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Democracy at Risk?

Posted on Thursday, October 20, 2016 No comments
If our democracy is at risk, it is because drivel which would never be permitted by a professor teaching first year critical thinking now passes for competent commentary from the Washington Post.

Our local paper, the San Diego Union-Tribune, carried Catherine Rampell's column this morning.  Apparently she thinks a "particular subset of Americans [read: 'deplorables'] have had enough of experts, facts, math, data. They distrust them all."

She is apparently appalled that "more than 4 in 10 Americans somewhat or completely distrust the economic data reported by the federal government."  And if we only count the 'deplorables', 68 percent do not trust the data "at all."  She calls roll on the usual suspects: unemployment, inflation, household spending, health insurance coverage rates, gross domestic products, etc.

If she had followed up with at least an attempt at substantive discussion of how these numbers are calculated and - even more importantly - how they are used, she could have at least avoided making her college professors look bad.  But there was nothing but red herrings and ad hominem - to the point I am left wondering if she even knows what those two terms mean in the world of critical thinking.

So let's do a little of the substantive analysis she couldn't provide in no fewer than 28 Union-Tribune column inches.

Inflation is easily the most important, and least understood, of the economic series reported by the government.  It is the most important because it provides the foundation for the 'deflator' which is used to calculate Gross Domestic Product.  The most important result of that relationship is this: If you understate inflation, you necessarily overstate economic growth.  Inflation is also what determines interest rates.  Here when you realize that the U.S. Government does not take in enough revenue month-to-month to even pay the interest on its debt, you also realize that keeping interest rates low is 1) a way of staving off the inevitable fiscal - and therefore political - reckoning; and 2) that this reckoning is, in fact, mathematically inevitable.  To understand why, just try to find someone who has refinanced their mortgage at a higher rate.

Rampell derisively refers to "shadow stats."  This can only mean one of two things: 1) She is aware of John Williams' and has thus failed to offer anything even approaching substantive interaction with his work; or 2) she has 'heard' about his work and is just parroting a second-hand narrative of 'conspiracy theories'.  Either way, she and her college profs (and we'll add her editors to the list) don't come out looking very good for her effort.

But leaving Shadow Stats aside, let's look at actual 2015 data from the Bureau of Labor Statistics.  The weighting of various prices in the Consumer Price Index is shown in complete detail.  The most glaring anomaly is rent.  The 'housing' component is 42 percent, which seems about right.  But within that component, only a little under eight percent is 'rent of primary residence' while a category called 'owners equivalent of rent of residences' is no less than 24 percent.  Let's explore that one for a moment: The 'owners equivalent' figure is notional.  This is not what owners are getting in rent; it is what the BLS guesses they could get in rent on their primary residence were they to rent it out.  But 'rent of primary residence' is an actual number - the rent being paid by the average renter of an apartment.  Can Rampell take a crack at explaining why someone would weight a notional number far more heavily than an actual number?

Another example is education.  CNBC writer John W. Schoen shows how tuition inflation has dramatically outpaced broader inflation measurements.  The BLS data shows us that college tuition is weighted at 1.8 percent.  And books and supplies at 0.16 percent (!!!).  Parents of college age students like me and my wife are painfully aware that the BLS formula ought to be labeled as the BLS formula - just remove the 'L'.

I'll round out the examples with health care.  The BLS data shows a weighting of 8.4 percent.  But when looking at various estimates of the percentage of income Americans devote to health care, 9.6 percent is the lowest number out there.  For those making $35-47K, the percentage is 14.5.  And with massive premium increases on the horizon, this picture is only going to get worse.

The long and short? The BLS data significantly under-weights the prices ordinary people (as opposed to the 'experts') know are the main drivers of price inflation.

Inflation - if we go by the 'textbook' - is the difference between the growth of the money supply and the growth of the economy.  Some will differentiate between this definition (monetary inflation) and the growth or decline in consumer prices (price inflation).  If, for example, the money supply has grown by 20 percent, but the economy only by two percent, the rate of monetary inflation is 18 percent.  One would expect - by the textbook theory - that price inflation will follow monetary inflation.  The claim is, of course, that price inflation is about two percent, so those who have been ringing the inflation fire alarm are ridiculed by writers like Rampell.

But if we look at all of the various paths money takes in the economy, and look at three in particular: the stock market; the bond market; and real estate, the answer is right in front of us.  And, no, Ms. Rampell, we don't need 'experts' to see it.

Stocks, bonds, and real estate are 'inflation sinks'.  Just like a 'heat sink' dissipates heat, these three markets are dissipating the inflation of the money supply.  But the only way to hide this effect in real estate, for example, is to underweight actual rents (which are soaring) and overweight notional rents - like what I might get were I to rent the house I live in.  It's as if we are to believe that notional rents have greater influence on consumer spending choices than actual rents.

And by not counting the stock or bond markets (they are not 'consumer prices', after all), we are hiding the real threat to our democracy: wealth inequality.  If Ms. Rampell was actually familiar with the writing of 'deplorables' like myself and others who challenge the 'data', she would see that between us and the Left, we agree that income inequality is a problem.  Where we disagree is on the origins of - and therefore the solutions to - the problem.

Income inequality is a function of public debt; here is how the cycle works: Each time the U.S. Treasury issues a 'bond', it is bought by a 'primary dealer'.  It then gets sold on the 'secondary market'.  When the Federal Reserve was engaging in Quantitative Easing (QE), they were literally creating money out of thin air (digitally) to buy these bonds on the secondary market. Each time a bond changes hands, fees and commissions are booked.  These bonds are issued, of course, to pay for deficit spending. Wall Street loves the arrangement - they are the ones booking the fees and commissions, after all.  And so just as the public debt soars, so does political spending.  Where does political campaign cash come from?  Primarily Wall Street - from the fees and commissions they book trading in government debt.

It is essential, then, both for the political and the financial halves of the 'political/financial' complex that this borrowing continue.  What threatens it?  Rising interest rates... again, who refinances a mortgage at a higher rate?  How do you keep interest rates artificially low?  By keeping the rate of inflation artificially low.

When we look at the multiplier between the salary of an average worker and that of a CEO, the 'norm' used to be about 20 (the CEO would make 20X the salary of the average worker.  When we look at the multiplier in companies 'closest' to all the new money that has been created (the 'political/financial' complex) the multiplier runs as high as 300.  If increases in income can be tied to increases in productivity and other forms of wealth creation, people should be free to make as much money as they please.  But when these increases are derived from proximity to banks and government, and funded by the banks lending to government, something is very wrong. And campaign finance reform will not fix it. And end to borrow-and-spend government will.

Inflation, then, works it way into so many other numbers.  With an honest reporting of inflation - by accounting for actual rather than notional prices for things like rent, properly weighting education and health care, and by taking into account stocks, bonds, and real estate - inflation would be significantly higher. And that would mean GDP would be significantly lower.  That, then, would expose the Big Lie - that we have been 'recovering' since the last financial crisis.  The fact that we have likely been in recession throughout the entirety of Obama's two terms is a very inconvenient truth.  But even worse - for both political parties - a true accounting of inflation would cause interest rates to surge, putting an immediate end to the debate over the debt ceiling.  That debate would be over because when no one is willing to lend us money at a rate we can afford, it will not make one whit of difference what the 'debt ceiling' is.

The cooperation and compromise everyone says they want will not happen until we start doing something very simple: Tell the truth about the economy.

Memo to the Fed: "Not Spending" and "Saving" are not the same!

Posted on Friday, October 14, 2016 No comments
Janet Yellen today:
We need to know more about the manner in which inflation expectations are formed and how monetary policy influences them.
OK, good start because it suggests they might be aware that there are things out there they don't know.  Her whole speech today actually hints that this is beginning to dawn on them.

Good news. So, let me offer a little help:

By 'inflation expectations', Yellen means ordinary people start believing that prices will go up soon.  The idea is that if you think that box of something is going to be more expensive tomorrow, you'll buy it today.

Now, as to how they are formed, and how monetary policy influences them: 'Saving' and 'not spending' are NOT THE SAME.  If I am 'not spending' it may be because I think prices are going to drop.  This is the opposite of the observation above: If that box of something is going to be cheaper tomorrow than today, why would I buy today?

'Saving' is different.  If I am 'saving' it could be because I am 'buying' peace of mind in case of a rainy day.  And if my savings earn me less and less (by way of interest rates), it only means that 'peace of mind' becomes more expensive.  I have to save more to 'buy' the same peace of mind I could have gotten for less if my savings earned a decent rate of interest.

I could also be saving for a couple similar reasons: If I want to save to help a child pay for college, again, I am 'buying' the ability to discharge what I might think is a parental responsibility.  The less I get on my savings, the more 'expensive' that ability becomes - because I have to make up for what I am not getting in interest by adding to my savings.  And in a sector of the economy without any 'normal' price discovery (for tuition and books), that 'ability' is outrageously more expensive than it should be.

I could be saving for retirement.  Here I'll let you in on the somewhat colorful sense of humor between me and my oldest son, who is 18.  We were talking about why paying off our mortgage is so important to me and his mom.  I buried my parents in 2010, so I have seen the care needed for a dying parent.  I was starting to explain why I wanted the house paid off as early as possible and said: "So you and your brother..."

My oldest interrupted. "...don't have to change your diaper instead of the other way around!"

We got a very good laugh out of that. (The way he actually put it was a bit more colorful.) And he was spot on the money!

So by paying off our mortgage, I am saving for my old age. I am 'buying' the peace of mind that I will not end up relying on my boys to 'change my diaper' as my time on this earth draws to a close.

This is all entirely different than 'not spending' and therefore has nothing to do with inflation expectations (save perhaps the matter of saving for college).  And it is appalling that I find myself - a charter member of the Basket of Deplorables - having to explain these things to the Chair of the Federal Reserve, for Pete's sake!

But it isn't really that surprising after all.  I look at money and see a way of measuring the output of my time and skills.  I then see it as a means by which I discharge what I believe to be responsibilities to my children.  Ms. Yellen, the Federal Open Market Committee (FOMC), and their coterie of academic economists apparently do not see money this way, but rather as a tool of the State to be used to dictate the social order.

Of course we have seen this before in King Charles I, before he triggered the English Civil Wars with his monetary impunity.  It has a lot to do with why do not have a Monarch in this country...

Or do we?

To Big to Fail, v2.0 - Deutsche Bank

Posted on Wednesday, October 5, 2016 No comments
Yup, here we go again...

Recently the Department of Justice levied a $14B fine against Germany's Deutsche Bank (DB) for its role in the last financial crisis - which was mainly a matter of selling securities based on mortgages they knew were bad.

DB, however, is on the brink of becoming the next "Lehman Brothers" (LB).  If that name isn't familiar, LB was the "systemically important" bank which went bankrupt, triggering the last financial crisis.  The way LB triggered the crisis was actually best explained in "The Big Short" - by Selena Gomez of all people! (Seriously, folks, please watch the video - you may well be about to see a re-run in DB.)

After you've watch this clip, read here.  This is the Reuters story on the quiet talks going on between German and U.S. officials about the fine.  There are so many angles to this, it is hard to know which ones to pursue and in which order.  I'll pick a few, to wit:

1) This is going to blow up the 'myth' that is the European Union and the fraud that is its money (the Euro) in a way that the Brexiteers couldn't have dreamed of;

2) This is going to prove that Central Bank intervention not only did nothing to end 'too big to fail', but actually made it exponentially worse; and;

3) This is going to demonstrate, once and for all, that we were lied to the first time around (the last financial crisis).

Taking these three up in reverse order: We are about to hear the term "under-capitzalized" again.  This was the reason we were given for the bailouts in the last financial crisis.  If we pay attention this time, we will discover there is actually another way of describing the same situation: Too much bad debt.

The difference is between looking at bank through the 'lens' of the asset side of the accounts instead of through the 'liabilities' side.  All we have to do - and no, you do not need a degree in anything to understand this - is ask ourselves how banks are supposed to be doing business.  Its actually pretty simple: they lend out money against collateral.  If you own a home, you understand this.  The bank lent you money to buy the home, and home itself is the collateral.  If you stop making payments, they take it from you and sell it to offset the loss.  A debt that is backed by good collateral - like your house - is considered a 'good' debt even if the borrower stops paying, because there is recourse.  Debts, however, that are not being paid back and have no such recourse are given all kinds of wonderful names like "non-performing loans" (NPLs), or "impaired" loans.  Its all euphemisms for 'bad debts.'

Banks are supposed to maintain a certain percentage of 'good' collateral against their outstanding loans to make sure they have recourse to survive when a certain percentages of those loans go bad.  The problem with DB is no one knows how to value their outstanding debts which were used for 'derivatives'. (Replay the Selena Gomez clip.  A 'derivative' is a bet on a bet on a bet on a bet on a player's Blackjack hand.)  Having good collateral is useless if you do not know what your liabilities exposure is.

We have seen this movie before.  When mortgages started going into default, no one could value the liabilities of banks like LB who had played at this Blackjack table (sub-prime mortgage backed securities).  If you cannot calculate your liabilities, you have no way of balancing the books, and therefore no way of knowing what each share of stock is worth.  When the market concludes they cannot know what a share should be priced at, everyone sells.  When everyone is selling something, and no one is buying it, that something is - by definition - worthless.  This is where DB is right now - even without the DoJ fine.  The only thing the DoJ fine may do is accelerate the day of reckoning.

We are learning that "government officials in Berlin, speaking on condition of anonymity,... hoped to facilitate a quick deal that would buy Deutsche Bank time to regain its footing."

What we are not told is how they propose DB "regain its footing."  Their "feet" are supposed to be planted on good collateral.  Either you have enough of it or you don't - and DB doesn't.  There are only two options: 1) Discharge the 'bad debt' in a bankruptcy; or 2) Raise more capital.  The raising of capital would require DB to offer more shares of stock.  There are two problems with this: First, it dilutes the value of the shares currently outstanding, making them unattractive to investors.  Second, it means investors are asked to buy shares in a company which cannot reliably state its liabilities.  You have to be smoking some choice herbs to make such an investment.

So then what?  A Central Bank - or a consortium of Central Banks - buy up the bad debt on DB's balance sheet to make it possible for DB to have a reliable print on the liabilities side of the books, so it can then raise more capital.  And in some cases, the CBs themselves buy that new stock.  When you address this problem from the 'assests' side of the sheet like this, you leave completely unaddressed the underlying cause - the excess of bad debt.

Sound vaguely familiar?  It should... again, we have seen this movie before.

On to my second point.  We have to go back to the 'dot com' bubble of 2000 to understand how we got here.  Easy money created massive speculation in 'dot com' companies because the Internet was so new and its promise so great.  When that bubble popped, 'geniuses' like Paul Krugman (single handedly responsible for the destruction of Japan's economy) called for a housing bubble to replace the dot com bubble.  We all know how that ended.

Central Bank intervention on the 'asset' side the sheet has done nothing to curb the appetite for bad debt.  In fact, by pushing interest rates ever lower, they have forced banks to 'reach for yield' in ever riskier ways.  Money and the economy is like nature and a vacuum.  The money has to go somewhere, so when all of the otherwise sound, productive uses have been funded, if money is left sloshing about the system, it will ALWAYS end up as chips on a Blackjack table.

So where are we now?  On the top of an 'everything bubble' led by junk bonds.  And a junk bond is nothing but the corporate version of a sub-prime mortgage!  DB, in particular, is the king of junk-bond-backed derivatives.  Again, replay Serena Gomez above to see what DB has been doing - only now it is in corporate bonds across the entire economy rather than mortgages.

Lastly, I have to honest about being a good German ('Horst' is actually a common German first name); I like my Schadenfreud paired with a stein of San Diego craft beer!

The entire European project has been built on a house of cards of debt denominated in Euros.  The idea is that Europe's people act in the interests of all Europeans - until they don't.  Listen to what is being said about DB:
The resolution of the crisis through a reduced settlement is crucial for Chancellor Angela Merkel, who faces a federal election next year. It could be political poison for her government to rescue a bank that got into trouble through speculating. At the same time, officials recognise that Germany's biggest bank, which employs around 100,000 people, cannot be allowed to fail.

'We are not Austria. We are the biggest economy in the European Union, one of the world's leading exporters. We need a big bank with a European and international presence but which is anchored here in Germany.' The official added that merging Deutsche with a European rival was fine in principle but only if Germans controlled the combined entity.
But wait! What happened to Europe?

A Tour de Force of Sophistry: Janet Yellen Needs to Resign

Posted on Wednesday, September 21, 2016 No comments
The statement from the Federal Reserve released this afternoon is a tour de force of sophistry, trying to explain exactly how doing the same thing over and over again is not insane.  Here is a blow by blow commentary:
Although the unemployment rate is little changed in recent months, job gains have been solid, on average.
Which jobs? The phantom 'jobs' derived statistically by the use of an out-of-date business birth/death ratio?  Do they mean the the service sector jobs which are being taken disproportionately by those 55 and older, for whom retirement has been exposed as a cruel joke?  If Ms. Yellen actually thinks the jobs report is 'solid', she should resign.
Household spending has been growing strongly but business fixed investment has remained soft.
Why bother with "fixed investment" when you have a much more certain return buying back your company's own stock? (Not to mention that nice executive bonus which is tied to the stock price!)  The data on corporate debt is available to anyone willing to look.  Corporations are further into debt than before the last crisis, and the bulk of those funds have gone to stock buybacks.  If Ms. Yellen cannot recognize this mathematically obvious reason for the 'softness' in fixed investment, she should resign.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.
Apply a stable calculation methodology to employment data from 1977 (when the 'maximum employment' mandate was added) until today, and it will become painfully obvious that the Federal Reserve has failed at this part of its mandate.  But this is more the fault of Congress than the Fed, for the Fed has never had the necessary tools.  They still don't, and they never will.  Full employment is a function of fiscal policy that prevents government from unduly competing with the private sector for capital.  If Ms. Yellen does not have the backbone to slam this ball back into Congress' court - where it belongs - she should resign.
The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace. 
Exactly why do they believe this?  After eight years of such monetary policy, we have not yet seen any 'moderate' expansion.  Why will a ninth year be any different?  If Ms. Yellen cannot explain to us why we should keep doing the same thing over and over again, expecting a different result, she should resign.
Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further.
Has it occurred to the Fed that they have cause and effect reversed?  Energy prices are low because there is a massive glut of supply and decreasing demand.  Why do they believe the effects of declining energy prices are 'transitory'?  The only way they rise is if the economy places greater demand on current supplies.  Exactly how does the Fed see that happening in a ZIRP and potentially NIRP environment where stock buybacks and derivatives speculation compete with productive uses of captial (which requires energy)?  Oh, wait, we've never been in a ZIRP/NIRP environment, so they can't possibly predict what will happen.  If Ms. Yellen does not appreciate how much about the current situation she cannot possibly know, she should resign.
The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.
Where do I start? After eight years of "wait[ing] for further evidence" we have every right to ask why they 'judge' that a ninth year will make a difference.  And if Ms. Yellen cannot explain that, she should resign.

And what does 'for the time being' mean?  With corporate debt, especially junk bonds (high yield) - which are just the corporate version of the sub-prime mortgage - higher now than before the last crisis, exactly when does she think will be 'a good time' to cut off the ability of over indebted corporations to to serially refinance their bonds?  Rising rates will force what are basically zombie companies into bankruptcy - and the longer they wait, the more of them will go down in flames all at once.  If Ms. Yellen cannot explain why some undefined time in the future will be 'better' than today for this reckoning, she should resign.

'For the time being'?  With the stock market propped up by corporate debt-funded stock buybacks, exactly when do they think will be 'a good time' to raise rates and cut off this support for stock prices?  With real estate all but back at pre-crisis inflated levels, and rising rates precluding refinancing of mortgages, exactly when does she think will be 'a good time' to raise these rates?  If Ms. Yellen cannot explain, she should resign.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.
How?  In 5,000 years of monetary history we have never had debt instruments yielding less than 0%.  Yet today, almost 1/3 of bonds outstanding - worldwide - are yielding negative rates.  Exactly what models are they using to inform their 'expected economic conditions'?  In the absence of any historical examples of the current monetary environment, exactly how have they validated those models?  If Ms. Yellen cannot explain, she should resign.
This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Again, what models inform 'indicators of inflation pressures and inflation expectations'?  How are those models validated?  And what the hell does "readings on financial and international developments" mean?  Is Ms. Yellen now admitting that the Fed is effectively the world's Central Bank?  Is she now admitting that the stock market is now the only 'data' that really matters?  Since they cannot have validated models without having historical patterns to validate against, it would seem there is nothing into which to plug their 'data' - so they end up with nothing but stock market indices.  If Ms. Yellen cannot explain why this is not the case, she should resign.
In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
What a complete crock of sophistry.  Monitor 'expected progress'?  Absent validated models, how?  They "expect that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate."  Why do they expect this?  They have expected this for eight years now.  Why do they expect a ninth will change anything?  The economic outlook will be 'informed by incoming data'?  With which they will do exactly what?  Plug the data into exactly which models?  Which have been validated in the absence of historical patterns exactly how?
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Oh my... They are going to maintain a massive balance sheet - preventing all of that capital from obtaining to actually productive uses - "until normalization of the level of the federal funds rate is well under way."  Which will be when again?  Sometime in the ninth year, after eight years of doing the same thing over and over again and expecting a different result?  And they expect to see that day when normalizing interest rates is 'well under way'?  Why do they expect to see that day, seeing as they have no validated models into which to plug their data so as to inform those expectations.

If Ms. Yellen cannot explain this in a way the orindary saver can understand, she should resign immediately.

Just When You Thought You'd Seen It All, Central Banks Begin 'Kiting' their 'Checks'

Posted on Friday, September 2, 2016 No comments
 It's a term from when credit cards were a rarity and 'Web Bill Pay' hadn't even been imagined.

Someone would open a checking account at two or more banks.  They would write a check from their account in Bank A to their account in Bank B.  There the funds would be available to allow other checks written against the account at Bank B to clear.  Once the checks written against Bank B clear, the person writes a check against the account in Bank B to his account in Bank A to allow the original Bank A check to clear.

The actual check would go from the bank at which it was deposited to an 'item processing' facility where the check would be scanned.  The numbers on the bottom of a check are printed with a special ink called MICR (Magnetic Ink Character Recongnition).  On a typical consumer checking account, the first set of numbers at the bottom (the 'ABA number') identify the bank.  The second set is the check number, and the third set is the account number.  After scanning these numbers, along with the amount they are sent to the bank for the settling of the check.

This scheme of using alternate accounts as a 'float' for the other account - basically turning each account into a form of interest-free 'payday loans' - depends on the time interval between when the check is deposited at a branch to when it is scanned at the item processing facility.  That time interval can be expanded by adding accounts at other banks to a circle around which a 'float' is passed from bank to bank.

The term for it is 'Check Kiting'.  The original check from Bank A to establish a 'float' in Bank B is called the 'kite' check.  It is and always has been illegal.

Apparently, though, not for Central Banks.

The underlying motive for check kiting is essentially the need for personal 'liquidity' - a purposefully opaque central banker's term for having money to spend.  For central banks, the desire is to provide 'liquidity' to 'markets' in the hope of increasing 'aggregate demand', therefore provoking inflation - so as to make today's staggering debt loads cheaper to pay.  That last part - making debt cheaper - is probably the hardest part for ordinary people to understand.  But for this post, it is not really that important.  What matters here is that central banks are engaged in a grand 'check kiting' scheme - one which can only end badly.

Let's say Spain's Banco de España buys bonds issued by the Spanish government.  To simplify, Banco de España writes a check to buy these bonds.  But to cover that check, they sell from their 'inventory' of bonds to Germany's Bundesbank, which writes a check.  The Germans now have Spanish bonds in their inventory, so they sell German government bonds to cover their check to Spain. Portugal writes a check to the Bundesbank for these German bonds.  The Portuguese central bank now has German government bonds in their inventory, in addition to their own government's bonds, so they sell some of their sovereign debt to Banco de España to cover their check to the Bundesbank.  Spain writes a check to Portugal's central bank for that debt, and then sells their debt to the Bundesbank to cover the check.  The Bundesbank then writes a check....

And around we go.  The 'kite check' is simply being passed along from central bank to central bank. (Yes, this is where you start banging your head on the desk...)

Remember, if an individual does this, it is all about the need for personal 'liquidity' so they have money to spend on something needed or wanted.  Central banks are kiting their checks in the hope of providing liquidity to their markets - hoping that it will be spent.  Throughout this whole charade, which is clearly not working, our esteemed central bankers remain oblivious to one stupendously simple observation: If you want people to buy products, you might want to try making products people want to buy.  IT WORKS EVERY TIME!

There is a point at which money becomes so cheap that the odds at the Blackjack table of derivatives speculation are actually better than lending to Main Street businesses, which might actually be able to use the capital to improve products and processes, or even to create entirely new markets.  (This is what made Steve Jobs the legend that he is.)  At that same point of cheap money, a publicly traded company can actually return the illusion of greater share value by buying back its own stock, rather than creating a nominally lower - but real - return by upgrading plant and equipment or doing R&D on a new product (otherwise known as capital expenditures, or 'capex', which then require them to actually hire people).

We can call this a Ponzi scheme or a Check Kiting scheme.  Either way, in any other part of our economy other than the Wizard of Oz world of central banking, this would be entirely illegal and would result in people going to jail.  (At least Iceland, of all places, gets this and actually jails bankers for stuff like this.)

The very best advice was actually given by Steve Jobs to the graduates of Stanford University, to whom he spoke at their 2005 commencement:  He said: "Don't be bound by dogma, which is living with the results of other people's thinking."

That advice can be no better applied than to today's central bankers, our esteemed Federal Reserve Chair Janet Yellen most certainly included.
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