The
critical issues in America stem from minimally a blatantly ineffective
public policy, but overridingly a failed and destructive Economic
Policy. These policy errors are directly responsible for the opening
salvos of the Currency War clouds now looming overhead.
Don’t be fooled for a minute. The issue of Yuan devaluation is a political
distraction from the real issue – a failure of US policy leadership. In my
opinion the US Fiscal and Monetary policies are misguided. They are wrong!
I wrote a 66 page thesis paper entitled “Extend
& Pretend” in the fall of 2009 detailing why the proposed Keynesian
policy direction was flawed and why it would fail. I additionally authored
a
full series of articles from January through August in a broadly
published series entitled “Extend & Pretend” detailing the predicted
failures as they unfolded. Don’t let anyone tell you that what has
happened was not fully predictable!
Now after the charade of Extend & Pretend has run out of momentum and more
money printing is again required through Quantitative Easing (we predicted
QE II was inevitable in
March), the responsible US politicos have cleverly ignited the markets
with QE II money printing euphoria in the run-up to the mid-term
elections. Craftily they are taking political camouflage behind an
“undervalued Yuan” as the culprit for US problems. Remember, patriotism is
the last bastion of scoundre s
READ MOREE
The United States is
facing both a structural and demand problem - it is not the cyclical
recessionary business cycle or the fallout of a credit supply crisis
which the Washington spin would have you believe.
It is my opinion that
the Washington political machine is being forced to take this position,
because it simply does not know what to do about the real dilemma
associated with the implications of the massive structural debt and
deficits facing the US. This is a politically dangerous predicament
because the reality is we are on the cusp of an imminent and
significant
collapse in the standard of living for most Americans.
The politicos’ proven
tool of stimulus spending, which has been the silver bullet solution for
decades to everything that has even hinted of being a problem, is
clearly no longer working. Monetary and Fiscal policy are presently no
match for the collapse of the Shadow Banking System. A $2.1 Trillion YTD
drop in Shadow Banking Liabilities has become an insurmountable problem
for the Federal Reserve without a further and dramatic increase in
Quantitative Easing. The fallout from this action will be an intractable
problem which we will face for the next five to eight years, resulting
in the “Jaws of Death” for the American public.
READ MORE
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POSTS: WEDNESDAY 10-27-10
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Greece reignites Europe debt woes, bond investors jittery
Greece reignites Europe debt woes, bond investors jittery
Pritchard
Mohamed El-Erian, chief executive of Pimco, said the
EU-IMF package prevents Greece from growing its way out of
the crisis and will test political consensus to
destruction. He said it would be healthier for both Greece
and Europe to opt for orderly debt restructuring.
Most investors seem to agree that the EU-IMF plan is
unworkable, merely buying time for German and French banks
to shift Greek liabilities on to EU taxpayers. A Barclays
survey found that 82pc of clients expect the eurozone to
face a debt restructuring, a sovereign default or even a
full break-up by 2013.
Hans Redeker, currency chief at BNP Paribas, said
global attention may switch back to Europe once the US
Federal Reserve clears the air on quantitative easing next
week.
"We are seeing a complete failure of the EU to agree on
common foundations for how to solve the eurozone's
problems. Germany is demanding a mechanism for controlled
bankruptcy but the high-debt states refuse to accept
this," he said.
"And over the next few months we are going to find out
what fiscal consolidation in Europe really means."
The biggest U.S. banks virtually doubled their collective
earnings in the third quarter just by injecting $8.1 billion into
net income from funds they had set aside to cover loan losses.
There are 18 commercial banks in the U.S. with at least $50
billion in assets, and together they earned an adjusted $16.8
billion in the third quarter. Of those profits, nearly half, or
48%, were from drawing down what bankers call loan-loss reserves,
according to an analysis by Dow Jones Newswires. A year ago, the
same 18 banks earned $6.2 billion in quarterly profits; at that
time, they added more than $7.8 billion to the same reserves, a
move that reduced their profits. The analysis omits a $10.4
billion noncash charge to earnings that
Bank of America Corp. disclosed during the third quarter.
J.P. Morgan Chase & Co. earned $4.4 billion in the third
quarter, in part because it released $1.7 billion from the bank's
loan-loss reserves. During a recent conference call with
investors, Chief Executive James Dimon told investors, "We don't
release reserves because we want [to hit] earnings targets or
something like that. We release them because we have to." He
called the rules "silly" and said they promote the industry's
history of boom-and-bust cycles; banks are unable to build an
extra cushion of reserves in good times, and then have to build
such reserves when loan problems surface.
At other banks, draw-downs from reserves accounted for the vast
majority of third-quarter profits. Of
Citigroup Inc.'s $2.2 billion in earnings, 92% came from
reserve releases. Similar releases accounted for 82% of earnings
at
Capital One Financial Corp. in McLean, Va., and 65% at
Huntington Bancshares Inc. in Columbus, Ohio.
Companies have done nothing less than the inverse of what our
Keynesian government is doing: they have cut all investment in
future business to the benefit of building out a cash buffer
(while the government has taken all future benefits to the present
day courtesy of an unlimited taxpayer funded piggybank). And since
this capex will need to be reinvested at some point, assuming some
reversion to the corporate mean, it is only a matter of time
before cash levels decline dramatically once again, only this time
nominal debt levels, as pointed out previously, will be at fresh
record high levels, courtesy of Bernanke's ZIRP insanity.
Asian leaders head to Hanoi this week for talks that may center
on calls for China to accelerate yuan gains to protect the
region’s export-dependent economies.
The Fed is close to embarking on another round of
monetary stimulus next week, against the backdrop of a
weak economy and low inflation—and despite doubts about
the wisdom of the policy among economists and some of the
Fed's decision makers.
The central bank is likely
to unveil a program of U.S. Treasury bond purchases worth
a few hundred billion dollars over several months, a
measured approach in contrast to purchases of nearly $2
trillion it unveiled during the financial crisis.
Fed
Chairman Ben Bernanke's push to restart the bond-buying
program—a form of monetary stimulus known as quantitative
easing—has been greeted with deep skepticism among some of
his colleagues.
In some of his strongest words yet, Thomas Hoenig,
president of the Federal Reserve Bank of Kansas City, said
Monday that more expansive monetary policy was a "bargain
with the devil."
In the next few months, internal opposition to Mr.
Bernanke's approach could intensify as presidents of three
regional Fed banks who have expressed skepticism about the
plan—Narayana Kocherlakota of Minneapolis, Richard Fisher
of Dallas and Charles Plosser of Philadelphia—take voting
positions on the Fed's policy-making body. There are 12
regional Fed banks, and five voting seats on the Federal
Open Market Committee rotate among them every year, with
New York always keeping one.
Investors already expect Fed action. Stock prices have
rallied since Mr. Bernanke broached the idea of bond
buying in late August. But investors and analysts are
divided on whether the gambit will work.
He summarizes his case against the Fed into 18
easy-to-digest points that start with the myth of lower
rates, and end with massive bubbles that destroy he
economy.
1) Long-term data suggests that
higher debt levels are not correlated with higher GDP
growth rates. 2) Therefore, lowering
rates to encourage more debt is useless at the second
derivative level. 3) Lower rates, however, certainly do
encourage speculation in markets and produce higher-priced
and therefore less rewarding investments, which tilt
markets toward the speculative end. Sustained higher
prices mislead consumers and budgets alike. 4) Our new
Presidential Cycle data also shows no measurable economic
benefits in Year 3, yet point to a striking market and
speculative stock effect. This effect goes back to FDR,
and is felt all around the world. 5)
It seems certain that the Fed is aware that low rates and
moral hazard encourage higher asset prices and increased
speculation, and that higher asset prices have a
beneficial short-term impact on the economy, mainly
through the wealth effect. It is also probable that the
Fed knows that the other direct effects of monetary policy
on the economy are negligible. 6) It
seems certain that the Fed uses this type of stimulus to
help the recovery from even mild recessions, which might
be healthier in the long-term for the economy to accept.
7) The Fed, both now and under
Greenspan, expressed no concern with the later stages of
investment bubbles. This sets up a much-increased
probability of bubbles forming and breaking, always
dangerous events. Even as much of the rest of the world
expresses concern with asset bubbles, Bernanke expresses
none. (Yellen to the rescue?) 8) The
economic stimulus of higher asset prices, mild in the case
of stocks and intense in the case of houses, is in any
case all given back with interest as bubbles break and
even overcorrect, causing intense financial and economic
pain. 9) Persistently over-stimulated
asset prices seduce states, municipalities, endowments,
and pension funds into assuming unrealistic return
assumptions, which can and have caused financial crises as
asset prices revert back to replacement cost or below.
10) Artificially high asset prices also encourage
misallocation of resources, as epitomized in thedotcom and
fiber optic cable booms of 1999, and the overbuilding of
houses from 2005 through 2007. 11) Housing is much more
dangerous to mess with than stocks, as houses are more
broadly owned, more easily borrowed against, and seen as a
more stable asset. Consequently, the wealth effect is
greater. 12) More importantly, house prices, unlike
equities, have a direct effect on the economy by
stimulating overbuilding. By 2007, overbuilding employed
about 1 million additional, mostly lightly skilled,
people, not counting the associated stimulus from housing-
related purchases. 13) This increment of employment
probably masked a structural increase in unemployment
between 2002 and 2007, which was likely caused by global
trade developments. With the housing bust, construction
fell below normal and revealed this large increment in
structural unemployment. Since these particular jobs may
not come back, even in 10 years, this problem may call for
retraining or special incentives. 14)
Housing busts also help to partly freeze the movement of
labor; people are reluctant to move if they have negative
house equity. The lesson here is: Do not mess with
housing! 15) Lower rates always transfer wealth from
retirees (debt owners) to corporations (debt for
expansion, theoretically) and the financial industry. This
time, there are more retirees and the pain is greater, and
corporations are notably avoiding capital spending and,
therefore, the benefits are reduced. It is likely that
there is no net benefit to artificially low rates. 16)
Quantitative easing is likely to turn out to be an even
more desperate maneuver than the typical low rate policy.
Importantly, by increasing inflation fears, this easing
has sent the dollar down and commodity prices up. 17)
Weakening the dollar and being seen as certain to do that
increases the chances of currency friction, which could
spiral out of control. 18) In almost every respect,
adhering to a policy of low rates, employing quantitative
easing, deliberately stimulating asset prices, ignoring
the consequences of bubbles breaking, and displaying a
complete refusal to learn from experience has left Fed
policy as a large net negative to the production of a
healthy, stable economy with strong employment.
Of course, the whole theory behind QE
revolves around the idea that the Central Bank can reduce
long-term
interest rates.
If they can reduce rates they can make other assets more
attractive, they can create a refinancing effect, they can
entice borrowing/lending and they can alleviate the
pressure on debtors. All of this will theoretically
help boost aggregate demand and result in sustained
recovery. There is only one problem with all of
this. There is no historical evidence that QE
actually works to lower interest rates.
I’ve already highlighted the two most famous cases –
the USA and Japan where interest rates rose throughout the
programs, borrowing remained weak and the economies
remained weak.
One instance that is less well
documented, however, is the case of quantitative easing in
the UK. The following chart shows the duration of
the program and the interest rate effect:
The conclusion is obvious.
Interest
rates do not decline
during a program of quantitative easing. In fact, in
all three cases I’ve highlighted interest rates
rose throughout the
program. This is extremely important to understand
because without the intended interest rate decline there
is simply no argument in favor of this policy. There
is no refinancing effect, there is no reduced rates to
borrow at, there is no fundamental change in the economy.
This is why, after all three instances, the economies
remain(ed) very weak. QE is merely an asset swap.
It doesn’t alter net private sector financial assets.
It does not reduce rates. It does not create jobs.
It does not boost aggregate demand.
Thus far, the only thing QE appears to
do is drive asset prices hOf course, the whole theory
behind QE revolves around the idea that the Central Bank
can reduce long-term interest rates. If
they can reduce rates they can make other assets more
attractive, they can create a refinancing effect, they can
entice borrowing/lending and they can alleviate the
pressure on debtors. All of this will theoretically help
boost aggregate demand and result in sustained recovery.
There is only one problem with all of this. There is no
historical evidence that QE actually works to lower
interest rates.
I’ve already highlighted the two most famous cases –
the USA and Japan where interest rates rose throughout the
programs, borrowing remained weak and the economies
remained weak. One instance that is less well documented,
however, is the case of quantitative easing in the UK.
The following chart shows the duration of the program and
the interest rate effect: The conclusion is obvious.
Interest rates do not decline during a
program of quantitative easing. In fact, in all three
cases I’ve highlighted interest rates rose throughout the
program. This is extremely important to understand
because without the intended interest rate decline there
is simply no argument in favor of this policy. There is
no refinancing effect, there is no reduced rates to borrow
at, there is no fundamental change in the economy. This
is why, after all three instances, the economies
remain(ed) very weak. QE is merely an asset swap. It
doesn’t alter net private sector financial assets. It
does not reduce rates. It does not create jobs. It does
not boost aggregate demand. Thus far, the only thing QE
appears to do is drive asset prices higher without being
supported by any underlying fundamental change. This is
largely due to the psychological impact of QE and the
falsehood that QE = “money printing”.
Thus far, this psychological impact of QE has backfired on
the Fed as
input costs have surged and the Fed has inadvertently
begun to reduce corporate margins. If the goal here
is to keep “asset prices higher than they otherwise would
be” then the Fed appears to be winning their battle.
Unfortunately, there is no evidence showing that there is
a fundamental reason why QE would justify such a move. In
fact, the market collapses following the end of all three
major historical QE programs appears to prove that this is
bordering on ponzi Central Banking and nothing more. Mr.
Bernanke appears to be ignoring the simple historical
facts. And those who ignore history are destined to
repeat it. igher without being supported by any underlying
fundamental change. This is largely due to the
psychological impact of QE and the falsehood that QE =
“money
printing”. Thus far, this psychological impact
of QE has backfired on the Fed as
input costs have surged and the Fed has inadvertently
begun to reduce corporate margins. If the goal
here is to keep “asset prices higher than they otherwise
would be” then the Fed appears to be winning their battle.
Unfortunately, there is no evidence showing that there is
a fundamental reason why QE would justify such a move.
In fact, the market collapses following the end of all
three major historical QE programs appears to prove that
this is bordering on ponzi Central Banking and nothing
more.
Mr. Bernanke appears to be ignoring the
simple historical facts. And those who ignore
history are destined to repeat it.
GENERAL INTEREST
Without a Plan, U.S. "Doomed to Move from Asset Bubble to Asset Bubble"
TTicker
The Commodity Futures Trading Commission's Bart Chilton is
putting pressure on the agency to take action in a high-profile,
two-year-old investigation of the silver marke
AUDIO / VIDEO
QUOTE OF THE WEEK
"The global financial system continues to be unsound in
the same way that a Ponzi scheme is unsound: there are not
enough cash flows to ultimately service the face value of all
the existing obligations over time. A Ponzi scheme may very
well be liquid, as long as few people ask for their money back
at any given time. But solvency is a different matter -
relating to the ability of the assets to satisfy the
liabilities."
John Hussman No Margin
of Safety, No Room for Error
Gordon T Long is not a registered advisor and
does not give investment advice. His comments are an expression of opinion
only and should not be construed in any manner whatsoever as
recommendations to buy or sell a stock, option, future, bond, commodity or
any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, he recommends that you consult with a
qualified investment advisor, one licensed by appropriate regulatory
agencies in your legal jurisdiction, before making any investment
decisions, and barring that, we encourage you confirm the facts on your
own before making important investment commitments.ont>
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Gordon T Long
is not a registered advisor and does not give investment advice. His comments
are an expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, we recommend that you consult with a qualified
investment advisor, one licensed by appropriate regulatory agencies in your
legal jurisdiction, before making any investment decisions, and barring that,
we encourage you confirm the facts on your own before making important
investment commitments.
