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Hang on to your wallets!

Posted on Friday, September 18, 2015 No comments

Friday, September 18, 2015

The decision of the Federal Reserve to leave the Federal Funds Rate at 0.00%-0.25% included a foreboding little tidbit in what is called the "dot plot" chart the Fed includes with its guidance.

Each dot in this graphic represents the expectations of a member of the Federal Open Market Committee (FOMC - also known as the "Bishops of the Temple of the Free Market").  The horizontal lines represent where they think the Federal Funds Rate will be looking forward. That rate, then, influences the "bond market" - which in turn determines the everyday interest rates we pay for things like mortgages and auto loans as well as what we receive for money we keep on deposit.

The most interesting thing about this month's dot plot is the existence of a single dot - one unidentified member of the FOMC - below the zero line for 2015 and 2016.  This means one FOMC member thinks the Fed will have to set a negative interest rate - which means the big banks will have to pay the Fed to hold on to their reserves - as soon as before the end of the year and then keep it there through 2016.

But if you pay attention to the Orwellian language games played by the 'political-financial complex' it becomes clear that we have already arrived at the beginning of this. JP Morgan Chase is now charging a 'balance sheet utilization fee' against large deposits. In other words, while they are paying interest on those deposits at sub-1% rates, they are now charging a 1% 'balance sheet utilization fee'.  Put these two things together and it washes out to a de facto 'negative interest rate' in the -0.25% to 0.50% ballpark - exactly what that one dot suggests be done.

Before getting into why these things are happening, let me just put the implications out there in everyday terms: YOUR CASH IS AT RISK!

This is already the norm in Europe.  The European Central Bank 'pays' -0.20% interest - or charges 0.20% on deposits it holds.  The ECB can do this out in the open because European society is generally oriented to look to the State to manage the economy.  That, in turn, produces a view of money that sees it as principally a tool of the State.

Here in the U.S., though, our social compact is built on a foundation that views money as a measure of wealth belonging to individuals.  The 'Federal Reserve Note' makes it possible to exchange that wealth efficiently.  Our money, rather than the State's money, is a utility enabling everyday commerce, not a tool used by the political-financial complex to impose an order preferred by elites.  Indeed, a government "by and for the people" presumes this particularly American view of money.

This is why all but one FOMC member has yet to openly predict negative interest rates.  Instead, they have to coin a euphemism to at least attempt to establish negative interest as an acceptable norm by calling it 'balance sheet utilization'. The manner in which the Treasury, the Fed and the banks colluded to prop up the debt-driven status quo during the last financial crisis should make it clear that these kinds of decisions are being made in concert with the Treasury and the Fed.

And the Bloomberg article linked to above has accurately captured the economic implications. It has also captured the political implications, but has badly oversimplified them as merely being a Tea Party agenda controversy.  Thomas Jefferson opposed the very idea of a central bank, and was very skeptical about the merits of "paper money." His concern centered around the integrity of the 10th Amendment.  In a letter to George Washington urging him to veto a bill establishing a central bank, Jefferson wrote:
I consider the foundation of the Constitution as laid on this ground that “all powers not delegated to the United States, by the Constitution, nor prohibited by it to the states, are reserved to the states or to the people.” To take a single step beyond the boundaries thus specially drawn around the powers of Congress, is to take possession of a boundless field of power, not longer susceptible of any definition.
Lastly, the dot plot might also explain why the Dow is getting hammered once again.  If you look at the grouping of dots and think of the 'standard deviation' (or the 'bell curve') the 2015 plot looks 'normal'.  It means expectations on interest rates follow what one would otherwise expect in a 'normal' situation.  But 2016 and 2017 form a 'narrow' shape, which if looked at from the point of view of a standard deviation from the norm, means there is nothing 'standard' about the dot spread and therefore nothing 'normal' about the expectations.  The plot does not 'normalize' until the 'longer run' expectations are plotted out.  All of this basically tells us that 2016 and 2017 are not expected to be 'normal' and they have no idea whatsoever what the 'longer run' looks like.

This is where a 'statist' view of money has gotten us.  It is going to be painful, and the only answer which bears the promise of restoring a meaningfully prosperous future for our kids is to recover our original understanding of money and put proper restraints on the money supply.

The Future of Europe is Where it Belongs: The Hearts of the Greek People

Posted on Monday, September 7, 2015 No comments

Monday, September 7, 2015

Greek Prime Minister Alex Tsipras has played the part of Volumnius and has fallen on his sword. Later this month the Greek people need to make sure they decide once and for all what dies and what lives. What should die is the fraud that is a Europe built on a foundation of 'sovereign debt'. What should live is a wholly new idea of Europe reborn where Europe was first born - in the hearts of the Greek people.

Polls show that Greeks overwhelmingly want to remain part of Europe.  But this will clearly come at the cost of their sovereignty if the terms of the 'deal' with their creditors stands.  In this upcoming election, the people of Greece need to look past that 'deal' and see the underlying fraud that is modern Europe for what it is - and then decide if this is really what they have in mind when they think of Europe.

The foundation of this fraud is the idea that economic prosperity can be delivered by political society.  Tsipras is partly to blame - and socialism as a political ideology shares the rest of the blame - for foisting this upon the people of Greece. By reckoning the State to be the most significant unit of society - which removes all natural restraints on the size and scope of government - Greece has spent a generation getting to where they are today. The ever-present, insufferable and stifling public sector has sucked dry the innovative spirit of the Greek people - exactly as it has done everywhere else government is allowed to grow unchecked and as it is doing here in America.  Greece has been left to the impotence of the public sector to generate economic growth.  That impotence should now be obvious.

This fraud is furthered by an obvious double-standard.  To start with, you cannot have irresponsible borrowing (Greek political society) without irresponsible lending (the ECB and Greece's other creditors).  If the idea of Europe in play here is the idea of a just society living at peace with one another then the risks involved in lending must be shared between both creditor and debtor. This can be best understood by looking at exactly what 'financial sovereignty' entails.

For the creditor (or the 'saver/lender' - mainly Germany) financial sovereignty is rooted in purchasing power.  The Germans are loath to see Euros printed to rescue debtor economies because each newly minted Euro subtracts from the purchasing power of the Euros they have saved. Debt forgiveness - the dreaded 'haircut' in the bond market - is an even worse outcome for the creditor because the value of the Euro is tied to the value of what it measures.  It does not measure anything of otherwise real value like gold or silver.  It does measure sovereign debt.  So if those debts are subject to haircuts, the value of that debt goes down and with it the value of the Euro.  The nature of the Euro as a currency union only magnifies this effect.  Sovereignty for the creditor means protecting the Euro at all costs.

For the debtor 'financial sovereignty' means being able to decide how much is spent on what public priorities.  The 'Troika' has utterly eviscerated any sense of financial sovereignty among the people of Greece. The creditor now enjoys all rewards and assumes no risks. Clearly, some are more sovereign than others.

The answer is conservatism as a political and economic philosophy.  But this is not a banker's conservatism demanding 'austerity'.  It is a conservatism rooted in community.  It is a philosophy that makes the distinction between political society and civil society, and believes that civil society will always be superior to political society when meeting social needs, and that economic prosperity is the result of the creativity and innovation of civil society.  Here is what I think a truly conservative plan for Greece might look like:

1) Repudiate the debt!  Yes, I just identified repudiation of debt as a conservative position.  Here is why: Conservative economics is rooted in human freedom. The fraud that is modern Europe has just exposed its moral nakedness for all to see in this so-called 'deal' between Greece and the 'Troika'.  It reveals to all that while the rewards of irresponsible lending are privatized among the financial sector, the risks are socialized among the people of Greece.  There is nothing moral nor conservative about Greece subjecting itself to this sort of theft.

2) Repudiate the public sector! The administrative nakedness of political society should now be obvious.  Conservative political philosophy starts with the conviction that the role of government is to do for the people only those things the people cannot do for themselves, and to otherwise leave civil society free to innovate and improve things in the real economy and to share the resulting wealth with those in need.  Far from everyone being on their own, repudiating the public sector means those who need help will enjoy the dignity of being lifted up by someone who knows their name. This, then, will mean lower taxes and more opportunity to innovate, improve things, and create real wealth.

3) Repudiate 'fiat money'! The mathematical nakedness of today's central bankers is increasingly on display as the Chinese bubble has burst - as their finance minister has said over and again this past weekend, much to the chagrin of other central bankers.  We are witnessing the death throes of this idea you can just print money 'hand over fist' - as we Americans like to say.  This money-printing and lending enterprise has brought the world to a cliff and no one really knows what the future will look like.

Until someone finally decides to lead and chart out a new path forward.  The people of Greece - once again - have the opportunity to lead the world away of this cliff and into a prosperous future where economies are organized around the creation of real wealth instead of the inflationary pretense of feeling wealthy.

Lastly, a call to all Greek cartoonists: How about Greece, in the person of Jesus, standing with his back to the reader, holding his whip, steaming mad over the σπήλαιον λῃστῶν ('den of thieves' - aka the Troika) that has become the temple of the free market.  (Read Matthew 21:13 for the reference.)  This is what it would look like if Jesus were to come to save Greece - and the rest of Europe from the fraud that is its political society and its money.

UPDATE: Huge thanks to Dino Deroukakis in Greece for the graphic above!  Better than a million likes on Facebook.

Watch Your Back - Meaning Your Access to Cash

Posted on Sunday, September 6, 2015 No comments

Sunday, September 6, 2015

A couple weeks ago the Financial Times came out with an article arguing for the end of 'cash'.  They are using the term 'barbarous relic' - a term John Maynard Keynes used for gold as a form of money - to de-legitimize cash as the source of our economic problems.

To most of us, Keynes is either a complete unknown or a vaguely familiar name - someone we heard about while the news was on as background noise while we were preparing dinner.  And our memory of the idea of gold (and silver) as the foundation of the money supply is all but non-existent seeing as it has been nearly 50 years since the gold held on our behalf was effectively stolen from us by the 'financial-political complex'.  (I'll channel a little modified Dwight Eisenhower here.)

But it is extremely important that we understand some of what is going on here, so I'll try to simplify things:  The Financial Times calls the legitimacy of cash into question:
The existence of cash — a bearer instrument with a zero interest rate — limits central banks’ ability to stimulate a depressed economy. The worry is that people will change their deposits for cash if a central bank moves rates into negative territory.
Note the refined academic vocabulary - 'bearer instrument with a zero interest rate'. You and I call it the dollars in our wallet.  The difference in description is telling and very important.  To say cash is a 'bearer instrument' is a deliberate propaganda attempt to take the simplicity of the money in our wallet and turn it into something academic and complex.  The point is to convince us that we are not smart enough to understand its implications.

The next part is even more revealing.  To note that cash "limits central banks' ability to stimulate a depressed economy..." reveals quite a few important things:  First, it reveals a view of money that sees it as a tool of the state to impose particular views about what a healthy economy looks like. Those views, I can absolutely guarantee, are very different when seen from Wall Street then when seen from Main Street.  Money, when viewed from Main Street, is a utility that is contrived by civil society (meaning you and I agree to exchange it) to facilitate everyday commerce.  It is crucial that we get our heads wrapped around this difference if we are going to defend ourselves from a possible attempt to ban cash.

To digress a little so as to explain: Economic growth comes when raw materials are made into things that are needed and useful.  To do this, you have to have capital (which includes land).  But the transformation of raw materials into other useful things requires something else: labor. When labor uses capital (or capital uses labor - depending on how you look at it) 'value' is 'added'.  Money, represented most commonly by cash, is how we measure that value and exchange it with one another.  This is just a somewhat technical way of explaining what is said above, and needs to be said again and again and again: Money is a utility (something of use) contrived by individuals in civil society to facilitate everyday commerce.  It is not a tool of the state the enforce the sensibilities of the financial-political complex (i.e. the 'elite') as to what a healthy economy looks like.

The article further reveals itself as essentially a propaganda hit piece: 
The second feature of cash is that, unlike electronic money, it cannot be tracked. That means cash favours anonymous and often illicit activity; its abolition would make life easier for a government set on squeezing the informal economy out of existence.
Again, there is a lot here - and some things that are conveniently missing. To start with, the idea that cash cannot be tracked is nonsense - our dollars all have serial numbers.  What cannot be tracked is everyday economic activity. No mention is made of the relative percentage of circulating cash which is facilitating "illicit activity" over and against the whipping cream and pound of shrimp I just bought with cash about an hour ago.  That number would be so small as to make throwing the baby out with the bathwater look like a reasonable proposition. And no mention is made of what the "abolition of cash" would mean for personal freedom.  "[M]aking life easier for government..." is blithely assumed to be a worthy end in and of itself.  (Our Founding Fathers would roll in their graves at this thought.)  And to suggest that "squeezing the informal economy out of existence" is desirable is to say that activities which might otherwise expose the intellectual nakedness of central bankers and their academic economist colleagues must be suppressed literally at all costs.

The article uses the example of Greece and tax collection, and it is, indeed, the absolutely perfect example. Greece shows us what happens under confiscatory tax regimes: all of the creativity which ought to be directed toward innovating and improving things in the real economy is directed instead into tax avoidance - an artifact of allowing the political economy to swallow up the real (civil) economy whole.  This is an awfully inconvenient truth for the financial-political complex, therefore it must be suppressed by the banning of cash.

Benjamin Franklin was asked what he and his colleagues had created.  "A republic, if you can keep it," he responded. We have already allowed ourselves the first false luxury which threatens it: Almost fifty years of deficit spending means we have voted ourselves the treasury - the day Franklin said would herald the end of the republic.  The second, and final step to losing it entirely would be to stand by quietly when the political-financial complex takes away our access to cash.

Wall Street Hypocrisy Knows No Bounds

Posted on Thursday, September 3, 2015 No comments

Thursday, September 3, 2015

"Rich" is a word that can mean different things in different contexts.  Wall Street is "rich" - but not just in terms of income or wealth but also in irony and hypocrisy.

Today's MarketWatch.com tells of Wall Street types crying in their beer (seeing as the head has dissipated and the glass doesn't have anywhere near as much beer as the Fed... er... the bartender had them thinking it did) about a trading strategy called 'risk parity'.  This is just a fancy word for 're-balancing' - you know, that thing they taught you about at work when your 401(k) administrator made their annual presentation.  Apparently this is now automated and is blamed for causing excessive selling on the downside.  Here is my favorite quote.  I have added the boldface:
Kolanovic warned that rapid rebalancing by such funds could make for chaos as 'price insensitive flows', determined by algorithms and risk limits, threaten to push the market away from fundamentals.
Now that is rich.

Since when has the 'market' been aligned with the 'fundamentals'?  For at least 20 years now, starting with the 'Greenspan Put' (I'll explain that in a second) the market has traded to Federal Reserve sentiment and intentions, not to market fundamentals.  As I have pointed out numerous times, the Case/Shiller Price-to-Earnings Ratio shows this clearly.  The recent downturn has seen it drop slightly, but it is till higher than only three other times since 1890.  The upswings cannot be explained by companies all of a sudden becoming more valuable.  The timing of the upswings makes it clear that it is a 'sink' for the inflation of the money supply each time Wall Street speculation gets ahead of itself - which is happening more and more often - as a result of the inflation of the money supply.

David Stockman, former budget director during the Reagan years, calls out the insufferable whining as well here. (Interestingly, Stockman calls the sham that has become of the market "card counting" just as I have done for quite a while.)

For the rest of us it will help to understand a few terms we will likely be hearing again on the news.  This 'Greenspan Put' is one:  A 'Put Option' is essentially an insurance policy.  If you own Microsoft  stock (MSFT - which closed out at $43.50 today), in a volatile environment you might want insurance again the possibility it drops over 10% within the next week.  A 10% drop would be a 'strike price' of $39.55.  If I 'sell' you a put option on MSFT I am agreeing to buy your shares at the strike price if it falls to that level within a certain amount of time. Under this arrangement two things might happen:

1) The 'expiration date' of the option might arrive without the stock dropping to the strike price.  In that event the option has 'expired' and I have collected the premium and booked it to my investment account, but you retain the stock.

2) The stock drops to the strike price before the expiration date.  In this case you can exercise your 'option' (which I have sold to you for the premium) to require me to take the stock off your hands at the strike price.  I still collect the premium. But I am also on the hook for the cost of taking the stock off of your hands.

The 'Greenspan Put' is a Wall Street term for the Federal Reserve's willingness to expand the money supply when stocks begin to slide.  It is almost as if there is a strike point in the stock indices at which the Fed loosens the money supply, sending this extra money chasing after stocks, thus arresting the decline - and creating a subsequent bubble.  Again, the Case/Shiller PE Ratio shows this dynamic better than any other metric.

What this means is that Wall Street can speculate with increasing abandon, believing that the Fed will goose the money supply should this speculation get ahead of itself.  As the money supply is increased, the cost of money decreases, creating even greater incentive for risky speculation.  The cycle of speculative collapses only gets tighter (crises happen more often) as the volume of money increases.

This, not 'risk parity', is what makes the complaint about pushing the market "away from the fundamentals" patently ridiculous.

Lastly, I just learned that the building which houses the Federal Reserve is called the 'Eccles Building' (after Marriner S. Eccles).  This made me laugh because the Greek word for 'church' is 'ecclesia'.  It really is the Temple of the Free Market and the FOMC are the new Bishops who have turned it into a den of thieves.  Read here about what happened last time there was a fight over the appointment of bishops.

Where is Jesus with his whip when you need him?
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