cost structure of these protected industries, which benefit entrenched elites (i.e. parasitic elites) at the expense of the overall economy.

Proponents of QE for the People have convinced themselves that essentially unlimited sums of new money can be created and distributed without generating inflation, since all the newly created trillions will be boosting “aggregate demand,” i.e. more consumer demand for more of everything, including resources that are depleted/scarce.

This belief that creating and distributing trillions in new money isn’t inflationary is necessary to suppress the common-sense view that inflation is inevitable once money-creation (and broad distribution of the new money) kicks into high gear.

Since the ruling elites have no other choice, they will embrace QE for the People and generate new money with abandon.

I am guessing the political movement demanding QE for the People will come to power by 2021. The money creation will begin in earnest and a few years later, inflation will start rising, much to the surprise of proponents of QE for the People.

At that point the proponents and the ruling elites will be trapped: they won’t be able to withdraw all the benefits (“free money”) of QE for the People, nor can they reverse runaway inflation without drastically reducing the creation of currency.

Various politically expedient policies will be tried–wealth taxes, the issuance of a new currency, perhaps even a state cryptocurrency–but none of these can reverse the underlying dynamic.

The currency devalues and then collapses, along with the “wealth” that it represented.

This is the predictable path because it’s the only one that’s politically expedient and doesn’t cause much financial pain until it’s too late to stave off collapse.

This essay was drawn from Musings Report 52. The Musings Reports are sent weekly to patrons and subscribers ($50/year or $5/month). 

My new book Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic is discounted ($5.95 ebook, $10.95 print): Read the first section for free in PDF format. 

My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)

My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format. 

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

2019: The Beginning Of The End

Authored by Adam Taggart via Peak Prosperity,

What will happen next & what to do now…

Welcome to our new readers and a very Happy New Year to everyone!

Now that it’s 2019, we’re going to start the new year here at Peak Prosperity by responding to the wishes of our premium subscribers and making our most recent premium report free to everyone.

For those unfamiliar with our work, it’s based on the idea that humanity is hurtling towards a disaster of our own making.  Several powerful and unsustainable trends are all converging towards an ever-narrowing gap in the future.

Because of this, the individual and collective choices we make today take on ever-increasing importance.  Our collective choices — around such issues as rampant money-printing by central banks, the failure to wean ourselves off of fossil fuels, and tossing an entire younger generation under the bus because that’s most convenient for an older generation afraid of living within its actual means — are all pointing to a diminshed and disappointing future. We need to make better choices that align ourselves with these (and many other) looming realities.

This is our work here at Peak Prosperity.

For ten years now, we’ve been pointing out the many predicaments society faces. And we will continue our vigilance.  No because we enjoy crisis, or that we relish delivering hard messages, but because these are the times in which we live — and those, like you, who are awake to reality, need unvarnished facts and data to make informed decisions.

So we offer to you, today, a peek behind our premium subscription curtain.  The people who subscribe to our work do so to make themselves more resilient, as well as to support Peak Prosperity financially as we carry on our mission of “Creating a world worth inheriting”, which invoves bringing difficult messages to reluctant audiences.  It’s not the easiest work, but someone has got to do it. And we’ve willingly taken that responsibility on.

If you like the idea of being kindly but persistently nudged towards greater personal resilience, and you want to support bringing this message to the world, then please become a premium subscriber to PeakProsperity.com. Join our growing community, and make your money count towards a building a better future for as many people as we can.

~ Chris Martenson

2019: The Beginning Of The End

For ten long years, the world’s central banks have dragged everyone along for one last attempt at scaling Mount Credit.

At several points along the way, in 2011, in 2013 and then again in 2016 it seemed all but certain that the wrong route had been picked and all was lost.  We warned people then about the risks, but to no avail. They found a way to navigate even higher from there.

And here we are again in 2018, warning everyone of the same risks. Starting back in August of 2018 we were questioning whether “it” had arrived and then were declaring that it had throughout October and November.

“Until and unless” the central banks reverse course 2019 will see even more of the same.  More stock market volatility, more bond losses, and falling real estate.  Eventually these credit stresses will impact those portions of the economy dependent on continued access to more dumb money. 

Weak companies that cannot sustain themselves without borrowing more will go out of business and lay people off.  Major corporations seeing that writing on the wall will reel in their own hiring and expansion plans.

Eventually all the of the highly leveraged trading strategies have to pack up shop and go home and that’s when we discover that these “markets” are as fake as a spray on sun tan.  No actual liquidity, only the appearance of such as temporarily afforded by all the computer algos out there.

In a very successful attempt at holiday season humor, the Wall Street Journal finally noted that the equity markets had become dominated by computer algos, a fact we noted – oh – 7 years ago:

Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

Dec 25th, 2018

Behind the broad, swift market slide of 2018 is an underlying new reality: Roughly 85% of all trading is on autopilot—controlled by machines, models, or passive investing formulas, creating an unprecedented trading herd that moves in unison and is blazingly fast.

“Electronic traders are wreaking havoc in the markets,” says Leon Cooperman, the billionaire stock picker who founded hedge fund Omega Advisors.

Behind the models employed by quants are algorithms, or investment recipes, that automatically buy and sell based on pre-set inputs. Lately, they’re dumping stocks, traders and investors say.

“The speed and magnitude of the move probably are being exacerbated by the machines and model-driven trading,” says Neal Berger, who runs Eagle’s View Asset Management, which invests in hedge funds and other vehicles. “Human beings tend not to react this fast and violently.”

(Source)

That’s funny!  10 years of steadily rising “markets” driven by these algos and the WSJ was entirely unconcerned.  Now that stocks have been shown to also go down, suddenly the impact of these algos is very concerning to the WSJ.  No worries as long as these programs are whipping prices higher, but a lot of concern when they amplify the moves down.

Well, better late than never.

Our concerns about “markets” so dominated by trading programs are that they are too easily subject to (1) manipulation and (2) sharp sudden movements that could, someday, result in markets being shut down due to lack of participation because the algos found conditions “out of parameter” and they up and left in the literal blink of an eye.

If we needed any further confirmation of just how dangerously volatile the markets can be when driven by these automatic trading routines, then Christmas week certainly provided it.

On Christmas Eve the US stock markets dropped more than they ever had.  Then the day after Christmas the Dow went up more points than it ever had.  The next day it swung an additional 900 points, and rather violently upwards mainly in the last 1.5 hours of trading.

From oversold to overbought to oversold to overbought all in 48 hours.

This is akin to what happens to a car that enters a skid and an inexperienced driver first over-corrects one way and then another with each oscillation become larger and less controllable.  Eventually the car lands in a ditch and the ride is over.

Is this happening now?  We think so.

And it’s the perfectly natural and expected outcome of too many years of increasing central bank intervention aimed at preventing the very thing we now face.

Again, this chart explains everything we have been experiencing in financial “markets” (now so grotesquely distorted by such interventions that price discovery has been almost entirely destroyed):

In every case so far, every attempt to halt QE has resulted in a Wall Street hissy fit and a lot of crybabies in the investing world demanding that the central banks reverse course.  And each time they did, and it worked for a little bit longer.

So here we are, and everybody wants to know what comes next.

That’s easy.  Until and unless the central banks reverse course, once again, and make the next round of QE even larger and more bigly than any previously, we’ll see lots of declines in financial asset prices.  Only this time?  It won’t be constrained to falling stocks – it will envelop everything.

A Fed Too Far

Crass, and vulgar, and utterly indefensible. That’s the only way to describe the combined “leadership” of Ben Bernanke and Janet Yellen who conspired to throw an entire generation under the bus, along with the elderly on fixed incomes and savers too. 

Millennials were locked out of first time homebuying by an interventionist Fed that decided all on their own that those already living in houses should be made to feel wealthier by virtue of rising home prices.

Instead of noting that the 2001 – 2007 housing bubble was a very bad idea, the Fed printed up $1.75 trillion of fresh money to buy mortgage paper and help drive house prices right back up towards their silly, ill-advised peak.

Houses, over the long term, should appreciate in line with inflation, no more no less.  Anything above that green box means house prices have gotten ahead of themselves, and below means they’ve fallen too far.

But the Fed decided, all on its own, that the prior peak was a good thing and needed to be replicated as soon as possible.

The idea here was morally bankrupt as it was illogical. The Fed thought that people living in houses with rising prices would experience a “wealth effect” and therefore both borrow and spend more, which would somehow be a good thing.

The illogical part is not hard to work out.  If you are already living in a house, and you have to live in one anyway, are you truly wealthier if it goes up in price?  Obviously the answer is no, and a tiny bit of thought reveals the opposite. 

The only way to tap that wealth, without borrowing against it, would be to sell your expensive house and downsize or move away to a cheaper location.  Moving nearby to an equivalent house does nothing for you expect waste realtor and other transaction fees.  A more expensive house defeats the strategy entirely.

Otherwise, living in a more expensive house costs you more in terms of insurance and property taxes.  That is, it makes you poorer, not wealthier.

Only in stupid-banker land does a liability that drains more cash from your pocket count as an asset.  As Robert Kiyosaki has stressed in every lecture he’s given over the past 25 years, the house you live in is not an asset.

Roofs need replacing, electricity and oil are consumed, painting and mowing and plowing are all part of simply preventing this thing from rotting straight away into the ground.  Mortgage interest, insurance and property taxes have to be paid or you will quickly lose ‘your’ house to some authority or another. 

You see any cash flying into your pockets during any of that?  Me neither.

Therefore your house is a liability.  Assets are things that put cash in your pocket, liabilities take cash out.  I don’t know about you, but my house is far from perfect except when it comes to taking cash out of my pocket.  There it’s batting 1.000

Hence, Robert Kiyosaki is right; the house you live in is a liability, not an asset.  How does someone become richer if they borrow more against their money pit?  Well, that’s the entire centerpiece of the Fed’s decision to drive house prices up.  It makes you richer.  That’s their whole plan, laid bare. 

Now a cash flowing rental property, either residential or commercial, is another matter entirely.  Those areassets.  Lever up for those!  Borrow away.  We’ll be holding a Real Estate investing webinar in January so keep an eye out for that and be sure to sign up.

The immoral part of the Fed’s decision to drive up house prices has two parts. The smaller part concerns the immorality of encouraging people to go deeper into debt (refi’s, HELOCS, etc.) by leveraging a liability.  Bankers not should but do know better. 

The larger part centers on forcing an entire generation (e.g. Millennials) to either skip buying a house because they can’t afford one, or to buy a more expensive house than they can reasonably or comfortable afford.

Put simply, the Fed threw an entire generation under the housing bus just so that the older folks could feel a little better about the price of their already purchased and lived-in home and maybe spend a little more.  It’s no different than setting your house on fire because you are a tiny bit cold.

This was crass, and vulgar, and utterly indefensible.

It’s Over

After ten long years of steadily rising equity markets, or ““markets”” as we like to call them to denote their fictitious and often fraudulent nature, something approximating volatility has returned here very late in 2018.

As we head into 2019, we’re expecting to see a lot more volatility and even more losses as reality once again steps back into vogue.  It never really left, of course, only was kept away for a while with monetary Botox administered by self-delusional bankers and politicians unable to face their many failures directly.

Every recovery eventually ends and this one is no different.

In our view, however, any recovery built on a foundation of cheap credit will not only end but end badly.  This is easy to understand in neighborhood terms.

Suppose you and your neighbor both earn $100,000.  Next year you both still earn $100,000 but your neighbor borrows an additional $25,000 on their credit card to spend on things like a gardener, a boat, and a couple of trips. 

The way the government records things your neighbor had their personal economy expand by 25% and that’s a very good thing.  Neither the US government nor the Federal Reserve bother to back out the borrowing when they count up economic activity.

Of course, they should, because all borrowing really represents is future consumption taken today.  Your neighbor, when they have to pay back that $25,000, plus interest, will have to forego that amount of future consumption to pay back the debts.

How dumb is it to not factor out borrowing when considering economic activity?  Fantastically dumb.

Here’s what happens to US GDP growth when just the increase in the federal debt is taken out:

This is why the ‘recovery’ is not really a recovery.  It’s not based on anything organic or healthy.  It’s simply borrowed and all borrowing sprees eventually come to an end.

Looked at from a stock market perspective, here’s what central bank inspired credit cycles look like:

Or we could rotate it and look at it from the perspective of debt accumulation:

(Source)

The above chart is a head scratcher.  Whenever that line is moving upwards, it means that debt growth is outpacing economic growth (and remember, debt’s effect on GDP is not factored out, so it’s even worse than what you are seeing here).

What’s the plan here?  Continue to pile up debt at a faster pace than economic growth forever?  What about the idea that economic growth has slowed of late and cannot grow forever for resource related reasons?  Is anybody in power paying even the slightest bit of attention?

Most importantly, what happens when ~40 years of excessive debt accumulation comes to an end?  Do financial systems and institutions even function anymore?

Nobody has a good answer to those questions, which is why the Federal Reserve, et al., are terrified to find out what happens when their grand debt bubble experiment comes to an end.  Mad max is not out of the question folks.  A lot of things very suddenly no longer work when the credit not only dries up, but goes in reverse.  Very basic things like food and gasoline distribution networks and public safety payrolls become difficult to maintain.  Just ask Venezuela.

Until and unless the central banks do something very, very different in the months ahead, it’s over.

First They Came For…

Because of just how dire it might be to end a 40 year long, and very ill-advised credit bubble, we are 99.98% certian the central banks will fight tooth and nail to keep it going.  Just a little longer, for as many months or years as they possibly can, but they’d kick the can forever if they could.

Meanwhile, the ecological world continues to hurtle towards complete disaster.  This next piece of news is one we’ve covered before, but it’s once again in the headlines with some new, rather dire findings:

Building blocks of ocean food web in rapid decline as plankton productivity plunges

Dec 22, 2018

They’re teeny, tiny plants and organisms but their impact on ocean life is huge.​

Phytoplankton and zooplankton that live near the surface are the base of the ocean’s food system. Everything from small fish, big fish, whales and seabirds depend on their productivity.

“They actually determine what’s going to happen, how much energy is going to be available for the rest of the food chain,” explained Pierre Pepin, a senior researcher with the Department of Fisheries and Oceans in St. John’s.

“Based on the measurements that we’ve been taking in this region, we’ve seen pretty close to 50 per cent decline in the overall biomass of zooplankton,” said Pepin. “So that’s pretty dramatic.”

Scientists say local testing reveals half the amount of plankton in a square metre of water today. It’s not just a problem here, declining plankton numbers are a global phenomenon.

(Source)

What scientists have been recording is an enormous drop in the very bottom of the entire food pyramid in the oceans of the world.  I cannot state this strongly enough; this is frightening and deserves our very highest and collective attention.  I cannot think of news much more alarming than a pronounced and continuing loss of oceanic plankton.

One does not simply wipe out the bottom of the oceanic food chain without consequences!

First they came for the insects, but I didn’t realize that they were important because I hate mosquitoes and didn’t really pay attention during biology.

Then they came for the phytoplankton and zooplankton, and, well, same reasons.

Then they came for all the fish in the ocean, but I switched to chicken, so no big deal, right?

Then they came for my oxygen and then it was too late…

On my recent trip to Costa Rica I leaned that even there, where it sounded vibrant and alive to me, that the insects have also begun to mysteriously and quietly disappear, mirroring the hyper-alarming decline in insects noted elsewhere across the world.

What’s going on?

Nobody really knows and I doubt anybody will ever be able to say for sure.  The natural world is a complex system with a seemingly infinite number of feedback loops in play. 

But one thing we could immediately do is realize that whatever it is that we’ve been doing over the past 25 years that’s new should be stopped right away.

Any pesticides or new chemicals being used should be withdrawn from the market immediately.  That would be a sane and healthy response.

Instead the entire political and economic structure of the world is hyperventilating about creating more growth, getting stock prices to go back up, and generally acting as if human developed economic and monetary abstractions were themselves more important than anything else including reality.

So even if the central banks fold and “win the battle” by getting stocks and bonds to resume their march higher, they will assure that we “lose the war” by distracting the center mass of humanity with dreams of riches that will serve to deflect attention from the many predicaments that we face.

We Might be Wrong But We’re Not Confused

That’s one of my favorite sayings; I might be wrong, but I’m not confused.

We’re as certain as can be that the insects and oceanic plankton are sending very important signals to those who can see them.  We know that one cannot borrow more than one earns forever.  We know that steep and rising wealth and income gaps are socially destabilizing.  We know that there’s a future energy crisis coming for which the world is utterly unprepared along every dimension including transportation and food production.

These thing matter, and they will matter more and more as time goes on.

We’re not even the slightest bit confused about any of that.

Hopefully the signs are clear enough again that more people can get back on the path of preparing themselves for the coming times.  There will be disruptions aplenty, and we will all know people, perhaps intimately, who are not prepared.

People will lose jobs and investment savings.  Many more will lose hope and thereby join a surprising number of young people who already have lost hope themselves.

Losing hope is a great first step.  We don’t need any more hope.  We do need optimism and we do need new actions, which means we need new belief systems and, of course, all new narratives.

Once we accept where we are and the path we’re on, then we can begin the long process of building resilience into our lives and communities.

But first you have to take care of yourself.  You place the oxygen mask over your mouth and nose before attending to those around you and helping them get theirs in place.

As we enter 2019, I want to offer you renewed encouragement to getting yourself prepared.  Our basic list should be like basic hand gun training.  You cannot over-train on the basics!

Step 1: Make sure your wealth is safely managed or entirely out of the markets. Our endorsed financial advisor uses a variety of hedging techniques to manage risk on existing positions to both limit downside as well as generate some additional returns. Keeping money in cash in the system to us means using TreasuryDirect in part to keep your cash in the safest of all possible places – with the US Treasury. If the Treasury fails, well, then we all have much bigger problems to contend with.

Step 2: Have at least 3 months in cash on hand, and out of the banking system.

Step 3: Have at least a 10% position in physical gold in your hot little hands stored somewhere safe where you can get to it yourself, possibly quickly.

Step 4: Check your supplies. Be sure to have all the basics safely stored and readily accessible. Food, water, personal protection, medical supplies, etc. Just in case of supply disruptions but also to give you peace of mind that will free you up for step 5.

Step 5: Be ready to help. The most likely outcome of all this, by far, is just a grinding decline that causes people to lose jobs and hope. Your role, as one who is prepared, will be to offer support. As much as you can.

To move beyond the basics, and to meet your fellow tribe, consider coming to this year’s Peak Prosperity seminar to be held April 26th – 28th in Sebastopol CA (link to more information here).

Remember, you cannot be too prepared, nor train too much.

Conclusion

Few are ready to hear these messages.  More will be ready over the coming year, but still the numbers will be surprisingly small.

This makes it even more important that we stick together and offer each other support and encouragement as we navigate increasingly difficult waters over the coming months and years.

We will all face setbacks.  Money will evaporate, jobs might be lost, and opportunities will vanish and appear in brand new places.  Our greatest assets will be intangible, and measured in our abilities to adapt quickly, and to be less reactive to events.

40+ year-old credit bubbles to not end either easily or gently.  Everything that people think they know about how things work, especially in finance and economically, will be ripped apart.

Eventually we revert to how things were all through history before the great credit wizards got their hands on the levers.  Capital is built up slowly from the efforts of humans, and banking and finance will be small portions of the overall activity, no more than 5% of the pie, dedicated to safely moving capital from A to B.

Between here and there?  A world of pain as expectations are forced back down to reality.  If we’re lucky that happens over many decades in a fairly predictable glide path.

If we’re not lucky, then it happens rather suddenly, or in a series of short, sharp shocks like a bowling ball falling down a set of stairs.  That could be a war in the middle east that drives the price of oil over $300/barrel, or a gigantic financial crisis that closes financial borders and causes one or more currencies to utterly fail (I’m looking at you Japan!).

Or a pandemic, or a solar EMP.  Who knows?  In a world of interdependent, just-in-time delivery systems anything that disrupts the supply chains for more than a month will be the same as our bowling ball skipped three stairs before landing extra hard on the fourth.

Is any of this certain or guaranteed?  No, of course not.  They are merely probabilities.  Smaller in the past, larger today, and growing.

Yes, the authorities will do everything in their considerable power to prevent economic reality from rising up and taking over.  They will print, and then print some more.

But they cannot print up 300% more insects to replace those already lost.  And they cannot print up 100% more phytoplankton either.  Nor can they print up another 100 feet of water column in the Ogallala aquifer.   

All they can do is print up more debt and consumption today, stealing from an ever more uncertain future.  Can they do it one more time?  Probably.  Another two times?  Three?  When does it ever stop but when reality overtakes the whole mess and destroys the works of man?

Which means the most important question before any of us is, what did you do about it?

The Arrival Of The Credit Crisis

Authored by Alasdair Macleod via GoldMoney.com,

Those of us who closely follow the credit cycle should not be surprised by the current slide in equity markets. It was going to happen anyway. The timing had recently become apparent as well, and in early August I was able to write the following:

“The timing for the onset of the credit crisis looks like being any time from during the last quarter of 2018, only a few months away, to no later than mid-2019.”

The crisis is arriving on cue and can be expected to evolve into something far nastier in the coming months. Corporate bond markets have seized up, giving us a signal it has indeed arrived. It is now time to consider how the credit crisis is likely to develop. It involves some guesswork, so we cannot do this with precision, but we can extrapolate from known basics to support some important conclusions.

If it was only down to America without further feed-back loops, we can now suggest the following developments are likely for the US economy. Warnings about an economic slowdown are persuading the Fed to soften monetary policy, a process recently set in motion and foreshadowed by US Treasury yields backing off. However, price inflation, which is being temporarily suppressed by falling oil prices, will probably begin to increase from Q2 in 2019. This is due to a combination of the legacy of earlier monetary expansion, and the consequences of President Trump’s tariffs on consumer prices.

After a brief pause, induced mainly by the threat of an unstoppable collapse in equity prices, the Fed will be forced to continue to raise interest rates to counter price inflation pressures, which will take the rise in the heavily suppressed CPI towards and then through 4%, probably by mid-year. The recent seizure in commercial bond markets and the withdrawal of bank lending for working capital purposes sets in motion a classic unwinding of malinvestments. Unemployment begins to rise sharply, and consumer confidence goes into reverse.

Equity prices continue to fall, as liquidity is drained from financial markets by worried investors, but price inflation remains stubbornly high. Consequently, bond prices continue to weaken under a lethal combination of foreign-owned dollars being sold, increasing budget deficits, and falling investor confidence in the future purchasing power of the dollar.

The US enters a severe recession, which is similar in character to the 1930-33 period. The notable difference is in an unbacked pure fiat dollar, which being comprised of swollen deposits (currently 67% of GDP versus 36% in 2007), triggers an attempted reversal of deposit accumulation. The purchasing power of the dollar declines, not least because over $4 trillion of these deposits are owned by foreigners through correspondent banks.

One bit of good news is the US banking system is better capitalised than during the last crisis and is unlikely to be taken by surprise as much it was by the Lehman crisis. Consequently, US banks are likely act more promptly and decisively to protect their capital, driving the non-financial economy into a slump more rapidly by calling in loans. Price inflation will not subside, because that requires sufficient contraction of credit to offset the declining preference for holding money relative to goods. Any credit contraction will be discouraged by the Fed, seeking to avert a deepening slump by following established monetary remedies.

The Fed’s room for manoeuvre will be severely restricted by rising price inflation, which it can only combat with higher interest rates. Higher interest rates will become a debt trap springing tightly shut on government finances, forcing the Fed to buy US Treasuries under cover of monetary stimulation. The true reason for QE will be that with a rapidly escalating budget deficit exceeding $1.5 trillion and more, the Fed will want to suppress borrowing costs compared with what the market will demand. Economic conditions will be diagnosed as a severe case of stagflation. In reality, the US will be ensnared in a debt trap from which the line of least resistance will be accelerating monetary inflation.

It will prove difficult for neo-Keynesian central bankers to understand the seeming contradiction that an economy can suffer a slump and escalating price inflation at the same time. It is, however, the condition of all monetary inflations and hyperinflations suffered by economies with unbacked fiat currencies. The choice will be to rewrite the textbooks, discarding current groupthink, or to soldier on. We can be certain the neo-Keynesians will soldier on, because they are intellectually unable to reform existing monetary policy in a manner acceptable to them.

That would be the likely outcome of the developing credit crisis if it wasn’t for external factors. There is precedent for it, and we can expect it from a purely theoretical analysis. It would be a rolling crisis, becoming progressively worse, taking six months to a year to unfold, followed by a period of economic recovery. But there is a major snag with this analysis for the US economy, and that is US monetary policy has long been coordinated with the monetary policies of other major central banks through forums such as the Bank for International settlements, G20 and G7 meetings.

The surprise election of President Trump upset this apple-cart with his untimely budget stimulus and the havoc he is wreaking on international trade. The result is the Fed is no longer on the same page as the other major central banks, particularly the Bank of Japan and the European Central Bank. Therefore, unlike crisis phases of previous credit cycles, the Eurozone enters it with negative interest rates, as does Japan, which are creating enormous currency and banking tensions. We will put Japan to one side in our search for knock-on systemic and economic effects triggered by the Fed’s increase in interest rates, and instead focus on the Eurozone, the heart of the European Union.

The Eurozone is irretrievably bust

It is easy to conclude the EU, and the Eurozone in particular, is a financial and systemic time-bomb waiting to happen. Most commentary has focused on problems that are routinely patched over, such as Greece, Italy, or the impending rescue of Deutsche Bank. This is a mistake. The European Central bank and the EU machine are adept in dealing with issues of this sort, mostly by brazening them out, while buying everything off. As Mario Draghi famously said, whatever it takes.

There is a precondition for this legerdemain to work. Money must continue to flow into the financial system faster than the demand for it expands, because the maintenance of asset values is the key. And the ECB has done just that, with negative deposit rates and its €2.5 trillion Asset Purchase Programme. That programme ends this month, making it the likely turning point, whereby it all starts to go wrong.

Most of the ECB’s money has been spent on government bonds for a secondary reason, and that is to ensure Eurozone governments remain in the euro-system. Profligate politicians in the Mediterranean nations are soon disabused of their desires to return to their old currencies. Just imagine the interest rates the Italians would have to pay in lira on their €2.85 trillion of government debt, given a private sector GDP tax base of only €840bn, just one third of that government debt.

It never takes newly-elected Italian politicians long to understand why they must remain in the euro system, and that the ECB will guarantee to keep interest rates significantly lower than they would otherwise be. Yet the ECB is now giving up its asset purchases, so won’t be buying Italian debt or any other for that matter. The rigging of the Eurozone’s sovereign debt market is at a turning point. The ending of this source of finance for the PIGS is a very serious matter indeed.

A side effect of the ECB’s asset purchase programme has been the reduction of Eurozone bank lending to the private sector, which has been crowded out by the focus on government debt. This is illustrated in the following chart.

Following the Lehman crisis, the banks were forced to increase their lending to private sector companies, whose cash flow had taken a bad hit. Early in 2012 this began to reverse, and today total non-financial bank assets are even lower than they were in the aftermath of the Lehman crisis. Regulatory pressure is a large part of the reason for this trend, because under the EU’s version of the Basel Committee rules, government debt in euros does not require a risk weighting, while commercial debt does. So our first danger sign is the Eurozone banking system has ensured that banks load up on government debt at the expense of non-financial commercial borrowers.

The fact that banks are not serving the private sector helps explain why the Eurozone’s nominal GDP has stagnated, declining by 12% in the six largest Eurozone economies over the ten years to 2017. Meanwhile, the Eurozone’s M3 money increased by 39.2%. With both the ECB’s asset purchasing programmes and the application of new commercial bank credit bypassing the real economy, it is hardly surprising that interest rates are now out of line with those of the US, whose economy has returned to full employment under strong fiscal stimulus. The result has been banks can borrow in the euro LIBOR market at negative rates, sell euros for dollars and invest in US Government Treasury Bills for a round trip gain of between 25%-30% when geared up on a bank’s base capital.

The ECB’s monetary policy has been to ignore this interest rate arbitrage in order to support an extreme overvaluation in the whole gamut of euro-denominated bonds. It cannot go on for ever. Fortunately for Mario Draghi, the pressure to change tack has lessened slightly as signs of a US economic slowdown appear to be increasing, and with it, further dollar interest rate rises deferred.

TARGET2

Our second danger sign is the massive TARGET2 interbank imbalances, which have not mattered so long as everyone has faith that it does not matter. This faith is the glue that holds a disparate group of national central banks together. Again, it comes down to the maintenance of asset values, because even though assets are not formally designated as collateral, their values underwrite confidence in the TARGET2 system.

Massive imbalances have accumulated between the intra-regional central banks, as shown in our next chart, starting from the time of the Lehman crisis.

Germany’s Bundesbank, at just under €900bn is due the most, and Italy, at just under €490bn owes the most. These imbalances reflect accumulating trade imbalances between member states and non-trade movements of capital, reflecting capital flight. Additionally, imbalances arise when the ECB instructs a regional central bank to purchase bonds issued by its government and local corporate entities. This accounts for a TARGET2 deficit of €251bn at the ECB, and surpluses to balance this deficit are spread round the regional central banks. This offsets other deficits, so the Bank of Italy owes more to the other regional banks than the €490bn headline suggests.

Trust in the system is crucial for the regional central banks owed money, principally Germany, Luxembourg, Netherlands and Finland. If there is a general deterioration in Eurozone collateral values, then TARGET2 imbalances will begin to matter to these creditors.

Eurozone banks

Commercial banks in the Eurozone face a number of problems. The best way of illustrating them is by way of a brief list:

  • Share prices of systemically important banks have performed badly following the Lehman crisis. In Germany, Commerzbank and Deutsche Bank have fallen 85% from their post-Lehman highs, Santander in Spain by 66%, and Unicredit in Italy by 88%. Share prices in the banking sector are usually a reliable barometer of systemic risks.

  • The principal function of a Eurozone bank has always been to ensure its respective national government’s debt requirement is financed. This has become a particularly acute systemic problem in the PIGS.

  • Basel II and upcoming Basel III regulations do not require banks to take a risk haircut on government debt, thereby encouraging them to overweight government debt on their balance sheets, and underweight equivalent corporate debt. Banks no longer serve the private sector, except reluctantly.

  • Eurozone banks tend to have higher balance sheet gearing than those in other jurisdictions. A relatively small fall in government bond prices puts some of them at immediate risk, and if bond prices decline it is the weakest banks that will bring down the whole banking system.

  • Eurozone banks are connected to the global banking system through interbank exposure and derivative markets, so systemic risks in the Eurozone are transmitted to other banking systems.

This list is not exhaustive, but it can be readily seen that an environment of declining asset prices and higher euro bond yields increases systemic threats to the entire banking system. As was the case with Austria’s Credit-Anstalt failure in 1931, one falling domino in the EU can easily topple the rest.

The ECB itself is a risk

As stated above, the ECB through its various asset purchase programmes has caused the accumulation of some €2.5 trillion of debt, mostly in government bonds. The euro system’s central banks now have a balance sheet total of €4.64 trillion, for which the ECB is the ringmaster. Most of this debt is parked on the NCBs’ balance sheets, reflected in the TARGET2 imbalances.

The ECB’s subscribed equity capital is €7.74bn and its own balance sheet total is €414bn. This gives an operational gearing on core capital of 53 times. Securities held for monetary purposes (the portion of government debt purchased under various asset purchase programmes shown on the balance sheet) is shown at €231bn (it will have increased further in the current year). This means a fall in the value of these securities of only 3% will wipe out all the ECB’s capital.

If the ECB is to avoid an embarrassing recapitalisation when, as now seems certain, bond yields rise, it must continue to rig euro bond markets. Therefore, the reintroduction of its asset purchase programmes to stop bond yields rising becomes the last fling of the dice. The debt trap Eurozone governments find themselves in has also become a trap for the ECB.

Conclusion

We can see that the global credit crisis has now been triggered. It always happens at some point anyway. The proximate triggers have been non-monetary, being the combination of President Trump’s fiscal reflation late in the credit cycle, and his imposition of tariffs on imported goods. The weakening of other economies from Trump’s tariff war is an additional factor undermining the global economic outlook.

Given these fiscal developments, the Fed had no option but to seek to urgently normalise interest rates, bringing on the credit crisis.

Inaction by the Fed would have undoubtedly seen price inflation accelerate, even allowing for the confines of a heavily suppressed consumer price index. The slowing of the US economy has, at least for the short-term, reduced price inflation factors. But as argued in this article they are unlikely to last.

These monetary developments have come at a time when two important central banks, the ECB and the Bank of Japan, are still applying negative interest rates. The disparity between these policies and that of the Fed, besides creating monetary and currency strains, will almost certainly lead to them both revising monetary policies. Only this month, quantitative easing in the Eurozone ceases, and bond prices are likely to fall significantly without it. A rise in the ECB’s deposit rate from minus 0.4% will surely follow, and it is hard to see how a developing systemic crisis in the region can then be prevented.

Since the Lehman crisis, inflation has been mostly bottled up in the financial sector, while being statistically suppressed in the productive economy. That is now about to change, leading to excess deposits at the banks trying to escape the consequences of their deployment for mainly financial speculation. It will not provide a boost in consumption, because consumers are maxed out and unemployment is rising. It will simply undermine the purchasing power of an increasingly unwanted, unbacked fiat currency.

Trump Administration Declares Puerto Rico Too Rich for Relief Money

The Federal Emergency Management Agency and the US Department of the Treasury informed the Puerto Rican government on January 9, 2018 that it will not receive a promised $ 4.9 billion loan for Hurricane Maria rebuilding efforts, after finding that the commonwealth had a cash balance of over $ 8.5 billion.

According to David Dayen of the Intercept, Puerto Rico had $ 1.7 billion for day-to-day operations as of December 29, 2017, along with $ 6.875 billion in other accounts. It will receive the loan from the Community Disaster Loans Program when this money decreases further. The commonwealth is the only US territory affected by disaster that is being means-tested, as well as the only territory that will receive a loan instead of a grant.

Puerto Rico is competing with Florida, Texas, and the US Virgin Islands, which have also suffered hurricane damage, for its share of $ 36.5 billion in disaster relief funds appropriated by Congress. As of January 27, 2018, almost half of the island is still without power, and Puerto Rican officials have stated that power and sewer companies will run out of funds in January.

The House of Representatives recently denied Puerto Rico $ 4.6 billion in funding for its Medicaid program, which officials say will run out of money early in 2018. In addition, the recently passed Tax Cuts and Jobs Act will put an export tax on manufacturers on the island, despite Puerto Rico being U.S. territory.

This story was first reported in Puerto Rico’s daily newspaper, El Nuevo Dia. The Intercept reported the loan denial on January 18. Only a few corporate media outlets have covered this story. Reuters reported similar information on January 17, but stated that the US Virgin Islands, Texas, and Florida have received loans, not grants as the Intercept reports. The Associated Press also reported this story on the 17th, but other news outlets, such as the Washington Post and NBC News, merely republished the AP story without any original reporting of their own. Luke Darby of the tabloid magazine GQ shared the Intercept story on the 18th, also commenting: “This is the same approach that conservatives have taken for years with welfare and social programs: make it as punishing as possible to participate in them and try to drown applicants in arbitrary and draconian red tape. Now they’ve taken the same logic and applied it to disaster relief. And with no senators or representatives in Congress, Puerto Ricans have no one at the federal level invested in advocating for them.”

Source: David Dayen, “Trump Administration Tells Puerto Rico It’s Too Rich For Aid Money,” The Intercept, January 18, 2018, https://theintercept.com/2018/01/18/puerto-rico-trump-administration-tells-its-too-rich-for-aid-money/.

Student Researcher: Peter Schiller (North Central College)

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Keep the Money and the Jobs at Home by Buying American Products

All homeowners want to do their remodeling projects as inexpensively as possible—that’s just common sense. Traditionally, this meant buying products and materials made overseas. But it looks like a change in American attitudes is taking place, according to a survey conducted by Consumer Reports. More than 60 percent of all respondents said they would spend 10 percent more for American-made products, and more than 25 percent said they would spend 20 percent more. If you’re thinking about remodeling your home, consider using only American-made materials. You can make a positive impact on the economy and in our communities while updating your home.

Why the Shift?

To meet the demand for inexpensive products, U.S. manufacturers and contractors looked overseas. Many overseas manufacturers cut prices until American manufacturers could no longer afford to make the same products. Oftentimes, the quality of both the materials and construction were lowered as well, to be able to sell the items at a lower price in the American market.

American consumers are now concerned with the quality of manufacturing and materials from overseas. They are aware of the wage practices and working conditions impacting offshore workers. Strict U.S. standards in construction and manufacturing and stringent labor laws mean American consumers know upfront what they are buying and how employees were treated while they made the product. Even with a higher initial cost, these products are more economical in the long run, because they don’t have to be replaced or repaired as often.

What to Expect When Looking for Materials Made in America

Last year, 84 Lumber Company challenged American builders and remodelers to build a home using 95 percent American-made materials in its “We Build American†campaign. At the completion of the initial home, the company discovered the total cost was only one percent higher than the estimate using overseas materials. The challenge lead to the discovery of what products were no longer made in the U.S. or were made by only one or two companies. Some things the “We Build American†project learned:

  • Nails. There is only one nail producer in the U.S., and the prices were higher and the wait time for the order longer.
  • Microwaves and doorbells. These are not made at all in the U.S.
  • Nuts and bolts. These are no longer made in the U.S., but comparable products can be obtained from heavy equipment manufacturers.
  • Light switches and electrical sockets. There is one U.S. supplier of these, and its product was slightly more expensive and of higher quality.
  • Drywall screws. Another item made by limited U.S. manufacturers for a higher price.
  • Lighting fixtures. American-made products are available but limited in designs.
  • Plumbing fixtures. As with lighting, American-made can be found in limited choices.
  • Appliances. There are limited choices that use more than 80 percent American components.
  • Electronic devices. Nearly all electronic equipment is manufactured outside of the U.S.

Filling the Gaps

The good news for consumers is there are companies that custom-make products from American components. For example, Champion Home Exteriors makes windows, doors, vinyl siding, sunrooms and roofing systems in its factories in Cincinnati and Denver. Local cabinetmakers can custom-make kitchen cabinets with American materials. Countertop specialists can create granite, concrete or wood-based kitchen counters for you.

With a little research, you can find local manufacturers of American-made home remodeling components. Your money stays in the community and you help support the jobs created by these home-town companies.

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